R.C. Lim, Attorney and Counselor at Law

The Cure: Inflation!!!

As this Op-Ed by Crispin Odey in the Financial Times persuasively argues, inflation could be a boon to the global economy.

It’s certainly hard to imagine things getting any worse.

National Heritage Foundation files Bankruptcy

Founded on the premise that it’s not only the bona fide charitable organizations that should be able to overpay their employees, the National Heritage Foundation has been in a battle to defend the idea that all citizens should be able to create their own mini-charities and then take both the tax deductions AND salaries. Too agressive in its strategy and execution, the National Heritage Foundation first fought the IRS and then state court on fraud charges and lost. Now the NHF is in bankruptcy, and those eager to save a few dollars on their tax bill are learning the hard way the costs of overzealous planning. Annuitants owed as much as $165,000 per year will be forced to do without payment until NHF emerges from bankruptcy.

http://query.nytimes.com/gst/fullpage.html?res=9805E4DF1338F93BA35756C0A9669C8B63&sec=&spon=&partner=permalink&exprod=permalink

http://www.forbes.com/2009/01/28/charitable-gift-annuity-personal-finance-taxes_0127_gift_annuity.html

How to Fix the Mess We Are In

Watch, read, or listen to the news and you’ll here a constant reference to the “toxic” assets on banks’ balance sheets.

What are they talking about here? Can anyone who is not tasked with the responsibility of crunching the numbers for these banks say for sure which assets folks are speaking of and how much these assets have been already been written down. The Congresspersons, talking heads, and supposed experts line up and give their spiel about these assets, but I doubt that any of these pundits has much of a clue. It’s a serious gig to try to unpack a bank’s balance sheet. At issue are the questions of whether the banks are lending, and if not, why they are not. The answers to these questions are also confounding. Can we really expect banks to lend at their old rate? We obviously cannot. So what is the new set point for an optimal rate of lending? It’s hard to say other than to say it should be lower. Probably much lower. A fact that often gets ignored.

All that is obvious is that the government has not done all that it can to help the banks that are on the verge of failure from collapsing. Treasury Secretary Paulson waffled on the important issue of whether to have the government purchase the bank’s distressed assets or to have it recapitalize the banks directly with loans and cash for preferred shares. Probably because it cut so deeply against some of his most cherished beliefs, his swansong will be that he missed the correct solution: option C. Option C would have been that he did not need to choose between options A and option B, and instead the government could have and absolutely should have pursued both options simultaneously.

The idea that some of the biggest banks are too big to fail is certainly true. However, by choosing this approach as the exclusive remedy to the problem, the Treasury has gotten involved in the whimsical business of deciding which institutions are “good” and which institutions are “bad.” Nice for them that there is no oversight here. It’s a ridiculous business, and the Treasury can hardly say that it is well acquainted with the balance sheets of the banks that have received TARP funds to pass judgment.

Now that we are on the eve of an announcement from the Geithner Treasury on how the new Obama administration intends to address the problem, I hope that the government takes heed of this simple answer. The government obviously can and should backstop these so-called “toxic” assets that trade at gargantuan discounts to par. Doing so would immediately shore up all of the hardest-hit banks. And, at a minimum, it might assure banks against future losses and get them lending again; it would be a reset point. Essentially, it would be a line in the sand pass which the government would refuse to let banks take losses. This would also partly avoid the moral hazard problem of government bailing out bankers’ risk seeking behavior. Perhaps in this time of crisis, the problem of moral hazard should be the last concern on anyone’s mind, and, I tend to agree with that point of view, but it is still an important if we are to expect a stable world for those a generation or more out. Finally, and perhaps most importantly, it could even be a profitable exercise for the government. That is, many of these assets are not at yet non-performing. They have market values that attempt to predict the future repayments over time. Even the pessimists in this age of worry believe that the U.S. economy or real estate or the Dow will stay where it has ten years from now. Hence, this gives the government the ability to wait out the cycle, to buy distressed assets at a value, and then to profit from the eventual economic recovery.

Bush Spends $17 Billion of Public Money from TARP to Bailout His Friends at Chrysler and GM

At first the Bush administration’s indecision about whether to spend money to “rescue” the auto industry seemed too much to take. Now that his administration has decided in favor of the bailout, that moment of uncertainty – painful though it was for the nervous markets – wasn’t as bad as the falsely belabored and dissipated corporate favoritism that taints our democracy.

First, all that Bush seems to have done is buy the automakers some time and not even very much time at that. If the analysts are correct, GM alone has a $4.2 billion quarterly burn rate. If the most pessimistic analysts’ estimates are used instead, that figure spikes to $6 billion. That’s a lot of money that they are losing, and the fact that there losses seem still to be accelerating is just scary.

And although GM is bigger, there is reason to believe that Chrysler may be in even worse shape than GM. Bob Nardelli has proven himself to be one of the least capable managers in corporate America. Remember, he is the same manager who bungled things at Home Depot during the most spectacular housing bubble in US history. A singular qualification.

Second, the Bush administration is among the most biased decision-makers. First there is the Tony Snow connection. Tony Snow is the Chairman of Cerberus, the private equity shop that bought Chrysler from Daimler for $7.4 billion in 2007. Only a few months earlier, Cerberus bought a 51% stake in GMAC. Tony Snow was also Bush’s second Treasury Secretary, and he is reported to have personally lobbied the White House for the auto bail-out. There is also Dan Quayle, who was Bush the Elder’s Veep, and who is now Cerberus’s Chairman of Global Investments. There are also assorted other GOP bigwigs that advise, consult, or work at Cerberus.

Bush defended his decision to bail-out the auto industry by saying that a bankruptcy would weaken the entire economy and that the suddenness of the economic collapse had meant that the automakers had not had enough time to prepare themselves. That’s a ludicrous idea and misjudges both robustness of the bankruptcy process and the effectiveness of prepackaged bankruptcies.