The Mike Gasior Blog

The public relations from the White House this morning were extremely clear.  The hedge funds, who are among the senior lenders to Chrysler, are the ones forcing the company into bankruptcy today.  What is helpful to the more simple types like myself is how elementary it is to understand what is to blame for this American tragedy.

–It wasn’t all the legacy costs the company has accumulated over decades of time as I thought.

–It wasn’t bad management.

–It wasn’t decades of making automobiles inferior to many other makers.

–It wasn’t union contracts that required the car maker to pay workers almost their full wages even when plants were idled and Chrysler wasn’t making cars or money.

–It wasn’t far too many dealerships in too many towns and cities.

It was hedge funds.

Gosh, thank you White House for dumbing it down so even I can understand the situation.

I totally agree with the White House’s logic in this regard too.  These hedge funds who hold the senior, secured debt in Chrysler with liens on plants, equipment, inventory and receivables should have simply accepted the Obama plan.  After all…all the senior creditors should have allowed the more junior creditors to leapfrog over them and taken gigantic losses for the sake of “saving” the company.  Certainly the investors who entrusted the fund managers with the fiduciary responsibility of protecting their investment should have taken much, much less than probably any bankruptcy judge in the United States would have granted them.  If I were one of these investors I would want the manager to do their “patriotic duty” and commit me to lose tons and tons of cash.  After all….isn’t that the new “American Way”?  Punish the fat cats and the investor class and protect the working men and women who embody our working class.  Throw aside centuries of contract law and make a “deal with the devil” and let the government FORCE you to accept TARP money that will ultimately allow the Treasury Department to exercise their right to become shareholders and the de facto owners of the major banks in this country?  Certainly Karl Marx and Chairman Mao would have done the same thing had they “inherited” this crisis.

What a sad day in America for me.

And the stock market reacts by jumping almost 100 points in the Dow Jones.  After popping 168 yesterday on news that GDP fell at a 6.1% annual rate, which was almost 50% higher than the consensus estimates.  And this is the economist in me teaching here, but remember that 6.1% contraction in the economy is a measure against the previous quarter where it also contracted over 6%.  Please understand what this means in simple terms.

–If your income last week was $1,000 and it was reduced by 6%, the next week you make $940.  If it reduces another 6% the following week your next paycheck $883.60.

I have to believe that many people who heard the GDP number for the first quarter (many of whom should actually know better) took solace in the idea that at least the first quarter was at least no worse than the fourth quarter of 2008.  But what do YOU think of this:

–Two weeks ago paycheck – $1,000

–One week ago paycheck – $940

–This week paycheck – $883.60

Do things seem to be leveling off to you?

I rest my case your honor.  And the senior creditors who wouldn’t agree to this crappy deal being offered by the White House are going to do MASSIVELY better in front of whatever bankruptcy judge oversees this case, which will be in court for YEARS.  At least the judicial system still has some modicum of respect for contract law and fairness.

I’m sorry that I haven’t done a very good job promoting the terrific radio show I appear on basically every other Monday in London, but I’ll do it now.

It is primarily folks from every corner of the hedge fund industry (and me) and the discussion can ramble to any corner of finance and investing.  It is hosted by my good friend “Dr. Stu” and it can be a pretty interesting hour of radio.   Here is part of the email Stu sends out to friends to remind them to listen:

You are cordially invited (next Monday, April 27th)  to listen to the next edition of the N@ked Short Club between 21.00 and 22.00 hrs., London time on not-for profit radio station, Resonance FM: 1 hour of loose talk about hedge funds and the state of the world, heady music, poetry…nothing to do with anyone’s day job, no promotional agenda, no commercial intent… just a bit of light relief in these interesting times.

Dr. Stu will be on hand with a team of cognitive behavioural finance therapy experts to help callers to the Emergency Hedge Fund Helpline (1-800-DISTRESSED) to get in touch with their Inner Arbitrageur…and
will be joined by several special industry guests.

You can hear it online at 4:00 p.m. Eastern  Daylight Time at:

http://resonancefm.com/

See you later on the radio.

You’ve all probably heard the news that the U.S. government has a bankruptcy filing in place for Chrysler, which may come as soon as next week.

The details are sickening.

There is already a deal in place that will protect the pensions and health-care of all Chrysler retirees.

From the basic details currently available, the situation seems to be as follows:

-Retirees are protected and all set.

–Common shareholders will get squat.

–Secured creditors might get something on the dollar should Fiat want some of the assets backing up the bonds, but one might suspect the unsecured lenders might get very little.  On average it appears it will be about $.22 on the dollar.

–The re-organizing Chrysler will be able to cancel franchise agreements with any dealers they don’t feel like keeping around as well as cancelling contracts with vendors who supply them with parts and materials.

–U.S. and Canadian taxpayers will provide all the new financing from here out.

Deals like this certainly make you want to run out and invest in the common stock or bonds of a U.S. corporation, doesn’t it.  I’m beginning to wonder why anyone who has investable assets would want to invest it in the U.S. with the rules changing like the wind blowing through Washington, D.C.

I know that many of you who check this blog are probably also on my newsletter mailing list so you probably already received my emailing regarding my brand-new seminar: “Auditing for Investment Fraud”.  I truly believe that this is the most exciting and important seminar that I have designed in many years, and anyone who has any control responsibility for the investment department should definitely attend.  If you didn’t get my email I have pasted it below.  But after it, let me explain how it ties perfectly to the relaxation of “mark-to-market” under FAS 157 and how we are slipping into another opaque, phony period in U.S. financial markets and reporting.

The reason for my email is to introduce to you a brand-new seminar I have just designed.  This seminar is unlike anything we’ve ever offered before.  With the turmoil and scandals that have rocked the global economy during the past 18 months this new session perfectly addresses the needs of every institution.  AFS Seminars LLC is the only organization offering training which addresses these critical issues.  I will even be discussing the recent relaxation of the “mark to market” accounting rules under FAS 157.

I recently completed a six-week consulting engagement as part of an internal audit investigation team and it was one of the most eye opening experiences in my professional lifetime.  It was that engagement that was the catalyst for me to immediately begin designing this new program to offer to clients.

The financial world has been brought to its knees with a variety of scandals, dangerous securities, lack of controls and inadequate or inappropriate pricing and accounting of securities portfolios.  I have been around the markets for 29 years and I can assure you of many things:

–I would have never invested dime one with Bernie Madoff
–The Barings/Nick Leeson and SocGen scandals would never have occurred had I been in the chain of command over those traders
–Orange County California would have never ended up bankrupt had I had any control over their treasurer Bob Citron
–No organization that I was making management decisions for would have invested in the CDO’s that are now stuck in the windpipe of the world’s financial system

And I could go on and on and on with these examples, but I will spare you that.  The simple truth is that after all of these scandals broke, it was painfully obvious that someone should have caught these risks before they caused such devastation.  But in order to catch the problems early it requires someone who knows what they are looking for.

That’s what this new seminar is designed to do; Boil down a lifetime of experience in the financial markets and relate it to my audience in a matter of two days.  This is an extremely intensive program and although the title includes the word “auditing”, this program is not for auditors only.  It is for any member of your organization who needs to understand any of the following:

– Appropriate internal controls for an institutional investment department and the infrastructure of the investment markets.
–Complex security types and structures and the risks associated with them.
–Appropriate accounting and pricing of portfolios including the most recent changes to mark-to-market accounting under FAS 157.
–What caused all the major scandals of the past 20 years and what went wrong in each case including the most recent like Madoff and Stanford Financial.

I am making this seminar available immediately to be held in-house at your location with as few as 10 people attending.  I am also willing to work with the leadership of associations and organizations to arrange the session for your members.  We have been the most cost efficient provider to the financial community for 20 years now and that has never been more important that right now.  This course is priced at $500 per person plus travel expenses and there are discounts available for larger groups.  The session also qualifies for 15 hours of CPE credit.

My recommendation is that the following staff should attend this program:

–Internal and External Auditors
–Investment Accountants
–Investment Operations Staff
–Investment Systems & IT Professionals
–Senior Management
–CFOs/Controllers

The session is also available in condensed format for presentation to boards of directors.

If you would like a complete course description with daily schedule, or to inquire about available dates, please drop me an email at mike@afs-seminars.com or contact my offices at (860)347-6568.

Please contact me directly if there are any questions I can answer for you.  I look forward to seeing you in one of my programs soon.

We are entering another extremely scary moment in the history of financial fraud at this very moment and what makes it so scary is that it is government sponsored.  It is quite a change of events from less than 10 years ago, when the dirty accounting of Enron, WorldCom and others lead to losses of billions of dollars for investors and the knee-jerk passage of Sarbanes-Oxley by the U.S. Congress. SOX was perhaps the worst legislation since Smoot-Hawley in 1930.  It causes undue hardship to public U.S. companies and has caused the U.S. to be a less likely destination for any multi-national company seeking a home.

I thought one of the unexpected positives of Enron and WorldCom is that my auditor friends were now longer willing to get pushed around by their client companies.  Unlike Arthur Anderson who would seemingly sign any financial statement if you were paying them enough, auditors began to boldly tell clients no.  No, we won’t sign those so fire us at your peril.  My experience and observation was that it made the financial system more honest.  SOX didn’t make it better, it simply made it more burdensome.  But now the government is the one leaning on my accountant friends to turn a blind eye to the completely fictional nature of these asset values.  Just when the auditors had some leverage with clients to try and keep them honest, the government turns into Tony Soprano and leans on them to look away.  This will come back to haunt us much sooner than you may expect.

But where are we now?  Now we are living in a world were first the politicians were bullying the ratings agencies to NOT downgrade the bond insurers last year from AAA/Aaa even though EVERYONE knew the companies deserved nowhere near that sort of rating.  Nor were any bonds insured by the companies trading at prices that were commensurate with a AAA/Aaa rating.

And now we have the government leaning on (forcing actually) FASB and my accountant friends to turn a blind eye to the actual value of assets held by companies.  These earnings being announced by these banks are being artificially inflated by the sudden increase of the “value” of the crappy assets they hold.  That and the fact the banks can now borrow from the Federal Reserve at 0% interest and lend it out at rates above zero.  Pretty nice business if you can get it.  No wonder the U.S. government announced over the weekend they don’t want their TARP money back and would rather exercise the convertible feature of their preferred share and become the owners of the banks.  Who wouldn’t want to be in that business.

Everything occurring right now is phony.  The assets held by these institutions didn’t suddenly become more valuable.  They are still crap.  No amount of accounting changes or lipstick will change these pigs.

And don’t believe all the nonsense about how the markets for these “toxic” (God, I hate that freaking term) has been “frozen” and no one is willing to trade them.  This is complete and utter bullshit.  There have been plenty of bids out there from extremely smart people with very healthy balances in their checking accounts.  The problem is that none of the investors holding the crap are willing to sell at prices that investors are willing to pay.  Those investors also faced the problem that if they WERE to sell at the legitimate price, then they would have to mark the rest of the crap to that fair market price.  The problem with that scenario is that all these banks would be bankrupt on that morning.

The United States government is the Enron of today.  They are actively promoting fraud in financial reporting and are experts in this arena having done it themselves for many, many years.  After all, why would Federal law require pensions in the private sector to fund their pension plans when the government would grant themselves an exemption from this requirement?  How could financing the Iraq War be an “off balance sheet” item that isn’t part of their budget.  Any corporation who tried that would likely be prosecuted under Sarbanes-Oxley.

This is all nonsense.  So I’ll give you the same advice my manager gave me on my first morning at work after joining the Wall Street community, which seemed amazingly jaded and cynical to me at the time SO many years ago:

“Mike; this is Wall Street.  Don’t believe anything you hear and only half of what you see since almost nothing here is true.”

Sober advice, but good advice nonetheless.  Take the advice for this precise moment of financial history.

In my most previous post on the blog I just got a reply from “Mike” (not me) commenting that my suggestion about how Americans might have actually learned their lesson and will start saving is contrary to my statements in my newsletters and seminars.

Well, in one regard, Mike is precisely correct.

I have always lectured that the CORPORATE learning curve can be amazingly flat due to management always engaging in CYA types of behaviors (”cover your ass” for those of you unfamiliar with corporate colloquialisms and acronyms) but the human species is actually a very different learning mechanism in its entirety.

The Japanese were already MUCH better savers of money than Americans when their stock and real estate markets imploded in the very late 1980’s and early 1990’s.  Without much surprise, Japanese consumers crawled into a bunker they actually still occupy almost 20 years later and almost completely stopped their consumerism of the 1980’s.  Even after the Japanese Central Bank cut their lending rates to effectively zero in the early 1990’s and the Japanese government went on a MASSIVE borrowing and spending spree, Japanese consumers still stayed home and kept saving and did not spend.  This drove Japan into the deflation they’ve suffered over the past 15 years (and the lost decade….or decade and a half) that still shows little sign of improving for them.  I hope a lot of this story sounds VERY familiar.

Most Americans don’t know that although our national debt to GDP ratio is still south of 80%, the Japanese government’s situation is 190%.  And Japanese government debt is rated “junk” compared to other governments.

I’m not suggesting American consumers are the same as Japanese consumers, but I simply suggest that human society is an organism unlike the corporate organism.  Consumers are more reactive and more dependable.  At least from an economics point of view, which is always the angle I’m always coming from.

And I further suggest that the American consumer is going to stay home and not spend whatever earned or borrowed money they have available (as bourne out by the PPI and retail sales statistics released this morning) no matter how low rates go or how much spending and borrowing is done by the U.S. governement.

This is a bear market rally and nothing more.  The economy is a disaster and there is very little to pin your hopes on in the immediate economic results.

I stand by what I said many, many months ago that this year will actually be worse than 2008 and the numbers are already beginning to prove me correct this morning.

As a friend on mine reminds me every time I get on a very fast snowmobile; “don’t get stupid”, I encourage you to do the same.  Stay calm and conservative and don’t get stupid.

Before I get to the point of this blog post, I need to ask my loyal friends and readers a favor.

Please forward this post to all your friends, relatives and casual enemies since I want to be heavily on the public record as being the ONLY person any of them has ever heard of with the opinions I’m about to express.

Seriously….please spread the word of what I’m saying because people need to hear these words and my suggestions since I can guarantee they aren’t hearing it elsewhere.  I’m counting on you to make this viewpoint a viral type of phenomenon on the Internet with millions of people reading these words.

Now to my point.

We all have gotten the public relations message from basically every possible angle imaginable at this point.  From the politicians.  From the bankers and Wall Street.  From car makers and home builders.  From the pundits and the Nobel Prize winners.  Everyone agrees on one point.

The most important thing in the global economy is to get credit flowing again.

People need mortgages.  People want car loans and larger credit lines on their Mastercard and Visa.  People want Jetskis, recreational vehicles and all sorts of other consumer goods and other nonsense.  What is holding all these people back is the lack of credit.

The banks won’t lend anyone money.  They’re hoarding their TARP funds and paying out extravagant bonuses.  The credit markets are frozen and everyone is burdened with “toxic” assets and there is no money to be lent.

Once we clear up these toxic assets and stimulate the economy, the banks will begin to lend once again and investors will once more be eager to buy the securities that are backed by the mortgages, car loans, credit cards, commercial mortgages, home equity lines of credit, student loans, and all manor of of other securitized products that have been so prevalent for the past 26 years.

The world will once again be functioning normally and we will all be back to our usual state of consumer driven Nirvana.  Gosh, it will all be so fabulous for us all.  A chicken in every pot and some gorgeous granite countertops to put the pot on after we remove it from the Viking Range.

It seems oh so simple.  Pump the economy with credit and consumers will embark on another drunken spending spree of buying a never ending river of crap.

But what if they don’t?

And that’s my point.

What if Americans aren’t even as stupid as I think they are?  What if they’ve actually learned their collective lesson that we’ve all been borrowing FAR too much during the past 10 or 20 years and we all decide to actually NOT borrow any money.  Even if it IS made available to us?

And God forbid….what if we actually start SAVING money??  What a bizarre concept not being discussed by our Nobel Prize laureates.  Perhaps Americans might even behave a little bit like the Japanese consumers did in the very early 1990’s after their stock market and real estate market bubbles burst.  Stop spending, start saving and stay home.

I’m rich, liquid and have a platinum credit score and I haven’t borrowed JACK this year.  Nor will I.

Americans might start driving their cars a few more years and skipping second homes, SeaDoos and all sorts of other nonsense that they never needed in the first place.

For all the supposed geniuses on Presidential task forces and at the Federal Reserve (and please notice I don’t include the U.S. Congress here since they are certifiable morons) why is it no one but me is considering that the problem isn’t the lack of credit.

The problem (for the economy) might be the lack of DEMAND for credit.

As much as I hate to admit it, but maybe Americans have smartened up and desire to conduct themselves in a financially responsible way once and for all.

I know this might all sound crazy, but don’t you think this might be the case?  Maybe?