Corruption or Arrogance?

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treasury_logoOver the past 3 1/2 years while living in India I felt that corruption was one of the bigger threats that could face a nation. In the US, an average citizen does not come across many opportunities to bribe.  In India, corruption is dealt with on a daily basis whether it’s straight forward in business or not so straight forward.  Need a new internet connection? I had to wait over 4 months to get mine, but I’m sure if I bribed the local technician I would have gotten it within a week. Service with a smile as they take your money to grease the wheels.

However, after hearing all the non-sense about the bailouts and latest program from the Treasury the Public Private Investment Program (PPIP). I think it’s arrogance over corruption that takes the cake. Wall Street believes it’s about them. They still believe they can fix the problem which was in part fueled by them. Obama from day one has talked about transparency, yet I’m willing to bet that the PPIP will be hazy in it’s dealings.  The applications for managers are due on April 10, I really hope that on April 12, they provide a list of all the investment managers that applied. I hope this does not turn out to be yet another thinly disguised compensation vehicle for Wall Street. Aren’t the PPIP investments still going to fall in value until the residential and commercial real estate markets stabilize?

This idea of getting Wall Street fixed then Main Street can recover is pure arrogance.  Let’s assume everything is fixed with Wall Street and all the banks are re-capitalized and ready to do business.  Who are they going to loan all this money to: people, companies, state/local governments?  Leverage is what got us to this point and jump starting the banking system to make loans to people that are still financially wounded sounds like another bubble in the making.

There is no silver bullet to this, there are way to many moving parts.  Governments and central banks have to show they are trying to do something but their attempts seem more like swimming upstream.  Some big actions like nationalizing Citibank might help and show the US is serious and bring back confidence.  Once confidence is in place then people might go back to their banks and apply for a loan and get a toaster instead of the other way around.

AIG Bonuses Revisted

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aig-sign-124Over the weekend, the Connecticut attorney general indicated the bonuses paid to AIG was closer to USD 218 million. I’m a bit enraged the bonuses were paid out, but you have to put the amount in perspective. Over the past 6 months AIG received over USD 160 billion in bailout money with more to come.  The bonus amount is less than two tenths of one percent of the current AIG bailout money. So why is their such little outrage at the other 99.80% of the money? I assume because it’s tough to put a human face to a counterparty like Goldman but if a single person like Douglas Poling receives USD 6.4 million it’s a different story. But even the USD 160 billion for AIG is chump change compared to what the Federal Reserve announced this week: to spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. It’s official the US Government used their last weapon and early – the printing of money. As a data point, last year the Bureau of Engraving and Printing (BEP) printed USD 154 billion in real currency notes based on yearly data provided by BEP.

Back to AIG, although the media talks about AIG to be precise there was a division within AIG that caused all the pain – AIG Financial Products (AIGFP).  You can think of AIGFP as the bad insurer. Towards the end of last year the WaPo had a great three part story on the history of AIGFP: Part 1Part 2Part 3

Another article I found has a quick timeline of the Rise and Fall of AIGFP

Finally, Rolling Stone Magazine (yes, of all publications) has a good story on AIGFP

Are you Warren Buffet?

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berkshire_buffetSomeone recently sent me a PDF describing how to invest like Warren Buffett…seriously What The Fu!@. I’m waiting for someone to send me a PDF on how to become the next A-Rod…oh wait just take steroids.

Before you start to mirror his trades remember this simple calculation. Based on the 2008 Forbes billionaire list, Buffett is worth USD 62 billion.  If he loses 99.5% of his wealth he still has enough change to buy an Airbus A380…USD 310 million. Now run that calculation on your networth?

This week Berkshire closed at around USD 73,000 an almost 50% haircut from it’s peak of USD 147,000 and now sits at a 5 1/2 year low.  It was fun to listen to Buffet just several months ago telling people to buy US equities because they were historically cheap. His newsletter came out last week and it looks like he tripped on his own advice and bought some stupid things. Let’s highlight some of the deals from the Oracle of Omaha:

Goldman Sachs – USD 5 billion at USD 115 a share and wait for it…wait for it…gets 10% a year.  Currently GS is at USD 75.65 (down 34%)

GE – USD 3 billion at USD 22.25 a share and gets 10% a year. Currently GE is at USD 7.06 (down 68%)

If you took Buffet’s advice you would be down quite a bit and you wouldn’t be getting the additional 10% kicker that Grandpa Buffet gets. Right now cash is king.

Citi’s Vikram Pandit

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citi_panditNew York Magazine recently ran an exceptional piece on the back story of Pandit’s rise to the top job at Citi.  In summary, he was smart but didn’t know how to play “the game” throughout his career.  The article is sprinked with anecdotes of how Pandit liked to roll with brown people and they even nicknamed his inner circle the “Indian Mafia.”

I’m still clueless on how Citi valued his hedge fund, Old Lane, at USD 800 million.  Even back then when money was flowing it seemed a bit outrageous.

The smartest move that Pandit made was selling off some assets in India. Back in November 2007, Citi sold one of it’s residential properties in South Bombay for USD 8.5 million. Sadly, that might be the only positive balance sheet move by Pandit.

The billion dollar quote from the article:

…When Pandit was born, an astrologer told his family that “whatever this boy touches will turn to gold.”

ouch…I wonder if that astrologer still has a job?

Lost City of Dubai

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palm_jumeirah_150The Atlantis Hotel located on Palm Jumeirah in Dubai had it’s grand opening on Nov 20th, 2008 the same day the world equity markets were hitting multi-year lows. The hotel is based on the mythical Lost City of Atlantis, the irony is that Dubai seems to be some what lost at the moment – massive debt, collapsed economy, over capacity and no one stepping up to save it.

Back in 1998 I spent several weeks working in Dubai and the common theme was “I’m just waiting to get my US visa and then moving.”  In 2005, it changed to “Dubai is the place to be, it’s the Hong Kong/London of the Middle East.” I would constantly hear from friends and business associates who said Dubai was the place to be, “it had more money then God” and if anything goes wrong Abu Dhabi would bail it out. Abu Dhabi is one of the world’s largest oil producers and home to Abu Dhabi Investment Authority the monster USD 1 trillion sovereign wealth fund.

The Dubai myth is over.  It’s clear Dubai has more borrowed money than God and Abu Dhabi is quietly buying marquee assets at distressed prices some of the names being thrown around are the real estate company Nakheel, the Emirates airline and the Dubai Metro.

Several family and friends went to Dubai two weeks ago and got to see it first hand. Malls were empty even with the Dubai Shopping Festival going on.  Most construction had stopped and high end villas were down 40-50%. People are leaving their cars at the airport and heading back home. The last statement might be hype but the reality is Dubai is bust no matter what metric you look at.

All this is not really surprising to me, what is shocking is the velocity of how fast it collapsed. Back in July 2008 major news organizations where talking about how Dubai would weather the global economic storm because of the growth potential. I remember talking to several people in early September (pre Lehman bankrupty) and they kept on telling me how great Dubai was doing even with the world markets collapsing. If Dubai can collapse then anything is possible.

Below are several links detailing the boom and bust of Dubai.

Boom:
CBS’s 60 Minutes – July 2008
NY Times – July 2008. Some great quotes…laughable now.

Bust:
DW-TV (via YouTube) – February 2009
CBS News (via YouTube) – February 2009
NY Times – February 2009

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