Citigroup - Too large to fail?

Is Citigroup too large to fail?

Lehman Brothers was obviously not too large to fail.

Bear Stearns was not too large to fail.

AIG was too large to fail.

If Citigroup is too large to fail, how should the nationalization of Citigroup take place?

Socialism doesn't work very well.

Allowing pure capitalism hasn't worked perfectly.

Could a synergistic nationalization of Citigroup work better than the simple profit model? How would it be structured?

Along with letting the President, the FED, the Treasury, the Congress, etc., determine who the winners and losers will be when runs on capitalism take place, why not create a fund of last resort, owned by taxpayers, to be benefited by taxpayers, whereby nationalized assets act like an endowment to support health care, education, energy development, scientific progress, retirement, and those who really do need help; like the poor, the oppressed, the sick, the wounded, the unemployed, etc. This fund would provide work for those that are out of work. Competition would still play an important part in determining income levels, opportunities for advancement, and most importantly, accountability. This fund would help those employed to help themselves. It would give them nationalized assets to provide the capital base that caused their jobs to be lost. It would provide education and accountability to help them improve.

Synergism still feels like a better approach to the nationalization of capitalism, than simply choosing winners and losers and letting competition, fear and greed determine the next batch of winners and losers.

Fishing and Presents

Two thoughts from today:

1. Give a man a fish, and you feed him for a day. Teach a man to fish and you feed him for a lifetime.

This should be a basic truth with respect to our economic bailout plans.

2. Yesterday is a memory; tomorrow is a mystery; today is a gift. That is why they call today the present.

Wahoo Moments

Three wahoo moments in two days. It just doesn't get better than that.

Yesterday I had a student come up to me and say "Thank you." After a lot of work and effort, this student had done very well on a test.

Another student, after struggling with a difficult math concept, suddenly "got it" and said, "wow, that is cool. I get it."

And finally, another student said "God really is there, isn't He!"

I couldn't help but reflect on the many wonderful teachers that I have had over the years. Thank you to each and every one of you. Your wonderful influences are greater than you'll ever know.

General Motors and Ford

Should the automakers be bailed out?

Whether we like it or not, changes need to take place with respect to the US auto industry. General Motors and Ford are struggling with their competitiveness as well as with their finances.

For example, my personal experience with General Motors and Ford is not favorable as compared to Toyota. My expectation when I purchase a vehicle from General Motors or from Ford is that something major will break down at the 36,000 mile mark. On the other hand, my expectation for a vehicle that I might buy from Toyota is that it will last me 250,000 miles before anything major breaks down. Competitively speaking, today I have more confidence in buying something from Toyota than I do from General Motors or Ford. I still have loyalties to buy American, but that must be balanced with results, finances and needs; IE, competitiveness.

So my thoughts to General Motors and Ford is that if you want some of the bailout money, what will you do to improve my confidence and expectations in your products, convincing me that an investment in your future with my tax dollars is a good investment?

The Federal Reserve

So how smart are these guys?

Why did they wait so long to start stimulating the economy?

How secure is their balance sheet?

Who is going to prosper as the economy recovers?

The San Francisco Federal Reserve just released their revised forecast for the next year. They are projecting that this recession will be deeper than the one in 2001, with unemployment peaking at about 7.5% in late 2009.

They are showing negative GDP growth over the next 3 quarters, and then a rebound to 4% positive real GDP growth by the 4Th quarter of 2010. They are showing 4 quarters of negative growth, with the most severe being the 4Th quarter of 2008 at a drop of about 3.5%.

They are showing an increase of debt on the Fed's balance sheet as of today's date at about $1.1 Trillion.

With monetary policy at near-zero on interest rates, they suggest that they have three strategies to stimulate the economy. The strategies are:

1. Keep funds rates low for enough time to stabilize financial conditions.

2. Continue to alter the Fed's balance sheet by selling Treasuries, and by buying commercial paper, agencies, etc.

3. Continue to increase the size of the Fed's balance sheet.

It seems to me that the whole point of this exercise is to get more money and confidence into the hands of consumers, so that there is an outlet for the goods and services of businesses.

Commodity prices have finally come down. But lending costs on mortgages and corporations have not. In fact the lending costs to most businesses has gone up tremendously.

Dear Dr. Bernanke:

It seems reasonable that the next target of reducing costs so that consumers can afford housing and other goods and services is to reduce the borrowing costs of individuals and businesses.

The San Francisco FED in their report showed investment grade corporate bonds at near 10% and high yield bonds at near 20%.

This sounds like a good recipe for more bankruptcies, higher unemployment and more trouble for consumers and businesses.

Thanks for the efforts you are making and best wishes to you as you navigate through these treacherous waters.

My neighbor, Dave Free, gave this advice yesterday. He said that his father always told him to:

Accentuate the positive.

Eliminate the negative.

Latch on to the affirmative.

And avoid what's in between.

United We Stand Divided We Fall

In Aesop's Fables about the Bulls, when the four Bulls, who were friends, stood together with their horns facing out and with their backs together, the lion could not harm them. But when they would argue and quarrel, and go off alone sulking, the lion could take them down, one by one.

In Aesop's Fables about the counsel of a dying father to his four sons, the father counseled his sons that if they were united, they were much stronger than if they tried to do things alone. He illustrated this counsel by giving the sons a bundle of sticks, wrapped tightly with twine. The sons could not break the bundle of sticks, but as the father would pull one stick out and give it to each of the sons to break, the sons found that it was easy to break just one stick.

Abraham Lincoln's utilization of the Savior's counsel in the New Testament was inspirational in saving the Nation. Matthew 12:25 "And Jesus knew their thoughts, and said unto them, Every kingdom divided against itself is brought to desolation; and every city or house divided against itself shall not stand:"

As I talk with people today about the economy, and the stock market in particular, there is a lot of angst (concern) and anger. A lot of this anger is focused on those whose greed has contributed to the problems we are now facing.

What if everyone did the right thing for the right reason? Would we as a people be as productive as we are without a profit motive?

The older I get, the less need I have to compete. In fact, I enjoy less and less those games where there are winners and losers. I prefer to compete where there are winners and winners.

I love to work. I love to play. I love to be productive. I love to be prosperous and happy. I would rather do these things in a spirit of synergism, where everyone is better off, than in a spirit of competition where there are winners and losers.

The stock market today has a lot of losers. These losers in many cases are determined never to play the game again. The greed of some players stacks the cards against fairness. In many cases, winning and losing, competition, power, greed, and money destroy the benefits of unity.

How can we develop of system, where we are still productive, and where synergism trumps the success of competition.

In Mitt Romney's book "Turnaround", his conclusion is that he and his family are much better off from their public service than they ever would have been by producing more and more money. The benefits (currency) of an efficient and successful commitment to public service far outweighed the monetary success of creating more and more money.

This sounds like an interesting recipe for our future economy, where united we stand and divided we fall.

Why I Love Slovakia!!!

In September 1994, I had the opportunity to spend a week in Slovakia, encouraging the people of Slovakia to embrace capitalism. This encouragement included the invitation to have faith in the uncertainty that capitalism breeds.

Why?

Because even with all of the problems of capitalism, the alternatives have been worse throughout world history.

In Slovakia I found a fear of uncertainty. Under the previous socialistic type of government the people had been guaranteed a car, a flat (apartment), an education and a job. The profit incentive did not exist. The incentives allowing the freedom to maximize potential weren't there.

I was concerned that the lack of these incentives had weakened the potential of the people and of the country. It had allowed a climate of decay to invade the country.

I love Slovakia because the people are friendly, ambitious, pretty, smart and patriotic.

I love Slovakia because of it's tremendous heritage, and because of it's beautiful scenery. I love the mountains of Slovakia.

I love Slovakia because it is embracing freedom. It is embracing the prosperity that comes with freedom.

In September of 1994, 18 different political groups were vying for power.

Somewhat thereafter, former communist leaders were elected to power.

Those leaders discouraged competition, and embraced protectionism and favoritism.

The results were disastrous.

But mighty changes have taken place, and Slovakia is well on it's way to enjoying greater peace and prosperity.

Best Wishes to you, Slovakia, and to all those who join with you in your success.

In 1994 I was saddened to see the decay that had taken place in many cities and historical landmarks. Decades of neglect had wiped out much of the beauty of the country's heritage. But I was excited to see the high energy level of a beautiful people, embracing the opportunities of a new independent country.

As I was reflecting on the changes that were taking place, the different consequences of political philosophies came to mind. The following definitions of these philosophies are worth considering. They utilize the example of cows in an interesting way to reflect on the differences of socialism, communism, fascism, nazism, anarchism, capitalism and synergism.

Socialism: If you have two cows, then the socialist will give you one cow and he'll give one to your neighbor.

Communism: If you have two cows, then the communist will give both cows to the government and the government will give you back some milk.

Fascism: If you have two cows, then the fascist takes all of the milk to the government; the government sells it and distributes the wealth as it will.

Nazism: If you have two cows, then the nazi will shoot you and take the two cows.

Anarchism: If you have two cows, then the anarchist will take both cows; shoot the government agent, and find more cows to take.

Capitalism: If you have two cows, then the capitalist will sell one cow and buy a bull.

Synergism: If you are a synergist, it becomes a group effort. If a synergist has two cows, he may keep them or trade them depending upon his comparative advantages. The synergism from two cows has to include every other commodity and service as well. Synergism is the team, community, nation or world, maximizing it's potential through comparative advantages, to the benefit of all. And that maximazation of prosperity can only be achieved and enjoyed if all parties choose righteously. It embraces the good habits that capitalism forces upon us, but it also requires that every individual freely chooses to do what's right for the group.

Until the day comes that the world population freely embraces synergism, peace, joy and prosperity will elude us.

Stocks - Should anyone own them?

Business Week recently ran an article that begged the question: Should anyone own stocks anymore and why? The devastation in the stock market has taken a nasty toll on corporations, government revenues, retirement plans, workers, retirees, etc.

To me the answer is a definite yes. We want to reward those that are willing to take risks and that go to work. The stock market is a liquid way to do that.

It's simply time for a heavy dose of optimism to void the self-fulfilling aggregate weakness that results from protectionism, fear and pessimissim.

Dear Congress: Re: Economic Change

Dear Congress:

To go along with the needed stimulus package, here are a few additional suggestions:

I. Stabilize prices and lower asset inflation. (I guess this year's deflation has taken care of a lot of the asset inflation. Hopefully, it's not too late to stabilize.)

1. Lower borrowing costs across the board.

2. Lower energy costs across the board.

3. Simplify the tax code and make it permanent.

4. Promote the fact that it is an honor and a priviledge to pay taxes. We as Americans are richly blessed. Taxes spent wisely benefit all of us.

5. Eliminate the negative connotations of such things as: taxes, adjustable rate mortgages, corporations, capitalism, derivatives, investment banking, hedge funds, etc. All of these items play a crucial roll in promoting, creating and sustaining economic growth and well-being.

6. Reign in the abuses and greed that have caused our problems, namely:

a. A weak and volatile dollar (substitute any currency). The inflation of oil prices, real estate, gold, grains, etc. have contributed as much as anything to the dire plight that we are in. We need stable and predictable prices.

b. High interest rates.
1. 30 year mortgages should be more stable and targeted near 6%.
2. The interest rates and fees on credit cards, credit advances, etc. should be capped at 10% per annum. There is an incredible amount of abuse by finance companies with their fees and interest rate charges.

c. High oil prices.
1. Tax levies should be used to offset the volatility in oil prices and to provide a revenue source for alternative energy sources.

d. Government might need to become a competitor in all capital markets to help bring accountablility to the abuses of individuals, governments and corporate america.



Greed seems to always be a problem with some individuals, corporate america and governments. The inflationary pressures of the past several years has aggravated this problem, as corporations, individuals and governments have reached for more and more revenues to offset the inflationary impacts.

It is time, first and foremost, for stable prices.

"Turnaround" by Mitt Romney

I am currently reading "Turnaround" by Mitt Romney. It is fun to read about the success of such a great leader. I am impressed by my interpretation of his management strategy. It includes these principles:

1. Conduct a Strategic Audit.

2. What is the organization's Mission?

3. Build a strong Team.

4. People, People, People; They are the most important.

5. Focus, Focus, Focus.

6. Details are important.

7. Covenant to be United; meaning top quality people, pulling together.

8. Commitment. Go through walls to get the job done. Do the job well.

9. Pull together.

10. Accountability - Keep the team motivated and working together.

It's a great look back at the success and turnaround of the 2002 Winter Olympic Games.

Optimistic Financial Musings

Wow!!!

What a mess our financial markets are still in.

The negativity in the media is almost overwhelming.

Looking on the optimistic side though, the Obama administration may have an opportunity to pull off a surprise in global prosperity.

Here is a possible scenario:

Trade relations improve with our foreign trading partners.

War payments subside.

Tax cuts incentivize the middle class to increase their purchases of goods and services, and the increase in equity valuations offsets the increased taxes on the wealthy.

Interest rates stay low. Say in 8 years they are averaging 3% on one year TBills and 5.5% on 10 year Treasuries.

Say that the S&P 500 compounds earnings at 10% and the P/E ratio averages 18 times earnings.

In other words, what if S&P 500 earnings in 8 years are at $170; then at 18 times earnings, the S&P 500 will be at 3060, compared to 900 today. That's an increase of 240%.

With even better numbers for productivity and inflation, the P/E ratio could be higher, and so could the averages. Let's see. If the value of equities in the next 8 years increases by 240%, that means that the wealth in equities alone of Americans will increase by maybe $40 Trillion.

What if this happens with the Federal Debt doubling? A $10 Trillion increase in debt with a $40 Trillion increase in wealth in equities alone, sounds like a good investment to me. And what if we are really profitable and the budget deficits are much less?

There is still the question of labor and capital to deal with. Which comes first; labor or capital?

Abraham Lincoln said that labor creates capital. But we need capital to incentivize labor.

The $800 Billion bailout package should be a good first step to provide that capital.

I am a little surprised though, that the government is charging the banks 5% for this capital. They should be charging less. Banks need to make money too. The government should be charging less and adding a greater equity kicker.

As a taxpayer and citizen of America, I would like to see part of my investment in the bailout package have the potential to increase 240% to help balance the budget.

Ramblings about American Competitiveness

How can we help our kids get good paying jobs after college?

With the average cost of a home approaching $300,000, how much earning power does a graduate need to own a home, support a family, provide for retirement and healthcare, and enjoy life?

Does the average starting salary out of college support an average life-style?

The answers are uncertain.

That uncertainty causes fear and anxiety.

But I'm excited to see what our new President Elect, Vice President Elect and all those who have won elections can do.

To President Elect Barack Obama: Congratulations!!! Even though I didn't vote for you, you have my support. The challenge to prepare our children for a competitive world is almost overwhelming. I've been inspired by your work ethic and by your dreams for our future. You have my full support in uniting this nation, so that we can meet the challenges of a competitive world, and help our children enjoy the freedoms of life, liberty and the pursuit of happiness. I applaud the international support, which also appears to be yours.

Michael E. Porter, a competitive guru from Harvard Business School, offered several ideas in a recent Business Week article titled "Why America Needs An Economic Strategy".

It is an interesting paradox to me that the deep fears and anxiety, identified by Mr. Porter, over the competition for wages and jobs from international sources like China and India, has led to the greatest prosperity that the world has ever known.

Someone once said that if you're going to have a competitor, you might as well have a good one. A competitor that keeps you from improving, or that doesn't help you improve does no good.

Mr. Porter identified seven comparative competitive advantages that we enjoy in America:

1. Entrepreneurship.

2. Science, Technology and Innovation.

3. Institutions of Higher Learning.

4. Free and competitive markets.

5. Decentralization across States and regions.

6. Efficient Capital Markets.

7. Dynamism and Resilience.

Mr. Porter also identified two weaknesses that undermine our potential:

1. Protectionism.

2. Favoritism.

The cool thing about comparative competitive advantage, is that we don't have to be better than someone else to be prosperous and successful. We just have to do our best, specialize, and then trade and share with each other.

It seems to me that we should embrace competition that makes us better.

By so doing, the potential prosperity for us, for our children and for the world is breath-taking.

It is my hope and prayer that the blessings of Heaven will be with all of us as we embark on this new leg of the journey to help our children and the world prosper in a competitive world.

Wells Fargo Bank and Debit Cards

Dear Wells Fargo Bank Debit Card Customers:

If you have a Wells Fargo Debit Card, BEWARE!!!

Wells Fargo Bank, like at least 13 other major banks in America who service debit card accounts, according to Business Week Magazine dated November 10, 2008, approves transactions when your purchases exceed the balances in your account, and then hit you with enormous fees.

Wells Fargo Bank will charge $35 per overdraft, and even though they will notify you by mail of the problem, they will continue to allow these fees to accumulate.

It is easy for a customer to quickly run up Hundreds of Dollars worth of fees.

The technology exists, and the type of debit cards exist, to disallow such transactions from taking place. But to "maximize shareholder wealth", Wells Fargo has chosen to allow these fees to accumulate. This problem takes advantage, in particular, of those struggling financially.

It is like throwing a block of concrete to a drowning victim.

Why would Wells Fargo prey upon such customers?

Do they need the money that bad?

The Federal Reserve has identified this service as potentially abusive, according to Business Week Magazine.

I would hope that our elected representatives would jump on the bandwagon to reign in such abuses.