Suez, America-style

It’s no longer any secret that the USA is deeply in hoc to foreign governments, particularly China, Japan, the Petro States, and increasingly Russia. We have two very large deficits that have to be financed: a trade deficit and a fiscal deficit. Americans buy more than they sell. We consume more than we earn. To keep the process going, Americans and our government have to borrow money from abroad. At rates that are totally unprecedented.

As I.O.U.S.A. notes, foreigners today own a larger share of American society than ever before. (During WWII the U.S. government ran up much larger deficits as a percentage of GDP, but these were financed primarily by American citizens themselves.)

This leaves our economy incredibly vulnerable. But how? It’s easy to understand military vulnerabilities, not so easy to contemplate economic vulnerabilities.

The 1956 Suez crisis has much to teach us…..

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Posted in Dollar, Economy, international trade | 15 Comments »

Movie Review: “I.O.U.S.A.”

Who knew someone was working on a documentary following David Walker’s Fiscal Wake-Up Tour? I interviewed Walker for an article about the Tour earlier this year, during the period when much of this movie was shot.

Anyway, tonight there was a special screening at 8PM in select theaters across the nation (see the Trailer at the bottom of this post). All the theaters in Manhattan were sold out. So I schlepped to the nearest theater with seats, out in Queens. The showing promised a live talkback broadcast into the theater from Omaha where David Walker, Pete Peterson, Warren Buffett and the heads of AARP and the CATO Institute all spoke. The talkback was disappointing: it was hosted by Becky Quick (the Squawk Box anchor on CNBC) who fumbled her lines, asked poor questions, and was unable to keep the panelists on topic. But more on that later.

How was the movie? Good, but incomplete. Kudos to the director for not dumbing down the subject too much for the audience. There was substantive discussion about

• the current budget deficit,
• about the unfunded liabilities for Medicare and Social Security that threaten to wipe out ALL government spending (except those two and interest on the federal debt) by 2030,
• about poor personal savings rates and how that leads to dependence on foreign creditors to finance our way of life and
• about the trade deficit itself, which leads to still more dependence on foreign largess.

All of the above included some ingenious animation that explained the math behind the issues very clearly. For this reason alone, everyone who pays taxes should run to their movie theater to see this when it hits wide release Friday. Also the trade deficit section brought in Warren Buffett to narrate his parable about Thriftville vs. Squanderville, which I’ve published under the Tutorials section of this blog for some time. Audiences will find that appealing as well.

But the movie was incomplete……

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Posted in Economy, government spending, politics, taxpayer issues | 26 Comments »

Foreigners push back….

How often does the NY Post beat the Journal and the Times to a good financial story? Today they did, noting that Lehman tried to secure $5 billion of rescue capital from South Korea, but failed to do so:

Lehman Brothers’ embattled Chief Executive Dick Fuld nearly struck a deal to raise almost $5 billion from South Korean wealth funds and institutions but the pact disintegrated, according to sources familiar with the matter.

That’s the meat of the article. No word on why talks broke down, what Lehman was offering to sell the Koreans, etc.

Though the article is short on detail, it remains very interesting thematically. Sovereign wealth funds that rode to the rescue in the early part of the credit crunch have suffered some brutal losses as I wrote in Post Infusion Blues (see bottom of this post for a nifty chart). Once bitten, twice shy: it’s likely that the Lehmans, Merrills, Fannies and Freddies of the world—who are in desperate need of MORE rescue capital—are finding that foreigners aren’t willing to write any more checks.

Speaking of Fan and Fred, the WSJ published a front page story today with this crucial paragraph:

[Freddie] had to pay hefty interest rates [in an auction of its debt yesterday]….Five-year notes were priced to yield 4.172%, or 1.13 percentage points above yields on safe Treasury notes, the highest “spread” Freddie has ever paid on such debt.

Also this: in this latest auction, Europeans/Asians bought 41% of Freddie’s debt, which is down from an average of 51% last year.

Among the largest buyers of Fannie and Freddie debt are foreigners recycling the dollars they collect as part of their trade surpluses. This is the ultimate source of many of the dollars flowing into the U.S. mortgage market. We buy foreign goods, foreigners get our dollars in return and then have to invest them somewhere. Many end up invested in so-called “agency” bonds; the agencies (Fan, Fred are the largest) use this cash to fund home loans.

If foreigners stop buying agency debt, the capital available to finance housing will be reduced significantly, and mortgage rates will spike.  Anyone who thinks the fall in housing prices can’t get much worse hasn’t considered what will happen if mortgage rates go to 9-12%. The trend isn’t looking good lately as you can see below………

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Posted in Economy, GSE, international trade | 2 Comments »

Lowenstein Lecture

In researching my last post, I found this video. It’s long, but worth it. One of the best summaries of the state of the American economy that I’ve seen or read.

Skip the introduction…

Posted in Dollar, Economy, Fed, Interest Rates, bailout, banking, bubble, credit crunch, housing, inflation, taxpayer issues | 3 Comments »

Summer Reading

I had a chance to catch up on some reading while in South America. Two books that may be of interest to readers of this blog include Roger Lowenstein’s new book While America Aged on the various pension crises facing America and Martin Mayer’s older book The Greatest-Ever Bank Robbery on the collapse of the savings and loan industry in the late 80s.

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Posted in Economy, banking, bubble, credit crunch, government spending, taxpayer issues | 2 Comments »

MBA’s Kempner out, replacement a doozy

This is old news at this point, but since I’ve been on vacation (a few pics here), I thought I’d note it just the same.

A few days after we published our expose of Jonathan Kempner’s poor performance as CEO of the Mortgage Bankers Association, he announced his resignation. He was most likely on his way out already, but I got word from the inside that the timing may have been accelerated in order to save those concerned some embarrassment.

Last week the Washington Post published a piece noting that deal volume in the D.C. commercial real estate market has collapsed this year. With vacancy rates ticking up and more space coming online, rents are sure to decline as well. Taken together, these trends demonstrate the sheer stupidity of Kempner’s choice to “invest” MBA’s rainy-day assets in a building purchased at the top of the market.

It would be interesting to know what kind of exit package Kempner received. One source said it will be a year’s pay, or more than $1.0m.

Making the story more interesting is MBA’s choice to replace Kempner: John Courson.

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Posted in housing, politics | 2 Comments »

Back from vacation

Hello again all. I’m back after 3 weeks in South America on the Amazon River and sailing the Galapagos Islands. The Amazon was fantastic, though the wildlife in Galapagos made for better photographic opportunities:

GIANT TORTOISES

BLUE-FOOTED BOOBIES

MARINE IGUANAS

AND LOTS OF BABY SEA LIONS

Along the way, we stumbled upon a sea lion in labor. We watched her give birth.  Amazing but poignant: the baby was still-born.

And, shortly, an update on the situation at the Mortgage Bankers Association, where the CEO resigned, a few days after OptionARMageddon exposed his poor performance.

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On vacation….

Hi readers. I’ll be on the Amazon River in Peru and the Galapagos Islands off Ecuador thru the first week of August. So if you don’t see any new posts for a couple weeks, you know why!

No doubt there will be lots of news on which to comment by the time I’m back…..

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Obama The Practical

A guest perspective……..

BY JOHN WINKLER

It’s fun to watch Obamaniacs’ disillusion over Their Chosen One’s changes of position. They seem to view his modifications as a form of treason but it’s really been quite clear that what the man is is a very good politician. He seems to have always understood that the way to power was the path of the empty vessel—allowing himself to be filled by his fans with whatever they needed to see in a national leader. And so he was painted as a change agent, a new kind of politician. And much of this has come from a national perspective. But in Illinois the view has been just a little bit different.

The salient point to understand about Illinois is that it is one of the most politically corrupt states in the nation. We have one scandal after another, one trial after another, and we probably hold the record for the number of governors sent to the big house. Our current leader just may be on the first leg of that journey.

None of which is to say that Obama is corrupt. But he didn’t get where he got by failing to understand how the system works. And there is no question he has been part of that system.

The country is now familiar with the name Tony Rezko, the convicted political fraudster who’s now in jail for his unsavory gaming of the system. Rezko was the very first contributor to Obama when he was just starting his career. He was a man who was known as a purchaser of politicians, so it was more than a little odd that Obama allowed Rezko to essentially give him a several-hundred-thousand-dollar discount on his house by buying his backyard for him. When caught Obama says he made a mistake.

By comparison some of his political endorsements are hardly worth mentioning, but they say a lot about his method of operation…….

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Posted in politics | 4 Comments »

Kempner doubling-down on MBA’s future?

Like the rest of the real estate universe, the Mortgage Bankers Association is in trouble. Membership is in decline, meeting attendance is down and some of MBA’s largest conference sponsors are either out of business or cutting back. With this in mind, it seems a poorly-timed decision to double-down on real estate. But that’s precisely what CEO Jonathan Kempner did, using MBA’s reserve fund to construct brand new headquarters.

Taking the hit for MBA’s financial difficulties include a “low double-digit” number of staffers that were recently fired as well as a subset of members for whom dues will increase.

Kempner refused comment for this article through MBA’s SVP for Communications and Marketing Cheryl Crispen, but it seems clear he’s not sharing the financial pain. In the year ending September 2006—the latest for which MBA’s tax filing is available—he pocketed $1.15 million in salary, bonus, benefits and expense reimbursements, ranking him among the “top earning” trade association CEOs in the U.S. according to a National Journal article published earlier this year.

And his comments to National Journal suggest he isn’t expecting a pay cut any time soon. One would seem to be in order…..

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Posted in bubble, housing, politics | 3 Comments »