Month: February 2009

Financial Dialysis

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

Citigroup just got the cliff notes for the stress test.

While Bernanke may say the test is not “pass/fail”, the financial markets think otherwise, and Citi was heading into the finals with a D- minus average, at least until this morning.

The capital infusion engineered by the Government (and still subject to the actions of preferred shareholders, who are being effectively crammed into common by the terms announced today), will operate as a cushion against the “worst case scenario” assumptions being used to redetermine Citi’s ability to survive further downturns in the value of its toxic assets.

Effectively, Citi is on financial dialysis provided by the US taxpayers. Why is it in their interest to do so — as they have also already done with AIG?

The fundamental reason has not really been stated by either the Fed Chairman or the Obama Administration — perhaps because that reason may be even more galling to taxpayers than what has been said publicly. Both Citi and AIG are core players in the globalized financial marketplace, intimately linked with the operations of foreign central banks (many of whose Chairs are Citi alumni) — and it is these banks who control the relative-value fate of the US dollar. For them, the stability of Citi is more important than a few more trillions in the official US deficit.

When Treasury Secretary Geithner says he’s for a stong dollar, he really does mean it in the worst way.  If he and the rest of our financial industry overseers were to let Citi go, or directly nationalize its bank subsidiary, like so many cable TV commentators urge — they apparently think they have the chops to be Treasury Secretary because they read financial news —  our distinguished lenders across the globe could come down with a very bad case of cold feet when it comes to holding US dollars.

In that circumstance, the Fed would be forced to buy US Treasuries by the bushel just to keep mortgage rates at something below stratospheric levels.

As Obama has said about this crisis, “it’s all connected”. Just be sure we connect ALL the dots — fundamentally, this calamity is about a  margin call on America from our financial landlords abroad, so we have some things that are pretty ugly EXCEPT when compared with the alternatives. Not everyone on dialysis is a zombie — many indeed live to a ripe old age (or can even hide out in the hills of Pakistan). Citi should be so lucky!

Don’t Quit on Your Country

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

Professor Obama held us after class tonight with a candid and confident, tutorial on the future with a textbook focus on clearly-articulated understood forward priorities: energy independence; health care reform; educational opportunity; and repaying our debts. But the emotional heart of the President’s first address to Congress was clearly the symbolic call to young men and women in high school not to quit on themselves or their country by dropping out.

The message to the rest of America – younger and older; parents and CEO’s; teachers and technicians; Wall Street traders and cable commentators; bankers and bricklayers – was unmistakable: the future is ours if only we’ll
take responsibility for it.

The politics of the speech will sort out in due time and course; the precise words of the speech will fade in memory; but the music of the speech was intended to resonate for a while longer.

The President sought to explain to Americans how Government has a central role to play in getting us out of the economic hole we have dug for ourselves, especially in the case of the banking system. But there was an equivalent call for personal responsibility, especially for fathers and mothers. And there was a call for common sacrifice of pet projects by both Democrats and Republicans, and by the White House itself. The tests will come soon enough in the budget negotiations – to be followed quickly by debate on health care and the future of Social Security.

The Republican response sounded like it had been recorded before the President’s speech; it was noteworthy to hear Governor Jindal complain about a stimulus package passed without being read, as he responded to a speech he obviously hadn’t read (or if he did, he obviously plagiarized). Obama will be happy enough for Jindal’s modest echo of his praise of America’s potential.

It will be interesting to see if CNBC will again attempt to trash this articulation of Administration policy as insufficiently detailed to please the derivative traders that network has come to represent. This was not a speech for Wall Street but for Main Street, and Main Street will understand it: the President is being “doctor beat the recession” – his audience will understand that. Except for our financial institutions, America is on its way out of intensive care and on its way to the “recovery room”. As for the banks, it will take a while, but at least it looks like the “stress test” from this doctor will be serious business, and that there may be some banks put on Federal dialysis in the form of  common equity.

Chairman Bernanke of the Fed indeed earlier said that the stress test is not “pass/fail” – any more than the traditional annual treadmill cardiogram simply concludes that if you’ve got cardiovascular disease,   you’re going to die soon! The question is what does the test diagnose and prescribe: a pill, a bypass, or the paddles. Different banks will get different medicines.



Just Pass Me the Damn Bill!

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.  

 It was Keyshawn Johnson, then of the New York Jets, who titled his not so famous book very similarly to the above.  President Obama may have better luck than Keyshawn, who is now in broadcasting, not on nay active roster. But to get there, the President, who seems quick to own up to his mistakes, needs to reposture his approach, especially with respect to BOTH the far left Democrats and the far right Republicans who are each trying to see if this new guy can be rolled.

 We know the Democrats game — since the stimulus bill gets around the “pay-as-you-go” formula they themselves insisted on, the House loaded the bill up with every pet Democratic project whether stimulative or not, to get them in under the tent: wholesale earmarks, rather than retail, but still a huge burden for their new leader in the White House.

Why? Becasuse they handed the demoralized and defeated Republicans an issue and a a weapon with which to beat Obama about the head — “business as usual”. Veterans of the hypocrisy game suddenly were able to credibly (if not quite fairly) accuse Obama of the same sin — although it wasn’t really his bill anymore, but some guy from Wisconsin named David Obey who wasn’t even on the ballot in 49 other States in November.

So it was a mistake for the President to let the House Committee chairs and Nancy Pelosi write his bill. Now he must use the moderation gang in the Senate to get back some measure of control of the package, and pull out all the stops to get back in control of the debate.

Suggestion: If John McCain and Lindsey Graham want to filibuster the bill, “bring it on”. The public won’t stand for it, and the Republican right knows it. Forget about pleasing the Cable TV folks — they just want to keep the election going because it appears to help ratings. Go right to the people — even Joe the Plumber — and remember the great phrase from the election campaign:  “Enough already!”