Treasuries Below Zero

Treasury was able to obtain $30 Billion in interest free loans today from the U.S. bond market as 3 month t bills dipped below zero for the first time since 1940. Investors are showing their real fear of the economic situation. They have foregone any risk and are essentially paying treasury to hold their money. There is more concern over counterparty risk and deflation than anything at this point in the market. Lenders are concerned that those on the other side of the trade will not be able to repay. The sale is good for taxpayers and the government, however, as the U.S. needs more financing to bail out the big institutions of this country. The massive flight to safety in these bonds has usually indicated that a more drawn out economic downturn is in sights. A quick recovery is out of the question.

The negatives outweigh the positives in this situation. At the very least the U.S. is financed for another 3 months with most of these bonds most likely going into the hands of foreign governments such as China, not necessarily the U.S. business environment. Thirst for the safest assets in the world are probably growing at fever pitches everywhere. There is an exacerbation, a sudden quickening of the financial imbalances between governments taking place. One has to wonder how quick this is moving and where it will go in the next few months. If a snap is about to take place. Systemic risk may be approaching critical levels. If China is purchasing these bills it may be trying desperately to continue its stimulation of unprecedented growth. The money being pumped into this country may even further harm the structure of our society while the imbalances become even greater in terms of what we produce and what we consume.

http://www.theatlantic.com/doc/200801/fallows-chinese-dollars/4

http://www.guardian.co.uk/business/feedarticle/8135756

http://latimesblogs.latimes.com/money_co/2008/12/wall-street-kee.html

http://latimesblogs.latimes.com/money_co/2008/12/some-investors.html

EU Approves Lower Rates

The European Competition Commissioner, Neelie Kroes, has approved a new French aid plan as well as more flexible rates for some of the top banks of Europe. The aid will allow governments to recapitalize fundamentally sound banks at rates as low as 7% to encourage interbank lending and to encourage lending to businesses. The cost of capital is being reset to rates of 7 and 9 percent plus a premium based on a risk profile structured by the commission. The commission is simultaneously trying to create safeguards against unfair competition based on the use of government aid against banks not using government aid. Governments want to control the money being put into the hands of these banks by setting conditions for aid such as requiring banks to lend to companies and households by between 3 and 4 percent.

These actions call into question some of the techniques being used in the U.S. to save the U.S. banking system. Why were Bear Stearns and Lehman Brothers allowed to fail? The failure of large banks is constricting competition and giving too much power to too few banks. The EU's actions have built in safeguards to protect other banks and consumers against unfair competition by ensuring that banks don't use funds to "finance aggressive commercial conduct to the detriment of competitors who managed without state aide." More steps are being taken to ensure banks don't mismanage funds through built in risk premiums based on the risk profile of each bank. Banks are not treated the same on the basis of how well they have been managed. The U.S. seems to be just throwing money at any big bank or insurance giant (?) that asks regardless of poor performance. The EU's pro-competition measures are innovative in the face of undesirable competitive circumstances involving government money. The effects of these steps will give a more favorable picture of the banking environment in Europe once the crisis passes.

http://www.iht.com/articles/2008/12/08/business/08euaid.php

Tax Evasion Crack Down

The European principality, Lichtenstein has reached an agreement to sign an agreement with U.S. authorities on December 8th. This would end years of banking secrecy provided to wealthy Americans and corporations trying to hide assets within the small country. The agreement involves Swiss banks as well as Lichtenstein banks, including LGT Group, controlled by the Lichtenstein ruling family. This will leave Monaco and Andorra as the only places left for Americans to hide their money under bank secrecy laws. The Lichtenstein accord will take affect in 2010 to give the country time to enable legislation. All money will begin being reported to the U.S. starting in 2009, meaning, everyone involved in Lichtenstein banking will have a month to move into tax compliant accounts. If information implicates tax evasion, banking clients can take advantage of IRS leniency by reporting all offshore income before hand. Under the agreement, the principality will be able to report corporation's use of their banks to reduce tax bills.

Corporations attempting to illegally avoid taxes will face large reputational risks to their firms if they are implicated in these evasion schemes. Practices such as these will also affect Swiss and Lichtenstein banks. It is apparent that these banks have been trying to repair their reputations by agreeing to terms with the U.S. in disclosure of these accounts. The U.S. has been pressing the principality's European neighbors to push them into more disclosure. They have been on global blacklists as supporters of money laundering for almost a decade. This agreement moves the world in a safer direction as well as prevents these unpatriotic acts.

http://www.cnbc.com/id/28034065

http://news.bbc.co.uk/2/hi/business/842781.stm

http://www.bloomberg.com/apps/news?pid=20601100&sid=aewltPzw8E7Q&refer=germany

Spike In Oil Not Necessary

Evidence suggests the spike in oil may have been due to misleading analyst perceptions led by Goldman Sachs and the U.S. Energy Department, and speculators in the market. The 2008 spike in oil may have been prevented and was almost certainly unnecessary as it did not seem to be driven by decreases in supply or increased demand. The speculative side was proven to be a part of the equation by a "squeeze play" on September 22nd when oil shot up $25 dollars. Speculators were forced to cover their positions or actually take the shipment of oil. They had to buy back their shorts or take the shipment. This showed traders were looking for a profit and not actually interested in taking on shipments all along. Demand was actually dropping all year while the government reported back in April that we had more gasoline on hand than at any point since 1992. While this was happening, both George Bush and Energy Secretary Sam Bodman gave credence and legitimacy to the speculators arguments. Demand in the beginning of May was reported by the Energy Department to be lowering by 190,000 barrels compared to historical averages. Soon after knowing that Saudi Arabia was sitting on huge tankers of oil with no place to ship, they raised the demand destruction numbers to 400,000, then 800,000, with it now at nearly 2 Million less than historical averages.

It looks as though the government held off admitting demand was actually decreasing instead saying that supplies were tightening. The bubble would not have inflated as large as it did if they had admitted what was really happening. Also, speculators should not be allowed to move such an important market in wild directions when they are not planning on taking shipments. The consequences of these actions has sent GM into a spiral with huge declines in their sales over the prospect of never being able to drive SUVs again. Individuals and business's will feel less of a strain with lower prices as they strive to adjust their budgets, especially if they are dependant on oil. The lower oil prices provide tax cuts that may soften the blows of a deepening recession as they should have without the spike in oil.

http://www.businessweek.com/lifestyle/content/oct2008/bw20081023_350289.htm

Pension Plans In Danger

The deepening recession is taking a toll on not only the single-employer pension plans in this country but also the multi-employer pension plans. Multi-employer pension plans pool together the assets of many companies to minimize the risk to the employees of failed companies. If one corporation failed the others would be able to support the employees that are left behind. The problem now is that too many corporations are failing and the ones that remain are left covering the others. This is causing huge cuts to the profits of these companies and causing strains on the companies ability to make payroll. Thanks to the 2006 Pension Protection Act that is now taking affect, corporations must make sure their pension plan have enough money to cover present and future obligations and have only a short amount of time to cover the shortfalls. They have been cutting jobs to do so. The country might actually have to come in and bail out the failing pension programs through the Pension Benefit Guaranty Corporation which is having its own shortfalls.

To protect themselves, pensions need to invest in less risky assets. Bonds have been helping healthy pensions stay current on their obligations. Even GM's pension is one of the healthiest in the industry because only 26% of their assets are in stocks. Even though it may seem like a bottom and most money managers would hate to sell at this point, it would make the most sense to do so and preserve and work with what they have now. Consistent volatility are proving stocks to be untrustworthy and will be for many more years as long as the Government and a very small number of Superbanks control the country's financial system.

http://www.businessweek.com/magazine/content/08_50/b4112040140636_page_4.htm

Obama Drops Windfall Tax

President-elect Obama's team anonymously announced that Obama would be dropping his promised windfall tax on Big Oil. Obama had originally pledged a 20% profit windfall tax on oil that went above $80/barrel. Many environmentalists and liberal groups are criticizing this move as a policy retreat. Oil's recent decrease from $147 to $47 has some groups looking for other ways to control the effects of Oil companies on the environment and tax payers. Some say the windfall profit tax is not this issue as much as the tax giveaways that Big Oil receives.

Obama's transition team has reiterated that $80/barrel was the target price for the tax. The tax is not included in Obama's middle class rescue plan. The oil companies need to be prepared for such a tax. If such a policy were enacted it could put a dent in profits past a certain level. This could open new windows of Tax Risk facing these companies. New assessments would need to be performed to identify the new tax environment facing the firms. The Risk would then have to be managed and monitored and would then have to be communicated across all levels of the company from shareholders to suppliers. Such a tax would expose management to new corporate governance processes. The tax should be set in place now as a country wide insurance policy against rising prices. The idea would be perfect right now with prices below $50 as the companies would have more incentive to keep the prices below $80. It would be ideal for the American people as well. If Americans know that prices are hard pressed to go above $80 for Big Oil then they would be more likely to reduce their own consumption toward that level.

http://www.businessweek.com/bwdaily/dnflash/content/dec2008/db2008124_176271_page_2.htm

http://findarticles.com/p/articles/mi_m6552/is_2_56/ai_n6051627

UAW Makes Concessions

With the country facing the real possibility of a depression on the heels of a failure of U.S. auto companies, the United Auto Workers made concessions to the big 3. The biggest of those concessions was a pay for no work provision enacted in the 80s to pay laid off workers whose factories had been shut down. Concessions were also being made by the CEO's of the auto companies. Rick Wagnor of GM and Alan Mulally of Ford both plan on working for $1 per year if a government loan was approved. They have returned to congress much humbled over their disaster of a first appearance with much more detailed plans of how they will use government money. Support for the auto companies is very soft in congress but many acknowledge the catastrophic effects of a failure.

Controlling labor costs is one of the most important aspects of restructuring GM, Ford, and Chrysler. So much more is needed to be done however. The mistakes of past management of GM, Chrysler, and Ford gave too much up to the UAW and other unions while sacrificing efficiency. If it were possible to send the 3 CEO's back to the drawing board for a 3rd and 4th time, the changes really needed may be achieved. Ultimately the companies need to be structured entirely different with many revisions to the contracts between workers and management. I'm beginning to believe these companies are quite capable of becoming world leaders in green car technologies if they took further cost saving steps. If Ford is able to come out and say they no longer need a bail out after going back and rethinking a bailout, I'm sure there are measures the other companies can take to avoid bankruptcy.

http://www.businessweek.com/ap/financialnews/D94RJLM80.htm