Treasury on Wells Fargo

Banking stocks have been volatile recently, partly because the government failed to aggressively counter notions of nationalization. The government finally issued more clarity about its intentions.

First, the Federal Reserve expressly stated it would not--I repeat, "not"--nationalize banks: “I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn’t necessary,” Bernanke said at the Senate Banking Committee hearing.

Second, President Obama said the government will continue to do whatever it takes to support banks, but with reasonable restrictions: "[The recovery plan] means preventing the catastrophic failure of financial institutions whose collapse could endanger the entire economy." President Obama also signaled that executive pay and corporate junkets would probably be limited.

Overall, the federal government has explicitly signaled that the top nineteen banks are too big to fail. This policy seems reasonable if Bernanke's prediction--that the economy will stabilize by the end of 2009--comes true. Indeed, some banking stocks seem undervalued now that nationalization is no longer an option. Let's look at Wells Fargo (WFC), for example:

From the Treasury’s Monthly Intermediation Snapshot report, submitted January 30, 2009:

Wells Fargo maintained in Q4 2008 its longstanding policy of not originating interest only, stated income, option ARM or negative amortizing mortgage loans.

Wells Fargo has reached 94% of its customers whose mortgages are two or more payments past due. For every 10 of these customers, we have worked with seven on a solution. Of those who received a loan modification, one year later, approximately 70% were either current or less than 90 days past due.

Wells Fargo added over 400,000 new household customers in the last year.

Sounds like there's at least one big bank that will come out of this crisis stronger.

Disclosure: I own shares of Wells Fargo (WFC).

Robert Reich = The New Dr. Doom?

The Commonwealth Magazine featured a recent Robert Reich speech, where he seems to be auditioning for Nouriel Roubini's "Dr. Doom" title. Mr. Reich predicts that the unemployment rate will reach double-digits and the Dow will be "languishing around 7,050." Of course, Mr. Reich is no dummy--he conditions his predictions on a supremely vague qualifier--"without effective government action." Mr. Reich believes at least $900 billion is necessary to be effective--which isn't too far off from the $787 billion package actually passed. After almost $800 billion, it's hard to believe another $100 billion would make a difference either way.

It appears that some Democrats and some Democratic supporters like Reich and Krugman see this crisis as a way to get more money distributed to the middle class and poor. There's nothing wrong with taking that policy position, but it may explain why so many pundits are advocating for more stimulus. Even if no stimulus money reaches the mid- to lower-income classes directly, the more money the government prints, the less burdensome consumer debt becomes. In other words, assuming the poor and middle class hold most consumer debt, printing money creates inflation, which temporarily reduces a debtor's burden. Inflation, at moderate rates, isn't all bad--it reduces the value of savings but also debt, and may lead to salary increases in certain fields. If anything, resulting inflation will hurt Chinese and Japanese investment holdings the most, because they hold the most dollar-denominated assets.

Still, it's important to understand why so many Democrat-linked economists are calling for more stimulus. It's quite simple, really. Mr. Reich and Mr. Paul Krugman view the last 25 years as an unconscionable transfer of resources/income from the poor and middle class to the rich--and the numbers seem to support their conclusions, at least where net assets are concerned. Mr. Reich even coins a funny phrase for this phenomenon: "DINS--double income, no sex," to demonstrate how badly the non-rich have fared. (Mr. Reich wants us to believe the poor and middle class are so overworked, they don't have time for basic things, such as sex.) Mr. Reich ends his speech on a safe note: he says that economic recovery is "likely to be [here] in two or three years."

I disagree. My main issue is with Mr. Reich's view that the last 25 years were a terrible time for the middle class and poor. Economics is not a zero-sum game. First, although the rich have gotten richer, the middle class is now enjoying an unprecedented quality of life. To be poor in America in 2009 is to be the envy of 90% of the world's population, many of whom work for less than $2 a day. I don't need economic statistics to prove this point--you can just look at how many foreign citizens apply for asylum here every year, or who are willing to risk their lives to cross America's border.

Second, it is true that other countries have more equitable distributions of income--but almost all those populations are smaller, less diverse, and declining. In large, diverse populations, including China and Brazil, income distribution is usually heavily concentrated at the top. The most notable exceptions are Canada and Australia, which have massive stores of natural resources and smaller military budgets. Unless America becomes energy-independent and more willing to cut defense spending, income equality will probably persist. This won't be because of a conservative Republican plot--it's just that too many Americans appear unwilling to advocate for a smaller military budget and, in recent history, too willing to go to war. That's a terrible combination, because as Californians are starting to learn, you can't have it all. At some point, the piper comes calling, and the bills become due.

In fact, Democrats like Reich and Krugman are stealing a page from the GOP's playbook. In the old days, Republicans would spend trillions of dollars on wasteful defense projects and then scapegoat poor single mothers on welfare. Now, Democrats are demonizing bankers and Wall Street to divert the public's focus from their own act of generational theft (America's future generations will be paying for the recent stimulus package). So while Republicans ran up deficits to increase the military, Democrats are running up deficits to send taxpayer money to their core constituents--education, local and state governments, and unionized interests. In the end, government gets bigger under either administration--it's just a matter of where the dollars go.

Meanwhile, fiscal conservatives like me are left screaming in the dark and wondering when Ron Paul will make a comeback. I hear Estonia's a nice place for anti-war libertarians like myself (see the incredible film, The Singing Revolution, to understand where I'm coming from). I might just go on a visit and not come back till Congress learns some fiscal discipline. If I do leave, however, it won't be because I think the rich in America have it out for the middle class, or that America's poor have terrible lives--it'll be because our two-party system has failed the average American who saves money, lives modestly, and tries to create a future where American children will be better off than their parents.

Roubini: Banks will be Nationalized

N. Roubini is getting on my nerves, because he's been pessimistic forever. When the market dived in 2008, suddenly everyone anointed him a guru--even though he was bringing the same negative shtick for over a decade. Now, he's made a prediction I think will be proven false:

And how long will it be before the administration goes in formally for nationalization? “I think that we’re going to see the policy adopted in the next few months . . . in six months or so.”

Set your calendars. If by August 22, 2009, Bank of America (BAC) and Citigroup (C) are still private entities, Roubini will be wrong. In fact, it looks like he's already wrong--the White House has publicly announced it will not nationalize banks and has taken action to prop up Citigroup.

Bonus: I've never heard of a Jim Morrison market, but apparently it's when "The future's uncertain and the end is always near." Check out this pessimistic Barron's article.

I would have preferred the more optimistic "Take it as it Comes" instead:

Go real slow
You'll like it more and more
Take it as it comes

In other words, slow down, Mr. Roubini.

California's Budget Crisis

The WSJ had a scathing op-ed on California's budget crisis:

http://online.wsj.com/article/SB123491737158404543.html

Oh, the lack of accountability.

Buy and Hold Wins over the Long Term

My Money Blog had a great article about what happens when investors try to time the market. I hedge my bets by trading actively in my regular accounts, and buying/holding in my retirement accounts. Right now, actively trading is working out better than buying and holding. At the same time, my regular account balances fluctuate wildly, so I've had to develop an iron stomach. Who would have thought trading "blue chips" like General Electric (GE) and Wells Fargo (WFC) would be akin to high stakes gambling?

Bank Market Caps

Barry Ritholtz almost always has great stuff on his blog, The Big Picture. Here's one particularly interesting post, showing how much banks have declined in value:

http://www.ritholtz.com/blog/2009/02/bank-market-caps-then-now/

Oh, the lack of prudence.

Middle Class Dream: Large Cities v. Small Cities

A new study shows that smaller cities tend to provide better opportunities for the middle class:

http://www.nycfuture.org/images_pdfs/pdfs/CityOfAspiration.pdf [Warning: PDF file]

http://www.nycfuture.org/content/articles/article_view.cfm?article_id=1233&article_type=0

Credit goes to Escape Brooklyn for the links.