Shareholder Derivative Suits - About Freakin' Time

I know that there have already been a number of shareholder derivative suits, most have failed and it is a difficult suit on which to succeed. I also know companies paying their executives billions in bonuses can likewise spend many millions defending the same executives without blinking an eye (which ironically in itself is a basis for a derivative suit if the executives in fact were serving their own interests above those of the corporation as the corporation should not be paying to defend their actions). So it should not be a big surprise that shareholder derivative suits have not been more common. Still, given the widespread press on corporate abuses in the financial sector, especially in terms of compensation and bonuses, you would think stockholders would be more adamant about pursuing their rights. And so it is with great pleasure that I see Goldman has been sued by its shareholders:

http://www.bloomberg.com/apps/news?pid=20601087&sid=acwVfK8iybLs&pos=3

I offer no opinion on whether the just filed suit against Goldman has legs. Based on what is being alleged by the government and a lot of blogs I suspect Goldman has a lot of explaining to do. Either way, I like this development. Shareholders need to take financial institutions to task and should be including individual officers and directors in such suits when there is good evidence they acted more in their own financial interest (i.e. short term gains for bonuses and pay raises) versus the long term financial interest of their companies. Given the government's less than stellar attempts so far (including the fraud suit against Goldman) to punish the culprits, the stockholders are the last line of defense against moral hazard. It is especially important to include the individuals and if there is good evidence of fraud or other intentional misconduct to include such allegations. Companies carry E&O coverage that will protect them and their officers and directors but if these officers and directors committed fraud or intentional misconduct they may lose their coverage and have to pay out of their own pockets.

We absolutely have to do what we can to punish the culprits and diminish moral hazard as the governments of the world are doing the exact opposite; they are financially saving and supporting the companies that brought about the financial disaster of 2008-2009 (and beyond).

Disclosures: I am short on some financial institutions, but not Goldman.

Time For A Nice Long Recession - I Hope

Last year I posted on what I referred to as the new reality. I talked about people becoming more frugal, less prone to using debt and more living within their means. During the depths of our troubles last year this came true. Consumers were hunkering down and, despite the dire times and unemployment, saving money. Certainly some government dollars helped people to start saving instead of building debt, but at least the attitude seemed to have shifted to a - pay down debt and start saving - attitude. Unfortunately, it was or may have been short lived.

The government is hell bent to get everyone spending again. This, my friends, is idiotic. We have spent virtually an entire generation spending more than we make, all the while with our incomes shrinking and our domestic economy less able to support our ways. There are numerous reasons for this debt driven generation and high on the list are low interest rates and lenders willing to lend to anyone who can fog a mirror - or can who can at least lie and say they can fog a mirror. Debt has skyrocketed on a private and public basis throughout the world and now we have a huge ass price to pay for it all.

Yet we are not paying the price. We are allowing our governments to incur record levels of public debt to keep the spigot flowing. And the government is promoting us to continue our spending ways. This, folks, is freaking insane.

I write this as I have a six year old daughter and a three year old son. I am truly, truly worried about the world we are leaving them. This is on many fronts - financial, environmental, energy, etc. But this blog is about financial issues, so let me focus there.

Let me start by linking a post that I highly, and I mean highly, recommend you read. At a minimum go there and look at the incredible charts. They tell the story, and the story is that we - on a private, government, financial or combined level - are heavily in debt in record proportions to GDP and most of the world is as bad if not worse off.

http://www.nakedcapitalism.com/2010/04/the-origins-of-the-next-crisis.html

We, folks, are hanging on by fingernails simply hoping interest rates do not rise. If the do, we are all screwed big time. If they don't, if we are lucky we are only screwed small time.

So let's get back to the story. Easy credit and low rates can only sustain us spending beyond our means for a limited time. When we incur debt we are simply buying stuff today on tomorrow's income. So what if tomorrow's income goes down or is nonexistent. What if our incomes stagnate and we cannot afford the new debt when we have to pay principle.

And so I return to the point of this post. For at least a generation we have bought stuff - be it cars, appliances, houses or whatever - on low interest debt. The "reality" is that you cannot maintain an economy based on debt based purchases. So now we have the reality that we need to start buying what we can afford - be it cars, appliances, houses or whatever. Unfortunately, we have a couple of very spoiled generations in this country - and perhaps the world - who like living beyond their means. But so be it. It will be painful but we need to spend within our means and pay down our existing debt. This, my friends, is no fun whatsoever. This, my friends, will suck for a long time. This will feel like a very long recession. Yet this, my friends, is exactly what we need. It is our new reality. Either we need to get used to it or we will kick this can down the road again and face a much worse fate 3-7 years down the road. Our problems, folks, are not going away.

We need no more government stimulus promoting us to spend dollars we do not have. We need to stop incurring debt we cannot afford and ignore the temptation of interest rates approaching zero. We need to start saving - a novel idea - and getting ready for the problems ahead. I suspect there is a lot of pain ahead and I am personally doing what I can to protect my children from it financially. Nonetheless I am quite upset that I have to do this and the government is screwing my children's future.

What we really need is to (a) make sure we have no total financial market meltdown (done) and (b) let the recession go on for decades if need be while we pay down our enormous debt and adjust our spending to be within our means. One might think that this process would put us at an economic disadvantage to the rest of the world living off of fiscal stimulus, but I think it builds a considerable advantage in the long run. We need to not live off debt and, indeed, pay it down. It will be a long painful process and it will feel like a (less than nice) long recession. I truly think, however, it is time for us to take our medicine, even if we have to take it for a decade or more.

Just my opinion.

Disclosures: None.

Kickin' Cans

A nice ($65 billion) relief package was announced for Greece over the weekend and everything is dandy. The VIX dropped, the cost of insuring against Greece default dropped by one day records and the DOW exceeded 11,000 for the first time since 2008. And the economy in the U.S. is expanding at roughly a 5% annual rate. Yeah baby, off to the races!

You know where I am going with this of course. According to this linked post, which I highly recommend reading in full, there are still some issues with Greece (as in you can put a whole lot of lipstick on it and it is still a pig), so the plan at most avoids immediate problems and, as the post notes, kicks the can down the road. Greece's problems are by no means over and the rest of the PIIGS are being called upon to help Greece out. Now that will work well - not.

http://www.nakedcapitalism.com/2010/04/auerback-the-piigs-problem-maginot-line-economics.html

For the GDP growth in the U.S., well I might opine that just a smidge is a trillion or so in government spending, which seems to be nearly at an end, and over half of it is inventory buildup. Inventory buildup? Yes, at least certain retailers and others seem to be buying into the line that the worst is over and the economy is about to take off.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUipGJoGciA0

Now I could add to the mix some info on continuing high personal debt levels, unemployment in the U.S. still around 9.7%, an aging population (here the U.S. looks good compared to the E.U. and Japan) and numerous other considerations. We have been kicking a lot of cans and those cans seem to be getting bigger with each kick. I hope you have steel toed boots on as the next couple of kicks are going to hurt even more.

Disclosures: None

Here's the deal, I used to blog pretty much daily as I believed it made a difference. People were listening. I did and still believe I was reporting accurately on fundamentals but I am now convinced that government stimulus and other factors can mask the fundamentals for a very long time. How long - years easily, and I fear perhaps much longer. And I am also convinced our government and others are hell bent on building a new bubble. I am not saying their intent is to build a bubble, just that this is what they are doing whether they realize or not. And so here we are left looking at tea leaves on (a) what the fundamentals say and (b) how does all the noise from government stimulus and actions by other interested players affect the outcome. I can only speak to (a) and note that eventually - in time - (a) always wins out. How long only time will tell.

So on (a) I still see nasty fundamentals. Housing still in a slump,with foreclosures still high, commercial real estate still in the slumps, unemployment still high, mortgage rates rising, and few fundamental reasons for short term optimism. And with government stimulus slowly being taken away, you guess what is about to happen.

Disclosures: None.

Just Checking In

Nothing much to post other than some idle thoughts. From what I can see we have avoided financial armageddon (hats off to Michael Panzner). The big financial institutions have built up capital big time. Now they are not lending it, which tells you a lot. They should be able to repay TARP and other funds in time and gradually survive the bad crap on their books. Nothing like Uncle Sam giving out money with virtually no interest to get you through the tough times.

Yet with the worst avoided, folks seem to be ignoring the big picture. China is in a major bubble, Japan is -well - still where it has been for 20 years, the PIIGS aren't flying and we are inflating a new bubble here at home. The fundamentals still suck big time and will for some time and we are not focused on the fundamentals. In my humble opinion we are entering into a very long phase of economic stagnation, both in the U.S. and Europe, which means those that sell us stuff are not going to do much better. NO market predictions here, just expecting that we are in for many years of no fun.

Disclosures: None.

Not Greecing the Wheels

Bloomberg reports that the bailout package for Greece, which is an EU and IMF package, has not convinced investors as it is still just a backup and only kicks in if Greece runs out of other options. Apparently investors believe, as I do, that Greece will soon run out of other options. It is certainly a problem for the EU. They are on the edge of violating some of their basic rules/premises. They do not want IMF involvement as that is a sign of EU failure. And they certainly do not want an EU country bankruptcy, though their very structure could lead to it.

Greece by any analysis is a problem child of the EU, though not the only one. They are the leading chin of the PIIGS. More will come if/after Greece fails. Yet Greece is a poster child of what went wrong in the bubble days. Their debt versus GDP went through the roof, real estate prices were sky high based on buyers with bubble financing, the economy has very little left to sustain it in the long term, tax evasion is rampant and the populace is not likely to be willing to go through the pain they need to in order to repair all this damage (few countries are today). Don't believe me, click on this link to Sudden Debt where the author has covered Greece in good detail.

http://suddendebt.blogspot.com/2010/03/greek-experiment.html

At the end of the day, I do not see Greece being able to do what it needs to do to address its problems. It did a number of financial tricks to kick its debt problems down the road and those will be showing up for years to come, and the citizens there are simply not going to put up with the necessary pain when they take the punch bowl away. Then again, I do not see the EU or IMF providing enough support to avoid that punch bowl leaving. So soveriegn bankruptcy is certainly in the cards in my book. Sure, if this were the only problem country for the EU it is small enough to figure something out, but it is not and those citizens footing the bill in other EU countries will not put up with saving all the PIIGS.

For countries around the world with problems, and I definitely include the U.S., it is time to get our house in order and stimulus spending is only making the long term picture worse, not better. Time to take our medicine.

Disclosures: None.

Option ARMs and Commercial Real Estate

A friend recently sent me an article from the WSJ about how option ARM resets this year and next may not be as bad as expected. Two basic reasons for it are (a) interest rates are very low so the resets will not be terribly bad for most and (b) a lot of underwater homeowners have already defaulted on their option ARMs even before the resets so there are not that many left there to default. A third possible reason is loan mods but we all know these are not really happening too often or working when they do (the percentages are small on this having an impact), so I will dismiss that one out of hand.

For the first point, let me note that these ARMs are either resetting to adjustable rate mortgages or eventually will go there and interest rates will not stay this low forever, so this is another kicking the can down the road success story. Moreover, a lot of these loans had homeowners simply paying interest only, so even with rates low the new payments that will include principal will still be higher. But, in any event, the low rates do give some people time to get back on their feet and perhaps refinance if their homes are not underwater, which is a good thing.

The second reason, a lot of defaults have already occurred, I do buy, especially in California where the option ARMs were all the rage.

Does this mean banks are out of the woods? In a word - no. Especially smaller local and regional banks still have a load of commercial loans that are continuing to sour and the pain is not done yet on the commercial side, though I would agree the worst is behind us on residential side. On the commercial side most commercial mortgages are expected to be underwater by the end of this year:

http://bubblemeter.blogspot.com/2010/03/elizabeth-warren-half-of-commercial-re.html

I really think we are in for a world of commercial real estate hurt this year and next. I read a stat earlier this year that the U.S. has significantly more, as in around 50% more, commercial real estate than any other country. For a country where consumers are still over their heads in way too much debt, I do not see commercial real estate rebounding any time soon. Obama can spend as much stimulus as he wants but I do not see many businesses walking out the plank and taking on new leases or real estate any time soon in this economy. This will lead to some massive commercial loan losses this year and next, which is simply the next step in this economy.

Disclosures: None.