Review of Michael Lewis' "Boomerang"

Michael Lewis captured many of the elements of the financial crisis and now looming threats to sovereign debt, since nations have decided to socialize the risks taken by reckless banks. His book examines the financial crisis from the viewpoints of Iceland, Ireland, Greece, Germany and the United States. The compelling question he raises is: Left alone in a dark room with a pile of money, what did these people do with it?
While there is a great depth to the reporting and witty writing, there appears to be a lot of missing parts. He didn't look at Asia with Japan's lingering malaise after its bubble burst in the early 1990s or China, the world's second largest economy with an abundance of poor people. However, a lot of eyes are on China to subsidize the folly of relatively affluent Westerners. He also hasn't looked at other emerging markets. In a topsy turvy world, emerging markets are now deemed less risky than many euro-zone nations. His coverage of the U.S. was centered on California, which is a financial basket case. But there is so much more of the story to tell about the financial crisis in the U.S. None of the people who were victims of subprime loan fraud were interviewed. The incomplete feel of the book led to a one star deduction.

Technology and the future of jobs and work

Not many people are shedding tears for lawyers displaced by the software that can search discovery documents, saving clients millions of dollars in billable time for the most complex legal cases. One lawyer at a chemical company told the New York Times about this innovation: “People get bored, people get headaches. Computers don’t.” Technology renders the task of reading rooms full of legal documents into a simple database search. Computers have become more intelligent to incorporate context and use linguistics to help users find and retrieve the veritable “needle in the haystack” from gigabytes and terabytes of storage.

In many respects, this will create upheaval in industries that required many people to search for that needle. It could be in the field of academia, medical research, marketing and other information intensive industries. Our economy has been an information-based economy for the past three decades as manufacturing moved offshore. Now the information business has become hyper-efficient, in large part from smarter computing, and the workforce has to think about how to position itself during this wave of innovation.

From a technological standpoint, companies do not want to be left behind in this capability to automate tasks and bring new efficiencies to benefit customers and improve the bottom line.

This represents a sea-change in work, much like the industrial revolution. If you think about it, Facebook has a $50 billion market valuation and only 2,000 employees. Wal-Mart, the nation's largest private employer, has over 2.1 million employees worldwide and a market valuation of $187 billion. In other words, Facebook is valued at $25 million per employee. Wal-Mart, which has revenue of $420 billion or about the same as the entire output of Sweden's economy, is valued at $89,000 per employee. Valuations are sometimes a dodgy prospect, since there are assumptions about growth rates.

The point that's being made here is that wealth is not necessarily determined by the size of an enterprise. Businesses are doing more with less and we will need to adapt to that new reality. Just as the car rendered horse carriages obsolete, our culture needs to think about what will be valued in the new economy.

Bit by the Christmas Bug

I usually am the last person to get excited about Christmas in my house. But the Christmas bug finally bit me. Yes, it's less than a week before Christmas. I went through the mall tonight to run errands. I always manage to ignore the decorations and music. That stuff's been up since Halloween. So the lights and garland are just part of the background, generating the same feeling as furniture being in the same place too long.

I went to stores to drop off payments for a few charge cards and still avoided doing any shopping for people on my list. A snowstorm sent me home from work and I ended up missing our company's Christmas party, casting an additional bit of disappointment upon my mood. The mall looked even kind of grim, with the Christmas music belying an empty mall from the nasty weather and consumers fatigued from a weak economy.

After parting with my cash to Verizon and being in a somewhat foul mood over the inflation of the family's cell phone bill, the Christmas finally bug sank its fangs into me. The Salvation Army kettle was gone, but the tree with the names of kids needing gifts was there. My kids were already taken care of this Christmas and they're too old to believe in Santa anymore. The tag immediately erased my disappointment and renewed my spirits.

An 8-old-boy named Elvin needed a Santa to get him a Laser Tag set and the Salvation Army puts the kid's sizes on the tags. I've never met Elvin and I don't plan on meeting him. His tag is the first one I saw.

It soon dawned on me eight is a crucial age in the Christmas lexicon. That's when a lot of kids start becoming Christmas agnostics when it comes to Santa Claus. The kids start talking about spying on where parents hide the gifts or start expressing disappointment about what they didn't get. I hope this year he still keeps his belief a little big longer. Elvin, I hope the Laser Tag set brings you the same joy that I had when I got my Star Trek walkie talkies. Merry Christmas Elvin, you brought some joy to a 41-year-old man's heart.

Bailouts: Where's all this cash coming from?

A couple hundred billion here and a couple hundred billion there. What's a few billion between friends? The government is spending hundreds of billions of dollars to sustain banks, AIG and the big mortgage aggregators, Fannie Mae and Freddy Mac. Is it really clear what we're buying as taxpayers? The money's being used to buy "toxic assets" but there is no clarity about what prices we're paying for subprime mortgages or other assets from banks to keep them solvent.
Citigroup's pricetag for a bailout grew by another $20 billion from the original $25 billion. The government also agreed to shoulder another $300 billion in losses from bad assets. How did Citigroup and the government come up with this figure? Do they just pull these numbers out of a hat? As a taxpayer, do I really want to own a business whose mismanagement makes GM look like a beacon of efficiency? Would it make more sense for the government to pay $30 billion to acquire all of Citigroup and close its doors? Taxpayers might be better off given the rising price tag for this mess.

Barry Ritholtz, who writes "The Big Picture" blog and is an investment strategist for Fusion IQ, says the bailout pricetag now exceeds $4.6 trillion. It is more than the combined cost of the Marshall Plan, NASA, the New Deal, the Louisiana Purchase, the Korean and Vietnam Wars, and the Iraq invasion. Bloomberg did some calculations and said the overall package is over $7 trillion. In other words, this is $24,000 for every American. I think the economy would have been a lot better off if The Fed and the Treasury just cut each person the checks. A $96,000 check for my household would eliminate my debts, pay a few years of tuition at a state college for my daughter and still leave enough for me to buy a car (effectively helping Detroit's autoworkers). Is that any less worthwhile than giving it to some poorly managed banks?

Instead, the Federal Reserve and the Treasury are keeping the printing press going and for no certain benefit, for ill defined objectives and for assets that do not have a clear market value. Our economy will be that like a South American banana republic when this is all done. We'll be begging the Chinese to lend our government more money and the dollar won't be worth much of anything. To top it off, President Bush and his Treasury Secretary have been absent in terms of providing leadership during this economic crisis. Could we just accelerate the Obama inauguration and evict Bush from 1600 Pennsylvania Ave?

"The Big Picture" economics blog -- Bailouts and Handouts

Barry Ritholtz explains why businesses are claiming to need government bailouts: "Free Money!" All of these bailouts have turned into a corporate welfare free for all. Too bad this is going to devalue the dollar and still will not really help consumers. If former Goldman Sachs CEO is correct, it could be grim. Check this out: http://www.reuters.com/article/Finance08/idUSTRE4AB7HT20081112

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Fed Cuts Rates

Econ 502:
If the Fed starts buying treasury bonds to put even more downward pressure on interest rates, we might work our way through this. Also, less cash will be in the fed's hands and more will be in the hands of investors. I'm still expecting a recession, but at least its severity can be kept in check.
The banks still have to work their way through some crappy mortgages on their books and the appetite for risk is probably not there in the near term. With lower interest rates, at least more sound projects and investments (or even home mortgages that make sense) will get bank funding.

By Keith Weir and Daniel Trotta
LONDON/NEW YORK (Reuters) - Central banks around the world cut interest rates in unison on Wednesday in a joint response to the global financial crisis, giving a boost to battered stock markets.

The Fed said it was cutting its key federal funds rate by 50 basis points to 1.5 percent. China, the European Central Bank (ECB) and central banks in Britain, Canada, Sweden and Switzerland also cut rates in the coordinated response which analysts had been demanding.

U.S. stock index futures leapt on the news and world stock markets trimmed their losses.
Before the rate cut, stock markets across the world had continued their downward spiral amid the worst financial crisis in nearly 80 years and fears of a global recession.

"The fact that we have got them coming across the board suggests that this is the end game," said Peter Dixon, an economist at Commerzbank in London. "Will it help the markets? Questionable in the short term."

The cuts followed days of calls for concerted action by economists and world leaders after repeated attempts by central banks to inject liquidity into world markets failed to halt a crisis of confidence.

Wall Street's Arrogance is Confounding

Originally published: Sunday, March 09, 2008

As I walked through Fortunoff's in the Woodbridge Mall today, I was amazed that the department store chain was bankrupt. It had great looking merchandise and customers. By those standards alone, any retailer would be successful. Yet the company is reorganizing under Chapter 11. This is not really surprising when you consider that a private equity firm bought control of it from the founding family.
Many of the people on Wall Street think they are smarter than people who work in other industries. This is despite the fact that these Wall Street gurus never really operated anything and their real world business experiences constitutes looking at a spreadsheet. In a perfect world for private equity firms, they buy a company from pooling together a portion of the purchase price from institutional investors (pension funds, hedge funds, investment banks) and borrowing the rest to seal a deal. They collect a fee from completing a deal. The private equity firm and its partners own the business, but plan to cash out at some point for more money when they list the company on a stock exchange.
However, the business world is rarely that smooth. Risk is sometimes mispriced; consumer tastes change; companies borrow too much; and sometimes the wrong people are left in charge. Eddie Lampert took over Sears and brought Kmart out of bankruptcy. Now he's finding out how hard it is to compete against Wal-Mart. He might end up tarnishing his legendary status on Wall Street because of the struggles at the retailer. Will Sears go bankrupt? I doubt it, but their Sears Essentials store in my area looks like its having a tougher time than Fortunoff. It's surrounded by a Target, a Wal-Mart, Lowe's, Home Depot and a Macy's. I'm sure South Plainfield is not that much different than the rest of America's retailing climate. Trimaran Capital Partners and the Kier Group bought a majority stake in Fortunoff from the founding family in 2004. The Fortunoffs hoped that the firm would turn them into a national department store and still held a stake. Published reports listed Fortunoff's debts exceeding $300 million in November and assets of $268 million. This indicates risky capital structure that is vulnerable to downturns in consumer demand. A bankruptcy court and a new owner could give the company a chance to create a better capital structure. Trimaran and Kier Group's troubles with Fortunoff are not that unique in retailing. Levitz filed for bankruptcy again. Catalog retailer Lillian Vernon and gadget seller Sharper Image recently filed.
Wall Street firms have a pretty good history of mismanaging retailers. Macy's was taken private in a leveraged buyout in the late 1980s and that led to a bankruptcy. You might be impressed with some of the big salaries these private equity types collect. If they start prowling around your company, be very afraid. The pedigree of a Harvard MBA associated with these Wall Street gurus is not a guarantee that they know how to keep retail customers happy or the shelves of these stores well stocked.