My Solution to the So-Called Crisis

29 04 2009

Authored by William Robert Barber

My solution once the problem is diagnosed: When it became clear that the problem was a need for a guarantee of liquidity for the issued AIG ‘put derivatives’, the US government should have immediately formed a specially designated company (SDC), capitalized initially with treasury bonds to be utilized exclusively as the bona fide surety for any and all outstanding derivative obligations. The recipient or counter-party or purchaser of the AIG issued derivative could have now held the treasury bond as collateral earning interest, cashed the bond, or borrowed against the bond from the government. 

This SDC should have been a globally-traded public entity offering preferred stock participation for institutions, licensed investment companies, and broker-dealers; in addition, common shares and bonds would be offered to the public at the standard floating bid-and-ask price.

I would order the SEC, in certain specifically designated cases, to permit financially troubled firms to be allowed to circumvent the subordinated debt rules and regulated procedure so to coordinate relieve from the SDC. This SDC entity would commit the same guarantees to those broker-dealers’ suffering from pending impairment because of insufficient subordinate debt ratios.

The collateral for these treasury guarantees would be all of the company’s assets, treasury stock; one or more members of the SDC would sit on the board and board of directors’ voting rights would be suspended until conversion to profitability was affirmed. As to the assets of broker-dealers, the SEC would hold same in a custodial account and for a fee provide transparent accounting and accountability until the broker-dealer is operationally viable.

The company’s senior management (which would include all companies that take SDC surety) would form individual management companies that would contract with the counter-party of the SDC (in other words their own former company) to provide managerial services for a specific fee over a specific period of time. The management company would retain the sole and exclusive rights to convert the management agreement to its original position after the company has returned to operational viability.

Because of the possession of this right to convert, the management company would have a special and significant inherent value; indeed, the management company would be motivated to succeed for a number of differing reasons.

Without hesitation, I would order a three-year reprieve or until the FASB board meets (whichever occurs sooner) to formally eliminate mark-to-market requirements as well as rescind FAS 157 in favor of FAS 133.

I would incentivize the individual participants of the common share purchasers including institutions with a moratorium on taxes for any dividend issued or gain sustained from their common share appreciation.

Well, there you have it: My solution to the so-called crisis… 

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The Sequel to “The Crisis That Wasn’t…”

25 04 2009

Authored by William Robert Barber

As a sequel to my previous article, ”The Crisis That Wasn’t…”, I challenged myself with what might be a reader’s question on the original article, “Oh yea, what would you have done if you were Bush/Paulson/Obama?”

A sizeable part of what I would have done has as much to do with what I would not have done. I would not have leaped to a conclusion before the gamut was exhausted by the utility of prudent discovery and cogent due diligence. I certainly would not have declared the problem nor submitted a solution without substantial-tangible-empirical verification that the declaration was accurate.

The next question by the skeptical reader might be: “Well, how long will that take? Rome is burning!” The answer to ‘how long’ is as obvious as it is straightforward when discovery evidences tangible proof. That proof of the problem will be apparent when the administration/treasury possesses the ability to present an articulate, verifiable, clearly defined presentation of the problem/solution to the people; as of this date no such clearly defined presentation has been made much less established by this administration or the former for that matter.

Explaining to congress, Bush/Paulson suggested that the problem was with the banks; they would not lend due to a self-imposed credit freeze. The administration explained that the reason for the banks’ credit freeze was the apprehension of undercapitalization caused by a number of current and pending unknowns. One of the great unknowns was the complicated disposition of mortgage assets packaged for securitization. Wherein, inherent within the bundling for securitization, good assets were commingled with ‘toxic’. Inclusive to the banks’ reasoning, broker-dealers had successfully purchased and sold billions of dollars worth of these securitized mortgage units to institutional as well as accredited investors. Some of the unknowns entailed that no one knew the amount of units/dollars sold, to which specific entity it was sold, or, more importantly, no one knew with any degree of certainty the present market value of these mortgaged back securities. This is the reason for the banks’ credit freeze, which supposedly created the financial crisis.

What the average Joe citizen is not aware of is two Financial Accounting Standards Board regulations. These measures were initiated by congress at the same time Sarbanes-Oxley came into being. Another example of the unsuspecting negative consequences of congressional actions is, as recently witnessed, that congress more often than not acts before it thinks. The first is mark to market valuation of assets; the second is FAS 157. Both of these rules have to do with evaluating the market value of assets. Now here is the hard part: under FAS 157, value can be outsourced (such as Chatham Financial) or management if no accredited third party is available. Because of the fear of litigation, pressure from oversight, and the mood of congress, the tendency is to undervalue versus trying to establish real world market value. It is my belief that both of these FASB rulings subjected banks and broker-dealers to an undervalued assessment of assets. It is this particular accounting requirement, the drop in real estate value, and the run to cash in derivatives that prompted the financial crisis in the first cause.

Here is what happened: The real estate sector – instead of its continuance of upward momentum, the sector’s value dropped by a fifth. In a matter of weeks the drop accelerated; the sub-prime mortgage borrows began, in droves, to default, the holders of these securitized mortgage units rushed to cash in their derivatives, the run to cash exceeded AIG’s ability to liquidate, demand exceeded available cash, as a defensive measure banks froze all new lending. The participating broker-dealers’ subordinate debt went negative – they could not comply with existing regulatory compliance; the effect was operational impairment.

The Bush administration’s response to all of this was to prod congress by the thrust and slash of harshly designed innuendos full of negative consequences; the persistence of Paulson prompted fearful confusion and congress submitted. Democrats and republicans came together in a bi-partisan manner to institute TARP as the solution to an ill-defined problem. They appropriated billions of taxpayer dollars on the hope that someone knew what the hell they were doing.

The exactness of what I would have done in the next article.





The Crisis That Wasn’t…

19 04 2009

Authored by William Robert Barber

What if the most recent financial crisis was NOT presently – and has not been – the financial disaster it’s been framed to be? Imagine the consequences… Would the stock market have fallen so dramatically? Would unemployment soar to 8.5%? Would Obama be president? Would certain sectors of the economy like the travel, hotel, and retail with all of their collaterally dependant services be suffering as much?

Businesses, both private as well as public traded, are petrified into submission by the frightful response of the former administration and discouraged by the negative economic/financial noise of Obama the candidate and Obama the president. They have responded in a defensive manner resulting in conserving cash, lowering inventory and operating cost; which in short order increases unemployment; which in turn perpetuates a continuum of economic decline. A general loss of confidence with the people had to be the natural consequence. 

But what if the crisis was no crisis at all, but instead a ruse to cover-up civil, even criminal violations of existing regulations? These violators could possibly be those certain in-the-know persons within the global proprietorships of enterprise and government. How’s that for a provocative thought?

Yes, the insurance giant AIG took (what we now know to be) exaggerated risk so to enhance premium income; but remember, AIG had been in financial trouble for many years before the real estate downturn and certainly before FAS 157 or Credit Default Swaps. And surely, with the benefit of looking back, one can ascertain the mistakes of AIG, inclusive of their profundity, over many years, for making mud out of multi-million-dollars of premium and fee income.  As significant a player AIG was in the game of selling, reselling, packaging, insuring and with global distribution reselling the securitization of mortgage backed credit; AIG was no more than a collateral participant, a feeder, certainly not a prime mover – in fact, AIG was a dependent.  

The big guys in the game were the distributors, the major broker dealers, Lehman Brothers, Goldman Sachs, Merrill Lynch, and the great many banks that participated in the international selling of high yield offerings to sophisticated, duly licensed institutions.  As long as housing and real estate boomed everything was on the upside. When the underlying value (real estate) softened, subprime borrows defaulted, and the insurance carrier could no longer pay out the downside plunge on the derivatives, the run to cash shut down all credit lines; such actions stymied the commercial paper trade and severely jeopardized the securitization of receivables as a viable financial instrument.

Places for the perpetrators to hide the dirty laundry of silliness and stupidity were rapidly diminishing. Cash and more importantly cash flow was drying up.

Well, lo and behold these gentlemen of special knowledge with the reputation of possessing the very best of business acumen made bets that had no assurance or fidelity on the recovery of principal. The taking of the interest was lauded as genius; the losing of the principal was intolerable so a crisis of the highest magnitude was created.  After all, without a crisis of global economic dimension the government of the United States would not find cause to step in and pay the perpetrators’ loss of principal.

Because leadership at private, public, and government institutions fumbled the ball, the ideal of dead reckoning wherein the more than ignorant are bamboozled by the less than ignorant was coming to an end. Conversely, the old reliable standby of flying by the seat of one’s pants would no longer hide the foolhardiness of their money-losing transgressions. The abrupt loss of bearings and precedence utilized by senior management as the measure for operational procedure was nowhere to be found – everyone panicked.  Pan jumped out of the wood line scaring the hell out of all within sight or hearing; a Pandean of emotion captured sensibility. Not understanding the actualities of the cause or effect Bush and Paulson decided that congress should grant the treasurer billions so they could act thereby saving the world from the pending economic calamity. Congress, particularly a democratic congress, loved the idea; no need to read, digest or debate – better to simplify and appropriate.

The timing could not have been better for the Democrats my candidate, McCain, not smart enough to discern the darkness from the light, fell into a trap designed by none other than McCain. Instead of holding the line on giving up billions to God-knows-what he endorses the TARP relief bill and the rest is history.

But, back to my opening suggestion, what if in fact the turn down of economic growth was and is the normal cycle of the marketplace’s economic rhythm? Is it possible that the ‘economic-financial crisis’ is a natural derivative of economic occurrence? Is this ebb and flow of financial undertakings a definitive of a freely founded market, a market populated by the arbitrary transactions of willing buyers and sellers acting on their perception of value?

I don’t know a single person that when the market was one of escalating real estate pricing, low interest, and mediocre loan underwriting, cried out in anguish when a second or third loan was approved and a proportionate lien was placed on their property by the lender. No one barked loudly at the ‘regulators’ when the benefit was perceived to favor their spending addiction. Everyone was dancing to the tune of Barney Frank’s Fannie and Freddie, of course that was because cash was flowing and every mortgage entity was affirming and selling. The buyers were packaging and reselling; there was no outcry or talk of under-regulation, bonuses, CEO salaries, nor did anyone point out that the stock market was overvalued and about to drop by two thousand points.

Of course the reader maybe saying “Oh yea, what would you have done smart one?”

So glad you asked that question, in my next article…

 

 





Panem et Circenses

13 04 2009

Authored by William Robert Barber

Many years ago, as a child, I believed. My belief was faithful and true; it encompassed the words of the Sisters of Star of the Sea, the few priests that spoke to me before mass or in confession. I also believed in policemen, doctors, most adults, and everything in print; this belief included a profound trust in my government.

When I joined the Marine Corps and was subsequently sent to Vietnam, of course being a Marine if I was ordered to parachute into Hanoi I would obey. However, at the time I did believe that my president and congress knew what they were doing and that they would certainly not sacrifice American blood unless absolutely necessary. I trusted that no commitment of martial forces would be engaged without the determined will of obtaining ultimate victory. After all, what kind of elected official would commit the nation’s youth to combat – another word for death and physical dismemberment – without clearly understanding the meaning and consequence of such commitment?

As I grew up I found that I could no longer believe in words. I find no surety in the words of elected officials nor do I have an assured believe in a person’s competency solely founded on their position of authority. I have learned to be suspicious of all the pretentious manifestations that effectually accompany those in elected office, private enterprise, and religious institutions. Over the years experience has proven to me time after time that one should be extremely wary of attorneys in general and I give no credibility to accountants, certified or not. I have no confidence in congressional competence, especially knowing a large majority of congress members being attorneys. As to college degrees and those possessing same, the passing of exams imposed by colleges, Ivy League or not, no longer impresses me as a gauntlet or stress test for leadership. Indeed, recent experience has me doubting that the elected, appointed, and even the employees of the Republican Party support the ideological virtues of a conservative governing philosophy – and they all (or most of them) attended or graduated from prestigious educational institutions.

I am convinced that the first cause of the elected and the wannabe elected is the retention / acquisition of power. This lust for power by the elected and the wannabe elected is an overriding ethical contradiction. The elected swear a dual fidelity: initially to the nation’s constitution, the other to servicing the interest of the people. Withstanding their oath of allegiance, the only known antidote for this lust of power is term limits; the longer a politician stays in power the more susceptible the office and office holder are to corruptive practice.

Nevertheless, term limits – even when voted into law – is ignored (i.e. Mayor of NYC) or amended to the benefit of the incumbents. The same attitude is taken by some of the elected when it comes to the new buzzword ‘Transparency’: The elect either totally ignore the promise of transparency or purposefully hide the documents of interest within their web site so to disguise ready availability.

I believe that this nation’s most recent former president, along with the last two republican speakers of the house, as well as incompetent senate leadership created the demise of believability and viability in the Republican Party.

This loss of believability and viability started during Bush’s first term wherein the administration’s spending on off-budget earmarks, their continuum of doling out the people’s currency violated the ideals of conservative governing. The Republicans controlled congress, inhaled the corruptive elixir of power, and wandered into the hinterland of self-dilution. It was this behavior, coupled with particularly Bush’s inability to communicate the Republican brand of governing ideology to the American people or to aggressively counter an effective response to the Democratic Party’s vicious and  often scurrilous accusations that led to the outcome of the last two elections, leaving the Republicans defeated.

The Democratic Party’s carefully orchestrated campaign of misinformation, disinformation, and outright distortion prompted and implemented by leftist-liberal politicians of rank, particularly the personal assaults on the president’s virtue and character, caused a continuum of disbelieve and disenchantment with everything Bush-related.

In addition, the president’s inability to astutely discern the exactness of the economic crisis caused confusion, disappointment, and a loss of fidelity for Bush and his political party. The president lacked the wherewithal to explain the banking/Wall Street crisis; enunciating the need for congress to appropriate billions was his only response while at that time his immediate critical imperative should have been to put in plain words – with meaningful, comprehensible specificity – the measure of the economic calamity. Instead, he fronted his Secretary of the Treasury who gave a statement as to the disbursement of the appropriated funds  – only to do something entirely different.

Although the president and his party do host a fine lunch and dinner, I would not bet a ham sandwich on anything they say. The party’s lack of credibility, a poor performance by McCain (the moderate), Bush’s inability to comprehend the gravity of the political consequences of his policies – all such injections of Republican stupid gave life to the political left-of-liberal Obama-rise within the Democratic Party.

Naturally I have serious believability issues with the current administration; I am perplexed as to the how and why any elected official could endorse the political, economic, financial, and foreign policies of this president. The answer is possibly as simple as it is blatant: The secular socialist wing of the Democratic Party has taken control of America; their interest is plain: consolidate, enforce, and enlarge the responsibilities of government by financing larger governmental obligations.

Panem et circenses – and the people will vote, once more, in favor of the giver…





Nicolas Sarkozy: “Redefining Capitalism”

5 04 2009

Authored By William Robert Barber

         In keeping with the Sarkozy expression of the recent G-20 (London) Summit, one could deduce that the functional righteousness of capitalism as an effective economic operating system is being scurrilously assaulted and besieged by the socialistic governments of Europe.

         The assault on America’s brand of enterprise is vicious, relentless, and wholly without material evidence; indeed, persons within this country representing governments, unions, and academia are exercising the sensibilities of a ranting mob as they curse and defame the very economic system that economically enabled America to be the greatest economic power the world has ever experienced.

         I do believe that Obama and his faithful positively embrace the assault on capitalism because these accusations feed into the Obama design of implanting voter acceptance via the outcry of misplaced populism and more regulation. Excessive CEO salaries, AIG bonus, and more regulation is nothing less or more than a feign of political strategy so that Obama can covertly push the applicability of European socialism into legislation.

         The leaders of the Democratic Party are all leftists who embrace the ideals of socialism. They are enacting legislative measures wherein the long arm of government is registered and felt into every aspect of our country’s political, social, economic, and financial infrastructure. Regretfully, I also believe Obama and his faithful intend to align and embrace a world order with the goal being the disenfranchisement of American sovereignty in favor of a United Nations approach to the governing of our foreign policy.

         It was Karl Marx and Friedrich Engels in their Manifesto that stated, “The condition for the development of each is the free development of all.” In the socialist doctrine individualism is suppressed in the interest of the collective. Individual competitive determination is no longer a measured consequence; the socialist government suppresses the outstanding in favor of the common denominator. “In the interest of fairness” is an Obama belief that corresponds within the contextual of a socialistic agenda. Such an agenda also bellows out claims of the wealthy class prosecuting the less-than-wealthy class; this sort of class warfare policy alignment is the exactness of the socialist and communist.

         Often the leaders of the democratic majority decry that the conservative republicans favor the wealthiest over the common; they point to either tax policy or the closed-loop favoritism they say is conventional of conservative governing as the example of such discriminating of the poor and middle class. Marx and Engels professed that the history of all hitherto existing societies is the history of class struggles. The democrats indiscriminately utilize the populism of class warfare to stir the pot of inflicting class struggle into their bombastic propaganda. It worked for Lenin, and the democrats are thinking it is working for them.

         Obama’s economic philosophy is reflected in the adherence to the words of many socialists; no wonder the Europeans love him. “One for all, all for one!” was the battle cry of Alexandre Dumas’ Three Musketeers; the author surely couldn’t have anticipated that such a declaration of élan by his protagonists would easily fit into a reflective of Obama’s definitive economic message.

         It is not enough for the Obama faithful that the top 1% of American taxpayers claim 22.1% of adjusted gross income but pay 39.9% of all taxes. This top 1% paid nearly double the proportion of their income in income taxes.

         The top 10% earned half of all income but paid a full 20.8% of all income taxes which equates to 13.8 million taxpayers paying 75% of the entire income tax bill in 2006. That year, there were 135.7 million tax returns equaling 8.1 trillion dollars.

         The great and overwhelming number of Americans pays 3% to 0% of their adjusted gross income in federal taxes. There are of course payroll taxes, which are supposed to be used to support a social insurance fund wherein upon retirement there would be proportionate benefits. Of course congress has forfeited their trust in the American people and used the funds to pay for other services and cover costs that have vacated the intent in the interest of stupidity. If congress was a private company, we the people could sue for damages; but in this case only congress itself could correct such a wrongful act.

         Liberals, leftists, and socialists – only a fine line separates them – just do not understand why I reject the concept of putting the majority of my money into their hands so they can decide what is in my best interest.