Sunday, December 21, 2008


No need for editorial comment on this one. Ripped from The New York Times of Sunday, December 21, 2008.

December 21, 2008
The Reckoning
White House Philosophy Stoked Mortgage Bonfire

“We can put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.” — President Bush, Oct. 15, 2002

WASHINGTON — The global financial system was teetering on the edge of collapse when President Bush and his economics team huddled in the Roosevelt Room of the White House for a briefing that, in the words of one participant, “scared the hell out of everybody.”

It was Sept. 18. Lehman Brothers had just gone belly-up, overwhelmed by toxic mortgages. Bank of America had swallowed Merrill Lynch in a hastily arranged sale. Two days earlier, Mr. Bush had agreed to pump $85 billion into the failing insurance giant American International Group.

The president listened as Ben S. Bernanke, chairman of the Federal Reserve, laid out the latest terrifying news: The credit markets, gripped by panic, had frozen overnight, and banks were refusing to lend money.

Then his Treasury secretary, Henry M. Paulson Jr., told him that to stave off disaster, he would have to sign off on the biggest government bailout in history.

Mr. Bush, according to several people in the room, paused for a single, stunned moment to take it all in.

“How,” he wondered aloud, “did we get here?”

Eight years after arriving in Washington vowing to spread the dream of homeownership, Mr. Bush is leaving office, as he himself said recently, “faced with the prospect of a global meltdown” with roots in the housing sector he so ardently championed.

There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk.

But the story of how we got here is partly one of Mr. Bush’s own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Mr. Bush chose to oversee them — an old prep school buddy — pronounced the companies sound even as they headed toward insolvency.

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; as recently as February, for example, Mr. Bush was still calling it a “rough patch.”

The result was a series of piecemeal policy prescriptions that lagged behind the escalating crisis.

“There is no question we did not recognize the severity of the problems,” said Al Hubbard, Mr. Bush’s former chief economics adviser, who left the White House in December 2007. “Had we, we would have attacked them.”

Looking back, Keith B. Hennessey, Mr. Bush’s current chief economics adviser, says he and his colleagues did the best they could “with the information we had at the time.” But Mr. Hennessey did say he regretted that the administration did not pay more heed to the dangers of easy lending practices. And both Mr. Paulson and his predecessor, John W. Snow, say the housing push went too far.

“The Bush administration took a lot of pride that homeownership had reached historic highs,” Mr. Snow said in an interview. “But what we forgot in the process was that it has to be done in the context of people being able to afford their house. We now realize there was a high cost.”

For much of the Bush presidency, the White House was preoccupied by terrorism and war; on the economic front, its pressing concerns were cutting taxes and privatizing Social Security. The housing market was a bright spot: ever-rising home values kept the economy humming, as owners drew down on their equity to buy consumer goods and pack their children off to college.

Lawrence B. Lindsay, Mr. Bush’s first chief economics adviser, said there was little impetus to raise alarms about the proliferation of easy credit that was helping Mr. Bush meet housing goals.

“No one wanted to stop that bubble,” Mr. Lindsay said. “It would have conflicted with the president’s own policies.”

Today, millions of Americans are facing foreclosure, homeownership rates are virtually no higher than when Mr. Bush took office, Fannie and Freddie are in a government conservatorship, and the bailout cost to taxpayers could run in the trillions.

As the economy has shed jobs — 533,000 last month alone — and his party has been punished by irate voters, the weakened president has granted his Treasury secretary extraordinary leeway in managing the crisis.

Never once, Mr. Paulson said in a recent interview, has Mr. Bush overruled him. “I’ve got a boss,” he explained, who “understands that when you’re dealing with something as unprecedented and fast-moving as this we need to have a different operating style.”

Mr. Paulson and other senior advisers to Mr. Bush say the administration has responded well to the turmoil, demonstrating flexibility under difficult circumstances. “There is not any playbook,” Mr. Paulson said.

The president declined to be interviewed for this article. But in recent weeks Mr. Bush has shared his views of how the nation came to the brink of economic disaster. He cites corporate greed and market excesses fueled by a flood of foreign cash — “Wall Street got drunk,” he has said — and the policies of past administrations. He blames Congress for failing to reform Fannie and Freddie. Last week, Fox News asked Mr. Bush if he was worried about being the Herbert Hoover of the 21st century.

“No,” Mr. Bush replied. “I will be known as somebody who saw a problem and put the chips on the table to prevent the economy from collapsing.”

But in private moments, aides say, the president is looking inward. During a recent ride aboard Marine One, the presidential helicopter, Mr. Bush sounded a reflective note.

“We absolutely wanted to increase homeownership,” Tony Fratto, his deputy press secretary, recalled him saying. “But we never wanted lenders to make bad decisions.”

A Policy Gone Awry

Darrin West could not believe it. The president of the United States was standing in his living room.

It was June 17, 2002, a day Mr. West recalls as “the highlight of my life.” Mr. Bush, in Atlanta to unveil a plan to increase the number of minority homeowners by 5.5 million, was touring Park Place South, a development of starter homes in a neighborhood once marked by blight and crime.

Mr. West had patrolled there as a police officer, and now he was the proud owner of a $130,000 town house, bought with an adjustable-rate mortgage and a $20,000 government loan as his down payment — just the sort of creative public-private financing Mr. Bush was promoting.

“Part of economic security,” Mr. Bush declared that day, “is owning your own home.”

A lot has changed since then. Mr. West, beset by personal problems, left Atlanta. Unable to sell his home for what he owed, he said, he gave it back to the bank last year. Like other communities across America, Park Place South has been hit with a foreclosure crisis affecting at least 10 percent of its 232 homes, according to Masharn Wilson, a developer who led Mr. Bush’s tour.

“I just don’t think what he envisioned was actually carried out,” she said.

Park Place South is, in microcosm, the story of a well-intentioned policy gone awry. Advocating homeownership is hardly novel; the Clinton administration did it, too. For Mr. Bush, it was part of his vision of an “ownership society,” in which Americans would rely less on the government for health care, retirement and shelter. It was also good politics, a way to court black and Hispanic voters.

But for much of Mr. Bush’s tenure, government statistics show, incomes for most families remained relatively stagnant while housing prices skyrocketed. That put homeownership increasingly out of reach for first-time buyers like Mr. West.

So Mr. Bush had to, in his words, “use the mighty muscle of the federal government” to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending.

Concerned that down payments were a barrier, Mr. Bush persuaded Congress to spend up to $200 million a year to help first-time buyers with down payments and closing costs.

And he pushed to allow first-time buyers to qualify for federally insured mortgages with no money down. Republican Congressional leaders and some housing advocates balked, arguing that homeowners with no stake in their investments would be more prone to walk away, as Mr. West did. Many economic experts, including some in the White House, now share that view.

The president also leaned on mortgage brokers and lenders to devise their own innovations. “Corporate America,” he said, “has a responsibility to work to make America a compassionate place.”

And corporate America, eyeing a lucrative market, delivered in ways Mr. Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment.

“This administration made decisions that allowed the free market to operate as a barroom brawl instead of a prize fight,” said L. William Seidman, who advised Republican presidents and led the savings and loan bailout in the 1990s. “To make the market work well, you have to have a lot of rules.”

But Mr. Bush populated the financial system’s alphabet soup of oversight agencies with people who, like him, wanted fewer rules, not more.

Like Minds on Laissez-Faire

The president’s first chairman of the Securities and Exchange Commission promised a “kinder, gentler” agency. The second was pushed out amid industry complaints that he was too aggressive. Under its current leader, the agency failed to police the catastrophic decisions that toppled the investment bank Bear Stearns and contributed to the current crisis, according to a recent inspector general’s report.

As for Mr. Bush’s banking regulators, they once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks.

The administration won that fight at the Supreme Court. But Roy Cooper, North Carolina’s attorney general, said, “They took 50 sheriffs off the beat at a time when lending was becoming the Wild West.”

The president did push rules aimed at forcing lenders to more clearly explain loan terms. But the White House shelved them in 2004, after industry-friendly members of Congress threatened to block confirmation of his new housing secretary.

In the 2004 election cycle, mortgage bankers and brokers poured nearly $847,000 into Mr. Bush’s re-election campaign, more than triple their contributions in 2000, according to the nonpartisan Center for Responsive Politics. The administration did not finalize the new rules until last month.

Among the Republican Party’s top 10 donors in 2004 was Roland Arnall. He founded Ameriquest, then the nation’s largest lender in the subprime market, which focuses on less creditworthy borrowers. In July 2005, the company agreed to set aside $325 million to settle allegations in 30 states that it had preyed on borrowers with hidden fees and ballooning payments. It was an early signal that deceptive lending practices, which would later set off a wave of foreclosures, were widespread.

Andrew H. Card Jr., Mr. Bush’s former chief of staff, said White House aides discussed Ameriquest’s troubles, though not what they might portend for the economy. Mr. Bush had just nominated Mr. Arnall as his ambassador to the Netherlands, and the White House was primarily concerned with making sure he would be confirmed.

“Maybe I was asleep at the switch,” Mr. Card said in an interview.

Brian Montgomery, the Federal Housing Administration commissioner, understood the significance. His agency insures home loans, traditionally for the same low-income minority borrowers Mr. Bush wanted to help. When he arrived in June 2005, he was shocked to find those customers had been lured away by the “fool’s gold” of subprime loans. The Ameriquest settlement, he said, reinforced his concern that the industry was exploiting borrowers.

In December 2005, Mr. Montgomery drafted a memo and brought it to the White House. “I don’t think this is what the president had in mind here,” he recalled telling Ryan Streeter, then the president’s chief housing policy analyst.

It was an opportunity to address the risky subprime lending practices head on. But that was never seriously discussed. More senior aides, like Karl Rove, Mr. Bush’s chief political strategist, were wary of overly regulating an industry that, Mr. Rove said in an interview, provided “a valuable service to people who could not otherwise get credit.” While he had some concerns about the industry’s practices, he said, “it did provide an opportunity for people, a lot of whom are still in their houses today.”

The White House pursued a narrower plan offered by Mr. Montgomery that would have allowed the F.H.A. to loosen standards so it could lure back subprime borrowers by insuring similar, but safer, loans. It passed the House but died in the Senate, where Republican senators feared that the agency would merely be mimicking the private sector’s risky practices — a view Mr. Rove said he shared.

Looking back at the episode, Mr. Montgomery broke down in tears. While he acknowledged that the bill did not get to the root of the problem, he said he would “go to my grave believing” that at least some homeowners might have been spared foreclosure.

Today, administration officials say it is fair to ask whether Mr. Bush’s ownership push backfired. Mr. Paulson said the administration, like others before it, “over-incented housing.” Mr. Hennessey put it this way: “I would not say too much emphasis on expanding homeownership. I would say not enough early focus on easy lending practices.”

‘We Told You So’

Armando Falcon Jr. was preparing to take on a couple of giants.

A soft-spoken Texan, Mr. Falcon ran the Office of Federal Housing Enterprise Oversight, a tiny government agency that oversaw Fannie Mae and Freddie Mac, two pillars of the American housing industry. In February 2003, he was finishing a blockbuster report that warned the pillars could crumble.

Created by Congress, Fannie and Freddie — called G.S.E.’s, for government-sponsored entities — bought trillions of dollars’ worth of mortgages to hold or sell to investors as guaranteed securities. The companies were also Washington powerhouses, stuffing lawmakers’ campaign coffers and hiring bare-knuckled lobbyists.

Mr. Falcon’s report outlined a worst-case situation in which Fannie and Freddie could default on debt, setting off “contagious illiquidity in the market” — in other words, a financial meltdown. He also raised red flags about the companies’ soaring use of derivatives, the complex financial instruments that economic experts now blame for spreading the housing collapse.

Today, the White House cites that report — and its subsequent effort to better regulate Fannie and Freddie — as evidence that it foresaw the crisis and tried to avert it. Bush officials recently wrote up a talking points memo headlined “G.S.E.’s — We Told You So.”

But the back story is more complicated. To begin with, on the day Mr. Falcon issued his report, the White House tried to fire him.

At the time, Fannie and Freddie were allies in the president’s quest to drive up homeownership rates; Franklin D. Raines, then Fannie’s chief executive, has fond memories of visiting Mr. Bush in the Oval Office and flying aboard Air Force One to a housing event. “They loved us,” he said.

So when Mr. Falcon refused to deep-six his report, Mr. Raines took his complaints to top Treasury officials and the White House. “I’m going to do what I need to do to defend my company and my position,” Mr. Raines told Mr. Falcon.

Days later, as Mr. Falcon was in New York preparing to deliver a speech about his findings, his cellphone rang. It was the White House personnel office, he said, telling him he was about to be unemployed.

His warnings were buried in the next day’s news coverage, trumped by the White House announcement that Mr. Bush would replace Mr. Falcon, a Democrat appointed by Bill Clinton, with Mark C. Brickell, a leader in the derivatives industry that Mr. Falcon’s report had flagged.

It was not until 2003, when Freddie became embroiled in an accounting scandal, that the White House took on the companies in earnest. Mr. Bush decided to quit the long-standing practice of rewarding supporters with high-paying appointments to the companies’ boards — “political plums,” in Mr. Rove’s words. He also withdrew Mr. Brickell’s nomination and threw his support behind Mr. Falcon, beginning an intense effort to give his little regulatory agency more power.

Mr. Falcon lacked explicit authority to limit the size of the companies’ mammoth investment portfolios, or tell them how much capital they needed to guard against losses. White House officials wanted that to change. They also wanted the power to put the companies into receivership, hoping that would end what Mr. Card, the former chief of staff, called “the myth of government backing,” which gave the companies a competitive edge because investors assumed the government would not let them fail.

By the spring of 2005 a deal with Congress seemed within reach, Mr. Snow, the former Treasury secretary, said in an interview.

Michael G. Oxley, an Ohio Republican and then-chairman of the House Financial Services Committee, had produced what Mr. Snow viewed as “a pretty darned good bill,” a watered-down version of what the president sought. But at the urging of Mr. Card and the White House economics team, the president decided to hold out for a tougher bill in the Senate.

Mr. Card said he feared that Mr. Snow was “more interested in the deal than the result.” When the bill passed the House, the president issued a statement opposing it, effectively killing any chance of compromise. Mr. Oxley was furious.

“The problem with those guys at the White House, they had all the answers and they didn’t think they had to listen to anyone, including the Treasury secretary,” Mr. Oxley said in a recent interview. “They were driving the ideological train. He was in the caboose, and they were in the engine room.”

Mr. Card and Mr. Hennessey said they had no regrets. They are convinced, Mr. Hennessey said, that the Oxley bill would have produced “the worst of all possible outcomes,” the illusion of reform without the substance.

Still, some former White House and Treasury officials continue to debate whether Mr. Bush’s all-or-nothing approach scuttled a measure that, while imperfect, might have given an aggressive regulator enough power to keep the companies from failing.

Mr. Snow, for one, calls Mr. Oxley “a hero,” adding, “He saw the need to move. It didn’t get done. And it’s too bad, because I think if it had, I think we could well have avoided a big contributor to the current crisis.”

Unheeded Warnings

Jason Thomas had a nagging feeling.

The New Century Financial Corporation, a huge subprime lender whose mortgages were bundled into securities sold around the world, was headed for bankruptcy in March 2007. Mr. Thomas, an economic analyst for President Bush, was responsible for determining whether it was a hint of things to come.

At 29, Mr. Thomas had followed a fast-track career path that took him from a Buffalo meatpacking plant, where he worked as a statistician, to the White House. He was seen as a whiz kid, “a brilliant guy,” his former boss, Mr. Hubbard, says.

As Mr. Thomas began digging into New Century’s failure that spring, he became fixated on a particular statistic, the rent-to-own ratio.

Typically, as home prices increase, rental costs rise proportionally. But Mr. Thomas sent charts to top White House and Treasury officials showing that the monthly cost of owning far outpaced the cost to rent. To Mr. Thomas, it was a sign that housing prices were wildly inflated and bound to plunge, a condition that could set off a foreclosure crisis as conventional and subprime borrowers with little equity found they owed more than their houses were worth.

It was not the Bush team’s first warning. The previous year, Mr. Lindsay, the former chief economics adviser, returned to the White House to tell his old colleagues that housing prices were headed for a crash. But housing values are hard to evaluate, and Mr. Lindsay had a reputation as a market pessimist, said Mr. Hubbard, adding, “I thought, ‘He’s always a bear.’ ”

In retrospect, Mr. Hubbard said, Mr. Lindsay was “absolutely right,” and Mr. Thomas’s charts “should have been a signal.”

Instead, the prevailing view at the White House was that the problems in the housing market were limited to subprime borrowers unable to make their payments as their adjustable mortgages reset to higher rates. That belief was shared by Mr. Bush’s new Treasury secretary, Mr. Paulson.

Mr. Paulson, a former chairman of the Wall Street firm Goldman Sachs, had been given unusual power; he had accepted the job only after the president guaranteed him that Treasury, not the White House, would have the dominant role in shaping economic policy. That shift merely continued an imbalance of power that stifled robust policy debate, several former Bush aides say.

Throughout the spring of 2007, Mr. Paulson declared that “the housing market is at or near the bottom,” with the problem “largely contained.” That position underscored nearly every action the Bush administration took in the ensuing months as it offered one limited response after another.

By that August, the problems had spread beyond New Century. Credit was tightening, amid questions about how heavily banks were invested in securities linked to mortgages. Still, Mr. Bush predicted that the turmoil would resolve itself with a “soft landing.”

The plan Mr. Bush announced on Aug. 31 reflected that belief. Called “F.H.A. Secure,” it aimed to help about 80,000 homeowners refinance their loans. Mr. Montgomery, the housing commissioner, said that he knew the modest program was not enough — the White House later expanded the agency’s rescue role — and that he would be “flying the plane and fixing it at the same time.”

That fall, Representative Rahm Emanuel, a leading Democrat, former investment banker and now the incoming chief of staff to President-elect Barack Obama, warned the White House it was not doing enough. He said he told Joshua B. Bolten, Mr. Bush’s chief of staff, and Mr. Paulson in a series of phone calls that the credit crisis would get “deep and serious” and that the only answer was big, internationally coordinated government intervention.

“You got to strangle this thing and suffocate it,” he recalled saying.

Instead, Mr. Bush developed Hope Now, a voluntary public-private partnership to help struggling homeowners refinance loans. And he worked with Congress to pass a stimulus package that sent taxpayers $150 billion in tax rebates.

In a speech to the Economic Club of New York in March 2008, he cautioned against Washington’s temptation “to say that anything short of a massive government intervention in the housing market amounts to inaction,” adding that government action could make it harder for the markets to recover.

Dominoes Start to Fall

Within days, Bear Sterns collapsed, prompting the Federal Reserve to engineer a hasty sale. Some economic experts, including Timothy F. Geithner, the president of the New York Federal Reserve Bank (and Mr. Obama’s choice for Treasury secretary) feared that Fannie Mae and Freddie Mac could be the next to fall.

Mr. Bush was still leaning on Congress to revamp the tiny agency that oversaw the two companies, and had acceded to Mr. Paulson’s request for the negotiating room that he had denied Mr. Snow. Still, there was no deal.

Over the previous two years, the White House had effectively set the agency adrift. Mr. Falcon left in 2005 and was replaced by a temporary director, who was in turn replaced by James B. Lockhart, a friend of Mr. Bush from their days at Andover, and a former deputy commissioner of the Social Security Administration who had once run a software company.

On Mr. Lockhart’s watch, both Freddie and Fannie had plunged into the riskiest part of the market, gobbling up more than $400 billion in subprime and other alternative mortgages. With the companies on precarious footing, Mr. Geithner had been advocating that the administration seize them or take other steps to reassure the market that the government would back their debt, according to two people with direct knowledge of his views.

In an Oval Office meeting on March 17, however, Mr. Paulson barely mentioned the idea, according to several people present. He wanted to use the troubled companies to unlock the frozen credit market by allowing Fannie and Freddie to buy more mortgage-backed securities from overburdened banks. To that end, Mr. Lockhart’s office planned to lift restraints on the companies’ huge portfolios — a decision derided by former White House and Treasury officials who had worked so hard to limit them.

But Mr. Paulson told Mr. Bush the companies would shore themselves up later by raising more capital.

“Can they?” Mr. Bush asked.

“We’re hoping so,” the Treasury secretary replied.

That turned out to be incorrect, and did not surprise Mr. Thomas, the Bush economic adviser. Throughout that spring and summer, he warned the White House and Treasury that, in the stark words of one e-mail message, “Freddie Mac is in trouble.” And Mr. Lockhart, he charged, was allowing the company to cover up its insolvency with dubious accounting maneuvers.

But Mr. Lockhart continued to offer reassurances. In a July appearance on CNBC, he declared that the companies were well managed and “worsts were not coming to worst.” An infuriated Mr. Thomas sent a fresh round of e-mail messages accusing Mr. Lockhart of “pimping for the stock prices of the undercapitalized firms he regulates.”

Mr. Lockhart defended himself, insisting in an interview that he was aware of the companies’ vulnerabilities, but did not want to rattle markets.

“A regulator,” he said, “does not air dirty laundry in public.”

Soon afterward, the companies’ stocks lost half their value in a single day, prompting Congress to quickly give Mr. Paulson the power to spend $200 billion to prop them up and to finally pass Mr. Bush’s long-sought reform bill, but it was too late. In September, the government seized control of Freddie Mac and Fannie Mae.

In an interview, Mr. Paulson said the administration had no justification to take over the companies any sooner. But Mr. Falcon disagreed: “They absolutely could have if they had thought there was a real danger.”

By Sept. 18, when Mr. Bush and his team had their fateful meeting in the Roosevelt Room after the failure of Lehman Brothers and the emergency rescue of A.I.G., Mr. Paulson was warning of an economic calamity greater than the Great Depression. Suddenly, historic government intervention seemed the only option. When Mr. Paulson spelled out what would become a $700 billion plan to rescue the nation’s banking system, the president did not hesitate.

“Is that enough?” Mr. Bush asked.

“It’s a lot,” the Treasury secretary recalled replying. “It will make a difference.” And in any event, he told Mr. Bush, “I don’t think we can get more.”

As the meeting wrapped up, a handful of aides retreated to the White House Situation Room to call Vice President Dick Cheney in Florida, where he was attending a fund-raiser. Mr. Cheney had long played a leading role in economic policy, though housing was not a primary interest, and like Mr. Bush he had a deep aversion to government intervention in the market. Nonetheless, he backed the bailout, convinced that too many Americans would suffer if Washington did nothing.

Mr. Bush typically darts out of such meetings quickly. But this time, he lingered, patting people on the back and trying to soothe his downcast staff. “During times of adversity, he bucks everybody up,” Mr. Paulson said.

It was not the end of the failures or government interventions; the administration has since stepped in to rescue Citigroup and, just last week, the Detroit automakers. With 31 days left in office, Mr. Bush says he will leave it to historians to analyze “what went right and what went wrong,” as he put it in a speech last week to the American Enterprise Institute.

Mr. Bush said he was too focused on the present to do much looking back.

“It turns out,” he said, “this isn’t one of the presidencies where you ride off into the sunset, you know, kind of waving goodbye.”

Kitty Bennett contributed reporting.

Copyright 2008 The New York Times Company

Thursday, December 11, 2008


On the plus side, the stock market hasn't tested its November bottom... On the negative side, the stock market hasn't tested its November bottom...yet.

Much negative news has clearly been ingested, if not digested by the financial markets - rising unemployment, declining industrial and business activity - worldwide, the spending of several trillion dollars domestically so far with little to show for it. Although, one must admit, had the Treasury and Federal Reserve NOT printed trillions of dollars to date, exactly where would we be? I shudder to ask and cringe at responding.

We have not reached the bottom of the burst housing bubble. Previously creditworthy folks still cannot buy automobiles. Many banks that claim to be refinancing difficult mortgage loans on better terms are often refinancing in such a way as to actually increase a homeowner's monthly payments.

A decision on federal loans to U.S. automakers has yet to be made - by anyone. It seems to be a "let them eat cake" mentality with no regard for human beings with jobs and mortgages, let alone buying power.

While Wall Street and an as yet unknown number of investors try to sort out the estimated $50 billion Bernard Madoff scam - "eh small potatoes!" - we can only wonder...

As has just begun to be reported in recent days and weeks, have we discounted the millions of projected mortgage defaults yet to come over the next several years? Have we discounted rising defaults on credit card and other consumer debt? How about commercial mortgage debt?

How long will the prices of oil, gasoline, natural gas and fuel oil remain relatively low? Will OPEC succeed in slashing production as demand declines worldwide, something they have usually failed to do?

How long will deflation be with us? When will the enormous wave of inflation that we have created reach our shores?

I truly hate to toss out more questions than answers at this writing. But here's the point...we can all take for granted that the stock market - historically - has been a pretty accurate leading indicator of turns in the economy. But in order to accomplish that, it needs reliable data.

Sorry...not enough data. Far too many unknowns. This recession is unlike any recession in the real life memories of those who are managing money.

Cash remains king (or queen).

Monday, December 01, 2008

Not Since the 1930s

Not since the late 1930s has the stock market technically been as low as it is now. After a week of rallying, the DJIA dropped 680 points, surrendering more than half its recent gains. The S&P 500 Index and NASDAQ responded in kind, with the broader index shedding nearly 8 percent in one day.

The economic news is bad - manufacturing worldwide, unemployment data, newly announced pending layoffs from major financial institutions.

And worse yet, both Ben Bernanke and Hank Paulson spoke today, reinforcing investors' lack of confidence in the Bush administration's team of economic knuckleheads.

Wall Street remains slow to comprehend the depth of this recession. Hence, in addition to their employers' lack of desire to see stocks' earnings estimates reduced, let alone SELL recommendations shouted out, analysts simply lack the broader outlook to highlight the dangers that still remain.

If anyone expects that we will not see continued waves of tax selling before year-end, well the awakening may be very rude. We will no doubt see a retest of earlier lows. We are less than 600 DJIA points away. I've suggested even lower lows before this market reaches bottom, 7200 on the DJIA and 700 on the S&P500. Investors strongly dislike uncertainty and we have months of it ahead of us.

The good news is that the market will eventually truly reach a bottom. But it won't be a bottom based on wishful thinking or some respected investment strategist waving a magic wand. We will need evidence of a slowdown of the slowdown. And regardless of where you look, we are not close to having that vision.

Monday, November 24, 2008


First off, the federal bailout of Citigroup (C).

After "forcing" Citi to take $25 billion in TARP funds from the Economic Emergency Stabilization Act of 2008 last month, and watching Citi just sit on the money rather than loaning any of it out as was the intent, Treasury comes to Citi's stockholders' rescue by giving it yet another $20 billion.

In exchange, us taxpayers receive $27 billion of preferred stock paying an 8 percent annual dividend, plus warrants to purchase 254 million shares of Citi common stock at $10.61 per share (Citi is trading this morning around $6 per share).

Given that Citi's total market value was less than $25 billion on Friday, it seems to me that we have the short end of the deal. Oh did I mention that we also cover 90 percent of the losses from a $306 billion pool of toxic garbage mortgage-backed and other securities after Citi absorbs the first $29 billion of pretax losses?

Sounds like a real deal for taxpayers! The common stock warrants will represent all of about 4 percent of Citi's total common stock should the warrants be exercised. Even if you assume that Citi's stock returns to its all-time high of some $55 per share, taxpayers stand to make all of $11 billion for assuming what could amount to $60 billion or more of losses on Citi's toxic asset portfolio.

Right now, it's difficult to estimate the extent of possible taxpayer losses. Anything is a guess, given the lack of public disclosure. I'm not sure if Treasury even knows what they've gotten into.

Citi has been badly managed for years. They've been encouraged to create, expand and manage tens of billions of dollars - if not more - of bad mortgage products and other derivative products.

But we had to save Citi. The largest bank and financial conglomerate was again "too big to fail." Citi's failure as a company, if not a bank, would have swamped the economy ad financial markets.

But we did not extract a sufficiently large price from Citi. I can only account for this because the guys running Treasury are all pals with the idiots running Citi - into the ground.

The Obama Rally

The Obama team has put together a qualified and competent economic team. It appears that they will propose an enormous stimulus package upon taking office on January 20. The rally in the market is a reflexive "anything should help" rally, not to mention that the appointment of anybody to fill what has become a vacuum of action in Washington is better than anything.

The Market

We are experiencing a very common rally in a bear market, not a bottoming of a bear market.Even if the DJIA and the S&P 500 were to recover all the way to 9500 and 1,000, respectively, it alone would not suggest the end of the downtrend. Don't forget. We can look forward to at least another year of very bad economic news. AND the auto industry mess is still unresolved.

Unless you are a trader, the best strategy is to take advantage of major rallies to lighten up on equities holdings. I expect that safe, high dividend yield stocks will continue to outperform and a good strategy will continue to be to buy them on weakness.

But don't get fooled. We can look forward to lots more pain.

Thursday, November 20, 2008



I suppose if you were not prepared for the stock market's devastation and its wholesale destruction of wealth and security, what could you say about the ferociousness of this bear market?

Today alone:

S&P500 Index:
752.44 down 54.14 or 6.71 percent. Intraday low of 747.78. Lowest level since 1997.

Dow Jones Industrials Average: 7552.29 down 444.99 or 5.56%. Intraday low of 7507.60. Lowest level since 2002.

NASDAQ: 1316.12 down 70.30 or 5.07%. Intraday low of 1314.90. Lowest level since 2003.

In past months, when this observer suggested that the stock market could likely see the DJIA as low as 7,200 and the S&P500 Index at 700, the targets were predicated on several factors: 1) a bear market decline on the order of the 1973-75 decline - that was around 48 percent, and 2) a return to the price/earnings valuations (PE) in the pre-1995 era - a much lower average PE of around 14 or so.

So where are we now?

Since peaking at 1565, the S&P500 is down 52 percent. The DJIA is down 47 percent. NASDAQ is down 74 percent.

Honestly, you have to go back to the 1930s to see such breadth of declines. From March 1937 to March 1938, the stock market declined by more than 54 percent. Except for November 1929 through July 1932, when the market declined by a staggering 86 percent, no other bear market has been as powerful.

Let's look at some scenarios in attempting to value stocks going forward through this dramatic recession. Everything is based on a return to an historic "norm" PE of 14.

S&P500 earnings decline to 2005 levels: S&P500 value 979

S&P500 earnings decline to 2002 levels: S&P500 value 386

S&P500 earnings decline to 1997 levels: S&P500 value 556

Using a simplistic approach of averaging those corporate earnings levels, you can make a case for the S&P500 Index declining to 640. That would translate into a DJIA of 6400.

Recently, Standard & Poor's reduced their earnings forecast on the Index component companies for 2009 to about $49. Applying a PE of 14 to that number and you arrive at 686. By the way, the average S&P500 earnings for the aforementioned three periods was about $46.

The trouble is this, as if those numbers are not frightening enough. How predictable are corporate earnings in this environment? If the Big Three auto manufacturers cannot recover, the ramifications for the entire economy are monumental. Metals producers, electronics, glass, rubber, carpet, etc. will all be severely affected.

The other assumption here is that a PE of 14 will be seen as reasonable - not 12 or even 10. And if you lived through the 1970s and were an investor, those lower PEs were commonplace.

Bottom line: 7200 on the DJIA and 700 S&P500 may be too easy to reach. Investment managers and analysts that are suggesting we are at or very close to a stock market bottom should be history. They have no reasonable basis for such conclusions.

I have been pointing out the high dividend yields of many quality companies that are likely to survive the current devastation. Yet the yields continue to increase. The suggestion to me is that investors don't care. They just want to preserve their principal. As do I and as should you.

Wednesday, November 19, 2008


Today, the stock market continued its trend to testing, and more than likely, taking out the prior October 2008 lows. In fact, both the DJIA and the S&P500 closed at their lowest since 2003.

The DJIA closed down more than 5 percent at 7997. The S&P500 closed down more than 6 percent at less than 807, smashing its October low of 830.

I haven't even commented on NASDAQ, which declined more than 6.5 percent today, blasting below its October lows.

While, as previously stated ad nauseum, we will likely see periodic rallies from such new lows, the stage seems set to reasonably expect to see the market continue to decline to 7200 DJIA and 700 S&P500.

Citigroup (C), the financial services and banking behemoth, set the tone for today, dropping more than 23 percent. Insurance companies, considered by average Americans to be pretty safe places, saw enormous losses, continuing trends not seen since the 1930s.

Pretty much, no place seems safe, feels safe if you are an investor. Oh, well gold was up 30-cents and ounce.

If you've been following any of the Capitol Hill testimony by the Big Three auto makers, I'm sure you are not reassured. After two days of testimony by the CEOs of GM, Ford and Chrysler, and the President of the UAW, no one in the Senate or the House is flashing any strong signals that they believe anything they are being told. It has been quite the spectacle. The CEOs of these manufacturing giants could not even tell their inquisitors how much cash they had on hand nor how much they really needed, let alone precisely when. Are you feeling warm and fuzzy yet?

If anything is being accomplished by these hearings, it is that management of these companies is as incompetent as anyone has been willing to suspect. Furthermore, they did their very best, including GM Chairman/CEO Wagoner in later interviews, how valuable they were to a recovery process. Really?

These are the folks that, on one hand, tout how many of their vehicles get more than 30mpg in the U.S. - on the highway. But guys, how about how many get more than 30mpg in urban driving? Hmmm?

They talk happily about how many new hybrids they "plan" to introduce in two years. But why didn't you produce them earlier? Like Toyota? Like Honda? Where has your management been? What have THEY been driving? SUVs?

The sad thing is that no one has grilled them about the higher fuel efficiency of dozens of models they manufacture and sell in Europe, and why they do not offer them here. No doubt, they have plenty of excuses.

Sadly, on one hand these guys just have to go. When I was an analyst in the '80s - back in Detroit of all places - it was all too evident then that U.S. auto management was in need of a major tuneup. But these companies cannot be allowed to fail. As has been accounted here before, there are simply too many jobs at risk, too many industries, too many small businesses and large businesses.

The auto execs seem to place the bulk of blame for their predicament on the recent economic downturn and tightening of credit. It's not like they've helped their own cause, requiring credit scores of well in excess of 700 - well in excess of 700 - to qualify for an auto loan. In light of this, to whom do they think they'll be selling cars? To Wall Street investment bankers? Oh gee. I forgot. They are all out of work. No job, well maybe no loan.

They've helped destroy their own market.

I fully expect that Congress will come to the rescue. Why not?! They've "tried" to rescue our major banks and the nation's largest insurance company, AIG, not to mention Fannie Mae and Freddie Mac.

Giant strings need to be attached to any auto bailout. This issue of more efficient European vehicles being available for manufacture here needs to be addressed. Labor costs MUST be brought down to levels competitive with domestic operations of foreign producers such as Honda, Toyota and Hyundai. Hybrid technology needs to be rolled out much much faster. GM needs to forget about charging - pun intended - $40,000 for an electric Chevy Volt.

Business as usual, led by the same tired management, must come to an end. Out-of-the-box thinking and management has to be injected into this industry. If not, they'll be back to the public trough sooner than you'll need to fuel up your Cadillac Escalade.

Thursday, November 13, 2008


This morning, we find ourselves - well the stock market - on the predicted way to test the October 2008 lows of 7,900 on the DJIA and 830 on the S&P500 Index.

As I write this, we are at DJIA 8,086 and S&P500 830. In just the past six trading days, the DJIA has fallen nearly 15 percent, the S&P500 16 percent. Finally, the markets are focused on this powerful recession and the seeming inability of the U.S. Treasury or the Federal Reserve to formulate an effective policy to mitigate damage.

With 240,000 job losses last month, unemployment is now the highest in a quarter of a century, at 10.1 million Americans. Add in the approximate 17 million that have dropped out of the workforce, and "real" unemployment/underemployment exceeds 17.5 percent!

There will likely be a lot of coal in holiday stockings this year. That does not bode well for retailers, who earn as much as 50 percent of their annual profits and/or sales from the winter holiday season. Circuit City is done. Linens n Things is done. Mervyn's. Fortunoff. Lillian Vernon. Sharper Image. STA Restaurants (Bennigan's). Airlines, banks, investment banks. The list marches on. Sadly, it's not over.

These companies, both well-managed and not, all represent jobs and human lives.

A few weeks ago, I suggested that the stock market has the potential to slide further to new lows, down to perhaps 7,200 DJIA and 700 on the S&P500 Index. I have not changed that position.

Also, I suggested that investors, should they not be able to resist the temptation to be invested rather than remaining in cash, consider stocks that have historically high and "likely" safe dividend yields. Please refer to the disclaimer stated elsewhere on this site. I'd like to repeat the list of examples from October 17, with the yields then and now:

Pfizer (PFE) - now 8.1% then 7.54% P/E below 10
Bristol-Myers Squibb (BMY) - now 6.3% then 7.18%
Dow Chemical (DOW) - now 7.9% then 6.92% P/E below 10
Verizon Communications (VZ) - now 6.3% then 6.71%
AT&T (T) - now 6.0% then 6.28% P/E below 10
General Electric (GE) - now 8.2% then 6.23% P/E below 10
International Paper (IP) - now 8.2% then 5.58% P/E below 10
Eli Lilly & Co. (LLY) - now 5.8% then 5.47% P/E below 10
Glaxosmithkline (GSK) - now 5.4% then 5.42%
Merck & Co. (MRK) - now 5.6% then 5.39% P/E below 10
DuPont (DD) - now 6.1% then 4.85% P/E below 10
Kraft Foods (KFT) - now 4.3% then 4.22%

Volatility will continue. Don't get me wrong. But it is much better to get paid while you are waiting for the market to bottom. So far every pundit and expert that has suggested the formation of a market bottom has been, well dead wrong. Historically, the kind of stocks that I have illustrated here do not trade with such high dividend yields. Sure, there is always the danger of a dividend being cut. But companies such as these have long records of dividend maintenance, if not annual increases, regardless of recession or expansion.

Buyer Beware. Your stockbroker is not your friend - for the most part, rarely has been. Analysts are always late to the table to downgrade stocks as evidenced by a recent downgrading of General Motors just days ago. Mutual fund managers don't get paid for holding 80 percent cash - as I am. Buy and hold doesn't work. Preservation of capital in this most uncertain of environments is paramount.

What are YOU doing?

Wednesday, November 12, 2008


The "Big Three," U.S.-based automobile manufacturers, General Motors (GM), Ford Motor (F) and Chrysler (C), are all failed companies - in the United States that is.

With the past year's spike in gasoline prices, the lucrative market for gas-guzzling SUVs, pick-up trucks, Hummers, luxury cars, and the myriad of other inefficient products has collapsed. The Big Three are now left with a mix of uncompetitive products that few people want, let alone can afford.

GM promises better times ahead - maybe in 2010 - with their electric Chevrolet Volt. Sounds promising. But GM, in their infinite wisdom, thinks that Americans will be willing, not to mention able, to shell out perhaps $40,000 for a Chevy Volt, rationalizing it because they will have to spend that much less for fuel. Here's the problem with GM's lack of thought: who is going to finance $40,000 automobiles for the middle-class? Banks? GMAC?

With the U.S. in the midst - well just in the early stages - of a major recession, people losing jobs by the hundreds of thousands, consumers slamming the breaks on discretionary expenditures (like new cars), and lenders tightening their standards, who will be left standing to buy the ill-priced Chevy Volt?

The U.S. auto industry has been mismanaged for decades.
Of that, there is no doubt. The market generally allows most mismanaged companies to fail, to file for Chapter 11 bankruptcy protection, to hopefully reorganize - or liquidate and go out of business. However, given the state of the U.S. economy, thanks in every large part to an unregulated mortgage securities industry, "too big to fail" is the anthem of the day.

Treasury Secretary Henry Paulson and his crew are so perplexed as to what to do to stop the hemorrhaging, they seem to have given up on the $700 billion plan to buy "toxic" securities - mortgage-backed securities - from banks and other financial institutions. Taxpayer money is being used to make direct investments in banks - oh, and the insurance giant and world's worst speculator, AIG - hoping that the banks will actually lend it out. But now the banks have a problem, an increasingly huge problem. To whom can they lend these tens of billions? Consumers? With job losses mounting and no daylight in sight, fat chance. Businesses? Capital spending is dropping like a dead weight in industry after industry. Retail giants are slashing spending on inventories, new retail outlets, closing less profitable ones, even closing up shop entirely - think Circuit City and Linens n Things, etc. Auto dealers? Surely you jest.

But back to automobiles. This is what we need to know:

According to the Center for Automotive Research (CAR), as of September 2008, the Big Three employed 239,341 hourly and salaried workers, the motor vehicle and parts industries directly employed 732,800 workers in the U.S. That's a total of more than 771,000 employees. Spinoff employment, defined by CAR as expenditure-induced jobs, or jobs associated with restaurants, dry cleaners, banks and other retailers and services used by those employees, as well as suppliers to the motor vehicle and parts manufacturers, totaled 1,427,663 employees. That is a total of about 2.4 million jobs.

CAR recently prepared a flawed report titled "The Impact on the U.S. Economy of a Major Contraction of the Detroit Three Automakers." Dated November 4, 2008, I say flawed because while they diligently used two scenarios for their analysis, one reviewing the effects of a 100 percent shutdown of Big Three auto manufacturing in the U.S., the other - and more plausible - a 50 percent reduction, oddly enough they assumed that all of the direct Big Three employees would be out of work in the first year. I have to assume that this was simply an error, badly proof-read by two PhDs. If I take the liberty of focusing on their 50 percent reduction scenario - which would be closer to the mark if we witnessed GM halting substantial production and Ford and/or Chrysler contracting - and reducing their projection of nearly 2.5 million immediate job losses by reducing their estimate by some 150,000. This leaves job losses at "only" about 2.3 million.

At the Big Three, these are classic middle-class jobs. In 2007, production workers earned an average of $67,480, skilled workers $81,940 (U.S. Dept. of Labor, Bureau of Labor Statistics data). While anyway you evaluate this data, we are talking about an enormous amount of human pain. 2.3 million of our friends, family and neighbors losing good-paying jobs, dignity and their ability to pay their mortgages, credit cards, college tuition, property, sales and income taxes, even WalMart bills.

In fact, the flawed version of CAR's analysis estimates that personal income would decline in the first year by some $150 billion, personal income taxes by some $24 billion, and Social Security receipts by $21 billion.

The analysis did not address the potential impact on the ongoing housing price decline spiral, something that is absolutely critical to stop.

Can we, as a nation, really afford to allow any of the Big Three to fail, to substantially contract or even close? This is both an economic question and a moral question. Regardless of how we feel about the historically incompetent management of the auto industry in the U.S., the potential cost of a federal bailout is dwarfed by the potential tsunami cost to the economy. While we can readily estimate the immediate effects of a catastrophic failure of a critical manufacturing industry, it is far more difficult to measure the longer-term effects. CAR makes an attempt to do this. However, in their analysis, they seem to assume that many of these folks will fairly rapidly find themselves back at work, within a year or two. I'm not sure how plausible that is, are you?

While a lot of discussion has been fixated on the high production costs of the Big Three in the U.S. - high salaries and benefits, skyrocketing health care costs, pension costs - and these certainly are a competitive reality, less often is it mentioned that the root cause of the Big Three's predicament is their failure to produce desirable, fuel-efficient cars in the U.S.

Let's look at who produces what, based on federal government fuel economy measures of the 2008 model year. This list includes ONLY passenger cars manufactured in the U.S. Also, these measures are based on highway mileage, not city driving (which I believe to be a better measure of fuel economy).

Chrysler 29.3 mpg
Ford 29.5 mpg
General Motors 29.4 mpg

Honda 35.2 mpg
Nissan 33.5 mpg
Toyota 34.7 mpg

The difference between the foreign manufacturers' U.S. production and the Big Three is glaring.

But following is what really stands out as almost criminal:

The Civil Society Institute (CSI) is a not-for-profit think tank that focuses on energy and ecological issues. They illustrate what they call a startling “fuel-efficient car gap” between autos manufactured and sold in the U.S. versus Europe.

CSI found that the number of vehicle models sold in the United States that achieve combined gas mileage of at least 40 miles per gallon actually has dropped from five in 2005 to just two in 2007 — the Honda Civic hybrid and the Toyota Prius hybrid.

CSI states that "Overseas, primarily in Europe, there are 113 vehicles for sale that get a combined 40 mpg, up from 86 in 2005.
Combined gas mileage is the average of a vehicle’s city and highway mpg numbers.
CSI further states that nearly two-thirds of the 113 highly fuel-efficient models that are unavailable to American consumers are either made by U.S.-based automobile manufacturers or by foreign manufacturers with substantial U.S. sales operations, such as Nissan and Toyota.

"These cars sold in Europe meet or exceed U.S. safety standards, so there is no reason why they shouldn’t be made available to U.S. consumers," said CSI President Pam Solo.

In fact, the bottom line is that, based on the same "combined gas mileage" standard, automobiles sold in Europe are about twice as fuel efficient as autos sold in the U.S.

So what's wrong with this picture? For years, it has been speculated and/or observed that the Big Three actually know how to produce more fuel efficient automobiles. They have fought increased federal and state (California) standards for decades - successfully, whining that they either did not have the technology of it might bankrupt them.

Certainly, if the Big Three began manufacturing many of the cars here that they do so overseas, we would not solve the energy crisis overnight. There are well over 250 million automobiles on the road in the U.S. It would likely take more than 20 years to replace all of them with more fuel efficient vehicles. But as we built and sold them, we would so a solid, incremental decline in the need for importing crude oil and gasoline from volatile foreign nations, eventually eliminating the need. No amount of new oil drilling in the U.S. would come close to having that impact - ever.

So how do we proceed? The Big Three are suggesting bailout packages ranging from $25 billion to $50 billion. Seems like pocket change compared with the well over $1 trillion the federal government has already committed to saving the U.S. economy. These "bailout" estimates are dwarfed by the financial impact of sitting back and allowing GM or Ford or Chrysler to slip down the drain. remember, CAR estimates the financial impact of a 50 percent contraction of the industry in the first year alone at nearly $200 billion, with lasting effects for years to follow.

Financially, the argument for a bailout is obvious and compelling, the argument against a bailout riddled with political and economic inconsistency.

But can we trust current management of any of the Big Three with the task of rebuilding the U.S. auto industry? Look at their track records. Their companies are where they are largely because of their decisions to produce what they produced, to go for the huge profits from selling fuel-guzzling behemoths. Now many academics and so-called experts argue that their role is to produce and sell what their customers tell them they want. But tell me: which customers haven't wanted more fuel efficient vehicles? At any time? To a product end-user, lower operating costs is lower operating costs. Families and businesses, alike, benefit from lower operating costs.

Now the Big Three have argued for decades that producing fuel efficient vehicles, "even if it were possible," would add to their costs and deter buyers. Really?

The Big Three and others are selling cars - granted, small cars - for under $10,000 outside of the U.S. True, the average price of a car in Europe is much closer to U.S. prices. In some countries, they are much higher, some about the same, some lower, depending on a bizarre array of tax policies.

But surely, the Big Three have the technology and capability to transfer their foreign expertise to the U.S. Any bailout of the Big Three MUST require a wholesale transformation of vehicle production here and preserve jobs. It must emphasize the scale of fuel economy they produce routinely in Europe and have deliberately failed to offer here at home.

Strong political will is required for this. Congress must hear from its constituents on this. Do we really want to see 2.3 million of our neighbors lose their jobs, more homes plummet into foreclosure, further dragging our home values down? How about all of you in retail and other businesses that rely on stable employment?

It is time to be heard on this issue. Do it.

Tuesday, November 11, 2008

Charter for Compassion

A Charter for Compassion, crafted by a group of leading inspirational thinkers from the three Abrahamic traditions of Judaism, Christianity and Islam and based on the fundamental principles of universal justice and respect.

The TED Prize is presented to three individuals each year to support an idea that can change the world. In 2008, Karen Armstrong, author and religious thinker, received the Prize and was asked to make one wish. Her wish was for TED's assistance in the creation, launch, and propagation of a Charter for Compassion. The Charter will reconnect people of all faiths to the core idea that all traditions share: The Golden Rule. It is a grassroots effort to lift the voice of compassion above the current noise of hate, violence, and division.

The Charter will be written by the world using an innovative Internet platform and will be guided and finalized by a council of religious leaders. The Charter for Compassion website will be launched on November 11th, 2008 and will be a place for people to submit their own words and read, rate, and comment on others submissions.

Beyond the Charter itself, the website will be a place for the world to share their personal stories of compassion. It is imperative that we reflect the voices of people of all religions, ethnicities, languages, countries, and backgrounds.

The goal is to have a bank of narratives on how compassion (or the lack thereof) has touched individual lives, captured in the speaker’s native language. We are looking for personal stories; stories that overcome the boundaries of religion and culture, and show what it means to live a life of compassion.

People want to be religious, says scholar Karen Armstrong; we should act to help make religion a force for harmony. She asks the TED community to help her build a Charter for Compassion – to help restore the Golden Rule as the central global religious do

Karen Armstrong is a provocative, original thinker on the role of religion in the modern world.

Why you should listen to her:

Religious thinker Karen Armstrong has written more than 20 books on faith and the major religions, studying what Islam, Judaism and Christianity have in common, and how our faiths shaped world history and drive current events.

A former nun, Armstrong has written two books about this experience: Through the Narrow Gate, about her seven years in the convent, and The Spiral Staircase, about her subsequent spiritual awakening, when she developed her iconoclastic take on the major monotheistic religions – and on the strains of fundamentalism common to all. She is a powerful voice for ecumenical understanding.

Armstrong's TED Prize wish asks us to help her assemble a Council on Compassion, where religious leaders can work together for peace.

"I say that religion isn't about believing things. It's ethical alchemy. It's about behaving in a way that changes you, that gives you intimations of holiness and sacredness."

Karen Armstrong on


Wednesday, November 05, 2008


Not much to say this morning. So many of us are grateful for the opportunity to have been able to volunteer and serve so many candidates this year, especially President-Elect Barack Obama. And many of us can now take some time and rest, recuperate and re-energize, for the BATTLE of HOPE has just begun.

So much more work to do: revitalizing the economy, helping those among us that are most in need, renewing our commitment to education, changing our health care system so that its emphasis is better placed on benefiting its users, restoring the world's confidence and trust in America, ENDING the immoral War in Iraq and bringing our sons and daughter safely home. And so many other issues to effectively address.

Obama's election is a milestone in so many ways. Many interest groups will claim that it is THEIR triumph. But it is everyone's triumph.

I look forward to our rights under the U.S. Constitution being fully restored. I look forward to fair trade replacing free trade. I look forward to a revised tax system that maintains its progressive formula while improving the position of the lower and middle classes as those that have benefited most in recent years pay a fairer share. I look forward to the Medicare Drug Plan being revised so that the federal government can negotiate pricing with pharmaceutical companies - just like the Veteran's Administration has done for years. I look forward to a greatly accelerated renewable and alternative energy program that ends our reliance on imported fossil fuels forever. I look forward to the use of diplomacy and the end of the Bush/Cheney "bombs first" policies.

Nothing will be easy. But the tone has been set.

If you were like me, you may have shed tears at some point yesterday. For me, the first wave hit at about 2:30pm Mountain time, as I was home for half an hour, taking a break from my Campaign volunteer duties, relaxing into my routine meditation rhythm. Then again, last night during Obama's Chicago speech.

While I have either campaigned or phone banked or canvassed or simply showed my support for many presidential candidates over the decades, beginning with Robert F. Kennedy's candidacy in 1968, this campaign for Obama has truly been the most transformative in so many ways.

As a nation, we have the opportunity to awaken to a more spiritual, less combative rising sun. Let us all take stock of the challenges that we all face, both in America and worldwide. We have the opportunity to retake the higher moral ground as a nation.

Let us all hold our government accountable. Let us all continue to raise our voices in support of the issues that we hold dear.

Monday, November 03, 2008


As we find ourselves on the eve of Election Day, with lots of questions to open up regardless of who wins, a quick comment on the state of the stock market and the economy.

We had a good rally in equities last week, but we still closed out one of the worst months in stock market history. It is strange how many market pundits and professionals feel good about the markets as a result. Essentially none of the fundamentals have changed.

* Unemployment is going to increase substantially.

* The nation's manufacturing index has seen its bottom fall out, declining to its lowest levels since 1982.

* General Motors and Chrysler are pleading for a federal bailout. Personally, I prefer to see bankruptcies, the old fashioned way to restructure badly managed businesses. GM and Chrysler dug their own holes, relying on low MPG, bloated and expensive vehicles rather than offering a broad range of products that actually appeal to a broad market.

* Many people see uncertainty as far as government fiscal policy, deficit management, etc. regardless of who wins tomorrow. So safe havens in the stock market continue, in my opinion, to be well positioned companies that pay good dividends and have the wherewithal to continue to pay them during a big recession. I've mentioned many of these names in prior posts.

* While we have been looking for lower interest rates internationally as well as domestically, we really haven't seen sufficient cuts as yet. We might; I would not take the negative argument for granted. Big European rate cuts, as well as cuts in China, would go a long way to mitigating worldwide recession. But it is still an uncertainty to be considered when investing. Insufficient cuts would be viewed negatively by the investment community. But even big rate cuts may not have any positive effect, at least lasting positive effect, since we still cannot accurately forecast the breadth and length of the recession.

* We are seeing some progress in the financial community regarding home mortgages, with JPMorgan Chase doing workouts on bad WAMU mortgages, at least on a temporary basis. But with a potential flood of two million or more possible foreclosures over the next several months, much more must be done.

* We still face uncertainties regarding potential default increases on auto and credit card debt.

* The still unregulated, decentralized credit default swaps arena, a $62 Trillion or so market, remains a huge black cloud over the markets and economies worldwide. Even if we are able to move forward with regulating this market, there could be major unpleasant "surprises."

Bottom line: there is little logical rationale for markets to continue a sustained rally from its October 2008 lows. That said, while we could certainly see ongoing rally periods, potentially of explosive nature, they are likely to be short-lived. Markets dislike uncertainty, even if some pundits and professionals, alike, voice delight about what they think are low valuations. Remember: valuations based on earnings forecasts are pretty much worthless as we enter recessions. Analysts are universally slow in cutting forecasts, and universally laggards in issuing outright SELL recommendations.

All of this suggests a continuing bias towards not only testing October's lows, but very possibly establishing new ones. You can choose to sell on rallies or buy on further declines. I'm not so sure about buying on further rallies unless you are getting good, safe dividends as insurance along the way. It's simply speculation.

As the computers and androids always say in science fiction films and novels, "NEED MORE DATA."

Stock market bottoms are

Friday, October 31, 2008













Thursday, October 30, 2008


In case you didn't catch it Wednesday evening:

Wednesday, October 29, 2008


You can fool a good portion of the people a good portion of the time.

Simply by repeating a lie over and over again, and having the media simply look the other way and not ask the correct questions, a lie can fester into a perceived truth. Such is the myth of the Alaskan natural gas pipeline that Vice Presidential candidate and newly annointed "wack job," Sarah Palin, perpetuates during the closing days of the presidential campaign. And of course, poor John McCain bought it hook, line, and sinker.

Here are the simple facts, much of which is excerpted directly from the web site of TransCanada Corporation.

On August 1, 2008, TransCanada Corporation (TSX, NYSE: TRP) (TransCanada) received the support of the Alaska Legislature to award it a license for the Alaska Pipeline Project under the Alaska Gasline Inducement Act (AGIA).

"The Legislature’s decision represents a significant milestone in advancing this major natural gas pipeline project to connect stranded U.S. natural gas reserves to Alaskan and Lower 48 consumers. We are pleased to receive this vote of confidence from the representatives of the people of Alaska," stated Hal Kvisle, TransCanada’s president and chief executive officer. "This ratification of our license under AGIA will facilitate TransCanada’s continuing commercial negotiations with potential shippers, improving the likelihood of a successful open season and the construction of a natural gas delivery system from Prudhoe Bay to Lower 48 markets."

TransCanada will now move forward with project development, which will include engineering, environmental reviews, aboriginal relations and commercial work to conclude an initial binding open season by July 2010. During this period, TransCanada will continue its efforts to align with potential shippers. If sufficient firm contracts are secured in the open season, TransCanada would begin construction after regulatory approvals are received. TransCanada is targeting to have the pipeline in service by September 2018.

TransCanada applied under AGIA to build a 4.5 billion cubic feet per day (bcf/d), 48-inch diameter natural gas pipeline running approximately 1,715 miles (2,760 km) from a new natural gas treatment plant at Prudhoe Bay on Alaska’s North Slope to Alberta. Integration of the pipeline with TransCanada’s Alberta System will provide access to diverse, Lower 48 markets across the U.S. The application includes provision for expansions up to 5.9 bcf/d through the addition of compressor stations in Alaska and Canada.

With more than 50 years’ experience, TransCanada is a leader in the responsible development and reliable operation of North American energy infrastructure including natural gas pipelines, power generation, gas storage facilities, and projects related to oil pipelines and LNG facilities. TransCanada’s network of wholly owned pipelines extends more than 59,000 kilometres (36,500 miles), tapping into virtually all major gas supply basins in North America.


Here's the plain English:

The pipeline project is still in the earliest planning stages. In fact, you could say that it isn't even in the "planning stage." Rather, it is in the CONCEPTION STAGE. Largely where it has been for years and years. The only thing that has changed since Palin became governor is that TransCanada now has the rights to "think" about building a pipeline. NO CONSTRUCTION CONTRACT. NO CONSTRUCTION HAS BEGUN. NO HARD DEADLINE OR TARGET FOR GAS DELIVERY. NADDA. ZILCH. TransCanada is performing some engineering and environmental work. But that's about it.

During 2007 and 2008 to date, TransCanada has issued ONE PRESS RELEASE regarding the Alaska Pipeline Project. That was on August 1, 2008.

Here's a problem with the proposed pipeline. The United States has an abundance of natural gas. It has really only ever been an issue of price when it has come to building pipelines, either in Alaska or the continental U.S. But in recent weeks, as the price of crude oil has collapsed, prices have fallen so far that major natural gas producers and explorers have been scrambling for cash and selling properties.

Shipping of yet more natural gas from Alaska to the rest of us would more than likely keep pressure on natural gas prices. This is usually a huge disincentive for to produce more, let alone invest $40 billion in a new pipeline project.

Fact is anyway, more than thirty percent of crude oil is used for transportation fuels. Natural gas accounts for a drop in the bucket. Republicans have done virtually nothing to encourage the use of natural gas as a transportation fuel despite the fact that the technology has existed for years, with millions of natural gas-fueled automobiles tooling around Europe. Sure, you see the occasional fleet of natural gas powered municipal buses and other fleets around the U.S. But nothing is really being done to facilitate the availability of natural gas as a transportation fuel, let alone providing incentives.

So just what would we do with more natural gas? The biggest key to slashing our dependence on oil imports is the conversion of our automotive fleet to "something else." Natural gas, electricity, wind power, Flinstones' foot power, whatever.


Tuesday, October 28, 2008


One week to go. Lots of people have voted early. Lots of people have voted absentee ballots. LOTS OF PEOPLE HAVE NOT YET VOTED!

I'm not disturbed by the latter observation. Most people don't bother to vote until Election Day, period. It is disconcerting that people that have likely made up their minds choose to wait until November 4 to cast their votes. They might have to endure enormous lines, some polls may close before all voters vote. The weather - rainstorms, snowstorms, frogs and locusts - might discourage some voters from venturing out, convinced that the election is in the bag for their candidate (I am assuming they would be Obama voters).

My candid advice to anyone that has not yet voted, yet has the legal opportunity to do so early? GET OFF YOUR ASS AND VOTE AND DO IT NOW!

Just because every poll seems to be saying the same thing, that Barack Obama will win on Tuesday, November 4, does not assure anyone of that becoming reality. People still must vote, not just think about or pray about it.

Besides, Election Day is one week away. And the POLITICS OF HATE are heating up from the Far Right. We haven't heard the last of the "Robocalls." We haven't heard the last of veiled or outright racist hatred epithets. We haven't heard the last about "Joe/Barack the Socialist" or "Joe/Barack the Marxist" or "Joe/Barack the Taxer" or "Joe/Barack the Appeaser" or "Joe/Barack the Who Knows What."

We certainly haven't heard the last from John McCain the Liar or Sarah Palin the Liar or the Republican National Committee the Liars, or the rest of the Right Wing "distortion trust."

The next week will be ugly. And spin doctors have been known to pull rabbits out of hats at the eleventh hour. The Bush administration seems to be doing their darnedest to insight more enemies and potential conflicts with attacks on Pakistani and Syrian soil, despite ongoing protests from those governments and even the Iraqi government.

I can expect John McCain to demand that Barack Obama take a public stand on Alaska Senator Ted Stevens felony conviction. After all, we can forget that Stevens has been "pallin' around" with Palin for years, despite what she says on the stump.

And who knows what dirt will be dredged up about all those under $200 contributors to Obama's campaign, myself included? Or the fact that Obama has actually accepted contributions from firms/employees on Wall Street as well as Main Street, and how that might be spun.

As quickly as the polls universally swung to Obama's direction, they can swing right back, pun intended. That is why it is soooooo important to vote and vote as soon as you can!

In multiple states, attempts continue to disenfranchise voters, new and old, for any number of reasons. Yes, this year the Democrats have been aggressive in filing lawsuits to reverse or prevent these actions. Here in Colorado, Republican Secretary of State Mike Coffman - who is running for Congress in my own district - is being sued because of the possible disenfranchisement of tens of thousands of potential voters. And many pundits - and experts - believe that Colorado could be The STATE to watch on Tuesday.

Enough people who have been claiming they will vote MUST get out and actually vote so that disenfranchisement does not cost Democrats the election. Hey! I would like to continue to live in the United States as an American. A McCain win on November 4 just might be sufficient to push me off the cliff to find a new country to call home. I'll take higher taxes and single-payer healthcare in the UK or elsewhere if it means I won't remain under the crushing foot of Right Wing "I'm Patriotic and You're Not!" Republicans.

One last thought for the day: John McCain has been so concerned about taxing and spending and the need to freeze or slash (depending on the day) spending in order to pull us out of our dire economic circumstances. Yet at the same time, this great student of history - McCain, I mean - accuses Barack Obama of wanting to pursue Herbert Hoover policies. Let's not forget our history - our real history. Hoover cut spending at just the wrong time, exacerbating a huge financial crisis and transforming it into the Great Depression. Rather than "deficit be damned" and stimulating the economy by investing in it, Hoover pulled the plug and everyone watched as the nation circled the drain, landing with one loud "glug glug glug, THUMP."

GET OUT AND VOTE!!!!!!!!!!!!!!!!!!!!!!!


Well today, the U.S. stock market rise about 11 percent. The Dow Jones Industrials Average exploded for nearly 900 points to close above 9,000. The S&P500 Index also rose about 11 percent to close up more than 90 points to more than 940. And yes, the NASDAQ Composite rose more than 140 points to close above 1,600.

It feels to some like an eternity since we've been that high. And many pundits are already expounding that we have likely seen the bottom in U.S. stock prices and it's time to BUY BUY BUY!


The stock market is back to where it was five short days ago. The market rose today on fairly light volume, suggesting not so much a huge influx of buyers and bargain-hunters, but perhaps more a lack of sellers today. Now this could be due to "sellers' exhaustion." It could be due to an absence of anything else to sell. But it certainly isn't due to a change in the fundamental outlook for the economy.

We are still staring down the barrel of a recession of still unknown proportions and length. While there has been some very modest movement to unfreeze credit markets, those all-important markets are still pretty stuck. We are looking at the likelihood of somewhere between two and three million homes going into foreclosure between now and the end of the year, barring dramatic action that is not yet in the equation.

An 11 percent one-day move in stock prices is not going to dent consumers' desire or ability to spend spend spend this Christmas. And who knows? Credit card issuers - banks - may not allow consumers to spend spend spend.

The Conference Board's index of consumer confidence plunged from 61.4 in September to 38 this month, the lowest reading recorded in 41 years. That's 1967, people.

After many stocks have declined anywhere from 50- to 75-percent off their highs, Wall Street securities analysts are just now issuing sell recommendations...but darned few of them. I guess the Harvard Business School logic is that if you thought U.S. Steel was a bargain at $195 a share, it had to be an even bigger bargain ALL THE WAY DOWN to $30 a share. Sure makes sense to me. I call that "The Lemming Logic of Financial Analysis" or LLOFA.

Thanks to LLOFA, tens of millions of retirement plans have been driven off a cliff this year. Oh no. It's not the first time, of course. But one must wonder...does it ever get any better? Do "highly educated, highly trained" people ever learn from history, let alone their own experience?

A poorly functioning clock is right twice a day, so they say. The investment industry only prays that we can't tell time the rest of the time. Or we are too attention deficit impaired to remember any past experiences.

I guess I don't quite fit that mold.

Sure, stocks are cheap if you believe that they'll have good earnings next year - the earnings estimates that analysts have yet to get around adjusting for a recession of ANY magnitude. And stocks appear cheap based on last year's earnings, very cheap. But unless you believe that this recession will be of shallow and short-term duration - which you know I do not - all you can say is it's nice to have an 11 percent up day for a change. But one day does not a trend make. And this day ignores any possibility of a recession.

Defense - no, not the manufacturers of grown-up war toys - remains the best strategy, in my humble opinion. Can the market still decline to 7,200 and 700 on the DJIA and S&P500, respectively? Nothing has changed from five days ago other than the market has been down and up and down and up.

If you are a trader, no doubt you'll find opportunities to bet on. But until there are clearer signals about our economic health, can you really return to serious investing? Five days...Where will the market be five days hence? Just after a presidential election?

Friday, October 24, 2008



Although this commentator was recently quoted in a print media outlet as "a former stockbroker," most of my career in the investment arena was spent as a securities analyst, portfolio manager, and research director. Be that as it may, as investor attempt to find their way, with most serious investors likely keeping most of their cash on the sidelines, many market pundits and manager/advisor wannabe's are simply perplexed.

Lately, as I observe all of the financial media via print, television, Internet outlets, and investment firms, there is talk mainly regarding two schools of thought - bargains and volatility.


A reasonable person - investor or otherwise - might define "bargain" as something that can be purchased at a below-market, or below-true value, price. I suppose you could define bargain in other ways. But these definitions seem to apply to things like stocks and real estate. So I'll stick with them.

In order to identify a bargain, you need to be able to relate its price to some historic norm or, on a more speculative scale, to a reasonable expectation of future value based on performance. Herein lies the problem with the argument for bargain-hunting.

How reliable are forecasts for future earnings? Sure, if you are that now rare "buy and hold" long-term, ten-year investor, you might be able to throw darts. However, if you're more focused on one, two, three, even five-year horizons, can you truly forecast, with any accuracy, earnings for many companies? And if you can, what value do you place on those earnings? In the face of a severe recession, how accurate can corporate CEOs really be when discussing future prospects with analysts?

I know, some readers may be thinking that I am beating the proverbial dead horse. But as you watch the incredible market volatility, particularly in light of the observation that quite "suddenly" market professionals have only just begun to consider the makeup of the current recession - it's depth and length - you just have to wonder what people are thinking, and who's best interests they have at heart, when they suggest that the stock market is at or near a bottom.


The other day, a number of supposed investment professionals were quoted in our daily newspaper regarding volatility:

"I don't believe this volatility is the real norm..."

"Volatility will persist..."

"The current volatility level has to do with the unique circumstances of the global credit crisis and the bottoming of the bear market."

"It is not uncommon for volatility to increase for prolonged periods."

"Definitely abnormal, but tumultuous times bring volatile markets."

"Unfortunately market volatility is here to stay for a while."

"For now we will continue to see wild swings in either direction."

Oh my! And these folks are actually paid to manage billions of our dollars? Golly gee! The market is volatile. Yep.


On October 10, I suggested that this stock market might not see a bottom until around 7,200 on the DJIA and 700 on the S&P500 Index. This morning, the stock market has, so far, hit an intraday low of about 8,200 and 853, respectively. We can be looking at further declines of 12 percent or more in the much-watched averages. Some stocks will decline more, some less, of course.

But this bear is not finished growling.

This morning, OPEC announced "their intention" to cut oil production by 1.5 million barrels a day. That's more than "Sister Sarah" and other oil industry "experts" believe can be pumped from ANWR ten years hence! It's a pretty big cut, even given collapsing near-term demand for oil.

I keep harkening back to the recession of 1973-76 and THAT stock market decline. We are in the midst of the biggest market collapse since at least that period, and perhaps yes, since the 1930s.

The following questions do not yet have clear answers:

How high will employment reach?

How much will gross domestic product (GDP) decline? And for how long?

When the dust clears, will there be a U.S. auto industry? And if not, how startling will be the ripple effects throughout the economy? Under Clinton (yes) and Bush trade policies, we have shipped a huge portion of our basic manufacturing capacity for goods overseas, perhaps not to return...ever. We could yet see several million more Americans out of work, and perhaps one or two million is a low number.

Will declining energy prices once again dent our will to switch to alternative fuel sources?

When will inflation finally rear its ugly head? While it is imperative for interest rates to continue to decline internationally in order to try to mitigate the recession, the end result of such declines is often inflation. And that will again result in much higher interest rates - bad for home buyers, for credit card holders, for the bond market, for equities, for everyone.

Despite OPEC's decision to cut production, the price of crude oil has plummeted. This morning, it broke $63 a barrel, down 57 percent from its peak. This is good news for consumers of energy, bad news for producers, bad news for developers of alternatives, possibly fatal news for General Motors and the development of the Chevy Volt electric plug-in.

Gold continues its march lower, suggesting that inflation is not yet seen as a problem, but rather deflation. And the evidence is all around us.

I must say, at the same time all this volatility and horrible economic news is before us, circumstances have created potentially great "bargains" in equities - assuming that you can see an end to the current recession and your investment horizon is long enough. Baby Boomers perhaps cannot see ten years down the road as an investment horizon for equities. At some point, especially after they evaluate their third quarter 401(k) and other retirement plan statements, they will (we will) at least gradually shift to less volatile investments. This will create less demand, perhaps for equities.

As suggested in earlier posts, this commentator has tip-toed back into the market during this recent leg of the bear. But 75-80-percent cash still feels pretty good to me. No one catches bottoms, well most professionals don't. Sure, we can all agree that bear markets bottom before recessions end. But when will this recession end? It is not like any recession that we've experienced in some time. And virtually no one that is managing money right now, hundreds of billions of dollars of investment portfolios, was around the stock market in the early '70s, let alone the 1930s. No, I wasn't around for the 1930s either. But I didn't learn about the investment climate of the 1960s and '70s through text books and lectures during my MBA years, either, I lived them. "B school" didn't teach me anything about effective investment management despite my investment in the degree. I simply had to get my hands dirty.

Today, we have a system of portfolio managers and securities analysts that too often landed in their positions simply because they "went to school." Think about that next time you open up your reports from your mutual funds and retirement plans. These folks often rely on other analysts, or equally bad, what self-serving CEOs of corporations tell them. They see trees, but not the forest. They follow unsustainable trends. They "go with the flow" and explode with the bubbles.