Sunday, August 17, 2014

Lehman Creditors Recover Another $ 4.6 Billion

Thus far, unsecured creditors of failed Lehman Brothers have recovered $ 57.1 billion according to today's Wall Street Journal.  This doesn't include more than $ 105 billion that was returned to customers in the immediate aftermath of the Lehman Bankruptcy.

What this suggests is that, had Lehman had a path to Chapter 11 bankruptcy, it may well have managed its way through and returned as a new Lehman Brothers, rather than go through liquidation.  In the 1930's, nearly a third of the banks that failed turned out to have positive net worth after liquidation, suggesting that the bank runs that put them under were purely psychological.

Similarly, it is looking more and more like what put Lehman under was psychology not economics.  The collapse of Lehman's access to the repo market in October of 2008 was the precipitate cause of Lehman's bankruptcy.  That is the modern form of a "run on the bank."

Normally, when companies can't pay their bills, there are two alternatives available to them (or, more accurately, to their creditors): 1) Chapter 7 bankruptcy (liquidation); or 2) Chapter 11 bankruptcy (recapitalization of the balance sheet reducing overall debt and ultimately emerging as a new company with a clean(er) balance sheet).  This latter process is not available to financial service companies, mainly because no one will do business with a bankrupt financial service company.

Strangely, travelers have no hesitation flying on bankrupt airlines or shopping at bankrupt stores or gaining health care at a bankrupt hospital.  But, partly by law, partly by custom, financial services entities cannot, in practice, utilize Chapter 11.

That should be changed.

There is no reason to liquidate an ongoing concern if a reorganization of the balance sheet can keep the business alive.

The current government strategy is to strangle financial service companies with regulations so that they cannot fail.  That is a sure fire way to guarantee that they will fail.

Better is to provide through legislation a Chapter 11 path, so that the Lehman Brothers of the world can operate like United Airlines -- go bankrupt but emerge healthier and wiser after bankruptcy.  Chapter 11 puts the onus on equity holders (who normally lose everything) and bond holders (who lose a lot but become partly bond holders and partly equity holders in the new company).  The taxpayers and customers are normally spared in Chapter 11.  That's the way it should be.

Thursday, August 14, 2014

Eurozone Does a Faceplant

Once again, the real story in Europe is the exact opposite of the rosy predictions made by the politicians.  Even the German economy has ground to a halt.  Numbers released yesterday tell the same sad story that has characterized the Eurozone for the past five years -- no economic growth -- at all.

Meanwhile debt levels in the Eurozone continue to escalate without bound.  If the debt/gdp ratio was a racehorse, it would own the Triple Crown. 

Mario Draghi notwithstanding, postponing the debt problems of Europe is not a solution to their problems.  "Extend and pretend" does not work and has never worked.   Sooner or later someone is not going to get paid.

Efforts to blame this on rich people, on Wall Street, or on the hapless George Bush are completely irrelevant.  When you can't pay your bills, there will be big losers. 

Besides massive debt problems, the Eurozone is plagued with non-competitive regulatory and tax environments, which the US is desperately trying to imitate.  The health care solutions in Europe are now beginning to bear the expected fruit -- long lines, inadequate care, and VA style cover ups.  Add health care woes and pension funding woes to the massive sovereign debt issues, how would anyone expect the Eurozone to have an economic future?

The legendary Texan, Senator Ralph Yarborough once described a political action as akin to "rats swimming toward a sinking ship."  That pretty much sums up current American economic policy as the Obama Administration continues its efforts to "Europeanize" America.  The predictable outcome is available for all to see -- the current Eurozone economy.

Sunday, August 10, 2014

Give Poor People a Chance

For nearly half a century, there has been a steady drumbeat of government support aimed, in theory, at helping the poor.  The result -- the poor have lost ground and their chances of becoming non-poor have gotten worse.  Why?

The century that preceded all the government help saw constant improvement in the economic status of the poorest fourth of the American population. Then, along came help.

The erosion of the economic position of the middle class has been mostly the result, since the 1960s, of attempts by government to aid middle income workers.  Providing benefits to workers raises employer costs and is ultimately completely born by the workers themselves -- not the employers. 

The right to sue is a costly right and lowers wage income.  The same is true of health care costs, unemployment compensation. OSHA rules, and on and on.  It's surprising workers have any money income left after government mandates have directed most of worker income in ways that workers themselves would likely not choose. 

To an employer, there is a single dollar cost of an employee.  Government mandates simply dictate how that cost is borne and cannot affect the total.  Increasing mandates reduce workers' disposable income, pretty much dollar for dollar.

So, now comes the "inequality" debate.  It is no longer about opportunity and rising incomes, the debate has now shifted to spotlighting rich people.  No wonder, since government programs have been completely ineffectual in improving opportunities and real incomes for the bottom quartile of the income distribution.

Helping poor people, whether in America or anywhere else, means removing the barriers that block their chances of improving their economic position.  In education, people should be free to choose the schools they wish to attend.   People should be free to pursue employment on whatever basis they wish to, including working for free or even paying an employer for the right to work -- if that's what they want to do.  The government should butt out.

There is no evidence that, long run, anyone, except the legal profession, is helped by all the "rights" and "protections" afforded employees under government largesse.

The poor need the freedom to pursue their own way. They should be able to choose where to send their children to school instead of having that decision dictated by an unfeeling and unaccountable bureaucracy.  The poor should be able to make whatever employment decisions they choose and start businesses without having to fight the ever-growing bureaucracy that thwarts small businesses in America at every turn.  The poor need police protection and the rule of law in their neighborhoods, not political correctness that appeals mainly to wealthy elites.

In short, the poor need what everyone needs -- a chance.  But, the government is too busy helping them to give them that chance.

Saturday, August 2, 2014

Get Rid of the Export-Import Bank

You often hear Republicans say that they prefer a smaller and less intrusive government.  So why does their leadership support the reauthorization of the Export-Import bank?  It is possible that the reauthorization bill will fail, but there is no shortage of Republican sponsors.

The Export-Import bank is crony capitalism at its worst.  There is absolutely no reason to subsidize exports, even if other governments subsidize their exports. Because someone else does something foolish does not mean you have to do something foolish as well.  Free markets, left alone, will provide whatever financing is required and deserved for our export sector.

Most of the subsidies from the Export-Import bank go to very large companies and are little more than a transfer of money from the average working family to large corporations.  Why is that a good idea?

I hope those who are trying to block authorization of the Export-Import bank will then turn their attention to the IMF and the World Bank, two other burdens on the American taxpayer with little or no benefit to anyone other than the bureaucrats employed by these embarrassingly inept organizations.