Professor Elam

RE Thinking Mortgages

Okay gripes about the bailout aside, the injection of money has brought LIBOR rates down and calmed the commercial paper market. The stock market is going down simply because people are selling too late. 

This morning Larry Fink CEO of Blackrock made a constructive suggestion, but first let's talk accounting. When a bank making a house loan repossess the house, that becomes a negative against their equity, OE in the A = L  + OE goes down as the loan moves out of A.  the trick to to arrange things so that does not happen. Fink suggests we have a post WW II like VA program and vigorously lower the interest rates on mortgages like we did for Vets, that makes sense since empty houses help no one. i would further suggest we eliminate

mark to market rules for firms that force marking down financial instruments in the absence of a certain market

letting banks re classify home mortgages as rent property. Frankly if one makes a 30 year loan, there is little to no equity build any time soon anyway. And with the housing market near gone, who are we kidding, the bank will have to rent the house anyway. so why not just reclassify it as a rent property, ie, the bank now owns stand along apartments not houses. that is a better idea than booting people out and classifying the house as a bad loan.

DLE

We Are the One!

John Stossel takes issue with the idea that government can 'fix'

 whatever is wrong with the economy.  On CNBC this morning the owner of a California bank took issue with the idea that the bailout was working. I did not catch the name of the bank but the principal asked

How come Warren Buffet is getting 10% and 100% warrant coverage on Goldman but the govt is still allowing CITI to pay a common dividend ?  good question, the bailout is not working and it is throwing money from planes to apparently those folks that are Goldman's friends. 

Rick Santelli who covers interest rate markets and futures for CNBC from the Chicago Mercantile made a great point this morning, 'I would rather have a bad oneyear than a bad ten years like we had in the depression.'  His point is, let the markets sort it out, let the CME trade the Credit Default Swaps and put real transparencfy in them, and the market will quickly determine who is worth what.  

Paulson is changing tactics. First Treasury was going to buy shaky paper, then they were going to purchase bank preferred stock, now they are going to help shaky non financial lenders help shaky creditors stay in houses that should never have been buit, okay so I editorialized a bit on that last one, stay tuend  for more changes.

Folks are e mailing cable tv shows suggesting they started a bank in their garage, where do they go for a bailout, good question.  Now of course American Express expects one and no doubt they have lots of toxic (read worthless) credit card paper.

Ford's CEO says he will consider granting stock options to the Fed Govt for, well some money. I would think Alan Mullaly would consider granting stock options to anyone pruchasing a Ford quite frankly. I mean it is not like he has any wiggle room, it would be a funny remark if it were not so serious.

Folks from southern states where foreign auto makers are doing fine, often thanks to generous incentives, read toyota in San Antoinio, oppose hleping GM and Ford. Ths is really all about bailing out the UAW who has contributed heavily to Democrats for decades. the auto industry is fin in right to work states as i have noted and a basket case in union shop states. But

right to work states have heavily subsidized newer automakers without legacy costs, now they oppose essentially the same thing for GM and Ford

there whould be some requirements that the UAW take the same contracts workers have in right to work states, but i don't think there is a chance Obama will suggest that

this is a hallmark of govt failing to head things off at the pass as well as GM Ford UAW ignoring reality and now amidst this financial mess there is a last minute solution, like the bank bailout, and the airline bailout where airlines still went bankrupt later, this too won't work, do I like it?

There would be a huge mess, forget Michigan, with all the dealers in hundreds of towns facing a bankrupt GM Ford, and given the social safety net we have, promising food stamps, unemployment extension payments, etc, ie, paying people not to work at this point makes no sense,  I say we might as well give them a measly $25B, GM and Ford helped win WW II after all

buchanan on China

I don't thnk we will get rich by washing one another's hair or cooking hamburgers for one another.

Ann Richards

I believe Anne will eventually be proved to be correct as the current financial crisis is suggesting.

Pat Buchanan takes a look at the export import situation vis a vis Chna and the US. I suggest we go back to makig our own stuff.

Sub Prime Explained

The Crisis Explained - Really

by rdf

Thu Sep 25th, 2008 at 10:24:14 AM EST

Analogies are never perfect, but here's one using horse racing. Don't expect a perfect correspondence to the banking situation, but I think it is close enough for government work.

Joe goes to the track and bets $2 on a horse.

Two guys standing nearby get into a discussion and Fred says to Sam, "I'll bet you $5 that Joe wins his bet."

Next to them are Bill and Bob. Bill says: "I'll bet you $10 that Fred welshes on his bet if he loses."

Next to them is Sally. Sally says: "For $3 I'll guarantee to Bill that if Bob fails to pay off, I'll make good on the bet."

Sally then goes to Mary and borrows the $7 needed in case she has to ever pay off and promises to pay back $8. She doesn't expect to every have to pay since she believes Bob will always make good. So she expects to net $2 no matter what happens to Joe.

A quick calculation indicates that there is now 2+5+10+3+7 = $27 riding on the outcome of the horse race.

Question how much has been "invested" in the horse race?

Answer:

$50,000 by the owner of the horse who is expecting to recoup his investment from the winnings of the horse and other future deals. Everyone else is gambling, not investing.

The issue with the home market is that the only "investor" was the person who bought the home. All those engaged in the meaningless derivatives spun off from this are gambling. You can see how quickly the face value of all these side bets can exceed the underlying investment. Who is holding these side bets - not the homeowner? It is the people at the failing investment banks, hedge funds and similar enterprises. Notice that the bailout is being directed at them not the homeowners.

The real world is, of course, even more complicated. Over the last 30 years people have been allowed to place bets on everything starting with the value of stock averages. They might as well bet on the temperature in Newark at 8:00 AM.

So when you hear everybody saying this is a crisis caused by the housing collapse, be skeptical. We are in the midst of a classic pyramid or Ponzi scheme and there is no way out except for people to lose a lot of money. All that is different this time is that it is the taxpayers who are being asked for the cash.

Professor Coleman Receives Award

  Professor Wayne coleman receives his award for research as  a PhD Professor. The annual ceremony, Doctoral Achievement Awards,  was sponsored by the San Antonio Westside chamber of Commerce. S A A & M was out in force for the october 30, 2008 ceremony held at the Menger Hotel.

 

Our group gathers in the foyer prior to the ceremony. From left, Dr. Carol;yn Green and Husband, Tracy Hurley and husband, Dr. Gary Coulton, Div Head A & S, and Laura Pantano. Studetn Affairs Director.

SA A & M Accounting Students Attend SA CPA Meet

Veronica Onate, Isabel Amesquita, and Yovela Rico along with yours truly attended an informative meeting Friday November 7, 2008 -  Everything You Wanted to Know about Becoming a CPA. A four member panel featured CPAs with various backgrounds. Ed Polansky, past President of Texas CPAs, was present, bringing 40 years of insight about the profession. Lisa Mattson, Division Director for Robert Half, made the point that CPA is the hallmark designation of the accoutning profession.

Our school was as well represented as any.  Oddly my experience is that the large schools are not supportive of such events. You mght have though our trio would be dwarfed by the UTSA students, hardly, there were about sixteen total students in attendance.  I noted the same thing several years ago at a reginal Beta Alpha Psi contest for accounting students. A & M College Station and UT Austion were not to be  found, fearful no doubt of being shown up by  a smaller school.

so you never know, I met up with friends ffrom being here previously that I asked to come to campus and speak to our students. Networking, what this game is all about.

Friday Night SA CPA Nov 7

Ed Polansky will speak at the Friday night meeting at SA CPA. Click the hyperlinks for more information.

Ed is a former President of the Texas Society so he is certainly well connected and in a position to see where this profession is going. We urge you to take advantage of this opportunity

Free pizza

Free info

Great networking

About as good as it gets

Dress i s business casual and be sure to have a business card!

RSVP to [email protected], (210)828-2722 or toll free (888)828-8680.

College Tuition Still Rising

San Antonio has the lowest four year tuition in San  Antonio, good thing. College across the nation continue to act as though demand for their product is totally inelastic.  That is no matter the price, consumers will pay it. I wonder.

The cost of college has escalated  faster than the salary has risen from obtaining that college degree.

 in the 1930s SMU cut professor salaries 20% one year than another 50% two years later. State economies are going to be pressed, sales taxes will be lower and property taxes will be a lot lower. In Texas falling oil prices mean lower severance tax revenues.

A lot of this is illusory. When students sign  a note they are not really seeing the final cost of the product, until they graduate that is. I suspect this is yet another perfect storm on the horizon.  College budgets are expanding but the revenue sources and tax base are declining, tough times ahead for state and private universities i think. The pace of construction at large schools is simply asounding, take a stroll acroos any large campus to see what I mean. When wil luniversities get the same message Toyota and GM are receiving today?

Ben Stein Reflects

Son of famed economist Herb Stein, Ben writes on the markets and established himself as the droll school person in Ferris Bueller's Day Off. He has appeared in numerous tv ads and several movies.

He reflects on losing money in this article. He asserts that one should be more of a favorite stock if it gets to one fourth of where you bought it before. The problem with such analysis is that is ignores where we are in the big picture.  In 1987 we had  correction, but in an ongoing bulll market. In 1929 and 1966, we were at the end of big bull runs. It would take until the early 1950s b before RCA, the tech darling of the 1920s regained its price it traded in 1929.  The Dow high of 1,000 in 1966 would not be really broken until the early 1980s. so Ben may be waiting a long time.

Now we are arguably at the end of the boom that started in the 1920s, if you see the 1900s as one long bull market interrupted by 1929-1952 and 1966-1982. If that is the case it is truly a New World.

I suspect this may not all resolve for some number of years. Power is clearly shifting. it is true that the US cannot go on consuming 25% of world energy with only 5% of its population, the world is not going to lend us the money to do that. Our markers are being called in, how long will the world accept our IOUs?  I frankly doubt either McCain or Obama understand that given their naive pronouncements during the campaign, and I don't know that their advisers are a lot better.

The world is weary of the US, China, India, and Russia not to mention the always down trodden economies of South America want their day in the sun. We are going through that transition process now. Who will emerge the big winner?  The country that produces goods and services the world wants. It will have a strong currency backed by that productivity of desirable goods. It will not have debt it cannot handle. At the moment that would not be the US with too much debt and an economy based on selling ring tones on cell phones....

Toyota Slashes Growth Predictions

Toyota stock dropped 10% in Japan as it announced lower forecasts.  All models are affected particularly luxury  Lexus and of course our  own Tundra pickup to be made in San Antonio. As you read the article note how surprised Toyota is at all this.  Clearly their analysts failed to see the slowdown coming.

Last night in the cost class we discussed budgets.  I mentioned that the budget depends completely on projections. If the projections change it throws everything off.  Now imagine how these large manufacturing companies are pressed to cut back production with too many vehicles on the lots, ie, inventory turnover has ground to a halt.

Offering incentives will be of little help as those never really went away.  So more layoffs are ahead.