October Launch for Microsfoft Windows 7

Looks like Microsoft October Launch for Windows 7 is looking more certain. Final release candidate is out and barring any jarring problems it will be out late October. Most of what I have heard about it is pretty good and I'm not exactly a lover of their horribly bad software.

Appleinsider has the scoop here.

WSJ Talks About Natural Gas As Potential Solution to Oil Dependence

Great piece in the WSJ on huge discoveries in natural gas. In the US, natural gas is probably the closest thing to quick fix for oil consumption in automobiles. A hybrid/natural gas has the potential to get us off foriegn oil. Boone pickens has been a huge proponent of natural gas. Link here and excerpt below:

Just three years ago, the conventional wisdom was that U.S. natural-gas production was facing permanent decline. U.S. policy makers were resigned to the idea that the country would have to rely more on foreign imports to supply the fuel that heats half of American homes, generates one-fifth of the nation's electricity, and is a key component in plastics, chemicals and fertilizer

But new technologies and a drilling boom have helped production rise 11% in the past two years. Now there's a glut, which has driven prices down to a six-year low and prompted producers to temporarily cut back drilling and search for new demand.

The natural-gas discoveries come as oil has become harder to find and more expensive to produce. The U.S. is increasingly reliant on supplies imported from the Middle East and other politically unstable regions. In contrast, 98% of the natural gas consumed in the U.S. is produced in North America.

Senior Secured Are About to Come Out--Things Heating Up

I think it's irresponsible for the White House to put Chrysler into Chapter 11 and not negotiate with the senior secured. Just going through JP Morgan which one could argue has awfully close government ties really clouds this situation up.

Also, giving the senior secured the same amount as the rest of the creditors and not negotiating with them directly is not only unfair but its absurd. This is not being hanled well.

Great Chart on US Credit Markets

The first point is while this is a cool chart I am pretty sure it's wrong.

The general point here is there is a solvency problem and without write downs you can't have a healthy recovery. However, they are using the 350% debt to GDP ratio which double counts a lot of debt. I've seen numbers that show if you eliminate all the double counting that goes into this statistic it's about 240% or so. This suggests only about 70% of GDP in write downs to get back to livable levels.

Chrysler Negotiatons Fail To Secure all 46 Lenders

Just a quick comment. Once this goes to the judge do the firms holding out have conviction they can convince those in the rest of the class to vote for a different deal? Are all the "hedge fund hold outs" senior secured? What voting % of the senior secured do they hold? These hold outs must believe they can win a class vote to be holding out if 40+ other creditors are agreeing to this deal.

The 2.25 billion the White House offered last night I thought was in the range except I thought:
1) There should be differentiation between senior secured and secured. The reporting I am hearing is the offer does not differentiate which seems way off.
2) Cash is king and Fiat is putting up zero cash which is just plain stupid. Fiat should have given up some equity to get this deal done. The numbers that the government is offering just don't make sense to me and it feels like Fiat is really getting an amazing deal. They are also replacing a CEO- Nardelli who may have a bad political reputation but I think is a very hard nosed, tough efficiency expert who had a track record for improving margins and cutting costs at Home Depot.
3) I think it could be argued that the votes of Citibank, JP Morgan etc, shouldn't count towards the super majority to cut off votes for the class given the government exerts significant control over these entities.

The White House is trying to portray these guys as "hedge funds" that holding out. I didn't know Oppenheimer was a hedge fund. In this entire financial crisis how many hedge funds have gotten TARP money? Zero. Oppenheimer is a bond investor I interviewed at right out of business school. Got nothing to do with a hedge fund.

Lastly- I don't think the White House really wanted a deal here "that bad" because the bankruptcy court is the only place it get get rid of all those dealers. The bankruptcy court can ammend or eliminate those deals any way it wants to in order to make a more viable entity.

Map of the Week: Where Walmart Gets its Goods

Technically this is map#2 but maps are cool. This is a map via Marginal Revolution of where Walmart gets it's goods from. In case you were wondering, it's also a map of what happens when the world's third largest economy artificially fixes its exchange rates way too low in order to make it's good more competitive. What does the other map look like? A bunch of debt being accumulated in exchange and artificially low interest rates.

Raja Koduri Heading to Apple- Samsung Getting the Boot?

I had this post a bit ago:

Additionally the supply the guts to pretty much everybody else (processors and screens). They do the chip for Apple's IPhone for example. Will Apple be able to get its recently acquired chip unit up to speed enough to start making its own processor (PA Semi)?

Looks like the Apple hiring machine is really ramping up. I'll be surprised if they are able to launch their own chip this early, but by next July--you bet. BTW the sentiment with producing your own technology internally--while it sounds like paranoia I think is a valid concern. I've seen certain companies in Asia try and rob tech blind. I think it's a risky move and I wonder what kind of edge it can bring Apple but I understand it.

Via the Inquirer:

A DAY OR SO AGO, we mentioned that Raja Koduri is leaving ATI and going, going... somewhere quite interesting. We've just heard from sources deep inside 1 Infinite Loop in Cupertino, California that Raja is heading there.

Between PASemi, Bob Drebin and other things we can't talk about yet, Apple is building up some serious hardware talent. All they need now is a good reliability person and a fire chief, and things will get really interesting on the hardware front in Cupertino

North Korea At it Again- A Solution to the Problem

North Korea is at it again with threats to test ICBMs and start enriching Uranium if it doesn't receive aid. What's the solution? There is only one lever that controls North Korea and that's China. China is the door to the North Korean peninsula and Japan is the key.

The only way to get China to exert it's influence is if there is a threat of Japanese counter moves to the NK effort. Specifically a change to the post WWII constitution in Japan that would allow Japan to scale up its military. This should be done in diplomatic back channels so that the Chinese see that if they stop the North Korean nuclear weapons program that Japan may not militarize.

The idea of Japan rearming is a sensitive matter to China and everyone else in the region. I think if North Korea starts becoming a strategic problem for China, it will exert the control that only it has. Russia has some influence but nothing compared to China.

Additionally, the sporadic nature of these clamors for attention by the government of North Korea make me wonder if the humanitarian situation there is a not a lot worse then generally reported. Via NY Times with an excerpt below:

— North Korea said Wednesday that it would start a uranium enrichment program, declaring for the first time that it intended to pursue a second project unless the United Nations lifted sanctions.

Calling the Security Council “a tool for the U.S. highhanded and arbitrary practices,” North Korea also threatened to conduct nuclear and intercontinental ballistic missile tests.

It would take North Korea months to prepare a nuclear or ballistic missile test, and some Western intelligence agencies suspect that it has already been pursuing a covert uranium-based nuclear program in parallel to its known plutonium-based program. New nuclear tests would use up some of North Korea’s fissile material, but give it more information to improve its technology, as would new missile tests.

By making public threats, the North used a familiar tactic to raise the stakes in the standoff between itself and Washington. Analysts say the country needs outside aid to feed its own people and outside enemies to justify its harsh rule. Since the collapse of the Soviet bloc, when North Korea lost most of its trade partners and aid providers, the impoverished country has used threats as a survival tactic. (When the United States and South Korea provide the North with aid, the government internally tells its people that the “enemies come groveling with tributes.”)

Nice Piece on Good Acquisition Market for IPhone Apps

The development cost is often low--development time is low--brand new market. Entrepreneurs and investors who have done small but smart projects here are starting to get some nice exits. I think there is still room here and I also love IPhone games still as a way to create interesting projects and get a nice exit even in a bad market overall for exits. Also still room in creative location based stuff. Is it a venture size business for someone who needs to put a lot of cash to work? Not so much--but for a scrappy unemployed entrepreneur looking for an idea. Why not?

Via Businessinsider:

The iPhone app store is a huge success for Apple (AAPL), with more than 1 billion apps downloaded in nine months. But it's also turning into a hot acquisition market.

The latest deal: IAC (IACI) has purchased Urbanspoon, a restaurant-finding site/iPhone app that Apple lists as the no. 11 most popular free app of all time. (Helped, no doubt, by an Apple television commercial.) The team will stick together in Seattle, now working for IAC -- after an "offer [they] couldn't refuse."

Earlier this week, Amazon (AMZN) purchased Lexcycle, which makes Stanza, a free e-book reader app. Presumably, the Stanza team will now build the next generation of Amazon Kindle mobile apps. (In the meantime, it promises no changes to Stanza.)

And we've seen a few other deals over the past few months. For example, Amazon rival Barnes & Noble (BKS) purchased an entire e-book platform -- Fictionwise -- which includes an iPhone e-reader app. Tumblr, the NYC-based blogging service, purchased an app called Tumblrette, which is now the official Tumblr app.

This makes sense. Many of the most successful apps are nimble startups run by a few people with little or no outside funding. That means apps can be acquired -- and engineers and designers can be 'acq-hired' -- for a price that's fair to the buyer and probably very nice for the seller.

So who's next to get purchased?

Just A Quick Note on the GDP #s and Lost Opportunity with the Stimulus

• First, I got the numbers a little wrong and thought the number would be worse by about a point at least. Some of that delta is consumption which I feel like is gasping out and which eventaully fall more. That's an advance number though and let's see if we don't get a final print a little lower.
  
• To me this is all about the lost opportunity with the stimulus package. Take a look at the indicators coming out of China which used its stimulus dollars on infrastructure. Specifically energy infrastructure, transportation, solar power to fuel their factories, and long term projects.
• Most of the economic #s out of China are just outstanding. It may be partially temporary but it's still incredibly impressive and I think reflects a government approach that was far more strategic.
  
• We have a long term problem, short term transfer payments are not going to solve it.
  
• Instead we wasted the money on a bunch of pork and transfer payments which wouldn't be so bad except we had to borrow abroad to finance them. If you are going to borrow from abroad it sure has hell better be on investments that generate a return.
• An energy grid, fuel efficient cars, next generation energy technology all generate huge dividends not only in economic competitiveness but national security benefits as well. I don't like government spending but these are things our country needs to stay competitive and get off foreign oil which lots of folks care about as a top issue.
  
• Borrowing costs for the US are starting to rise already...I feel like the stimulus plan was a wasted opportunity to get this country on the right track. We need to fix this while we stil have the ability to finance it cheaply.
  

The Fed Inside Pandora's Box, and Why Would Bernake Want this Job?

The Fed seems like it's in an interesting box with respect to its program to print money which is about 1/6th of the way through its $300 billion announced program. Why?

• The 10 year which is the benchmark for 30 year mortgage loans (duration issue) is creeping up. The fed came out with an announcement which was exactly right--pretty much status quo yet the bond traded down.
• The longer this bond has a low yield, the longer mortgages stay low. The longer they stay low, the more support that provides the economy to counter balance deflation in risk based assets. Policy makers probably want one additional quarter of rates this low which is going to be very hard to achieve.
  
• Most of this is folks treading every so slightly back into risk based assets and/or moving from dumping long term bonds into short term ones (not good). If they ever start do so in a herd like fashion that Fed is going to have a difficult time trying to defend that number and they will need lots more than $300 billion to do it.
  
• If they accelerate their buying program now, and interest rates keep going up despite their efforts, this will undermine Fed credibility and their ability to intervene and be effective.
• My guess is they wait a bit to see if the rise in rates has life of its own--as it creeps way past 3..it will be forced to speed up its program and/or increase the size.
  
• If they start announcing numbers of money printing that are way too big they may undermine the dollar which makes the chance for rate increases much worse. The more money you print, the higher rates will need to go and may at some point rise out of control.
  
• If they wait too long to do anything at all, people may pile in and it will get a momentum of its own. That's not good either.
• A lot of the DC gossip is around whether Bernake will get a new appointment. Frankly while I complained that he should have started easing in May when the crisis was apparent, I think he has done a fantastic job since August. But at this point, given the decision trees ahead one might wonder if he still wants the job at this point. Not an envious position.
  

Wide Ranging Interview With Obama

Lots of ground covered here. The stuff is more contextual and clues to potential policy decisions rather than any policy announcements. Covers financials services and philosoph on heatlh care though. Via NY Times Magazine:

You know, I’ve looked at the evidence so far that indicates that other countries that have not seen some of the problems in their financial markets that we have nevertheless don’t separate between investment banks and commercial banks, for example. They have a “supermarket” model that they’ve got strong regulation of.

Are there tangible ways that Wall Street has made the average person’s life better in the way that Silicon Valley has?

THE PRESIDENT: Well, I think that some of the democratization of finance is actually beneficial if properly regulated. So the fact that large numbers of people could participate in the equity markets in ways that they could not previously — and for much lower costs than they used to be able to participate — I think is important.

Now, the fact that we had such poor regulation means — in some of these markets, particularly around the securitized mortgages — means that the pain has been democratized as well. And that’s a problem. But I think that overall there are ways in which people have been able to participate in our stock markets and our financial markets that are potentially healthy. Again, what you have to have, though, is an updating of the regulatory regimes comparable to what we did in the 1930s, when there were rules that were put in place that gave investors a little more assurance that they knew what they were buying.

There was this great debate among F.D.R.’s advisers about whether you had to split up companies — not just banks — you had to split up companies in order to regulate them effectively, or whether it was possible to have big, huge, sprawling, powerful companies — even not just possible, but better — and then have strong regulators. And it seems to me there’s an analogy of that debate now. Which is, do you think it is O.K. to have these “supermarkets” regulated by strong regulators actually trying to regulate, or do we need some very different modern version of Glass-Steagall, (1)

Like Canada?

THE PRESIDENT: Canada being a good example. (2) And they’ve actually done a good job in managing through what was a pretty risky period in the financial markets.

So — that doesn’t mean that, for example, an insurance company like A.I.G. grafting a hedge fund on top of it is something that is optimal. Even with the best regulators, if you start having so much differentiation of functions and products within a single company, a single institution, a conglomerate, essentially, things could potentially slip through the cracks. And people just don’t know what they’re getting into. I mean, I guarantee you that the average A.I.G. insurance policyholder had no idea that this stuff was going on. And in that sense I think you can make an argument that there may be a breaking point in which functions are so different that you don’t want a single company doing everything.

But when it comes to something like investment banking versus commercial banking, the experience in a country like Canada would indicate that good, strong regulation that focuses less on the legal form of the institution and more on the functions that they’re carrying out is probably the right approach to take.

Rotterdam, Europe's Largest Port, Almost out of storage room for Oil

Via Bloomberg:

Rotterdam, Europe’s largest port, may be running out of space to store crude as global oil demand posts its first back-to-back annual drop in a quarter-century.

The harbor is Europe’s largest refinery center and a trading hub for refined products such as gasoline and diesel. Some ships have been diverted or are waiting outside the port until space is available, said Jeroen Kortsmit, manager for commercial affairs at Royal Dirkzwager.

“A lot of tanks are fully loaded,” Kortsmit said by phone from Rotterdam April 27. He joined the company, which provides shipping information to terminal operators around the port, 24 years ago and said he has never seen storage this full before.

The Organization of Petroleum Exporting Countries, accounting for about 40 percent of global supply, agreed to cut output three times since September as demand crumbled. Oil prices have plunged 66 percent from a record $147.27 a barrel reached in July.

Rotterdam can store 11.9 million cubic meters of crude, port data from 2007 show. That’s equal to about 75 million barrels or enough to supply the 27-nation European Union for about five days.

Some on-shore storage tanks for oil products are either full or have no unreserved space available, Pieter Kulsen, a Rotterdam-based refined oils consultant at PJK International BV, said by phone yesterday.

The port doesn’t monitor how much capacity is left in on- shore tanks, Sjaak Poppe, a spokesman for the Port of Rotterdam, said by phone on April 27.

Companies with oil-storage facilities at Rotterdam include The Hague-based Royal Dutch Shell Plc, Europe’s biggest oil company, London-based BP Plc, the second-largest, and Rotterdam- based Royal Vopak NV, the world’s largest oil and chemical storage company. Company officials declined to comment.

Bill Ackman on Charlie Rose

Great interview with Bill Ackman on the real way to get the financial system healthy again. Essentially his point is historically we get through these problems by converting debt into equity through the bankruptcy process or through agreed upon exchanges that convert debt to equity. And when I say historically --I mean this is how these crises are resolved every single time yet this time Hank Paulson and Geithner decided they wanted to try something brand new. Print money and have the tax payer assume all the debt.

The Paulson/Geithner approach has been that these banks are too big to fail therefore the government has prevented write downs from taking place that would have occured otherwise. He's made some logical leap from the banks being too big to a hands off policy on making sure proper write downs occur. Truly horribly financial policy by Paulson and now Geithner that presumes that if these write downs occur like they have in every single other real estate crisis the world would end. So instead of a policy of converting bad debt to equity, the government is converting private debt and private risk into public sector debt.

Seems a lot more to me like Treasury officials far too close to bankers and too fearful to make proper policy decisions for the US taxpayer. President Obama is an intelligent man and it's my hope that he can persuaded these write downs can take place without the world ending. Otherwise we are going to be paying for this crisis for the next hundred years or until we eventually lose our ability to finance our debt through a cratered currency.

BlindReason has expressed a similar view in "Through the Looking Glass" and "Is the Us Economy Turning into a Russian Novel? Ask Tolstoy", "It's about the Debt" and about 20 others if you do a search on debt or write downs.

Map of the Week

This week it's the US Energy Grid. Fascinating map via NPR with some interactive maps showing power transmission for wind and for solar (separate). The map gets an A+ because right now while Solar and other types of energy is getting cheaper, the transmission lines still need to be built. Often this process is bogged down as local municipalities try and get a piece.

More details and interactivity straight at NPR here.

Treasury Auction

The treasury auction was a bit "meh". Several folks feel the ten year at 3.0% is a line in the sand the Fed will defend. Will more intervention (printing of money) be announced tomorrow?

Maybe --but I'd bet probably no. But if it continues to creep up over the next week or two--you bet. Rates have not been low enough, long enough to provide enough monetary stimulus. At some point, given all the government borrowing, rates will spike way up.

FBR Says BofA May Need $70 Billion

Looks like Meredith Whitney Jr. is trying to make a name for himself. i.e. Seems a bit extreme given the relative badness of BofA compared to other banks. If you believe BofA needs 70 billion, there is probably another 500 billion needed in the rest at least. I just don't buy it based on current data.

Just hit Bloomberg and will probably be updated with more info later here:

Bank of America Corp. needs $60 billion to $70 billion of capital, according to Freidman, Billings, Ramsey Group Inc. analyst Paul Miller, who cited stress tests performed by his firm.

Bank of America should consider converting its preferred shares to common stock, including $27 billion of privately held preferred “as soon as possible,” Miller wrote in a note to clients dated today. Miller said his firm’s versions of the stress tests were “somewhat tougher” than those by U.S. regulators.

More on Specter from WPost

Just a further comment on this threatened party switch by Specter which the Post is reporting. Here is some of the rationale:

Pennsylvania Sen. Arlen Specter will switch his party affiliation from Republican to Democrat, according to sources informed on the decision.

Specter's decision would give Democrats a 60 seat filibuster proof majority in the Senate assuming Democrat Al Franken is eventually sworn in as the next Senator from Minnesota. (Former Sen. Norm Coleman is appealing Franken's victory in the state Supreme Court.)

"I have decided to run for re-election in 2010 in the Democratic primary," said Specter in a statement. "I am ready, willing and anxious to take on all comers and have my candidacy for re-election determined in a general election."

"Since my election in 1980, as part of the Reagan Big Tent, the Republican Party has moved far to the right. Last year, more than 200,000 Republicans in Pennsylvania changed their registration to become Democrats. I now find my political philosophy more in line with Democrats than Republicans."

Specter as a Democrat would also fundamentally alter the 2010 calculus in Pennsylvania as he was expected to face a difficult primary challenge next year from former Rep. Pat Toomey. The only announced Democrat in the race is former National Constitution Center head Joe Torsella although several other candidates are looking at the race.

While I think political expediency in the primary challenge rather than convictions are probably driving his decision more than anything, I agree with his sentiment. The GOP has gone way off the farm in their effort to appeal to the religious right they have driven out moderate voters who used to vote GOP over economic issues. In my view, I care too much about issues like energy independence, returning high tech manufacturing to the US from Asia, and tax reform to care about some of these insanely artificial religious and social issues.

Right now the Democrats have captured the middle and are virtually unchallenged. To be a political force the GOP needs to get rid of its Carl Rove designed social agenda that only serves to divide Americans and recapture the middle ground so we can have a civil and two sided debate on these issues that will decide our country's economic future.

Big Juicy Rumor that Arlen Specter is Leaving the Reblican Party

Pretty amazing news if true. Gives Democrats a filibuster proof majority. That's a big push for getting contentious issues like Health Care through the Senate.

BW Repor on Apple "Media Pad"

Apple Talks with Verizon Wireless

This BW piece talks about a new category of device similar to what I've been lusting for on the blog here. Basically a device that has a larger screen than a IPhone and smaller than a Kindle. A 6 inch screen --maybe 8 would make sense to me. I don't really follow why this has to be an exclusive deal with Verizon. I suppose Apple is trying to get the media pad subsidized so it's easier for folks to afford. I'd rather have a device that i can just plop in any air interface card I want including Wimax, GSM or CDMA.

And you may have noticed a bit more gadget coverage lately. Well, we've got some new devices coming in the next month and I can't help myself being a gadget lover. That said, only one more month and we should be back to our regular course of finance/tech and politics.

Via BW:

Small Media Pad

The new Apple devices under development, if introduced, hold the potential to shake up the tech industry. The media pad is smaller than an Amazon (AMZN) Kindle electronic reader, but its touchscreen is bigger than the Kindle's, says the person who has seen it. Carriers such as Verizon and AT&T are keen on striking deals to supply wireless Internet access to these new small computing devices, such as netbooks, which represent revenue growth opportunities. Phone carriers also fear being cut out of their core markets for supplying land-line and wireless voice services.

"The media pad category might go to Verizon," said the person who has seen the device. "We are talking about a device where people will say, 'Damn, why didn't we do this?' Apple is probably going to define the damn category."

The new iPhone-like device is slightly thinner and smaller than the existing iPhone, people say. The reason the device is much cheaper than existing iPhones is that it relies on a so-called system on a chip, which incorporates many types of chips and drives down the cost of silicon in such devices, says one source familiar with the design. This new chip could also potentially be used in the media pad. "It will have a much lower cost that will blow away the margins on the BlackBerry and the iPhone," the person says.

Government Reaches Deal With Chrysler Creditors -Washington Post

This looks like a deal of around a 70% write down. My guess had been about 65% and I thought they'd get at least 25% of the equity so I am off on this one apparently. I still think the deal with Fiat doesn't make any sense and its better for the country to just license the technology from GM. This supports a US based technology and US jobs and doesn't introduce new production into already crowded distribution channels. We need Volt technology to have an opportunity to reach some scale economies so the technology can be affordable.

The other thing I think is wrong--Honestly I would keep Nardelli as he strikes me as exceedingly detail oriented, efficiency focused, and hard nosed. Also in Congressional testimony he wa the only one who didn't make himself look like an idiot. Dumping this guy is just politics and optics and ignores his ability to cut costs and build an efficient and lean competitor.

More details via the Washington Post who got the scoop here:

The Treasury Department reached an agreement with Chrysler's creditors late last night that may prevent the troubled automaker from going into bankruptcy, a source familiar with the matter said this morning.

The carmaker had owed a fractious group of 45 banks, hedge funds and other firms about $6.9 billion. These creditors have agreed to write down the debt to $2 billion, the source said.

The agreement comes as the storied American automaker is seeking to fend off bankruptcy and liquidation.

The creditors had opposed the government's demands that they trade most of their loan claims for a small stake in the company, but the Obama administration had said it would send Chrysler into bankruptcy proceedings if the company and its lenders failed to reach an agreement by May 1, although the administration reportedly preferred to settle the matter out of court.

Today's news follows an announcement yesterday by Chrysler that it has also reached an agreement with the United Auto Workers leaders to modify the union's labor contract and to reduce the amount that the company owes a retiree health fund.

If it is approved by union members, the deal would be a significant step toward that restructuring of the company that President Obama has said is necessary to ensure its future. Once the company reaches agreements with the UAW and its creditors, it plans to partially merge with the Italian automaker, Fiat.

The deals with creditors and the union are considered a significant step toward Chrysler's rescue.

Chrysler owes $10 billion to its retiree health fund. The union agreement is expected to reduce that amount by half, while offering the health fund an equity stake in the company.

"Once again our active and retired members are being asked to make extraordinary sacrifices in order to help Chrysler return to viability," said UAW Vice President General Holiefield, who heads the union's Chrysler Department. "In order for the company to have a sustainable future, all stakeholders will have to show the same willingness to contribute to the common good that has been demonstrated repeatedly by our membership."

In a statement, the firm said the "provisional agreement provides the framework needed to ensure manufacturing competitiveness and helps to meet the guidelines set forth by the U. S. Treasury Department. As a result, Chrysler LLC can continue to pursue a partnership with Fiat SpA."

BofA fails the Stress Test (Rumor)

Just a quick note on the rumor this morning that BofA failed the stress test. This is a bit along the lines of the guess we made on the blog here:

If I were to take a wild guess on which big bank would fail the stress test--purely for entertainment purposes and with just anecdotal evidence such as body language given during interviews--it would be B of A. All the press coming out about the pressure on Mr. Lewis from Bernake as well (do the ML deal or you are fired--come on) is similar to the stuff BofA "leaked" when he fired John Thain. It looks like pre release damage control to me.

Supposedly it's only a few billion and my guess would be easily remedied with a conversion of preferred shares to common.

However, Citibank also failed and it's not clear exactly by how much. Those stress tests had a worst case of unemployment at 10% and it would be more interesting to see what happens to their default rates and balance sheets at 15% or so. At this point given how much fundign Citibank has received it's a little surprising it still has an issue.

I think both of these rumors are consistent with an approach that I had in that original post called a "qualified pass". Basically, the smartest regulatory strategy is to fail two banks but provide a path to passing that the banks have no problem meeting. For example, simply converting preferred shares. This way the government gets some credibility for the rest of the banks passing while increasing stability at the weak gazelle's of the herd.

On a somewhat unrelated note, there continue to be quite a few siren calls from certain "One Tune Tony's" saying "US banks are insolvent" and calling for a further collapse of the financial system. For example, Roubini who gets a lot of well deserved credit for calling the crisis pretty much sings this one note and nothing else no matter what happens to the data. It's important to keep in mind that banks borrow short and they lend long. The "lend long" part of the equation is dependent on the idea that in general those loans are held to maturity and at the least there is no forced liquidiation. If you measure any bank against an immediate liquidation of those longs they are almost always going to be insolvent by definition.

A Nuclear Arsenal That Pays Rent

Here is a quote from Pakistan's Zardari on their nuclear weapons stockpile and the need for more money to "safeguard it". Maybe all the troubled banks of the US and Europe should develop their own individual nuclear weapons programs. It might be a cheaper way to get money out of the government.

When Zardari's wife Bhutto led the country he was accused of bribery and graft on a rather wide scale earning the nick name "Mr. 10 percent". What a shakedown.

President Asif Ali Zardari, speaking to reporters, called for Pakistan's allies to provide more aid on top of the more than $5 billion pledged at a donor conference earlier this month, saying the country needs money to safeguard its nuclear arsenal.

I almost want to Buy Myself Some GM Bonds...

Just so I can vote no on that deal.

Government Announces Offer for GM Creditors--Looks DOA to Me

Really perplexing strategy by the government here. Everyone seems really excited about this proposal and even GM's stock is trading up based on the notion it won't be entirely wiped out and with such a low debt load it will be able to be profitable very quickly.

However, much as in the Chrysler case, I think they are being too aggressive on the creditors. A good portion of the creditors they need to vote in favor of the proposal do better, in some cases far better if GM goes into bankruptcy. Perhaps it's a strategy to show Congress that they fought hard with the lenders then facilitate a last minute compromise.

Additionally, to get people to get some of these creditors to vote for it you there has to be some level of symmetry between how the various classes are treated. Unless i am missing something this proposal will fail and I think the Rattner knows that. Via the FT:

This swap, combined with a writedown in GM’s contributions to a union-managed healthcare fund, would reduce GM’s liabilities by $20bn and leave the US government and the United Auto Workers union together holding 89 per cent of its shares, with debtholders holding most of the remainder, said Fritz Henderson, GM chief executive.

GM on Monday made an offer to holders of its $27bn public debt to swap all of it for 10 per cent of its own equity and announced further deep cuts to its operations in what Mr Henderson described as “a defining moment for the corporation.”

In a filing to the Securities and Exchange Commission, GM said it would offer bondholders 225 shares of its common stock for every $1,000 of principal they held.

Mr Henderson said the bond exchange would aim to reduce GM’s $27bn debt by $24bn.

The debt exchange would be dependent on GM securing the writedown of its debt to the US government and an agreement from the UAW to accept equity for 50 per cent of GM’s contribution to a union-managed healthcare fund.

The deadline for the exchange is midnight on May 26 “unless extended”, GM said. This would be just six days before the June 1 deadline set by a Treasury-led task force on the US auto industry for America’s largest carmaker to prove it can become a viable concern.

GM said it would file for bankruptcy if the exchange were not consummated, and that its bondholders would “receive no consideration at all for your GM notes.”

“We’re going to get ourselves restructured,” Mr Henderson said. “If we can’t do it outside a bankruptcy, we’ll do it in a bankruptcy.”

Just a Quick Follow Up On Another IPhone Competitor Rumored

This one is also from Samsung but sans keyboard--it's called the I7500 and it has Google's Android (which was also announced on a netbook today btw):

Not for nothing, but Korean companies have 50% of the US cell phone market already which is an incredible statistic. Additionally the supply the guts to pretty much everybody else (processors and screens). They do the chip for Apple's IPhone for example. Will Apple be able to get its recently acquired chip unit up to speed enough to start making its own processor (PA Semi)?

I love the competitive heat on Apple here and I am hopefully that we will get a revolutionary uptick in design as opposed to the more iterative change we had last summer.

Here are the specs and the full story via our gadget loving friends at BGR.

• Android 1.5 OS
• Quad-band GSM/GPRS/EDGE, dual-band UMTS/HSPA
• 528 MHz Qualcomm MSM7200A CPU
• 3.2-inch HVGA capacitive OLED touchscreen display
• 5 megapixel camera with LED flash
• Wi-Fi
• Bluetooth
• GPS
• 8GB internal flash memory
• microSD slot
• 3.5 mm stereo jack
• Metal case, 11.9 mm thick

Samsung out With a Viable IPhone Competitor In July? And Does this Lock down OLED for IPhone?

Italian website samsung.HDblog.IT has got a leak for a July release of this dream phone:

• amOled the touch screen 3.5-inch WVGA 800 × 480
• sistema operativo windows mobile 6.1 (aggiornabile appena disponibile al 6.5) operating system windows mobile 6.1 (upgradeable to 6.5 as soon as available)
• tastiera slide QWERTY orizzontale horizontal slide QWERTY keyboard
• fotocamera da 5megapixel con autofocus, stabilizzatore immagine, flash e video 5megapixel camera with autofocus, image stabilizer, flash and video

My questions--

What's the battery life on this thing?

Second, what about a Google android version? Does this put pressure on Apple for an OLED verison of the IPhone. OLED has battery life implications which also have multitasking implications. If all these competitors are releasing phones in the next few months, that makes me feel like Apple almost has to do OLED in June.

George Will Talks about Our Hand's Off Auto Policy--Me=Frustrated

These so called conservatives who get on the Sunday shows (George Will in this case) and claim that Obama wants to design our cars are demonstrating an outrageously ignorant claim. Congress has been telling the auto industry what kind of cars to build for 50 years. I normally love George Will but his comments here were disappointing.

How?

Ridiculously low fuel efficiency standards in the US lobbied for by the auto makers that not only fall behind Japan and Europe but the entire industrialized world acted as a subsidy for car's like SUVs and Hummers. How the hell is that not "telling the auto industry how to build it's cars". The government told them to build gas guzzlers, so they did. I normally love George Will's perspective but that position is materially ignorant and dumbfounding.

I guess I really wouldn't mind so much if I didn't feel like the K-Street political lobbying and kickbacks that generated this galactically stupid policy in Congress hadn't made us hostage to oil exporters that hate our guts and involved us in two gulf wars killing thousands of Americans. It's also resulted in $10s of billions of bailout for US auto companies because they didn't make enough fuel efficient cars when American's decided they couldn't afford gas guzzlers.

Since Japanese and Europeans had high fuel standards, their car makers already made plenty of fuel efficient cars. GM still doesn't have the Volt out and at this rate it may never get there still.
It also exacerbated the financial crisis by causing a $700 billion dollar a year capital outflow that causes currency and macro distortions across the planet.

Other than that yeah, our auto policy has been totally hands off. Come on George.

p.s. It's the same kind of logic error when people talk about the financial industry and whether it's been regulated or not. Years of conflicting incentives and regulations create all sorts of bad economic decisions. Bad regulation is not the same thing as no regulation.

Stephanopolus Interview with Iran's Ahmadenijad

George Stephanopolus had a great interview on ABC news Sunday morning with the President of Iran, Ahmadinijad.

There were about half a dozen interesting areas of the interview:

1. Stephanopolus pushed him hard on the idea that now Obama has opened the door for talks, will Iran accept talks without preconditions. Ahmadinijad can't answer the question directly even though George goes at it about 3 different ways.

I think this gives a little bit of credence to the theroy that the US strategy to isolate Iran the last 30 years has in many ways alleviated pressure on these regime and repressed any potential for internal dissent against the relgious cult that runs Iran with. At least so far, I am cautiously optimistic at the wisdom of the strategies used by President Obama in dealing with Iran may yield some progress. The interview highlighted a few things:

Ahmadinijad's reluctance for talks with the US without Precondition now shows how difficult Obama's strategy is for him to react to. A bit part of his own political support is based on an Anti-US confrontational strategy.

2. George asked him a question :If the Palestenian's choose to accept a two state solution, will Iran accept that as well?" He could barely answer the question which shows how much Hamas has been used as a useful tool by Iran for it's own politcal objectives. If President Obama is able to reach a successful two state solution, it would do a lot to check Iranian power in the region.

3. I don't think Ahmadinjad is going to win the elections coming up in Iran. I think the interview demonstrates quit a bit of pressure on him to react to President Obama's strategy.

4. A more stable Iraq will eventually serve as a check to the power vacuum that was created when Hussein was toppled. I think some of the efforts by Iran to increase influence inside Iraq may end up backfiring.

5. I think we are on somewhat medium term fuse for this new strategy to work. I think Israel and others pressing for airstrikes and other measures to stop enrichment will start to step up pressure for a strike. Particularly at the end of June when US troops move out of Iraqi cities (hopefully).

6. As Iraq stablizes, and as progress is made between Israel and the Palestenians, Iran's leverage points diminish greatly. I think Iran senses that the time for them to do a deal is this year.

New AIG Commercial

The Government's Fiat Strategy is Postponing the Problem not Solving It

The government is making the case that the senior debt needs to be crammed down because Fiat needs to get 20-30% of Chrysler and the combination is going to somehow save the company. Supposedly Mckinsey or BCG is doing some sort of study on the value Fiat brings to a combination with Chrysler deal but the idea that this is some sort of huge value change for Chrysler seems bogus to me.

We (the US taxpayer) gives Chrysler to Fiat and cram down 80% of the senior debt and give a juicy management agreement and US distribution to Fiat for free while offering them a big chunk of the company for "synergy" benefits. Come on, does anyone believe the synergy benefits are really that substantial? Does it really turn Chrysler into a viable business or does it just buy more time until the next bankruptcy a few years later?

So what does Fiat say that it brings to this deal and does it really help Chrysler or does it make it worse for Chrysler and the US auto industry as a whole? Specifically, Fiat is offering 3 basic things:

1. Technology transfer -- If it's about hybrid technology, why not just license the Volt technology GM has instead. GM management is strongly against a merger here but why not provide economies of scale for US invented technology at the very least? If we can get economies of scale in the Volt, it's cost which now is inordinately high will go down. Isn't a US technology across GM and Chrysler with better fuel economy and less foreign oil consumed a economic and national security benefit for the US Taxpayer? That's worth an investment of a few billion. GM management hates the idea of merging with Chrysler but at the very least how about a license deal to get this technology humming.
2. Fiat gets distribution into the Chrysler's US network. This helps Fiat sell more cars in the US but aren't there enough car producers in the US here already? The US auto makers used cheap loans to encourage car sales which led to over production. This means that everyone who sells cars in the US needs to find ways to lower production. Adding Fiat cars to the mix is great for Fiat but it's not so great for Ford and GM who are having a tough moving inventory out the door as is. Adding more production to the over consumed US market may help get a short term deal get done but it doesn't help the long term viability for the over produced US market and it sure doesn't help GM which is facing a bankruptcy of its own in a few months. We need to be figuring out ways to cut back on over production, not adding it.
3. Fiat will do a management agreement for Chrysler. The CEO of Fiat is an ex-lawyer much like the ex-CEO of Citibank was a lawyer. That is often a problematic background for a CEO but boards often do it because lawyers usually have good interpersonal skills (that's how good lawyers get clients). The interpersonal skills required to be a good lawyer are not the same ones a CEO needs and they are often counter productive. Honestly, I'd keep Nardelli in there. He's a tough minded guy who is very good at cutting costs and pushing for change. In my opinion-this reduces value, and does not add it.
   

Look there is not a lot of detail available and I have not seen the consulting studies on potential scenarios for the business (I would love to get my mits on them though). However, this feels a lot like the government is mixing politics with business here. It wants to preserve as much of the union agreements as possible and push back as many of the job cuts and pain as possible so as not to introduce any kind of economic shock in the system. It also wants to send a signal to GM creditors that it means business and they should conceded quickly and early. Some of these objectives are politically expedient but in the long run they just make the problem worse.

If a merger is going to work, it's better done with a US company that has hybrid technology that Chrysler can use like GM (as opposed to all the other US companies with hybrid technology). A technology agreement at least with GM rather than Fiat, makes more sense to me because hybrid technologies need volume to be economical. Why not give the US technology some kind of an edge. We should be asking Fiat to license the Volt technology for Europe not trying to use their technology here. Plus there is only so much volume in the US and we should be rationing producers not adding new huge ones.

Pushing hybrid technology is actually a US taxpayer benefit because it makes US cars more fuel efficient and reduces our dependence on foreign oil. It also makes our hybrid cars cheaper and allows us to catch up with Toyota. If we are going to spend billions to bail this out why not get some sort of benefit out of it. Why not get behind this Volt technology, push the costs of it down for US consumers and get a more efficient auto industry all at the same time. One could argue that is a national security benefit as well.

That's a better deal to me then selling a combination with Fiat so they can push more of their cars in the US. It's also a lot better than some sort of fake restructuring agreement that does zero to actually restructure Chrysler and simply pushes the bailout out a few years.

One last thing. If you need BCG or Mckinsey to "document" synergies, that pretty much tells you that even the government knows those synergies aren't really there.

Forever Young?

Nice piece on anti aging technology via Wired. I hope it protects against swine flew too. Excerpt below:

The U.S. Army has itself a problem: Its top trops don't stay young forever. "Highly qualified and very experienced soldiers regularly leave the Army because their physical and/or cognitive performance capabilities are significantly less than that of a 20 year old," Army researchers grumble. So they've come up with a new research push to fix all that -- keeping G.I.s as fresh as the day they entered basic training.

It's the latest in the Army's continued efforts to toy with cellular aging. Mitochondria, responsible for converting glucose to energy, slow down as we age. Researchers suspect this deceleration is to blame for declines in physical and cognitive performance in our golden years. Last January, the Defense Department took note of progress in mitochondrial anti-aging research, and appealed for proposals that would find new ways to revamp our cellular powerhouses. Big-pharma is thinking along similar lines: GlaxoSmithKline has invested $720 million into resveratrol, a compound in red wine that’s been shown to enhance mitochondrial performance and retard age-related ailments.

Of course, the military has tried before to build stronger, longer-lasting soldiers. But, as they point out in their latest request for research proposals, spinach and sit-ups will only get you so far: "At present, individuals attempt to counter their mitochondrial decline with frequent exercise and antioxidants, both of which are crude methods with limited effectiveness." Now, the army wants to get right to the source, and keep aging soldiers fit for duty with "a more precise methodology to stimulate mitochondrial energy production." Military researchers liken the process to "replacing zinc carbon batteries with silver oxide batteries – more energy production capacity will enable the warfighter to sustain demanding cognitive or physical activities longer."

That supercharging could be closer than we think, if the military can combine the potential of resveratrol with the power of the mole rat. In February, biochemists at the University of Texas Science Center expanded the mitochondrial theory, based on a study of the unbreakable proteins in mole rats, who outlive lab mice by around 20 years. Their work suggests that efficient mitochondria and resilient proteins may work in tandem to promote longevity. Scientists are now trying to determine the "protein protectant" that keeps the rats so darn frisky.

Government Preliminary Stress Test Out

The results were prepared by the law firm Stahl, DeFer and DeLay. Which is pretty much what they should be doing, as long as they can.

Quote of the Week

Barney Frank on the performance of Tim Geithner “They made a mistake with Geithner: they put him out there when he wasn’t ready. Geithner sometimes gives the impression that he’s giving a bar mitzvah speech and his voice is going to crack."

Great Cover on the Economist

Jeffries out on Like Stress Test Failure for BofA

Via Bloomberg. Jefferies is out with comments this morning that the stress test may induce a conversion of preferred into common shares. I guessed similarly in this post. I just don't think Ken Lewis knows what he is doing. He strikes me as manager with a surplus of imprudence. Full piece here:

Bank of America Conversion May Spur 80% Return, Jefferies Says

April 24 (Bloomberg) -- Investors stand to gain more than 80 percent betting that Bank of America Corp. will convert some of its preferred shares into common stock, according to Jefferies Group Inc.

Bank of America’s 6.204 percent preferred shares may be converted into equities worth 80 percent more than their closing price of $11.26 yesterday, Jefferies strategists led by Patrick Neal wrote in a note today. The 8.2 percent preferred could yield returns of about 59 percent if the Charlotte, North Carolina-based lender decides to convert them into common stock, Jefferies estimated.

“Investors have an opportunity to set up to profit from a potential common-for-preferred exchange,” Jefferies analysts wrote in a report sent to clients today.

U.S. regulators may tell the 19 biggest banks today how they did on the so-called stress test meant to determine whether they have enough capital to withstand further credit losses. Treasury Secretary Timothy Geithner said April 21 that firms needing additional capital will have a range of options for shoring up their balance sheets, including the conversion of government investments from preferred into common shares.

Bank of America, the largest U.S. lender by assets, may be forced to accept additional aid by converting between $15 billion and $20 billion of preferred shares into common stock, KBW Inc. analysts led by Frederick Cannon said yesterday. The conversion would boost the bank’s tangible common equity, a measure of its ability to absorb losses.

As a Country Have We Lost the Ability to Execute?

When New York did it's subway system, it just did the dang thing. While there was public input, things got done and the system was built. Same with the railroads in the 19th century, the highway system and the Hoover Dam.

Let's look at our track record late:

• Rebuild the World Trade Center. This crisis happened in 2001 and we have barely got this project started. Political battles, bickering and regulation keeps us from building it's replacement. Don't we owe it to the rest of the country to finish this project? What has gotten into our zeitgeist that we can't execute?
  
• Energy grid. Every municipality and local state has different rules and regulation making it almost impossible to deploy a national grid. This needs to be regulated Federally (I actually agree with Harry Reid on this).
• Nuclear power plants. We now can build plants that are safe, secure and great for global warming but it takes 10 years to build one of these because the regulatory process is so cumbersome.
  
• Wireless towers. Try putting one of these up these days. The local towns keep these on lock down and extract a Porsche per tower. Hard to build a national wireless grid when each tower takes huge kickbacks and regulatory hurdles.
  
• High Speed rail. China, Taiwan, most of Europe all have high speed rail projects moving full speed ahead. Even in the dense urban Northeast, we can't get approvals for high speed rail because the local communities put this on lock down. In San Francisco a one mile extension of a muni is going to take 10 years to build.

While we've made a lot of progress as a country in terms of technology and the ability to manufacture quickly, doesn't it seem that we've more that lost abilities in actually getting things done. Have we gotten so fat and happy with local payoffs and politics that we've forgotten how to execute?

As an aside on the World Trade center. How wimpy was it that we were afraid to build taller towers her because "the terrorists might attack it again". A great country should reach for the stars, else what's a heaven for?

Book of the Month: Joker One

On a recent flight I ripped through "Joker One" by Lieutenant Donovan Campbell. The purpose of the book is to detail the story of a Marine platoon in Iraq through the perspective of it's LT. No matter what your perspective is on the invasion or whether it was a good decision or not, Lt. Campbell's work brings the platoon and its members to life in a manner that made me proud of my country and the men and women serving in Iraq. It's a great story of leadership, courage and the sacrifices these Marines made in service to their country.

I particularly liked his observations about his own men and the people he led along side. Not everyone has the ability to see the traits of the people surrounding them so easily which makes him an ideal teller of their story. I think that alone is a valuable trait for any leader to be able to read the strengths, weaknesses and general traits of the men and women around you. I think part of why Lt. Campbell does this is to tell the story of the men individually for the reader so it is remembered--my guess is for reasons that will become clear once you read the entire book.

I know things are going better over in Iraq and like many Americans I hope that trend continues. More than this, I hope that the people of Iraq who don't seem to pleased with our invasion--at some point end up as strong American allies and appreciate the sacrifices men and women like Donovan Campbell made. I know I do, especially since I myself have never served in Iraq or Afghanistan. The best I can do is when I get a resume from men and women returning from Iraq and are having a hard time finding a job--I try and find them a gig. I am usually pretty good at pairing people up in the place they should be or finding things they would be good at in tech land. That and the thanks of a grateful American for the sacrifices of Joker One platoon is the best I can offer.

Aside from of course buying the guy's book---you should too.

Picture of Larry Summers at the President's Meeting With Bankers

An yep, this was while the President was speaking. Get some sleep Larry. Poor guy.

Just a Guess- For Entertainment Purposes Only

If I were to take a wild guess on which big bank would fail the stress test--purely for entertainment purposes and with just anecdotal evidence such as body language given during interviews--it would be B of A. All the press coming out about the pressure on Mr. Lewis from Bernake as well (do the ML deal or you are fired--come on) is similar to the stuff BofA "leaked" when he fired John Thain. It looks like pre release damage control to me.

That said, the smart thing for the government to do is to delay releasing this information as long as possible. The stress test just gives the banks time to earn a spread and get more equity which allows them to take more losses. Time is on the financial systems side given their current strategy. The longer it takes the better. And if the government is smart, when they do release it, every big bank will receive a qualified pass. But anyone were to fail, my guess would be BofA.

Oh and either way--I think Ken Lewis is toast, sooner or later. From blog entries earlier on Mr. Lewis on September 15th when the deal was announced:

• Is Ken Lewis the Bernie Ebbers of Banking? Can he say no to a deal? I don't get a good vibe off this guy. He just seems sort of aggressively scattered. He hasn't even integrated LaSalle. This just seems like it's creating a huge behemoth. The risk management on this entity is going to be a material issue given it's going to be so huge. I hope the government is watching this thing like a hawk. This one really is too big to fail.
• This entire piece reminds me of some comments we've had on the blog about Ken Lewis being out of control. Why? In November, after taking $15 billion in US Government bailout money he used $7 billion of it to invest in China Construction Bank. That boy Ken has never met a deal he doesn't like. He upped his stake in in CCB to a whopping 19% for that sum. What could he have bought in the US for that? Like 100% of 4 huge US and European banks? Instead he'd rather overpay for Merrill Lynch and some overprices real estate in Shanghai which has not yet been written down to reality. I mean come on....where is this guy's Board?

WSJ OP-Ed on Federalism Amendment

Great piece in the WSJ on a Federalism amendment to constrain a somewhat out of control bailout happy Treasury and Congress. The author talks about what state legislatures can do to get support from Congress for this kind of a "Federalism" amendment which would replace the income tax with an excise tax.

The author is a law professor and I found the dynamic around a convention and the Congress itself rather interesting. It would be interesting to see. Also can you imagine how the bond market might react? It would be interesting depending if a convention was actually convened.

The economic merits of this idea are that it would not only raise a lot more money for the government but it would also make the economy much more dynamic and increase the growth rate (both static and dynamic growth rates). I hope someone tries somethig like this frankly, I'd support it. I think many Americans feel like things have gotten out of control and there needs to be some sort of discipline somewhere. As for whether it would pass, as the author says, "stranger things have happened". Via the WSJ:

In response to an unprecedented expansion of federal power, citizens have held hundreds of "tea party" rallies around the country, and various states are considering "sovereignty resolutions" invoking the Constitution's Ninth and Tenth Amendments. For example, Michigan's proposal urges "the federal government to halt its practice of imposing mandates upon the states for purposes not enumerated by the Constitution of the United States."

While well-intentioned, such symbolic resolutions are not likely to have the slightest impact on the federal courts, which long ago adopted a virtually unlimited construction of Congressional power. But state legislatures have a real power under the Constitution by which to resist the growth of federal power: They can petition Congress for a convention to propose amendments to the Constitution.

Article V provides that, "on the application of the legislatures of two thirds of the several states," Congress "shall call a convention for proposing amendments." Before becoming law, any amendments produced by such a convention would then need to be ratified by three-quarters of the states.

An amendments convention is feared because its scope cannot be limited in advance. The convention convened by Congress to propose amendments to the Articles of Confederation produced instead the entirely different Constitution under which we now live. Yet it is precisely the fear of a runaway convention that states can exploit to bring Congress to heel.

Here's how: State legislatures can petition Congress for a convention to propose a specific amendment. Congress can then avert a convention by proposing this amendment to the states, before the number of petitions reaches two-thirds. It was the looming threat of state petitions calling for a convention to provide for the direct election of U.S. senators that induced a reluctant Congress to propose the 17th Amendment, which did just that.

What sort of language would restore a healthy balance between federal and state power while protecting the liberties of the people?

One simple proposal would be to repeal the 16th Amendment enacted in 1913 that authorized a federal income tax. This single change would strike at the heart of unlimited federal power and end the costly and intrusive tax code. Congress could then replace the income tax with a "uniform" national sales or "excise" tax (as stated in Article I, section 8) that would be paid by everyone residing in the country as they consumed, and would automatically render savings and capital appreciation free of tax. There is precedent for repealing an amendment. In 1933, the 21st Amendment repealed the 18th Amendment that had empowered Congress to prohibit the sale of alcohol.

Could such a Federalism Amendment actually be adopted? Stranger things have happened -- including the adoption of each of the existing amendments. States have nothing to lose and everything to gain by making this Federalism Amendment the focus of their resistance to the shrinking of their reserved powers and infringements upon the rights retained by the people. And this Federalism Amendment would provide tea-party enthusiasts and other concerned Americans with a concrete and practical proposal by which we can restore our lost Constitution.

Jon Stewart interview with Pelosi

The Daily Show With Jon Stewart	M - Th 11p / 10c
Nancy Pelosi
thedailyshow.com
Daily Show Full Episodes Economic Crisis Political Humor

Hat tip straight to the Dailybail.com and I am copying their commentary below. I agree with the comments in the sense that--

1) I don't think our political leadership understood what they singed up to do. They trusted Hank Paulson that it was necessary and were in many ways forced into acting.

2) Most of Congress is financially illiterate. The last hearing or two the Q&A is much better but phew, this stuff is tough to watch. Get some staffers who were ex Wall Street guys--tons of awesome resumes around jeebus.

3) I don't think it was politically advisable for Nancy Pelosi to do this interview with Jon Stewart. You can hear the fear in her voice when she talks about this stuff. Better to just lay low at Stanford mall and figure out the complicated shopping center diagrams. Why don't smart people run for Congress? Dailybail.com commentary below:

Difficult to pin down her specific stupidity; more of a general sense that she has no idea wtf happens in the financial markets. This is not light criticism. It's the reason we find ourselves in our current bailout mess. Congressional leaders were steamrolled by Heny Paulson last September because of their immense fear of the unknown. Their knowledge of financial markets and securitization is sub-standard; they made a bit of noise but in the end were easy prey.

If the economy continues to remain flat or even weaken substantially from here, as I believe it will, we could be looking at 11% unemployment this month next year. The economy and the bailouts will be the most salient issue to voters in the 2010 cycle and it could be a very dangerous time to be an incumbent. This new reality has your writer considering a run for Congress, though it's exporatory at this juncture. Were I to run, I would be one particular Indiana incumbent's worst nightmare. This I promise.

Scam Email Volume Relative to Economic Contractions

Is it just me or are there a lot more scam emails going out during this downturn. I have gotten no less than 5 of these things in as many days promising vast fortunes if I just do a small task in the last few days.

The best one was from some guys who said they found some lost Hussein dollars in Iraq and they just needed me to store his stash until they got out of the Rangers. It was frankly, really well written and I was half intrigued. I can enjoy a well written piece even if it is from a scam artist. Most scam artists don't write well.

The rest are either from a lost Nigerian prince, a priest, a nun or someone about to die or already dead. Of those, quite a lot are lost Nigerian princes which evidently have a bad sense of direction. Sometimes, they have a chronic illness and their health is "deteriorating rapidly". Almost universally they involve an attention grabbing sum of money -5 million that they will generously share with you.

Why do I keep getting these? It's because people fall for these tricks all the time, especially during a down cycle when they are needy.

Kedrosky or someone should chart the # of scam emails relative to contractions in economic activity. I wonder at some point will people start twittering scams?

I was gonna post the one I just got that inspired this missive (it incorporates like 5 of the 7 major theme elements I have seen used to manipulate people into responding) but I am worried I might just encourage the practice.

Analyst says he feels "Humiliated"

So right away I am liking this guy. This commentary on the Morgan Stanley earnings this morning is interesting in the context where the analyst says he feels "humiliated" which I frankly have not seen. I love people that are confident enough to admit they were wrong. Admitting you were wrong is the first step in getting it right just a little more often. Additionally, the commentary on the risk management at Morgan Stanley shows that John Mack has probably had enough risk for his lifetime.

Brad Hintz, a Sanford C. Bernstein & Co. analyst who has rated Morgan Stanley stock “outperform” since mid-2007, said the bank’s weaker-than-expected results left him feeling “humiliated.”

“My guys are holding the sword so I can run on it this afternoon,” Hintz said in an interview today, adding that he’s still reviewing his earnings estimates and hasn’t changed his recommendation on the company.

Morgan Stanley today posted a $177 million loss in the first quarter, or 57 cents a share, compared with the 8-cent average loss estimate of 19 analysts surveyed by Bloomberg. Hintz, a 59-year-old former Morgan Stanley treasurer, was the top-ranked analyst covering brokerage firms in a survey by Institutional Investor magazine last year.

He said he was “very disappointed” that Morgan Stanley reaped $1.3 billion of fixed-income revenue in the same quarter that Goldman Sachs Group Inc. had record revenue of $6.56 billion and JPMorgan Chase & Co. had revenue of $4.9 billion, both records.

“Why on earth would you bring down a balance sheet or reduce your leverage of 11 times in the face of what were excellent flow trading results?” he said, referring to the leverage ratio that compares total assets to shareholder equity. “If you constrain fixed-income traders, there’s nothing they can do.”

Colm Kelleher, Morgan Stanley’s chief financial officer, said today that the trading results reflected the firm’s reduced appetite for risk. Chief Executive Officer John Mack said in the earnings statement that “we have focused on prudent stewardship of our balance sheet, capital and risk profiles.”

Hintz said that last year’s bankruptcy of smaller rival Lehman Brothers Holdings Inc. and the subsequent drop in the stock and bonds of Morgan Stanley may have affected management’s judgment, even though the company’s shares and debt have rebounded.

“Is this the fallout of the near-death experience that the firm went through after Lehman? Is this a management team that says ‘whoa, we’re not going to take risk, we’re going to pull back, we’re going to be very conservative’?” Hintz said. “They let a perfectly well-thrown ball just zoom right by them.”

Short Term Gain for Long Term Pain

This budget out of the UK is pretty illustrative of what happens when you take private debt and move it onto the public balance sheet. The top tax rate has risen up to 50%. Usually during these types of collapses we write all this junk debt off, but instead we've decided to have central governments assume the debt. Essentially, by preventing losses and write downs that would have otherwise occurred, central governments have put all of this debt on their credit cards.

Why? Well politicians don't like going in to elections when there is an economic contraction. So the trade is we get some short term softening of the pain in exchange for debt burden that we'll be paying off for decades with higher taxes and debt levels so high they crowd out private business. If we had just let the markets write this stuff off, we would be already starting an up cycle by now. Instead we have short term gain for long term pain.

Moreover, there seems to be no equation where people ask the question what are we getting for all this huge borrowing. What kind of decline do we get if we don't mortgage our future? Is is 5%? 10%? Why not debate it here in the United States. Is this much borrowing worth shielding us from some severe but short term pain? Isn't it up to the surplus countries to spend those reserves and surpluses now if they want to juice up growth?

The worst part is most of this new debt is not going to things like getting us off of foreign oil, a modern transportation system or an energy grid.

From the FT with an excerpt below:

Mr Darling warned that public borrowing would reach a post-war high of £175bn this financial year, or 12.4 per cent of gross domestic product, falling to £173bn next year and £140bn the year after.

The increased public spending, combined with weakening tax revenues, would mean that public sector net debt would almost double to 79 per cent of national income by 2013. After that it is expected to stabilise and then start to fall only from 2015-16.

Mr Darling said the provision for the cost of banking bail-out and intervention measures would be more than £50bn, at 3.5 per cent of gross domestic product. But he promised to halve the public spending deficit within four years in order to ensure confidence.

“There are no quick fixes, there are no overnight solutions,” he said. “We need a clear path to recovery here, both fiscally and building a path to recovery.”

But David Cameron, Conservative party leader, attacked the soaring levels of borrowing, saying Mr Darling had written himself into the history books and ”written a whole chapter in red ink’’.

To fill the hole in public finances, Mr Darling plans to cut growth in real spending from 1.2 per cent to 0.7 per cent from 2011. After taking into account the rising costs of unemployment and interest payments on debt, that is likely to lead to painful cuts across the public sector.

Mr Darling will also bring in new taxes on the wealthiest. The top rate of tax will rise from 40 per cent to 50 per cent for those earning more than £150,000, a higher level of tax than the 45 per cent rate foreseen in last November’s pre-Budget report. The rise in tax will also come in a year earlier than planned – beginning from 2010.

Jack Bauer Saves Los Angeles-- in real life

Basically the bad guy answers a question about a potential attack with "You'll know soon". Now to be honest, I am against torture. I do think it hurts the US reputation. However, in this case where KSM implied an attack was imminent on a US city? What would you do?

Did they get the information from the water boarding? Did it come from other techniques? More questions than answers here. It really is the classic Jack Bauer dilemma.

Via [CBS]:

The Central Intelligence Agency told CNSNews.com today that it stands by the assertion made in a May 30, 2005 Justice Department memo that the use of “enhanced techniques” of interrogation on al Qaeda leader Khalid Sheik Mohammed (KSM) -- including the use of waterboarding -- caused KSM to reveal information that allowed the U.S. government to thwart a planned attack on Los Angeles.

Before he was waterboarded, when KSM was asked about planned attacks on the United States, he ominously told his CIA interrogators, “Soon, you will know.”

According to the previously classified May 30, 2005 Justice Department memo that was released by President Barack Obama last week, the thwarted attack -- which KSM called the “Second Wave”-- planned “ ‘to use East Asian operatives to crash a hijacked airliner into’ a building in Los Angeles.”

Quote of the Week

This one is by Tim Geithner in Congressional testimony this week:

"We encourage you to look at these solutions (to the banking crisis) like we do at Treasury, in the context of the alternatives".

That comment in his testimony was interesting as he bobbed and weaved through his congressional testimony. My thing is--- I didn't know a bad idea became meritorious just for the lack of something less stupid to try. The guy is just over is head for a crisis like this.

Also, many times he was asked some half decent questions from Congress and he appeared to be trying to avoid the questions rather than giving an honest answer. In some cases implying the question was overly simplistic when in most cases they were valid questions (which in terms of financial testimony is unusual for Congress). Not confidence inspiring at all.

The guy in this job should be comfortable with the policies he is implementing and have conviction that he is doing the right thing for the country. It shoudn't be--fake it till ya make it.
That said--he is better than Hank Paulson by a good measure.

ET Phone Home

Okay this is in the category of super neat. They have basically discovered two planets. One which is in the habitable zone where water could exist but too large, the other is Earth size but a bit too close.

Given the odds, I'd bet at some point they are going to find a planet our size with water on it. Sometimes it seems we've barely explored our own world but could you imagine setting foot there? Via the Chronicle:

"The Holy Grail of current exoplanet research is the detection of a rocky, Earth-like planet in the 'habitable zone,'" said Michel Mayor, an astrophysicist at Geneva University in Switzerland.

An American expert called the discovery of the tiny planet "extraordinary."

Gliese 581 e is only 1.9 times the size of Earth — while previous planets found outside our solar system are closer to the size of massive Jupiter, which NASA says could swallow more than 1,000 Earths.

Gliese 581 e sits close to the nearest star, making it too hot to support life. Still, Mayor said its discovery in a solar system 20 1/2 light years away from Earth is a "good example that we are progressing in the detection of Earth-like planets."

Scientists also discovered that the orbit of planet Gliese 581 d, which was found in 2007, was located within the "habitable zone" — a region around a sun-like star that would allow water to be liquid on the planet's surface, Mayor said.

He spoke at a news conference Tuesday at the University of Hertfordshire during the European Week of Astronomy and Space Science.

Gliese 581 d is probably too large to be made only of rocky material, fellow astronomer and team member Stephane Udry said, adding it was possible the planet had a "large and deep" ocean.

"It is the first serious 'water-world' candidate," Udry said.