Sunday, August 28, 2011

LEGISLATIVE MUGGING ... ALLEY POLITICS AT ITS BEST

"WE THE PEOPLE" AND OUR EMPLOYEE'S ...


Nero in the White House

Posted: August 08, 2011 5:20 pm Eastern

Three significant historical events have been eclipsed by Obama: 1) Jimmy Carter will no longer be looked upon as the worst president in American history; 2) Richard Nixon and Bill Clinton will no longer be recognized as the greatest liars in presidential history; 3) Clinton's stain on Monica's dress, and what that did to White House in general and the office of the president specifically, will forever pale in comparison to the stain and stench of Obama. 

I need not spend much time on the failure of Obama as president. His tenure has been a failure on every measurable level. So much so, in fact, that some of the staunchest, most respected liberal Democrats and Democratic supporters have not only openly criticized him – some even more harshly than this essayist – but they have called for him to step down. 

Richard Nixon's words "I am not a crook," punctuated with his involvement in Watergate, and Bill Clinton's finger-wagging as he told one of the most pathetic lies in presidential history, in the aftermath of Obama, will be viewed as mere prevarications. 

Mr. Nixon and Clinton lied to save their backsides. Although, I would argue there are no plausible explanations for doing what they did, I could entertain arguments pursuant to understanding their rationales for lying. But in the case of Obama, he lies because he is a liar. He doesn't only lie to cover his misdeeds – he lies to get his way. He lies to belittle others and to make himself look presentable at their expense. He lies about his faith, his associations, his mother, his father and his wife. He lies and bullies to keep his background secret. His lying is congenital and compounded by socio-psychological factors of his life. 

Never in my life, inside or outside of politics, have I witnessed such dishonesty in a political leader. He is the most mendacious political figure I have ever witnessed. Even by the low standards of his presidential predecessors, his narcissistic, contumacious arrogance is unequalled. Using Obama as the bar, Nero would have to be elevated to sainthood. 

As the stock markets were crashing, taking with them the remaining life saving of untold tens of thousands, Obama was hosting his own birthday celebration, which was an event of epicurean splendidness. The shamelessness of the event was that it was not a state dinner to welcome foreign dignitaries, nor was it to honor an American accomplishment – it was to honor the Pharaoh, Barack Hussein Obama. The event's sole purpose was for the Pharaoh to have his loyal subjects swill wine, indulge in gluttony and behavior unfit to take place on the property of taxpayers, as they suffer. It was of a magnitude comparable to that of Tyco CEO Dennis Kozlowski's $2 million birthday extravaganza for its pure lack of respect for the people. 

Permit me to digress momentarily. The U.S. Capitol and the White House were built with the intent of bringing awe and respect to America and her people. They were also built with the intent of being the greatest of equalizers. I can tell you, having personally been to both, there is a moment of awe and humility associated with being in the presence of the history of those buildings. They are to be honored and inscribed into our national psyche, not treated as a Saturday night house party at Chicago's Cabrini-Green. 

The people of America own that home Obama and his wife continue to debase with their pan-ghetto behavior. It is clear that Obama and family view themselves as royalty, but they're not. They are employees of "we the people," who are suffering because of his failed policies. What message does this behavior send to those who today are suffering as never before? 

What message does it send to all Americans who are struggling? Has anyone stopped to think what the stock market downturn forebodes for those 80 million baby boomers who will be retiring in the next period of years? Is there a snowball's chance in the Sahara that every news program on the air would applaud this behavior if it were George W. Bush? To that point, do you remember the media thrashing Bush took for having a barbecue at the White House? 

Like Nero – who was only slightly less debaucherous than Caligula – with wine on his lips Obama treated "we the people" the way Caligula treated those over whom he lorded. 

Many in America wanted to be proud when the first person of color was elected president, but instead, they have been witness to a congenital liar, a woman who has been ashamed of America her entire life, failed policies, intimidation and a commonality hitherto not witnessed in political leaders. He and his wife view their life at our expense as an entitlement – while America's people go homeless, hungry and unemployed.
 
Mychal Massie is chairman of the National Leadership Network of Black Conservatives-Project 21 – a conservative black think tank located in Washington, D.C. He was recognized as the 2008 Conservative Man of the Year by the Conservative Party of Suffolk County, N.Y. He is a nationally recognized political activist, pundit and columnist. He has appeared on Fox News Channel, CNN, MSNBC, C-SPAN, NBC, Comcast Cable and talk radio programming nationwide. A former self-employed business owner of more than 30 years, Massie can be followed at mychal-massie.com.
























ITS NOT NICE TO FOOL WITH MOTHER NATURE & VOTERS ... OH PLEASE, JUST KICK ME IN THE HEAD!!!


Obama takes charge at hurricane command center

IN A SOMEWHAT RELATED & DEVELOPING STORY: OBAMA TAKES CHARGE OF THE DONNER PARTY ... 


RELATED CONTENT
US President Barack Obama warned the US east coast was in for a "long 72 hours" as he led his government's response to Hurricane Irene at a disaster command center in Washington.

Obama on Saturday chaired a meeting at the National Response Coordination Center (NRCC) set up at the Federal Emergency Management Agency's (FEMA) headquarters in Washington, which is marshaling federal and local hurricane-relief efforts."This is going to be a tough slog getting through this thing," Obama said during a video teleconference including senior federal officials and local government agencies in the east coast path of Irene. 

"It's going to be a long 72 hours. Obviously a lot of families are going to be affected ... the biggest concern I'm having right now has to do with flooding and power," Obama said during the videoconference. [Where was Obama this spring when the midwest took the big hit with floods and power outages? I'll give you 65 million reasons!]

"(It) sounds like that's going to be an enormous strain on a lot of states" that could last days, or even longer in some cases, he said. [Mass hysteria only plays with group think!]

Saturday evening Obama convened a conference call with members of his senior emergency response team including Vice President Joe Biden and Department of Homeland Security Secretary Janet Napolitano, among others. [Is this going to be like the J.O.B.S. "new" initiative in September?]

"The President was briefed on the current track of the storm, the weather impacts being felt so far and efforts to pre-position response and recovery assets," said a statement released by the White House.

"The President asked to be kept apprised of developments throughout the night and said that he wants the group to re-convene tomorrow morning." [Ah yes, the famous 3am call, its still raining and the wind is blowing, "call me in the morning!"]

The White House said Obama heard updates on Saturday from governors and emergency management officials in North Carolina, Virginia, Maryland, Delaware, Pennsylvania, New Jersey, New York, Puerto Rico, Connecticut, Rhode Island, New Hampshire, Maine and Vermont. [sucking around for "free FEMA funds"]

The White House appears to have carefully considered the lesson of Hurricane Katrina in 2005, when a botched response effort and confusion between state and federal agencies inflicted a heavy political price on president George W. Bush.

Obama returned home one night early on Friday from his island vacation on Martha's Vineyard in Massachusetts and appeared keen to be visibly in charge as the response to Hurricane Irene unfolds. [Oh, please ... spare me!]

In an earlier conference call on Saturday, Obama held a conference call with Napolitano, FEMA administrator Craig Fugate and other senior emergency management officials. [quoting "dead fish" Emmanuel can't left a potential crisis go to waste.]

"The president reiterated that we know that this storm's impacts will continue to be felt throughout the weekend and that we still have work ahead of us to support potentially impacted states and communities," the White House said.

Sustained winds of 85 miles (140 kilometers) an hour lashed coastal areas as Irene made landfall near the southern end of a chain of barrier islands that ring the North Carolina coast, the National Hurricane Center said.

Cities along the east coast of the United States -- from Washington to New York to Boston -- braced for the impact, with hundreds of thousands of people ordered to evacuate low-lying areas. [common sense dictates you gotta come in out of the rain, people aren't stupid ... but voters are]

Saturday, August 27, 2011

ALICE IN BANKERLAND ... IS IT A RANDOM WALK IN WONDERLAND OF INTERNATIONAL GREED

Wall Street Aristocracy Got $1.2 Trillion in Secret Loans


Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.
  • By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.
  • Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

“These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.”

Foreign Borrowers
It wasn’t just American finance. Almost half of the Fed’s top 30 borrowers, measured by peak balances, were European firms, some were: 


  • Edinburgh-based Royal Bank of Scotland Plc, which took $84.5 billion, the most of any non-U.S. lender, and 
  • Zurich-based UBS AG (UBSN), which got $77.2 billion
  • Germany’s Hypo Real Estate Holding AG borrowed $28.7 billion, an average of $21 million for each of its 1,366 employees.
The largest borrowers also included Dexia SA (DEXB), Belgium’s biggest bank by assets, and Societe Generale SA, based in Paris, whose bond-insurance prices have surged in the past month as investors speculated that the spreading sovereign debt crisis in Europe might increase their chances of default.

The $1.2 trillion peak on Dec. 5, 2008 -- the combined outstanding balance under the seven programs tallied by Bloomberg -- was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010, according to data compiled by Bloomberg.

Peak Balance
The balance was more than 25 times the Fed’s pre-crisis lending peak of $46 billion on Sept. 12, 2001, the day after terrorists attacked the World Trade Center in New York and the Pentagon. Denominated in $1 bills, the $1.2 trillion would fill 539 Olympic-size swimming pools.

The Fed has said it had “no credit losses” on any of the emergency programs, and a report by Federal Reserve Bank of New York staffers in February said the central bank netted $13 billion in interest and fee income from the programs from August 2007 through December 2009.

“We designed our broad-based emergency programs to both effectively stem the crisis and minimize the financial risks to the U.S. taxpayer,” said James Clouse, deputy director of the Fed’s division of monetary affairs in Washington. “Nearly all of our emergency-lending programs have been closed. We have incurred no losses and expect no losses.”

While the 18-month U.S. recession that ended in June 2009 after a 5.1 percent contraction in gross domestic product was nowhere near the four-year, 27 percent decline between August 1929 and March 1933, banks and the economy remain stressed.

Odds of Recession
The odds of another recession have climbed during the past six months, according to five of nine economists on the Business Cycle Dating Committee of the National Bureau of Economic Research, an academic panel that dates recessions.

Bank of America’s bond-insurance prices last week surged to a rate of $342,040 a year for coverage on $10 million of debt, above where Lehman Brothers Holdings Inc. (LEHMQ)’s bond insurance was priced at the start of the week before the firm collapsed. Citigroup’s shares are trading below the split-adjusted price of $28 that they hit on the day the bank’s Fed loans peaked in January 2009. The U.S. unemployment rate was at 9.1 percent in July, compared with 4.7 percent in November 2007, before the recession began.

Homeowners are more than 30 days past due on their mortgage payments on 4.38 million properties in the U.S., and 2.16 million more properties are in foreclosure, representing a combined $1.27 trillion of unpaid principal, estimates Jacksonville, Florida-based Lender Processing Services Inc.


Liquidity Requirements
“Why in hell does the Federal Reserve seem to be able to find the way to help these entities that are gigantic?” U.S. Representative Walter B. Jones, a Republican from North Carolina, said at a June 1 congressional hearing in Washington on Fed lending disclosure. “They get help when the average businessperson down in eastern North Carolina, and probably across America, they can’t even go to a bank they’ve been banking with for 15 or 20 years and get a loan.”

The sheer size of the Fed loans bolsters the case for minimum liquidity requirements that global regulators last year agreed to impose on banks for the first time, said Litan, now a vice president at the Kansas City, Missouri-based Kauffman Foundation, which supports entrepreneurship research. Liquidity refers to the daily funds a bank needs to operate, including cash to cover depositor withdrawals.

The rules, which mandate that banks keep enough cash and easily liquidated assets on hand to survive a 30-day crisis, don’t take effect until 2015. Another proposed requirement for lenders to keep “stable funding” for a one-year horizon was postponed until at least 2018 after banks showed they’d have to raise as much as $6 trillion in new long-term debt to comply.


‘Stark Illustration’
Regulators are “not going to go far enough to prevent this from happening again,” said Kenneth Rogoff, a former chief economist at theInternational Monetary Fund and now an economics professor at Harvard University.

Reforms undertaken since the crisis might not insulate U.S. markets and financial institutions from the sovereign budget and debt crises facing Greece, Ireland and Portugal, according to the U.S. Financial Stability Oversight Council, a 10-member body created by the Dodd-Frank Act and led by Treasury Secretary Timothy Geithner.

“The recent financial crisis provides a stark illustration of how quickly confidence can erode and financial contagion can spread,” the council said in its July 26 report.


21,000 Transactions
Any new rescues by the U.S. central bank would be governed by transparency laws adopted in 2010 that require the Fed to disclose borrowers after two years.

Fed officials argued for more than two years that releasing the identities of borrowers and the terms of their loans would stigmatize banks, damaging stock prices or leading to depositor runs. A group of the biggest commercial banks last year asked the U.S. Supreme Court to keep at least some Fed borrowings secret. In March, the high court declined to hear that appeal, and the central bank made an unprecedented release of records.

Data gleaned from 29,346 pages of documents obtained under the Freedom of Information Act and from other Fed databases of more than 21,000 transactions make clear for the first time how deeply the world’s largest banks depended on the U.S. central bank to stave off cash shortfalls. Even as the firms asserted in news releases or earnings calls that they had ample cash, they drew Fed funding in secret, avoiding the stigma of weakness.


Morgan Stanley Borrowing
Two weeks after Lehman’s bankruptcy in September 2008, Morgan Stanley countered concerns that it might be next to go by announcing it had “strong capital and liquidity positions.” The statement, in a Sept. 29, 2008, press release about a $9 billion investment from Tokyo-based Mitsubishi UFJ Financial Group Inc., said nothing about Morgan Stanley’s Fed loans.

That was the same day as the firm’s $107.3 billion peak in borrowing from the central bank, which was the source of almost all of Morgan Stanley’s available cash, according to the lending data and documents released more than two years later by the Financial Crisis Inquiry Commission. The amount was almost three times the company’s total profits over the past decade, data compiled by Bloomberg show.

Mark Lake, a spokesman for New York-based Morgan Stanley, said the crisis caused the industry to “fundamentally re- evaluate” the way it manages its cash.

“We have taken the lessons we learned from that period and applied them to our liquidity-management program to protect both our franchise and our clients going forward,” Lake said. He declined to say what changes the bank had made.


Acceptable Collateral
In most cases, the Fed demanded collateral for its loans -- Treasuries or corporate bonds and mortgage bonds that could be seized and sold if the money wasn’t repaid. That meant the central bank’s main risk was that collateral pledged by banks that collapsed would be worth less than the amount borrowed.

As the crisis deepened, the Fed relaxed its standards for acceptable collateral. Typically, the central bank accepts only bonds with the highest credit grades, such as U.S. Treasuries. By late 2008, it was accepting “junk” bonds, those rated below investment grade. It even took stocks, which are first to get wiped out in a liquidation.

Morgan Stanley borrowed $61.3 billion from one Fed program in September 2008, pledging a total of $66.5 billion of collateral, according to Fed documents. Securities pledged included $21.5 billion of stocks, $6.68 billion of bonds with a junk credit rating and $19.5 billion of assets with an “unknown rating,” according to the documents. About 25 percent of the collateral was foreign-denominated.

‘Willingness to Lend’
“What you’re looking at is a willingness to lend against just about anything,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta and now chief monetary economist in Atlanta for Sarasota, Florida-based Cumberland Advisors Inc.

The lack of private-market alternatives for lending shows how skeptical trading partners and depositors were about the value of the banks’ capital and collateral, Eisenbeis said.

“The markets were just plain shut,” said Tanya Azarchs, former head of bank research at Standard & Poor’s and now an independent consultant in Briarcliff Manor, New York. “If you needed liquidity, there was only one place to go.”

Even banks that survived the crisis without government capital injections tapped the Fed through programs that promised confidentiality. London-based Barclays Plc (BARC) borrowed $64.9 billion and Frankfurt-based Deutsche Bank AG (DBK) got $66 billion. Sarah MacDonald, a spokeswoman for Barclays, and John Gallagher, a spokesman for Deutsche Bank, declined to comment.
Below-Market Rates

While the Fed’s last-resort lending programs generally charge above-market interest rates to deter routine borrowing, that practice sometimes flipped during the crisis. On Oct. 20, 2008, for example, the central bank agreed to make $113.3 billion of 28-day loans through its Term Auction Facility at a rate of 1.1 percent, according to a press release at the time.

The rate was less than a third of the 3.8 percent that banks were charging each other to make one-month loans on that day. Bank of America and Wachovia Corp. each got $15 billion of the 1.1 percent TAF loans, followed by Royal Bank of Scotland’s RBS Citizens NA unit with $10 billion, Fed data show.

JPMorgan Chase & Co. (JPM), the New York-based lender that touted its “fortress balance sheet” at least 16 times in press releases and conference calls from October 2007 through February 2010, took as much as $48 billion in February 2009 from TAF. The facility, set up in December 2007, was a temporary alternative to the discount window, the central bank’s 97-year-old primary lending program to help banks in a cash squeeze.
‘Larger Than TARP’

Goldman Sachs Group Inc. (GS), which in 2007 was the most profitable securities firm in Wall Street history, borrowed $69 billion from the Fed on Dec. 31, 2008. Among the programs New York-based Goldman Sachs tapped after the Lehman bankruptcy was the Primary Dealer Credit Facility, or PDCF, designed to lend money to brokerage firms ineligible for the Fed’s bank-lending programs.

Michael Duvally, a spokesman for Goldman Sachs, declined to comment.

The Fed’s liquidity lifelines may increase the chances that banks engage in excessive risk-taking with borrowed money, Rogoff said. Such a phenomenon, known as moral hazard, occurs if banks assume the Fed will be there when they need it, he said. The size of bank borrowings “certainly shows the Fed bailout was in many ways much larger than TARP,” Rogoff said.

TARP is the Treasury Department’s Troubled Asset Relief Program, a $700 billion bank-bailout fund that provided capital injections of $45 billion each to Citigroup and Bank of America, and $10 billion to Morgan Stanley. Because most of the Treasury’s investments were made in the form of preferred stock, they were considered riskier than the Fed’s loans, a type of senior debt.


Dodd-Frank Requirement
In December, in response to the Dodd-Frank Act, the Fed released 18 databases detailing its temporary emergency-lending programs.

Congress required the disclosure after the Fed rejected requests in 2008 from the late Bloomberg News reporter Mark Pittman and other media companies that sought details of its loans under the Freedom of Information Act. After fighting to keep the data secret, the central bank released unprecedented information about its discount window and other programs under court order in March 2011.

Bloomberg News combined Fed databases made available in December and July with the discount-window records released in March to produce daily totals for banks across all the programs, including the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, Commercial Paper Funding Facility, discount window, PDCF, TAF, Term Securities Lending Facility and single-tranche open market operations. The programs supplied loans from August 2007 through April 2010.


Rolling Crisis
The result is a timeline illustrating how the credit crisis rolled from one bank to another as financial contagion spread.

Fed borrowings by Societe Generale (GLE), France’s second-biggest bank, peaked at $17.4 billion in May 2008, four months after the Paris-based lender announced a record 4.9 billion-euro ($7.2 billion) loss on unauthorized stock-index futures bets by former trader Jerome Kerviel.

Morgan Stanley’s top borrowing came four months later, after Lehman’s bankruptcy. Citigroup crested in January 2009, as did 43 other banks, the largest number of peak borrowings for any month during the crisis. Bank of America’s heaviest borrowings came two months after that.

Sixteen banks, including Plano, Texas-based Beal Financial Corp. and Jacksonville, Florida-based EverBank Financial Corp., didn’t hit their peaks until February or March 2010.

Using Subsidiaries
“At no point was there a material risk to the Fed or the taxpayer, as the loan required collateralization,” said Reshma Fernandes, a spokeswoman for EverBank, which borrowed as much as $250 million.

Banks maximized their borrowings by using subsidiaries to tap Fed programs at the same time. In March 2009, Charlotte, North Carolina-based Bank of America drew $78 billion from one facility through two banking units and $11.8 billion more from two other programs through its broker-dealer, Bank of America Securities LLC.

Banks also shifted balances among Fed programs. Many preferred the TAF because it carried less of the stigma associated with the discount window, often seen as the last resort for lenders in distress, according to a January 2011 paper by researchers at the New York Fed.

After the Lehman bankruptcy, hedge funds began pulling their cash out of Morgan Stanley, fearing it might be the next to collapse, the Financial Crisis Inquiry Commission said in a January report, citing interviews with former Chief Executive Officer John Mack and then-Treasurer David Wong.


Borrowings Surge
Morgan Stanley’s borrowings from the PDCF surged to $61.3 billion on Sept. 29 from zero on Sept. 14. At the same time, its loans from the Term Securities Lending Facility, or TSLF, rose to $36 billion from $3.5 billion. Morgan Stanley treasury reports released by the FCIC show the firm had $99.8 billion of liquidity on Sept. 29, a figure that included Fed borrowings.

“The cash flow was all drying up,” said Roger Lister, a former Fed economist who’s now head of financial-institutions coverage at credit-rating firm DBRS Inc. in New York. “Did they have enough resources to cope with it? The answer would be yes, but they needed the Fed.”

While Morgan Stanley’s Fed demands were the most acute, Citigroup was the most chronic borrower among the largest U.S. banks. The New York-based company borrowed $10 million from the TAF on the program’s first day in December 2007 and had more than $25 billion outstanding under all programs by May 2008, according to Bloomberg data.


Tapping Six Programs
By Nov. 21, when Citigroup began talks with the government to get a $20 billion capital injection on top of the $25 billion received a month earlier, its Fed borrowings had doubled to about $50 billion.

Over the next two months the amount almost doubled again. On Jan. 20, as the stock sank below $3 for the first time in 16 years amid investor concerns that the lender’s capital cushion might be inadequate, Citigroup was tapping six Fed programs at once. Its total borrowings amounted to more than twice the federal Department of Education’s 2011 budget.

Citigroup was in debt to the Fed on seven out of every 10 days from August 2007 through April 2010, the most frequent U.S. borrower among the 100 biggest publicly traded firms by pre- crisis market valuation. On average, the bank had a daily balance at the Fed of almost $20 billion.


‘Help Motivate Others’
“Citibank basically was sustained by the Fed for a very long time,” said Richard Herring, a finance professor at the University of Pennsylvania in Philadelphia who has studied financial crises.

Jon Diat, a Citigroup spokesman, said the bank made use of programs that “achieved the goal of instilling confidence in the markets.”

JPMorgan CEO Jamie Dimon said in a letter to shareholders last year that his bank avoided many government programs. It did use TAF, Dimon said in the letter, “but this was done at the request of the Federal Reserve to help motivate others to use the system.”

The bank, the second-largest in the U.S. by assets, first tapped the TAF in May 2008, six months after the program debuted, and then zeroed out its borrowings in September 2008. The next month, it started using TAF again.

On Feb. 26, 2009, more than a year after TAF’s creation, JPMorgan’s borrowings under the program climbed to $48 billion. On that day, the overall TAF balance for all banks hit its peak, $493.2 billion. Two weeks later, the figure began declining.

“Our prior comment is accurate,” said Howard Opinsky, a spokesman for JPMorgan.

‘The Cheapest Source’
Herring, the University of Pennsylvania professor, said some banks may have used the program to maximize profits by borrowingfrom the cheapest source, because this was supposed to be secret and never revealed.”

Whether banks needed the Fed’s money for survival or used it because it offered advantageous rates, the central bank’s lender-of-last-resort role amounts to a free insurance policy for banks guaranteeing the arrival of funds in a disaster, Herring said.

An IMF report last October said regulators should consider charging banks for the right to access central bank funds.

“The extent of official intervention is clear evidence that systemic liquidity risks were under-recognized and mispriced by both the private and public sectors,” the IMF said in a separate report in April.

Access to Fed backup support “leads you to subject yourself to greater risks,” Herring said. “If it’s not there, you’re not going to take the risks that would put you in trouble and require you to have access to that kind of funding.”


IN A RELATED BUT UNRELATED STORY:  Billionaire investor Warren Buffett made headlines on Thursday (August 27, 2011) when his company, Berkshire Hathaway, announced that it would invest $5 billion in Bank of America. And according to CNN, warrants related to the deal earned Buffett $357 million on Thursday alone. Nice work if you can get it.

Friday, August 26, 2011

AS THE GIANT SLEPT, HE WAS RAPED ... OR WAS IT CONSENSUAL?!


An economist is someone who knows the price of everything and the value of nothing.



I recently noted how conventional (CONSENSUAL) cost accounting inexorably focuses executives’ attention on increasing short-term profits by cutting costs.

The same thing happens in economics. Take a recent study that set out to shed light on the role of Chinese businesses vis-à-vis American consumers. Galina Hale and Bart Hobijn, two economists from the Federal Reserve Bank of San Francisco, did a study showing that only 2.7% of U.S. consumer purchases have the “Made in China” label. Moreover, only 1.2% actually reflects the cost of the imported goods. Thus, on average, of every dollar spent on an item labeled “Made in China,” 55 cents go for services produced in the United States. So the study trumpets the finding that China has only a tiny sliver of the U.S. economy.
Gallery: The 10 Fastest-Growing Retailers
Video: The Next Evolution Of Outsourcing

So no problem, right?

Well, not exactly. The tiny sliver happens to be the sliver that matters. What economists miss is what is happening behind the numbers of dollars in the real economy of people.
How whole industries disappear

Take the story of Dell Computer [DELL] and its Taiwanese electronics manufacturer. The story is told in the brilliant book by Clayton Christensen, Jerome Grossman and Jason Hwang, The Innovator’s Prescription :

ASUSTeK started out making the simple circuit boards within a Dell computer. Then ASUSTeK came to Dell with an interesting value proposition: “We’ve been doing a good job making these little boards. Why don’t you let us make the motherboard for you? Circuit manufacturing isn’t your core competence anyway and we could do it for 20% less.”

Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. On successive occasions, ASUSTeK came back and took over the motherboard, the assembly of the computer, the management of the supply chain and the design of the computer. In each case Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. However, the next time ASUSTeK came back, it wasn’t to talk to Dell. It was to talk to Best Buy and other retailers to tell them that they could offer them their own brand or any brand PC for 20% lower cost. As The Innovator’s Prescription concludes:

Bingo. One company gone, another has taken its place. There’s no stupidity in the story. The managers in both companies did exactly what business school professors and the best management consultants would tell them to do—improve profitability by focus on on those activities that are profitable and by getting out of activities that are less profitable.Amazon couldn’t make a Kindle here if it wanted to.

Decades of outsourcing manufacturing have left U.S. industry without the means to invent the next generation of high-tech products that are key to rebuilding its economy, as noted by Gary Pisano and Willy Shih in a classic article, “Restoring American Competitiveness” (Harvard Business Review, July-August 2009)

The U.S. has lost or is on the verge of losing its ability to develop and manufacture a slew of high-tech products. Amazon’s Kindle 2 couldn’t be made in the U.S., even if Amazon wanted to:
  • The flex circuit connectors are made in China because the US supplier base migrated to Asia. 
  • The electrophoretic display is made in Taiwan because the expertise developed from producting flat-panel LCDs migrated to Asia with semiconductor manufacturing. 
  • The highly polished injection-molded case is made in China because the U.S. supplier base eroded as the manufacture of toys, consumer electronics and computers migrated to China. 
  • The wireless card is made in South Korea because that country became a center for making mobile phone components and handsets. 
  • The controller board is made in China because U.S. companies long ago transferred manufacture of printed circuit boards to Asia. 
  • The Lithium polymer battery is made in China because battery development and manufacturing migrated to China along with the development and manufacture of consumer electronics and notebook computers. An exception is Apple [AAPL], which “has been able to preserve a first-rate design capability in the States so far by remaining deeply involved in the selection of components, in industrial design, in software development, and in the articulation of the concept of its products and how they address users’ needs.”
A chain reaction of decline

Pisano and Shih continue:

“So the decline of manufacturing in a region sets off a chain reaction. Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.”

  • The lithium battery for GM’s [GM] Chevy Volt is being manufactured in South Korea. Making it in the U.S. wasn’t feasible: rechargeable battery manufacturing left the US long ago.

    Some efforts are being made to resurrect rechargeable battery manufacture in the U.S., such as the GE-backed [GE] A123Systems, but it’s difficult to go it alone when much of the expertise is now in Asia.

    In the same way that cost accounting and short-term corporate profits don’t reflect the true health of corporations, the economists’ reckoning of the impact of outsourcing production overseas misses the point. Americans are left with shipping the goods, selling the goods, marketing the goods. But the country is no longer to compete in the key task of actually making the goods.

    Pisano and Shih have a frighteningly long list of industries of industries that are “already lost” to the USA:

    “Fabless chips”; compact fluorescent lighting; LCDs for monitors, TVs and handheld devices like mobile phones; electrophoretic displays; lithium ion, lithium polymer and NiMH batteries; advanced rechargeable batteries for hybrid vehicles; crystalline and polycrystalline silicon solar cells, inverters and power semiconductors for solar panels; desktop, notebook and netbook PCs; low-end servers; hard-disk drives; consumer networking gear such as routers, access points, and home set-top boxes; advanced composite used in sporting goods and other consumer gear; advanced ceramics and integrated circuit packaging.

    Their list of industries “at risk” is even longer and more worrisome.
    What’s to be done?

    With such a complex societal problem, it’s hard not to start from Albert Einstein’s insight: “The significant problems that we have cannot be solved at the same level of thinking with which we created them.” Many actors will have to play a role.
    Company leaders:
  •  Business leaders need to recommit themselves to continuous innovation and the values and practices that are necessary to accomplish that. i.e radical management. As Pisano and Shih write: “Whether you’re the US firm IBM [IBM] with a major research laboratory in Switzerland or the Swiss company Novartis [NYSE:NVS] operating in the biotech commons in the Boston area, sacrificing such a commons for short-term cost benefits is a risky proposition.”
  • Accountants: Accountants need to get beyond the mental prison of cost accounting and embrace the thinking in throughput accounting that puts the emphasis on how companies can add new value, rather than just cutting costs.
  • Investors: Investors need to realize that the companies of the future are those that practice continuous innovation as Apple [AAPL], Amazon [AMZN] andSalesforce [CRM], as compared to companies practicing traditional management, such Wal-Mart [WMT], Cisco [CSCO] OR GE [GE]. Investors need to realize that short-term financial gains are ephemeral: the companies that will generate real value are those that do what is necessary to continuously innovate.
  • Government: Government has a role to play in protecting and promoting fields of expertise or what Pisano and Shih call “the industrial commons”. Thus: “Government-sponsored endeavors that have made a huge difference in the past three decades include DARPA’s VLSI chip development program and Strategic Computing Initiative; the DOD’s and NASA’s support of supercomputers and of NSFNET (an important contributor to the Internet); and the DOD’s support of the Global Positioning System, to mention a handful.”
  • Politicians: At a time of poisonously divisive political debate, in which candidates recite anti-government mantras and call for “getting government out of the way of the private sector”, it is time for serious politicians to step up and examine which parts of the private sector are fostering, and which parts are destroying, the economy of the country. They must stop embodying e.e. cummings definition of a politician as “an ass upon which everyone has sat except a man.”
  • Economists: Economists need to realize that merely adding up the numbers is not enough. They have to look at the meaning behind the numbers. When they trumpet their finding that “Chinese goods are only 1% of the U.S. economy”, it’s akin to saying “we kept the house but gave away the keys.”
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Steve Denning’s most recent book is: The Leader’s Guide to Radical Management(Jossey-Bass, 2010).
Follow Steve Denning on Twitter @stevedenning
Join the Zurich Gathering For C-Suite Leaders with Steve Denning Zurich Sep 12, 2011
And join the Jossey-Bass webinar series, “Why Management Still Matters“: Sep 22-Oct 20, 2011: To register, go here use discount code JBMSD