Tuesday, September 30, 2008

This week and next I don't have a time to post with the ready to wear show and the motor show, but I decided to relay this.

Last evening, at a cocktail party, my, and others crackberries went crazy, it was word that Congress rejected the bailout. The reaction of most was pure bewilderment. How? Why? After sleeping on it I've come to the conclusion that America has collectively lost its mind, you're FUCKED and you'll take the rest of the worlds economy with you. Client's are already complaining that they are being squeezed and their lines of credit are being cut. How many layoffs will it take because the employer can't buy materials without credit or can't meet a payroll without a receivables loan?

Kim

18 Comments:

Anonymous Anonymous said...

It looks from here, not far outside the DC beltway, that Congress caved because the public, in it's well-justified fury over the way this is going down, demanded they reject the bill. That this was a short-sighted response may well prove to be true, sort of an economic shooting ourselves in the foot. Only time will tell, and if we spiral into recession/depression, we'll have no one to blame but ourselves. Ah, the Bush legacy!

2:00 PM  
Anonymous Anonymous said...

In my prior post, I wrote...

Most don't realize how close the precipice that we find ourselves--even those of us not living in the U.S. And the problems in the U.S. could easily spread to other industrialized nations with lightening speed.

This is not a time to score political points. Instead, it is a time to find solutions. Unfortunately, politics are never so easy.


So now we find ourselves face-to-face, mano-o-mano with the outcome we hoped to avoid.

The markets in the U.S. just opened, higher so far, but falling off the highs.

At this point, everything is in flux. If this continues much longer, the world leaders will need to convene a special pow-wow to deal with this mess and issue some sort of a proclamation.

Interesting times.

K

4:00 PM  
Blogger Kim said...

Anon & K, your comments bring to mind a pair of Chinese proverbs: Be careful what you wish for, and May you live in interesting times.

Neither are very comforting.

This week I'm hobnobbing with fashion and auto industry people and one word describes the thoughts of both groups, troubled.

4:43 PM  
Anonymous Robert said...

If the price of stocks are falling, who is buying them and why?

What I didn’t like about the bailout package is its lack of attention to corporate governance. The same people who caused this mess are getting the funds to correct it?

Instead of a gift, why doesn’t the U.S. Government take a $700 billion equity position in the banks? With that kind of shareholder power the government should be able to place some senior civil servants on the audit committees of the Boards of Directors. Their task would be to weed out the unethical and incompetent managers and replace them with bankers of probity and honour. As the banks return to profitability, they could buy out the government’s position.

5:17 PM  
Anonymous Anonymous said...

This week I'm hobnobbing with fashion and auto industry people and one word describes the thoughts of both groups, troubled.

The haute couture world will, undoubtedly, undergo change. There's some serious carnage taking place.

Autos too have their issues. No longer can people use their homes as bottomless ATMs, forever dispensing cash to fund that fun, exciting, extravagant lifestyle.

Wayward drunks dancing along the sides of the road usually avoid the oncoming traffic. I suspect too that the politicians, intoxicated with power and politics, will avoid a financial meltdown of the free world. Something good will happen soon. That is not to say, however, that good times are here again. Rather, it just means we avoid a worldwide financial meltdown.

Since MC likes videos, here's a video of a drunk cowboy driver almost escaping the long arm of the law with his dancing skills.

http://video.yahoo.com/watch/873553/3537118

K

8:02 PM  
Anonymous Anonymous said...

Quality of previous video appears a bit better on YouTube...

http://www.youtube.com/watch?v=gM6a5YBOOqs

K

8:05 PM  
Blogger Kim said...

Robert: The buyer in a falling market is taking the risk that value of the stock will return to a higher price than was paid, sometimes they win and sometimes they lose.

Regarding the bailout. As it was explained to me, the House bill was the result of a negotiation between members of both parties, the house & senate and the White House. The bill was something negotiators could agree to not necessarily the only solution.

Again as I understand it, the bill did include oversight and a compensation cap, your question regarding equity is likely related to what was politically doable. But the government would receive stock warrants that would allow the Treasury to trade them for preferred stock that could be sold at a future date. But this ownership would not give the government any power within the company beyond current and future regulatory powers.

The $700M isn't a gift, but for the purchase of the bad debt, which might increase in value if the at risk mortgages don't fail and if some of the failing ones can be restructured. The government will be collecting the mortgage payments and can hold them to maturity or resell them at a future date. For the 700M the government gets an asset that comes with a lot of risk and stock warrants.

K: Couture will be fine those customers are recession proof. It will be the buyer who once shopped exclusive stores and top end department stores who will shift their purchases to H&M, Target etc. Those customers are the bread and butter of the fashion industry. Remember that the big spring and fall fashion shows are for ready to wear clothing.

Kim

10:56 PM  
Anonymous Anonymous said...

The politicians are simply going to have to make a much much better case, as to why joes with wives and kids working 30K jobs should bail out dudes making 30M. Those 30K guys just aren't buying it so far, and politicians in less than safe seats are responding to that.

There are an awful lot more 30K guys out there than 30M ones. I expect hard times are coming for those that prey on the 30M guys, which would include punters and dudes that subsidize their wives' fashion habits.

Either end of it, Kim, I think you are in trouble, you've been a parasite on the rich in both your professions, and frankly, being one of those joes, well, it is hard to feel sorry. I'm eating macaroni and cheese tonight, howabout you?

I don't get to live in Paris either. I make a little north of 30K year, and have a wife and kids, and it is really really hard to feel sorry for the hedge fund dudes and the fashionistas.

Just saying. That whole chickens coming home to roost thing perhaps.

2:59 AM  
Anonymous Anonymous said...

The politicians are simply going to have to make a much much better case, as to why joes with wives and kids working 30K jobs should bail out dudes making 30M. Those 30K guys just aren't buying it so far, and politicians in less than safe seats are responding to that.

There are an awful lot more 30K guys out there than 30M ones. I expect hard times are coming for those that prey on the 30M guys, which would include punters and dudes that subsidize their wives' fashion habits.

Either end of it, Kim, I think you are in trouble, you've been a parasite on the rich in both your professions, and frankly, being one of those joes, well, it is hard to feel sorry. I'm eating macaroni and cheese tonight, howabout you?

I don't get to live in Paris either. I make a little north of 30K year, and have a wife and kids, and it is really really hard to feel sorry for the hedge fund dudes and the fashionistas.

Just saying. That whole chickens coming home to roost thing perhaps.

2:59 AM  
Anonymous Anonymous said...

"I don't understand this government bail-out. Where's the government bail-out of the 10 million uninsured children? Where's the government bail-out of the people who are losing their homes? Where's the government bail-out of the people who are losing all their money betting on Dancing with the Stars, and it going terribly wrong?" Craig Ferguson.
Take comfort in this, "You can always count on Americans to do the right thing - after they've tried everything else." Winston Churchill.

3:53 AM  
Anonymous Anonymous said...

While it feels good to rail against those responsible, it is even better to help yourselves.

Those on Wall Street are in for a shake-up regardless of what happens next. Wall Street will undergo tremendous change. Many Wall Streeters are going to experience a career change and a drastic change in lifestyle.

"So what?," you say, what does that mean to you? Why should you care about a bail-out?

No bail-out means everything seizes up. Your local car dealer can't pay his staff. Many retailers can't stock up for Christmas. Businesses across the U.S. and other countries begin laying staff off--including those making less than 50K per year. In effect, we all lose.

Think I'm a scaremonger? Here's the Wall Street Journal...(subscription req'd)

http://online.wsj.com/article/SB122281874953692447.html

A chorus of business leaders and trade groups urged Washington to enact a financial-markets rescue plan, warning that inaction would have dire consequences for the economy and their businesses.

Calls for passage of a rescue measure came from the National Association of Manufacturers, as well as organizations representing retailers, restaurants, wholesaler-distributors and other industries.


Here's another sign of things to come...

http://online.wsj.com/article/SB122272847811388021.html

Bill Heard Enterprises Inc., one of the largest Chevrolet dealers in the U.S., filed for Chapter 11 bankruptcy protection in a Decatur, Ala., court after shutting down last week amid a prolonged downturn in the U.S. auto industry.

Mr. Heard ran 14 Chevy dealerships and dubbed himself "Mr. Big Volume" because of the high amount of sales his stores were responsible for. About 3,200 people were put out of work when the dealerships closed their doors Wednesday.


I wonder how many people he employed making less than 50K in his 14 dealerships? Any guesses?


http://online.wsj.com/article/SB122281737106692341.html

Fifty-six trade associations signed an open letter to Congress urging passage of the Emergency Economic Stabilization Act "to bring stability to credit markets."

Groups ranging from the Business Roundtable and U.S. Chamber of Commerce to the Food Marketing Institute and National Roofing Contractors Association said the lack of credit is affecting businesses and consumers and failure to enact the financial-rescue plan could cause further declines in housing values.

"If Congress fails to act and credit markets tighten further, our associations' members will find it more difficult -- if not impossible -- to secure credit to run their companies, and our members' employees will find it harder to get mortgages, secure auto loans and borrow money to send their children to college," the letter said.


So go ahead, screw those fat cats on Wall Street. Teach'em a lesson.

And when you or your friend or your neighbor loses her job, just remember how good it felt to screw those rich bastards.

And while I am sure Kim is more than capable of taking care of herself, I find the parasite comment humorous, yet sad. Most often those who hurl insults at others, especially toward those they do not know, have more issues than the one insulted. Don't like Kim, don't read her blog. There millions of blogs to choose from.

K

5:06 AM  
Anonymous Anonymous said...

Robert wrote...

Instead of a gift, why doesn’t the U.S. Government take a $700 billion equity position in the banks?

You might be interested in reading George Soros' comments in the Financial Times. Apparently you two think alike.

Recapitalise the banking system by George Soros in FT

http://www.ft.com/cms/s/0/d68e10cc-8f45-11dd-946c-0000779fd18c.html

(subscription might be required)

Instead of just purchasing troubled assets the bulk of the funds ought to be used to recapitalise the banking system. Funds injected at the equity level are more high-powered than funds used at the balance sheet level by a minimal factor of twelve - effectively giving the government $8,400bn to re-ignite the flow of credit. In practice, the effect would be even greater because the injection of government funds would also attract private capital. The result would be more economic recovery and the chance for taxpayers to profit from the recovery.

K

6:21 AM  
Anonymous Anonymous said...

People are not rational and they don't understand what the bailout would do or what's at stake. Almost all the NO votes were from Reps in close races - and of course the Republicans have more close races given their failures over the last 8 years (and until 2007, 12 years as the majority in the House).

I have my doubts about the bailout; it's supposed to prop up the bottom by taking over potentially bad mortgage securities, but the problem is the pyramid is inverted, with vast amounts of derivatives, many times more in face value, built on top of those mortgages. Will those recover at least enough to free up liquidity? (I wonder because that market has been revealed as having rested on dramatically flawed risk assumptions.)

People don't understand that the problem is not merely liquidity and reluctance by lenders, but insolvency. They are bankrupt, almost every one, and unless their assets have value they cannot lend. I wonder how much they'll be able to lend in the relative future, since the capital business - over the past 10 or so years - has depended on almost unimaginable capital flows. Institutions will likely - prudently - now and for some time look to deleverage and they will restrict their lending not only because of a lack of confidence or even a lack of funding but because they will not leverage as much and will not have "easy" sources of revenue such as credit default swaps (which were "free" money for many until they were revealed to be poison pills).

In other words, people don't understand the bailout was an attempt to stave off a world depression and they further don't understand that no matter what the Fed and the other central banks would dump all their available resources into the mess to try to keep the financial system afloat. The central banks have pumped in nearly a trillion dollars over the past few weeks, all short-term cash, and that is expensive and risks crushing the dollar and unleashing massive inflation (which accompanied by a demand drop = absolute hell).

But people don't like to have a gun put to their head. The Republicans in Congress, in particular, don't want to be portrayed in such blunt terms as the destroyers of the financial system they so desperately believed in.

(They wanted to believe the destructive power of markets would be for the good. One can argue that in the long term, the markets would indeed clear this mess - through depression, through wholesale remaking of the financial system - but their belief was that this wouldn't happen, that the markets would be destructive within normal bounds, punishing the weak and foolish but not taking down the system. They were wrong.)

Note the Republicans in the House tend to be more right wing and more religious right wing and their belief in the markets is not only economic but has the quality of faith. Many of them cannot abandon their faith in the markets any more than they can abandon their Christian faith.

6:26 PM  
Blogger Kim said...

Derivatives, the possible collapse of that market is the great fear.

Some perspective the dollar value of troubled mortgages is about $8 Trillion but the derivatives market is about $46T and its value only exists because the market believes that those contracts have value.

This article by Dan Leonhardt in the NYT is about the best plain English explanation of the whats and whys I've seen.
http://www.nytimes.com/2008/10/01/business/economy/01leonhardt.html?hp

Kim

7:28 PM  
Anonymous Phantom Man said...

Kim, as you know, politicians vote with their own interests uppermost in their minds, namely their own reelection. With the polls running against a "bail-out", politicians in toss-up districts voted with the people. Whether the people are right or not is irrelevant; they voted to keep their jobs, as politicians almost always do. For politicians, the good of the country always takes a back seat to self-interest.

9:44 PM  
Anonymous phantom man said...

Oh yes, Kim, I will be very interested in your take on the VP debate on Thursday. It should be a fun evening.

And I wish you the best at the motor show and fashion show.

9:47 PM  
Anonymous Anonymous said...

Suggest watching the Charlie Rose interview of tonight (10/1) with Warren Buffett. The video should be up soon. Buffett makes a lot of sense - of course. For the opposite - meaning non-sensical, not opposing points of view - read the comments on the Rose site.

4:29 AM  
Anonymous VJ said...

Reading the FT (FT.com) in the last week has been the scariest thing I've read in a very long time. It was like the lead up to WW11. Or the Next Great Depression. So yes, something had to be done. The bill on offer was a stinker, but it was the only one on offer. The Repug's had to be brought along & bought off for political reasons. They could not be allowed to run against the Bill as a Bush-Pelosi Deal. Which is Exactly what they were prepared to do last Monday when it failed. So they had to buy into clearing all the mess, as the very folks with the neo-con version of the same old laissez-faire philosophy that's been pushed by the Repug's, well since the Last Great Depression. But any of the Econ blogs have had a decent analysis on what might be done, but politically? It was wholly necessary to be getting as close to half the Repug's on board as possible. That may mean another Year or 2 of Yes economic suffering, but it also helps ensure that no damage was done to Obama. When the nation calls for leadership, Leaders have to step forward. Even if it's painful, and they know there's lots more pain ahead of us before anything can be done well or 'correcting' the underlying problem & issues. That's the way it is unfortunately. reality is seldom pretty for everyone or sometimes Anyone! Cheers & Good Luck, 'VJ'

6:39 AM  

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