DAILY TOL: Tree of Liberty

I took my daughter to the American Girl Doll (AGD) store a few days ago for lunch. The lunch was good, but expensive. The bill was $35 and change for the two of us. I will just rack it up to stimulating the economy. After lunch we took a cruise through the store. My daughter is on the cusp of out growing playing with her dolls, but to any female alive, the lure of the AGD store is mighty powerful. The clothes and accessories are all so beautiful and nicely made. I noticed a few other moms, with their daughters, in the store and they had big AGD bags filled to the brim with AGD stuff. Let me tell you, right now, if you don’t already know, that AGD stuff is not cheap. All I wanted to do, in that moment, was to buy my daughter what ever she wanted. But I couldn’t. I am too responsible for that. I did, however, buy her a nightgown that was $39…choke…cough…sputter. Read the rest of this entry →

Let me start with two basic premises: 1) Globalization and the Global Economy are realities at which one may feel free to rail, but doing so is a waste of energy and 2) Protectionism is not a balm that can be applied to #1.

That said, all bets are off when it comes to companies lining up to feed at President Obama’s public stimulus trough.

What do you think the public reaction would be if municipalities used stimulus money to purchase police cars that were foreign made.  To be clear, I’m talking about a foreign brand assembling cars using foreign workers in a foreign land.  I’m guessing that the UAW would have a thing or two to say about that.

Intellectual honesty suggests we apply the same outrage to the outsourcing of white collar jobs as we would to blue collar.  Over the past five years, IBM has been shedding U.S. based jobs at an alarming rate.  Perhaps taking a cue from Obama’s chief of staff, they seem be making the most of our current crisis to increase the rate even further.

I’m a capitalist and IBM operates, for the most part, an unregulated business so while I personally find their decisions distasteful, I acknowledge their right to put their shareholders first and do what it is they are doing…unless they do it on the backs of We the People.

Business week reports:

IBM is seeking a share of the $8 billion the U.S. plans to spend on high-speed rail and part of the $20 billion in the stimulus plan to digitizethe U.S. health-care system. Palmisano was one of 13 executives who met with President Barack Obama in January in an appearance aimed at pressuring the House of Representatives to pass the economic stimulus bill. He joined the CEOs of Xerox (XRX), Motorola (MOT), and Google (GOOG).

Kenney says the political climate may make IBM’s global restructuring touch raw nerves. Some economists have estimated that taxpayers are paying an average of $225,000 for each job created in the economic stimulus package. Says Kenney: “Taxpayers are saying, ‘I don’t want to give them money if they’re moving jobs offshore.’”

It’s an interesting article and I high recommend taking a moment to read it.

So what’s my suggestion?  I strongly believe that taxpayer money should be spent to benefit those who pay the taxes.  Seems pretty basic, but I have little interest in using tax money to help bolster IBM’s stock price.  Yes many Americans may have IBM stock as a part of their 401k and no we should not be protectionist.  However, while we might purchase steel from overseas to support infrastructure projects funded with stimulus money, we would never think to buy the whole bridge and have it shipped over for installation.

Our intellectual capital is a finished product as well.  IBM shipping off billions of hours of services work to digitize hospital records is no different than shipping off the building of a levee.  Under no circumstances should we be stimulating the Indian economy with debt financed U.S. stimulus dollars.

We need to view this from a macro perspective.  Yes, the work may be done cheaper if one employs the IBM model and that may be the primary consideration if you are procuring a new Point of Sale system for Walmart.  However the customer here is not Walmart; it is We the People.  So if IBM lays off 5,000 people as they did today and employs 5,000 folks from India, those newly unemployed Americans will now receive unemployment insurance, subsidized COBRA, and won’t be paying taxes.  Those costs must be added to the cost of the project IBM just shipped off and should put them at a competitive disadvantage when compared to a U.S. based small business employing all U.S. people.  To do otherwise creates an uneven playing field where large multi-nationals have an unfair advantage.  Beyond basic fairness; it’s really just stupid to use taxpayer dollars to encourage domestic layoffs and foreign hiring.

Spending taxpayer dollars to benefit taxpayers is not protectionist; it’s common sense.

Well, I don’t completely agree with him so maybe that seal is just badly cracked.  Still, if you see four horsemen on a hill, you’ll know it was more than just cracked.

I’ll include a couple of links below from Timothy Geithner and Paul Krugman, where each layout their positions.  You can decide for yourself.  I’m really quite stunned where I fall on this, but I prize intellectual honesty above ideology so Krugman the Leftist and I are in a boat together..deal with it.

Here’s my take:

Banks have a bunch of questionable assets that need valuing.  Geithner thinks if the government tried to value those assets, they’d screw it up so the private sector should do it.  Cool…I’m with him so far…no faith in government…check.  Once an estimated value is determined, bundles of these questionable assets are offered for auction to the highest bidder.  I’m still ok with this although, speaking in Ebay terms, we may want to have some reserve set in case the auction brings such a low price that it causes a bank to implode….I’m just sayin’…  

Anyway, maybe there is such a provision in place, but I didn’t see it mentioned. So the thinking here is that private investors, hedge funds and the like, take a chance on buying risky assets at a depressed price in hopes they appreciate over time.  Meanwhile, banks shed assets they can’t carry and get a fresh infusion of capital.  Risk / Reward the heart of capitalism; I’m still hanging with Tim.  

Set aside for a moment that these “Private Investors” are the same jokers that thought it was a brilliant idea to slice a mortgage into pieces and resell them without any real idea of whether the underlying assets were properly priced or collateralized.  So let’s start putting some real example numbers in place.  Let’s say ABC Bank has a bundle of assets originally worth $2,000,000 on its books.  They’ve already written down those assets based on Mark-to-Market (don’t get me started on that), to 1,200,000.  This bundle is put up for auction and the high bid is 1,000,000…not too bad.  The bank absorbs an additional 200k loss, but also gets a 1,000,000 infusion of fresh capital.

So these investors pay the bank $1,000,000 and hope for the best right?  No, the government wants to share the risk/reward equation so it plans to put up half the equity.  Ok, so that means Uncle Sam puts up 500k and Mr. Hedge Fund puts up 500k thereby splitting the risk and the reward, right?  Well, no, it seems that Mr. Hedge doesn’t want to play at those terms so here’s what we’re going to do.  The FDIC is going to guarantee a loan for 840k to ABC bank and Uncle Sam will put up another 80k.  But wait…that means that Mr. Hedge only has to put 80k at risk to control 1,000,000 worth of auction valued assets?  That doesn’t seem right…let’s do some math.

Rosy Scenario:
It’s 2014, things have improved and Mr. Hedge’s bundle of assets is now valued at 1,700,000.  Still far below its peak, but a lot better than the 1,000,000 auction price.  So now there is 700k worth of profit which is split between Uncle Sam and Mr. Hedge, 350k each.  That represents a 437.5% return on Mr. Hedge’s 80k investment or about 87% a year.  That’s one heck of a return for Mr. Hedge and I’d be fine with that except that We The People, absorbed 92% of the risk (84% for the FDIC loan + 8% for the Uncle Same equity stake).  What happens if things go to shit badly.

Not Rosy Scenario
It’s 2014, things have not improved and Mr. Hedge’s bundle of assets is now valued at zippo.  Mr. Hedge is out his 80k and We The People are out 920k.!!

Hmmmm.  Heads we each win 50% of uncapped profits of a highly levered asset where that lever is provided by We The People.  Tails we lose: Mr. Hedge loses 8% and We The People lose 92%.  If any of you all are wondering where the FDIC is going to come up with all these sets of 84% loan investments, I share your wonderment.  Last I checked, the FDIC provided Deposit Insurance; that’s kind of what the “D” and “I” stand for.  Maybe they’ll just have their friends at the Fed print some more.

What’s Krugman suggest?  Basically, put badly damaged financial institutions into Receivership like was done with the S&Ls in the 90s.  I’m not a big fan of this approach because I think it could crater the financial system, but do agree with Krugman that Geithner’s plan leaves We The People with 92% of the downside risk and They The Hedge Funds with nearly all the upside potential.  I also think a fair, equitable, and viable plan could be developed by incorporating components from the Krugman and Geithner world views.

This, of course, cannot happen for two reasons:  1) It presupposes that our representatives are intelligent, informed, and care about finding a solution that is best for the country as opposed to populous grandstanding and 2) it presupposes that those on the Ideological left and right are willing to put aside their world views to craft a compromise solution that is best for the country.

And now for your reading pleasure here are the plans from Paul Krugman and Timothy Geithner.