Ed Whitacre is the new chairman of GM?

Pretty shocked by the news that Ed Whitacre is being allowed to run GM. And it's not because he said he doesn't "know anything about cars," which is the hook of HuffPo's 108pt (I mean enough already) headline. Whitacre is right that at the highest levels executive competence doesn't require any detailed knowledge of the actual product or service a given company sells.

But Ed Whitacre is also the guy who helped the Bush administration do their illegal spying and then, when he was called before Congress to answer questions about said cooperation, basically told Congress to go fuck itself. I can't find the video, unfortunately. It's really chilling. One of the most memorable moments of the Bush era, for me. The CEO of a huge telco, before Congress, acting like nothing was going to come of this "massive illegal wiretapping" business. And of course he was proven right.

In lieu of video, here's the Atlanta Journal-Constitution:

A Senate hearing Thursday intended to explore the consumer impact of a proposed AT&T-BellSouth merger instead turned into a contentious face-off over phone privacy.

Senate Judiciary Committee Chairman Arlen Specter (R-Pa.) asked AT&T Inc. Chairman and Chief Executive Ed Whitacre whether his company had turned over phone records to any law enforcement agency. The question stemmed from his concerns about a report last month in the newspaper USA Today involving the National Security Agency's use of phone records.

"The privacy of our customers is utmost [in importance] and we follow the law," Whitacre replied.

The senator repeatedly asked for a fuller explanation, but Whitacre only said again and again that "we follow the law."

Specter, appearing increasingly impatient, said, "I think that answer is contemptuous of this committee."

Suggesting more hearings would follow, he told Whitacre, "you and I will talk about this further."

Ooooooh, scary. And now this tan golem of unaccountable corporate power is the chairman of GM, which is largely government-owned. Perfect. And let this be a lesson to those who would cross Arlen Specter!

There's no crying in activist investing

I've been a big Bill Ackman fan over the years. Made a lot of great calls. Put on a great show on Charlie Rose. So I'm trying to figure out some way to find it okay that at the Target annual meeting, after getting pulverized in his proxy fight with the board, he actually cried a little bit. But I can't. I don't care how much value his strategy would have unlocked, it's disappointing.

Update:
Ohmigawd I hadn't even gotten to the part where he responds to Joe Nocera (who reported the tearing-up) with a letter running 5,000 words! Bill, come back to us!

Update 2:
Words 13-18 out of 5,000 are "I also have a thick skin..."

Gonna make Atrios's head explode

The opening to the New York Times article on $33.9 billion being necessary to keep Bank of America solvent:

Executives sparred with the government over the amount, which is higher than executives believed the bank needed. But J. Steele Alphin, the bank’s chief administrative officer, said Bank of America would have plenty of options to raise the capital on its own before it would have to convert any of taxpayer money into common stock, a move that would effectively increase the government’s holdings in the troubled bank.

“We’re not happy about it because it’s still a big number,” Mr. Alphin said. “We think it should be a bit less at the end of the day.”

This idea that the government is forcing capital down the throats of the bankers is totally nuts. The financial institutions these people are running are bankrupt. However, they are pretending otherwise because bankruptcy involves wiping out common shareholders and replacing management (whose stock and options would also be made worthless).

That even the New York Times, whose coverage rarely dabbles in pro-banker spin, includes the quote from the poor widdle bank who has to accept $34 billion in capital (for which the government will probably pay an above-market price) I can only attribute to CNBC's dominance of business media.

The government is funneling huge amounts of money into these institutions, but their executives, stockholders and bondholders want it/us to do it without getting ownership of the banks in return. This is obviously an unreasonable request! Of course they're going to make it. They have a fiduciary duty to do so, in fact. But we, and certainly the New York Times, are not supposed to take it so seriously, and/or feel badly for them.

And we're listening to him because...

After quoting a Robert L. Rodriguez at length as the bearish counterpoint to the now-bullish Doug Kass, this column rather undermines his credibility here:

The Capital fund that Mr. Rodriguez manages for First Pacific, which is slightly lower for the year and down 42 percent since last March, is now making heavy bets on energy companies.

So on one hand you can listen to Doug Kass, who was considered the most prominent bear going into the collapse, or on the other you can listen to a guy who took it on the chin at least as badly as the S&P over the past year. And if he's down 42% since last March, he's probably down a lot more than that since YE07, given how horrendous the first three months of 2008 were.

This isn't to say that Mr. Rodriguez is especially bad at his job or is wrong that there's a lot more downside left, only that it's not clear why they couldn't find a bear they could quote who had been a little less wrong recently.

h/t Ritholtz

That's the private banking system for you

As Dr. Black explained to Larry Summers in his seminal post "Stop Feeding Me A Shit Sandwich," it's called bankruptcy you idiot.

It's true that the government can't do much to stop AIG from paying out bonuses but this is because Obama listened to Summers and Geithner and decided to pretend that these institutions aren't bankrupt.

Well guess what, if they're not bankrupt then who is he to say that their executives didn't generate tens of millions of dollars worth of "shareholder value"?

You think Apple's playing about its money?

High dudgeon in the tech blogosphere over Apple's putting an "authentication chip" in the headphones/controller of the new ultra-tiny iPod Shuffle. The chip ensures that if you want to buy non-Apple headphones you'll only be able to get them from companies that are paying Apple for the privilege (and passing the cost on to you).

Now I get the argument that making your product a "closed" system like this is counterproductive. If you discourage third parties from making hardware/software that's interoperable with yours, you will eventually get out-innovated by a competing platform that welcomes them.

But in the mobile music player space, Apple doesn't have any competitors on the horizon. That's why they can take their customers' lunch money and leave them clawing their eyes out for more. And even to the extent that someday there's a Zune Shuffle to worry about, the battle is not going to be won or lost over whose players are compatible with the greatest variety of headphones.

So why should they leave money on the table, is my take.

h/t

Sounds plausible

DougJ: "To put it simply, I fear that we are now ruled by incompetent egomaniacs who will never blow the whistle on each other, no matter how bad things get, because to do so would be to admit that none of them is indispensable or brilliant after all."

h/t

First Solar spits the bit

Wow is this ugly. I'm listening to the First Solar (FSLR) call from yesterday after the close, and it's becoming clear why the stock cratered afterhours: doom and gloom! Lack of financing crushing demand? Check. Customer distress starting to eat away at backlog? Check. Intense price competition from module oversupply? You know it.

Maybe the scariest development is the disclosure that the company is starting to take ownership of some of the projects that had been customers. So they are being effectively pulled "downstream" (i.e. towards the actual construction/installation of solar facilities, away from their core business of making the panels) by the absence of financially healthy customers.

On the other hand, they're still profitable and they still have what could be the leading solar panel technology. I think it's got a 20% chance of becoming a $100 billion company, so at a $10 billion valuation I'm not selling. Things could easily get worse before they get better, though.

Disclosure: I own FSLR shares

Government to convert its preferred into common

This is being seen as another "step towards nationalization," and that's one way to look at it. I think of it as a step towards recognizing what's already taken place: government being on the hook for the losses of the money center banks. They've just been gradually working up the courage to insist a share of the profits when things recover (the preferred equity that the government/we currently hold is more like debt, where you just get your money back with interest).

People talk a lot about whether they "feel bad" for the bank shareholders or if they "deserve" their losses. This is a stupid discussion. These banks are insolvent, which to my mind is synonymous with the shareholders not owning anything. If shareholder equity is negative, and the government is compelled to assume the liabilities to prevent massive debt defaults and a run on the banking system, the shareholders are SOL.

The only way sympathy enters into things is if you propose government cushion the losses of equity investors, just 'cause they're probably nice people or something, which is clearly bonkers.

Anyway, the market is down 3% despite big rallies in the banks. Apparently people are taking this equity conversion as a sign that the government "sees value" in the common. I'm hoping the rationale is to own 40% of the common so that when it eventually has to be wiped out it will only be 60% publicly held.

Update:
In his post "Citigroup's Clever Plan to Screw Taxpayers Again," Henry Blodget makes the key observation that the government can either convert $45 billion of preferred into common equity or it can take only a 40% stake of the common. But doing both requires assigning a wildly above-market value to the common stock in the conversion (i.e. requires the government to give Citigroup free money.) This post wasn't misleading, since I didn't mention the $45 billion figure, just the 40%, but the fact that the story's numbers don't add up is a big deal.

If the government is going to get $45 billion worth of Citigroup common stock and be treated fairly, then the government won't own 40% of the company, it will own well over 90%.

The 'Let's Surprise the Markets' Strategy

Von at Obsidian Wings has a firm but fair takedown of Matt Yglesias's suggestion that Chris Dodd shouldn't be musing openly about nationalization.

Yglesias on finance is like Shaq at the free throw line: you live with it because he's so good at other things.

The Chamber of Commerce really hates Tim Geithner

I was shocked at how bad his speech was, but this means Geithner must be doing something right.

Eisinger and Salmon on the financial crisis

Jesse Eisinger (Portfolio) and Felix Salmon talk about the financial crisis and the government response.

It's worth checking out if only because it's nice to hear a relatively optimistic viewpoint from someone (Salmon) who is more interesting than the usual permabulls on CNBC. At the same time, I agree with Eisinger that Salmon is totally underestimating the trouble that the banks are in, by overestimating the extent to which debt is being temporarily "mispriced" because of liquidity constraints. As Eisinger says here:



Eisinger also makes a point I've been meaning to make about the relationship between government policy and the stock market: Bank nationalization could be (and I think probably is) the best route to take for the country, economically. But that doesn't mean it wouldn't have dire implications for financial stocks. A lot of them would go to zero! And that's what should happen because they are at the very bottom of the capital structure (i.e. last in line to get their money back) and there's not enough money to go around. Even debtholders, who are ahead of them in line, will probably lose some of their investment.

Even though most of the damage has already been done (bonus Salmon link), bank nationalization would almost certainly result in "another leg down" in the equity markets. Just mechanically, with index funds and ETFs, you can't literally wipe out a lot of shareholders in one industry without affecting shareholders in a bunch of other industries. It would almost certainly be Bad For Stocks.

But the real economy would survive bank nationalization just fine. Individuals and businesses would still go to the same bank, it would just be owned by the government instead of a bunch of really pissed-off stockholders.

Anyway my guess is Obama really doesn't want to go the "Swedish route" but people should realize that the stock market should absolutely be expected to react poorly to bank nationalization (or an increasing perceived probability of it), and that the declines are in no way evidence that nationalization is a bad idea.

Mr. Market takes another swig of Haterade

If there is a global conspiracy to make Barack Obama look good, I think it's now safe to say that it does not extend to manipulation of the stock market. Equity prices have tanked on election day, Geithner plan announcement day, and now on the day he signs the $787 billion American Recovery and Reinvestment Act.

For the S&P to be down almost 5% in a day is serious business, even by recent standards of volatility.

Don't try this s--- at home

I like Paul Kedrosky's blog. It's a fixture in the old RSS reader, and it isn't in any danger of getting expelled. He just digs up too much interesting stuff to exclude on personality grounds alone. But ohmigod is he capable of heroic feats of wankery. To wit:

I'm tired of behavioral finance. It has become a sort of socio-psychological financial freakshow, the past decade's version of chaos theory. It can go away now.

Uh huh.

Sure, we could tell lots of good stories – availability heuristic! hindsight bias! rational inattention ! etc. -- but what was the real and measurable contribution of behavioral finance to ameliorating the credit crisis. Tell me, because I don't know.

Ummm...

What happens? Well, it's not that we abandon the stuff. Some of behavioral finance gets pulled into finance (whatever that is anymore, and that's a bigger subject). And much of the "oooh, look at the silly humans" behavioral stuff finally bores enough people that it doesn't sell books or get articles published. Then that's it. We just have finance again -- and it's as ex post and generally useless as ever, but at least they can tell better stories.

Paul Kedrosky, ladies and gentlemen. If I ever get like that, I want someone to tell me.

Geithner's taxes

It looks for all the world like Tim Geithner, Obama's nominee for Treasury Secretary, is going to get confirmed easily despite recent the recent revelation that he had underpaid his taxes by about $42,000.

I obviously don't have any idea whether the mistake was honest or not, but the "it was an obscure IMF-specific technicality" excuse should be completely off limits to him. If you can't figure out your tax liability, I would think you shouldn't be Treasury Secretary, no matter how complicated the rules may be.

The weird thing about the unpaid taxes is that Geithner seems to have spent his entire professional life in training for this job. You'd think that for an ambitious bank regulator, the cost-benefit analysis of cheating Uncle Sam out of $42k is about as unfavorable as it gets. Then again, he was caught and it's still not going to stop him from getting the job, so maybe it wasn't that unfavorable after all.

In any case I'll be interested to hear about his secret plan to save the banks.

Harry Markopolos

Barry Ritholtz has been following the story of Harry Markopolos, and it's kinda awesome. Markopolis is the accountant who independently figured out that Bernie Madoff's hedge fund was a huge Ponzi scheme, and wrote a lengthy memo telling the SEC all about it in 2005.

It's a great story both because the protagonist seems to fit exactly what you would expect from a movie version of events (he's a semi-paranoid Rain Man with pit bull tenacity) and because it strips the the SEC of any remaining fig leaf of credibility. I mean jeebus. How do they prevent anything whatsoever if they got a 19-page memo about Bernie Madoff entitled "The World's Largest Hedge Fund is a Fraud" and he still had to turn himself in three years later?

I had assumed that Markopolis was just dismissed by the SEC as some crank who maybe lost money or something, but apparently he had a regular contact there named Ed Manion, who the Globe story says "encouraged" him to pursue Madoff. The story does not specify why Manion himself did not also pursue Madoff, being, between the two of them, the one who works (still!) for the SEC.

It's too bad Markopolos seems so publicity-shy, because he should really get a little something for the effort. A fat book deal or high-paid consulting gig or something. He started putting the case together in 1999. It wasn't his fault the regulators are morons or don't care. He did what he could, and it was an awful lot. You don't even need to speak financial jargon to understand a lot of his memo. It's a pretty amazing document if you ask me.

The Wilpons lost money in the Madoff scheme

CNBC just announced that the Fred Wilpon's Sterling Equities had "accounts" with Bernard Madoff (actually pronounced Made-Off), whose brokerage firm turns out to have been a $50 billion Ponzi scheme.

Still, it was a better decision than signing Mo Vaughn.

Bloomberg has the story here.

I guess real estate didn't take

A little under nine months. That's how much time passed between the breaking of the Eliot Spitzer prostitute story and his first column for Slate. The title of this business column is "The Best Policy." That would of course be a reference to the old saw: "Committing adultery is the best policy." Anyway I have a few gripes with the debut column itself:

1. I don't think the fact that international buyers now trust the Chinese to manufacture aircraft (instead of, say, shoes or consumer electronics) is terrible news for America.

2. Using $7.8 trillion figure for the "cost" of the bailouts is pretty misleading. Yes, he specifies that it includes guarantees but he nonetheless talks about the money as if it's been "spent." The government hasn't spent anywhere near that much money. The difference between taking a loss and being exposed to a loss is very big.

3. Spitzer writes:

For years, we have accepted a theory of financial concentration—not only across all lines of previously differentiated sectors (insurance, commercial banking, investment banking, retail brokerage, etc.) but in terms of sheer size. The theory was that capital depth would permit the various entities, dubbed financial supermarkets, to compete and provide full service to customers while cross-marketing various products. That model has failed..."

This is nonsense. If anything the "financial supermarket" model has been vindicated. Look at the biggest of the survivors: JPMorgan Chase, Bank of America, and Citi... all of them are supermarkets, with retail branches and investment banking operations. Bear and Lehman were pure investment banks, as was Merrill (which didn't end quite as badly). And now the remaining pure investment banks are looking to get into the retail business, because deposits are the readiest source of funding these days.

The problem isn't that the banks were supermarkets, it's that their proprietary trading, and the amount of risk they took on in general, was wildly irresponsible. But that mismanagement didn't flow necessarily from the diversity of business lines, and there are better ways to address it than to try to arbitrarily cap banks at a certain size. Reserve requirements can be imposed, better underwriting standards can be enforced in the mortgage industry, the rating agencies can be blown up reformed, etc.

I don't have a problem with "true competition with winners and losers; companies that disappear; shareholders and CEOs who can lose as well as win..." But it's worth separating the practices which are intrinsically flawed and prone to causing financial catastrophe from those that aren't.

Anyway I'm not a huge fan of the piece. It's pretty interesting, though, I'll give him that. I'll continue to read him even though he's a scumbag.

Good business press

Mike Santoli of Barron's (and CNBC) puts it in perspective:

The virtually unwitnessed level of damage in a short period almost defies hyperbole. After Thursday's drop to an 11-year low on the S&P 500, the index was farther below its all-time high than at any time since 1949. The year 2008, had it ended then, would rank as the worst since 1872 at least. The S&P hadn't been as far below its 200-day average since 1932. Nearly 40% of S&P 500 stocks were below $4 billion in market capitalization, the minimum new stocks must meet to be added to the index.

He sounds compelled by the value case, but concludes with a recommendation of not an equity ETF but a corporate bond ETF (because stocks are still that scary).

via Ritholtz

"We'll be blowing less smoke than usual this evening."

CNBC begins its 8pm special report with the anchor saying "Well we can't understate anything tonight."

What? You guys have been understating the extent of the problems? Never.