Updates: Following the Money

The window is closing on Seth Carey's casino. This morning's Boston Globe is reporting that two North Shore racetracks, Suffolk Downs and Wonderland Greyhound Park, are combining operations, perhaps with the goal of launching "a premium resort-style casino." This is bad news for Rumford lawyer Carey and his envisioned Evergreen Mountain Four Season Resort & Casino in Oxford County. With gaming revenues stalling nationwide, Carey's only chance for a viable enterprise rests on further delay in Massachusetts, where Governor Deval Patrick supports the idea of casino development. Mainers are still waiting for details from the Evergreen campaign regarding exact location and investor support.

Wall Street banks raise money any way they can. Desperate for cash, Merrill Lynch is expected to cut its dividend to shareholders by at least half. This long overdue step would be a first (Merrill has never cut its dividend since it became a public company in 1971) and follows the company's announcement two weeks ago that it sold a tranche of mortgage-backed securities at a huge discount to face value. Meanwhile, Lehman Brothers is selling off a third of its commercial real-estate assets, three-quarters of which are mortgages sure to be be discounted.

But the money keeps going out faster than it comes in. Last week Citigroup and UBS joined Merrill in agreeing to buy back auction-rate securities sold to retail clients earlier this year. Combined price tag: $40 billion (and climbing, as JPMorgan Chase and Morgan Stanley have just settled). For pushing ARS, several of these firms have been fined by government regulators to the total tune of $200 million. And the write-downs for mortgage-backed securities are never-ending. J.P. Morgan revealed in a 10-Q filed Monday with the SEC that its collateralized debt lost $1.5 billion in value just in the past month. That's 75% of the firm's second-quarter profit--gone.

MDOT puts pavings projects on ice. Apparently $105 million does not go as far as it used to. The Maine Department of Transportation originally planned to pave 825 miles of the state's roads in 2008. But with the price of liquid asphalt jumping 150% since January, the Department is going to come up 85 miles short for the money budgeted.

The news has Peru residents patting themselves on the back. In 2007 the Town voted to borrow $400,000 to address a backlog of local road projects. At the time there was no competition for contractors from the state, which had placed a moratorium on paving projects pending the results of a bond referendum. Peru's timing looks even better now that paving costs have skyrocketed, easily justifying the borrowing costs of the ten-year loan from the Maine Bond Bank.

Living to Tell the Tale

Taking the time to refresh a blog becomes a challenge when the outdoors beckon. August in Maine is about as good as it gets, and the blueberries this year on Whitecap are just plain ridiculous. Yesterday my wife and I were scooting up the mountain yet again when we met an elderly gentleman descending, in one hand a trekking staff and, in the other, a four-quart basket filled right to the top with plump blueberries.

This was David Worcester of Hanover, and we got to chatting. David told quite a story of a tragic incident on Whitecap 49 years earlier, when a party of berry-pickers, himself included, got zapped by lightning near the summit. All were stunned; one was killed. Photos of the expedition are posted at David's website.

What Merrill Means for MaineFail

When a shaky investment falls in value while no one's looking, does it still make a sound? Answer: only when it's time to sell. Earlier this week investment bankers up and down Wall Street began complaining about some serious ear-ringing at the exact moment that Merrill Lynch announced an impending sale of impaired assets at 22 cents on the dollar.

The mortgage-backed securities on Merrill's balance sheet are on everyone else's, too. Ever since the credit crisis began last August, there has been a tacit code of silence among the players: whatever you do, don't let on as to what these securities are really worth. Write these down gradually, a few billion this quarter, a few more the next. What we need is time to wriggle our asses, sorry, assets out of this mess.

Merrill has broken that code. (You may now cue up the Chambers Brothers' "Time Has Come Today--TIME!") Thanks to Merrill, there is now a market to which these assets can be marked, triggering massive write-downs throughout the industry. "Merrill Lynch converted its mark-to-market losses into permanent ones," noted investment strategist Ed Yardeni in an e-mail to clients Tuesday. "This is bad news for other investment banks and commercial banks trying to get rid of loans and securities in a market flooded with distressed assets."

Which brings us to Maine's failed investment in MainSail II. Yesterday Maine's Treasurer, David Lemoine, posted an update on the State's cash pool. Because accounting rules required a "valuation snapshot" of the MainSail investment on June 30, or fiscal year's end, consultants used their magic dartboard to come up with 33 cents on the dollar. That meant that Maine's cash pool was showing an unrealized loss of almost $13.3 million on that investment. But that was then. If we mark to Merrill, not to magic, we are looking at a paper loss in excess of $15.5 million on an initial investment of $19.9 million.

Let's keep going. Remember that Merrill accepted only 25% down on the sale of the CDOs, or 5.5 cents on the dollar. The loan of the other 75% is secured only by the CDOs themselves, which means that Merrill will get them back if they decline in value by another 25% from here. If you use the down payment as the real market value of such securities, then MaineFail's loss balloons to $18.8 million. Why does it suddenly sound so loud in here?

Lemoine's capsule summary is as good as any. "The market estimate confirms that the U.S. housing market and the worldwide credit markets continue to suffer, and that investors continue to shy away from mortgage-backed investments regardless of their underlying value. The arrival of a bear market on the equities exchanges, ongoing huge bank write-downs, relentless energy prices and inflation fears have stifled investor appetite for fixed-income instruments such as Mainsail II."

Will Merrill's Bungee Break?

Shell-shocked shareholders got more bad news from Merrill Lynch last night when the company announced the sale of new common stock in a desperate attempt to stay afloat. The number of shares outstanding will increase by one-third, a painful dilution that compounds the injury of depreciation. Merrill's stock price has declined by three-fourths in the last eighteen months (and is still over-priced, according to Oppenheimer's Meredith Whitney).

This latest stock offering is supposed to raise $8.5 billion, but don't count on shareholder equity increasing by that much. Merrill will turn around and give $2.5 billion of that to its largest investor, a Singapore-owned sovereign fund, as compensation for losses suffered on an earlier stock purchase. Merrill now expects a third-quarter write-down of nearly $6 billion. So the "new" $8.5 billion is basically gone before it even comes through the door.

CEO John Thain, who has been on the job for less than a year, inherited this mess and so can be spared much of the blame. Still, he has been slow in gauging the depth of the doo-doo. In April he remarked that "we have plenty of capital going forward and we don't need to come back into the equity market," and less than two weeks ago he reiterated that "we are in a very comfortable spot in terms of our capital." Further damaging Merrill's credibility is the liquidation, also announced last night, of over $30 billion worth of collateralized debt obligations at a discount of nearly 80%, a markdown that should have been booked long before now. "Why these assets are written down when you're selling them and weren't written down in your earnings is a question," observed one research analyst.

How toxic are these CDOs? Merrill was forced to finance 75% of the sale price--i.e. they practically gave 'em away. Since the financing is secured only by the assets sold, Merrill will be on the hook if the CDOs decline in value by another 25% or more. The firm had tried to hedge against such depreciation through guarantees purchased from bond insurers, but those insurers are facing insolvency themselves. Merrill is currently trying to extract termination fees from these insurers and managed to collect $500 million from Security Capital Assurance.

What times we live in that such an iconic franchise has to search between the sofa cushions for whatever loose change it can find.

A Mixed Bag

Will the U.S. Senate smooth out the kinks? The mortgage-relief bill passed by the House on Wednesday has some noble objectives. It seeks to protect hundred of thousands of homeowners from foreclosure and to extract concessions from lenders who floated risky mortgages built to fail. It favors owners of modest means who actually occupy their homes while leaving speculators in pricier properties exposed to market discipline. It creates loan-loss reserves funded by exit fees from relieved lenders and insurance premiums from relieved borrowers. It stiffens disclosure requirements for lenders and mandates a seven-day waiting period between the delivery of mortgage documents and closing. These are all good.

Now for the bad and the ugly. Yesterday I penned my disgust with the GSE bailout. Not only has the Treasury Department been given a blank check for loaning backup to the terrible twins, Fannie Mae and Freddie Mac, but it is not even required by law to demand the most senior position among lenders to these entities. This feeds the suspicion that the bill is intended to prop up Fannie and Freddie's debt (to the debtholders' benefit) as much as it is to rescue borrowers from sky-high mortgage payments.

Other flies in the ointment:

A one-year moratorium on risk-based pricing for FHA-insured loans. The Federal Home Administration is a government program that actually works. It helps mortgage borrowers with weak credit or little upfront cash, and it does so without costing taxpayers money. Congress wants the FHA to insure another $300 billion in home loans, almost doubling its exposure, while preventing it from charging high-risk borrowers extra. Said FHA Commissioner Brian Montgomery at a hearing this spring, "the FHA should not be forced legislatively to compromise its fundamental [lending] criteria at the future expense of the taxpayer." Sorry, Brian, consider yourself forced.

A tax credit for first-time home buyers. This obviously departs from the main mission of rescuing borrowers trapped in unaffordable mortgages. At the same time that the House bill insists on adequate down payments for refinanced loans, it offers to cover (up to $7,500) the down payments of new borrowers with 15-year interest-free loans. These are taxpayer-funded teasers, all risk and no return--a desperate attempt to chew through the housing glut while possibly ensnaring a new generation of distressed borrowers.

A permanent increase in conforming loan caps. Remember that back in February the economic stimulus package passed by Congress temporarily raised the limit for a Fannie or Freddie loan. The new bill makes the increase permanent, from $417,00 to $625,000. Again I ask, how does this help low- and middle-income homeowners? The new cap serves only to restore liquidity and prop up values in the high-end market, where borrowers should have known better.

[update, July 30--]
The National Association of Home Builders admitted in a statement today who benefits most from the temporary tax credit for first-time buyers: "the tax credit will stimulate home buying, reduce excess supply in housing markets and shore up home prices." In other words, the ones who over-built in the first place get to hawk their inventory (buyer-assistance courtesy of the American taxpayer) before prices crash completely.

When Is a Bailout Not a Bailout?

When the President says so. "I don't think it's a bailout," insisted George Dubya last week as Congress was putting the finishing touches on a bill that would provide a financial backstop for mortgage lenders Fannie Mae and Freddie Mac. The President's reasoning? "The shareholders still own the company."

The Prez seems confused on two points. First, when he said "bailout," he probably meant takeover. After all, a major criticism of the mortgage-relief package is that it would be the first step toward nationalization of Fannie and Freddie, a government takeover of two distressed companies that cooked the books and rewarded top executives handsomely while taking on huge risk. Gains were privatized; losses will be socialized. Such an outcome must not sit well with our Capitalist-in-Chief.

Make no mistake, the owners are getting bailed out. The bill passed by the House of Representatives yesterday enables the Treasury Department to extend an unlimited line of credit to Fannie and Freddie. This obviously adds value to the franchises; witness the tripling in share prices in FNM and FRE over the past two weeks. If it walks and talks like a bailout, it must be one.

And it might, in the end, be a takeover as well--the other point of Dubya's confusion. Not only will the U.S. Treasury lend boatloads of capital to the GSEs, but it will buy their stock (or accept it as collateral for the loans). You might call it the Paulson Put, a taxpayer-funded option that protects shareholders from further downside. Republicans are choking on the idea, but heck, it's an election year. Besides, the President at the last minute has changed his mind about a veto, a sign that confusion and desperation reign supreme.

Mama Merrill!

Make it four consecutive quarters of red ink for Merrill Lynch, which reported Q2 earnings last Thursday. Did I say earnings? I meant losses, which have piled up to $19 billion over the past year. It took the investment firm four years to earn that much money--and only one to watch it go poof!

Write-downs for impaired assets came to almost $10 billion for the quarter, or over $40 billion since a year ago. To raise cash, Merrill sold its 20% stake in Bloomberg LP for $4.4 billion and its controlling interest in Financial Data Services for $3.5 billion. For now it is retaining its 49% stake in asset manager BlackRock Inc., but expect that one to go by the end of 2008. Merrill must liquidate, as it is simply no longer able to raise new capital. The window is closed.

Reporting the same day, executives at the nation's largest investment bank, Citigroup, were doing fist pumps. They lost only half as much as Merrill and only half as much as they had the quarter before. Progress! Still, over $7 billion in write-downs were taken, bringing the overall total to $40 billion since the credit meltdown began last August. If this keeps going, we'll soon be talking about some serious money.

Bay State Blues

State government in Massachusetts is running on fumes, finally cobbling together a budget two weeks into the new fiscal year. Presented with a $28.2 billion dollar budget, Governor Deval Patrick attacked it with a rusty jackknife, whittling away $122.5 million in earmarks. "We've got to prepare now for economic troubles ahead," Patrick said at a signing ceremony yesterday. "Our present circumstances demand increased restraint." Credit the governor with facing up to the new reality.

The budget takes half a billion from the Commonwealth's rainy-day fund and tacks on a buck to the cigarette tax. Even so, the business-funded Massachusetts Taxpayers Foundation foresees $1 billion of red ink in 2009, with capital gains tax revenues drying up and federal healthcare reimbursements falling short. Patrick himself realizes that more cuts may be needed, and he has asked lawmakers for the same authority to make mid-year cuts that was accorded Governor Mitt Romney in 2003. "Granting that authority now, before the end of the legislative session," said Patrick, "enables us to respond quickly and responsibly in the event of a serious downtown."

Troubles? Downturn? It appears that longtime economic adviser Rosy Scenario has been given the pink slip.

Phil 'er Up

Don't worry, be happy, says former senator Phil Gramm in a newspaper interview appearing Wednesday. Easy for him to say. He's already got his, having parlayed his political experience into a vice-chairmanship at Swiss banking giant UBS. Serving as John McCain's top economic adviser, Gramm insists that all this talk about America in decline is just that, talk. "Misery sells newspapers," he scoffs. "We have sort of become a nation of whiners. You just hear this constant whining, complaining about a loss of competitiveness."

O.K., let's check the headlines for the past 48 hours. GE to sell Japan unit to Shinsei for $5.4 billion. Citi to sell German retail unit to Credit Mutuel for $7.7 billion. Merrill may get $5 billion for Bloomberg stake. Earlier this spring Bear Stearns sold itself to JP Morgan Chase, and Lehman Bros. is next. Folks, this implosion in American finance constitutes the biggest yard sale in human history, and Gramm says that it is all "mental?"

To his credit, candidate McCain has distanced himself from Gramm's remarks. Meanwhile, Mr. Consumer, please ignore the four-dollar gas, the ten-dollar mozzarella, the pink slip, and the eviction notice. You are only imagining those things.

The Future of Gaming in Maine?

Build it, but will they come? Maybe not, if the chart above is to be believed. While the new Hollywood Slots opened with considerable fanfare this week in Bangor, less attention has been paid to the sliding stock price of the parent company, Penn National Gaming, Inc. Notice the 50% haircut since the first of the year. Investors are apparently worried that revenues will dry up in the current recession.

Yesterday a leveraged buyout of Penn National was called off. The original offer, announced in June 2007, was $6.1 billion, or roughly three times annual revenues. This translated to $67 a share, a 30% premium at the time. The day after the announcement, PENN shares gapped up about ten bucks. But that was the high-water mark. In August credit markets began to implode (that was when MaineFail defaulted, remember?), and by mid-January PENN had retreated to its pre-offer price.

By the one-year anniversary of the offer, the deal had still not closed. Investors, sensing that the LBO partners wanted better terms, began dumping the stock, which got a one-third discount in just two weeks. Now the buyers have walked away, although it will cost them to do so: a termination fee of $225 million, plus the purchase of $1.25 billion of preferred stock with no guaranteed dividend before the 2015 redemption date. That adds up to a $1.475 billion cash infusion for Penn National, which says that it will pay down debt and repurchase stock. Oh, and if there is anything left after that, they might expand their business--maybe.

As Maine voters go to the polls on November 4, they should realize that the gaming industry is in trouble. Call up any stock chart you want. Pinnacle Entertainment was trading at 35 in February 2007; now it is under 10. Over the same period, Isle of Capri Casinos has gone from 30 to under 5. MGM Mirage, trading for 100 as recently as last October, is now under 30. It can be assumed that insiders are among those jumping ship.

Will the anonymous backers of the proposed Oxford County casino be the next to walk?

[update, July 10:]
The stock price of MGM Mirage fell another 22% to 23 today following news that Nevada's gambling revenue fell 15% in May. The drop-off was even more precipitous in Las Vegas, where "the decline in Strip revenues is worse than the period immediately following Sept. 11, 2001," according to a UBS analyst. Revenues away from the casino floor are also under pressure, forcing reductions in flights and room rates.

THIS Will Get Their Attention

UBS, pronounced oops. Last month UBS Financial Services bought back auction-rate securities valued at $37 million that had been previously sold to 17 Massachusetts cities and towns (see May 8 post, "Pain in the ARS"). At the time the firm declared the matter "resolved." Now UBS is being prodded to do the same for individual investors, who have been unable to unload their ARS since the market froze in February. All told, over $200 billion of investment capital is trapped in these illiquid securities.

The Massachusetts Securities Division will file civil fraud charges today, alleging that UBS misrepresented ARS as cash-like investments with iron-clad protection of principal. Even worse, UBS continued to market the securities to small investors even as the firm was warning larger institutional clients of potential risk. Such two-tiered treatment of customers seldom goes over well with regulators.

Passive investors who thought they were safe started to smell the coffee in May, when their monthly statements from UBS began showing ARS as "fixed income" positions, not "cash." This meant that their securities could fluctuate in value, just like bonds. Sure enough, UBS has begun marking down the value of some of these investments on customer statements. "Your future," purrs the marketing jingle, now discounted at your friendly neighborhood broker.

Banc of America and Merrill Lynch are also in the crosshairs of Massachusetts regulators. Any money firm that spells "bank" with a "c" is guilty until proven innocent. As for Merrill, its rap sheet is as long as the Nile. I had a brokerage account with Merrill's Boston office back in the late '70s and early '80s and got personal attention from a customer rep named Don Martineau. He got me into Prime Computer before the stock took off, and that's how I paid for my honeymoon. Years later, though, long after I had moved to Maine, Martineau was convicted of bilking clients of millions and did some time. The "kulture," it appears, has not changed.


[update, 1:45 p.m.--]
Remember those preferred stock offerings that Merrill, Lehman, and Citigroup issued this spring to fortify their balance sheets? Those shares are now trading at 9.5% yields, which means (1) the share prices have declined since and (2) any new deals would have to be priced with double-digit yields. The day is coming when deals cannot get done at any price, and that is when the sugar will really hit the fan.

[update, July 24--]
New York Attorney General Andrew Cuomo announced today that he is joining the posse going after UBS for pushing auction-rate securites. "Not only is UBS guilty of committing a flagrant breach of trust between the bank and its customers, its top executives jumped ship as soon as the securities market started to collapse, leaving thousands of customers holding the bag," said Cuomo in a press release. Cuomo is seeking to compel UBS to buy back the ARS at face value, plus penalty. His lawsuit is the latest of two dozen against brokerages in nine states alleging marketing fraud.

Bad Money

Obama? McCain? It won't matter, according to Kevin Phillips, author of the new book Bad Money. The wheels are already in motion, and there is little the next President can do to prevent the coming train wreck. "This books," writes Phillips in his preface, "is about the insecurity of America's future as the leading world economic power, given a debt-gorged and negligent financial sector, and the vulnerability caused by the nation's expensive dependence on imported oil." To make sure you get the point, Phillips adds an ominous subtitle--Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism.

It is tempting to blame it all on the Bush II Administration, but let's be clear. These problems have been building for two decades, and simply escorting Dubya into retirement will not solve them. Since Alan Greenspan was appointed Chairman of the Federal Reserve Board in 1987, total debt in the U.S. has quadrupled to more than $40 trillion. That debt overhang is three times the country's annual Gross Domestic Product, a multiple surpassing the prior record set following the stock market crash of 1929.

Much is made of the Dubya Deficits, but government borrowing (federal, state, and local obligations added together) is less than one-third of the total private-sector issuance (financial, corporate, and mortgage). "In reality, public debt wasn't the big ballooner," points out Phillips, "private debt was." The risk to any society, as debt metastasizes, is that resources are allocated away from production and toward the useless pursuit of paper profits. Financial services in the U.S. now account for more than 20% of GDP, while manufacturing has shrunk to 12% (it was almost 30% the year I was born). The hollowing out of American manufacturing will make it that much harder to work off our debt.

"Money is 'bad,'" writes Phillips," when a leading world economic power passing its zenith...lets itself luxuriate in finance at the expense of harvesting, manufacturing, or transporting things." Phillips makes no predictions about how severe or prolonged the looming downturn will be, but he is pretty sure that down is where we are headed. For a reality check, let's check some headlines. How about this morning's? Citigroup Inc. today will begin laying off 10% of its investment banking staff, bringing its total headcount reduction for 2008 to over 15,000. And the American Federation of State, County and Municipal Employees, a public employees union, says about 45,000 government layoffs have been announced this year due to budget shortfalls.

And it's only Monday.

Quick Hits: Seeking Scapegoats

The massive deleveraging taking place in our economy, for all its impact, lacks suspense. When the dominoes start falling, the eventual result is known beforehand. That is why I can leave town for a week, dabble at farming in the Berkshires in the June sunshine, return home, learn of top executives at Lehman Brothers walking the plank during my absence, and not be surprised. I offered in my June 4 post that Dick Fuld's tenure as CEO was at risk. Turns out that the CFO and COO took the fall instead.

I fail to see how guys like Fuld can, or should, escape. These corporate execs get paid obscene amounts of money and should be held accountable when things go awry. Their compensation and severance packages should be heavily taxed (hear that, John McCain?). As they say on the farm, manure is a good thing only if it is spread around. Piled in one place, it stinks. The same thing goes for money.

[update, June 27:]
Bloomberg News is reporting that CEO Fuld will forgo his bonus in 2008. Last year Fuld made $40 million, less than a million of which was his actual salary. The rest was his bonus. How's the guy going to carry on without it?

Who pays for fixing medical mistakes? Sadly, it is either the patient (the victim) or those who pay insurance premiums (the rest of us, which makes us victims as well). Massachusetts wants to change all that. Yesterday state officials, in concert with the state's largest private health insurer (Blue Cross and Blue Shield), announced that hospitals or doctors may no longer bill for the costs of extra care following any of 28 different types of screw-ups. The extra costs may range from hundreds of dollars per case for preventable bed sores to thousands for post-surgical infections.

This cost-containment measure is long overdue--and essential if affordable health coverage is to be extended to the entire population. Again, it is all about holding perpetrators accountable. Until recently practitioners got away with medical errors, which went largely unreported. Who knew, for instance, that more people die in the U.S. each year from faulty treatment or diagnosis than from cancer!

American healthcare, when you think of it, is more like Russian roulette. When seeking services, there is a sizable chance that you will end up infected, indebted, disabled and/or drug-dependent. For that, you pay the highest per capita healthcare costs in the world. Now excuse me while I go for my aerobic workout.

Hoop Heaven

First K.U., now the C's!

Back From the Berkshires

Friends on a Mission youth group

United Baptist Church of Peru
Monterey, MA
06-14-2008

More Gloss Than Grit

It's a mouthful, this so-called Evergreen Mountain Four Season Resort & Casino. Doesn't exactly roll off the tongue now, does it. The long name bespeaks the project's aim to be all things to all people: a creator of jobs, a magnet for tourists, an anchor for investment, a benefactor of state programs, a guarantor of student loans, a steward of the natural environment, and a liberator of honest Maine folk just looking for a little entertainment close to home. It is Seth Carey's very own economic stimulus package for Oxford County.

But Seth has retreated to the background. Instead, Pat LaMarche, one of Maine's most recognizable public figures, has come to the fore to champion the idea of casinos in Maine. Last evening she made her pitch in Rumford before three dozen people in the Town Hall auditorium. At stake is a referendum question on the November ballot that, if passed, would give the ever-green light to construction of a casino "somewhere in Oxford County." What's more, the venture would be protected from any and all competitors for ten years.

Saying that the project is in the "conceptual" stage might be generous. Lacking a business plan, Carey has been unable to secure a favorite-son endorsement from the River Valley Growth Council, which hosted last night's forum. LaMarche threw out a few figures--4,000 visitors a day, a thousand jobs, repatriation of a million Maine dollars now going to Foxwoods--and promised more by November 4 (Year Five total revenues? revenues per customer?). She estimated ripple-effect job creation at 40%; for every ten casino jobs, four more would be created in the local economy.

Representative John Patrick led a discussion about how the Maine Legislature would have the opportunity to massage the bill if it passes. Though Patrick supports the initiative, he admits that it might need some "fixing" by the Legal and Veterans' Affairs Committee, on which he has served. Alas, Patrick is termed out and will be running for County Commissioner, begging the question as to who will remain in the House to shepherd this thing through. Talk of "trusting the Legislature" to get it right brought involuntary twitches from more than a few in last night's gathering. Something about foxes and chickens...oh, never mind.

LaMarche's patter was a reprise of her radio-host shtick as she tried to cozy up to her audience with local trivia and home-spun aphorisms. Clearly she is being paid to lend credibility and buy time while Evergreen tries to get its act together. Which is exactly what Evergreen promises: entertainment.

Quick Hits: Lehman Ducks, Lame Duck

"The worst is behind us," said CEO Richard Fuld in April at the annual shareholders meeting of Lehman Brothers Holding Inc. Oh, yeah? Then why did the Wall Street Journal report yesterday that Lehman may be issuing more common stock to raise $4 billion--just two months after a preferred-stock offering? The report sent Lehman's stock down almost 10% in one day, bringing the cumulative decline to over 50% since January 1.

Late yesterday Lehman, the fourth largest U.S. securities firm, denied rumors that it was borrowing from the Federal Reserve. "We did not access the primary dealer facility today," insisted Treasurer Paolo Tonucci. That lending facility allows an investment bank temporarily to swap illiquid assets for U.S. Treasuries, buying time until either the assets resume trading or the bank raises new capital.

Lehman next reports quarterly earnings on June 16, and losses are expected. By month's end Fuld may be gone, following Wachovia's CEO (G. Kennedy Thompson was dismissed Monday) into early retirement.

I'm here to give you some important advice, said President George W. Bush to Furman University's graduating class on Saturday. "My advice to you is not to dig a financial hole that you can't get out of. Live within your means."

Words from the master. During the Bush II adminstration the federal debt has increased by two-thirds to $9.4 trillion, and outstanding debt to foreigners has doubled. The private sector has followed suit, with home mortgage debt doubling and domestic financial debt (engineered by the likes of Lehman Bros.) increasing by two-thirds. These are staggering numbers. Says former comptroller general David Walker, "we have gone from a point where we were projected to pay off all the federal debt and have fiscal sustainability for 40-plus years to a point where we have large and mounting debt burdens and the simulation model that is used by GAO to project fiscal sustainability crashes in about 40 years."

[For more on Walker's concerns, see my Feb. 25 post.]

The Maine Mantra: Relief to Taxpayers

Taxpayers everywhere, not just in Maine, want relief. But Mainers, more than most, may be entitled to it. Year after year the Tax Foundation has ranked Maine among the two or three most heavily taxed states in terms of the combined state and local tax burden as a percentage of per capita income. Maine's figure of 14% compares to the national average of 11%.

Governor John Baldacci would like Maine to retreat to the middle of the pack. In 2005 he signed LD 1, a measure to limit year-to-year increases in public spending at all levels--municipalities, school districts, counties, and state. Formulas were devised to calculate for each budget a Growth Limitation Factor, itself a function of changes in average personal income and property valuation. Each town must calculate its own GLF, which is the maximum percentage increase that may be applied to its Property Tax Levy Limit. Any spending above the limit must be approved through an override vote.

My town, good old Peru, Maine, will act on a proposed 2008-09 budget by referendum on June 10. For the first time, Peruvians will be asked by the Selectmen to override the LD 1 cap. Actually, the Selectmen nearly forgot to ask. When it was pointed out to the Board that the municipal budget would expand by 9.2% with passage of all articles, somebody said uh-oh! and called the Maine Municipal Association for guidance. Hence Article 3-A , a late insertion to the warrant that first appeared in the annual town report.

At a public hearing last night, the Selectmen justified the juiced-up Levy Limit by insisting that the budgets for 2006 and 2007 were artificially lean and that you cannot run a town for so little money. I happened to chair the Board during those two cycles. So if anyone deserves scorn for holding the line, it is I. [Never mind that the merger with SAD 21 was growing Peru's school spending by double digits annually, effectively starving the rest of the budget.]

If Article 3-A and all subsequent spending articles are passed, the municipal budget for 2008-09 will reach $583,400. Together with an expected $1.3 million school assessment and a $76,853 county assessment, total appropriations will fall just shy of $2 million. The total tax commitment will come in at roughly $1.555 million, which, according to Selectman Jim Pulsifer, may raise Peru's mill rate from 14.3 to as much as 16. Bon appetit.

What $8 Gasoline Will Buy

Eight reasons you'll rejoice when we hit $8-a-gallon gasoline - MarketWatch

Bates College Commencement, May 25, 2008

Brett Hine, Bates 2008, B.A., Music

Drinking Water in Short Supply

Pictured above is the reservoir for the city of Barcelona, Spain. So where is the water, you ask? And what's with the building? Submerged when the reservoir was commissioned 40 years ago, the building once again sees the light of day, thanks to human thirst and climate change. Barcelona now imports water on tanker ships.

Dwindling water supplies are also a problem in parts of the U.S. Last week the San Francisco Chronicle reported that the East Bay Municipal Utility District is now rationing water to its 1.3 million customers. After two dry years and the driest spring on record, the District has declared a water-shortage emergency and instituted a drought management program that would cut overall use by 15 percent. The rest of California may soon follow, as the Sierra Nevada snowpack is only 67 percent of normal. Orange County began rationing to its 330,000 customers last year.

Drought has also hammered the Southeast, where reservoirs are dangerously low. There are even rumblings of a border war between Georgia and Tennessee over rights to a part of the Tennessee River. Elsewhere efforts are under way to make brackish water potable. Albuquerque, Las Vegas, Orlando, San Antonio, and San Diego are all currently considering desalination plants.

Reading stories like these, Mainers are quickly reminded that they are sitting on an increasingly valuable resource: clean, fresh water. It is an asset which multinational corporations are eager to monetize, and they are blitzing local planning boards with large-scale proposals to pump groundwater, bottle it, and truck it outta here. To their credit, some communities are resisting. Perhaps Maine should consider legislation similar to what Vermont passed last month, declaring the state's groundwater a public trust and establishing a permitting process for high-volume users.

So THAT'S What They Mean by Self-Storage!

Sometimes you have to get out of rural Maine to recognize broad cultural trends, especially emerging ones. In June 2001 my daughter and I hit the road to look at college campuses. We exited Maine on U.S.-2 and wended our way across northern New England and into New York for our first stop, Skidmore College. All told, we visited ten colleges in seven states over eleven days. We saw a lot of the upper Midwest.

There were three things that we saw too many of: single-occupant vehicles (particularly SUVs), golf courses, and the newest of the three, self-storage facilities. Let me dismiss the first two quickly. We all know about Americans' over-reliance on the automobile. Idling in congested commuter traffic on Chicago's freeways (there's a misnomer) reinforced my conviction that cheap gasoline is a curse. As for golf courses, they swallow up wildlife habitat and farmland to benefit relatively few people. They are an ecological scourge.

So what about self-storage units? At the time we joked about how Americans have so much STUFF that they cannot fit all of it in their domiciles anymore. There are houses for people and now houses for their stuff. Remote storage seems a tacky testament to modern consumerism and excess.

Now for the newest trend, reuniting people with their stuff. This is no joking matter, as explained in the N.Y. Times earlier this week. People facing foreclosure on their homes need to park their stuff temporarily, so they turn to self-storage units. Problem is, the people who cannot keep up with their house payments also tend to fall behind on their storage rentals, thereby running the risk of having their stuff auctioned off. The solution for some people is to walk away from the house and move in with their stuff (storing themselves, as it were), which must drive local code enforcement officers crazy. My suggestion: put car pads next to the storage units and use retired SUVs for housing.

For more on the booming storage industry (and on the vultures who descend on the property auctions), go here:
Losing a Home, Then Losing All Out of Storage

[update, May 14, 2009--]
James Quinn at Minyanville has calculated the following: "Americans have accumulated so much stuff that their McMansions can’t contain it all. In 1984, there were 6,601 self-storage facilities with 290 million square feet space; in 2008, there were 51,250 “primary” self-storage facilities representing 2.35 billion square feet - an increase of more than 2.0 billion square feet. There's 7.4 square feet of self-storage space for every man, woman and child in the nation; thus, it's physically possible that every American could stand -- at the same time -- within the space we've allotted to self storage."

Mother, Meet Meredith

Meredith Whitney is today's E.F. Hutton: when she talks, people listen. And what she is saying today about four of Wall Street's biggest firms will not please shareholders. The Oracle of Oppenheimer describes the outlook for Merrill Lynch, Goldman Sachs, Lehman Brothers, and Morgan Stanley as "far more bleak than that reflected in the market." She has cut 2008 earnings estimates for the group in half and singles out Mother Merrill for an "underperform" rating.

Whitney first made a name for herself last October 31, when she pointed out that the biggest U.S. bank of them all, Citigroup, had insufficient cash flow to cover its dividend to shareholders. Unless it slashed the dividend, raised capital, or sold assets, it was on a path to bankruptcy. Within a week Citigroup's CEO was gone. By January Citigroup was implementing the measures recommended by Whitney, who by then had received death threats for telling it like it is.

This was a classic the-emperor-has-no-clothes shift in perception. Investors were forced to accept that valuations were spun out of thin air. Balance sheets were (and still are) stuffed with derivative dark-matter that is illiquid and hard to price--marked to myth, not to market. How can anyone figure out what these firms are worth? "You can't really know,'' says Whitney. "The financial disclosure is terrible. They're all either liars or they don't know--but I assume they really just don't know.''

And for that company executives have been paid mega-millions, way more than what Whitney makes as a lowly analyst.

Bull in a China Shop

In its zeal to solve one problem, Congress has created another. Lawmakers thought they were doing the right thing last year when they mapped out a timeline for increasing the supply of biofuels in the U.S. The goal: reduce our dependence on foreign oil. The strategy: expand domestic production of renewable fuels five-fold to 36 billion gallons annually by 2022. Corn farmers will be the big winners in the early going, as annual production of corn-based ethanol will double to 15 billion gallons.

It has been just five months since President Bush signed into law the Energy Independence and Security Act of 2007, supported by all four members of Maine's congressional delegation. Already the ethanol mandate is coming under fire. Last Wednesday the Senate Homeland Security and Governmental Affairs Committee examined whether the rush to corn-based ethanol is contributing to higher food prices. Susan Collins of Maine, the senior Republican on the committee, thinks so. The week before she had joined 23 other Senate Republicans in drafting a letter to the Environmental Protection Agency (EPA) calling for a change in the mandate. In the words of presidential candidate John McCain, "this subsidized program--paid for by taxpayer dollars--has contributed to pain at the cash register, at the dining room table, and a devastating food crisis throughout the world."

Did he say subsidy? That's right, ethanol blenders qualify for a federal tax credit of 51 cents a gallon for helping to meet the Renewable Fuels Standard (RFS) mandate passed in 2005. That comes to $2.5 billion a year. Corn growers get their own subsidy, and they are further protected by a tariff on imported ethanol of 54 cents a gallon. That keeps Brazilian sugar-based ethanol out of our market, to the consumer's detriment. Ethanol from corn costs $1.05/gal. to make with a per-acre yield of 400 gallons. Ethanol from sugar cane costs $0.81/gal. at 590 gallons per acre. Which business would you rather be in?

All told, corn ethanol is subsidized to the tune of $1.45 per gallon. But a gallon of ethanol does not deliver the same energy as a gallon of gasoline. In reality the subsidy comes to well over $2 for every gallon of gasoline replaced. We get way more bang for the buck for subsidies paid directly to the oil industry. Meanwhile, diversion of corn (as much as one-fourth of the crop) from food to fuel has jacked up food prices by 25%--"the best example I've seen of the law of unintended consequences," said Collins at Wednesday's hearing.

When it comes to predicting consequences, politicians struggle. As Henry Hazlitt wrote many years ago in Economics in One Lesson, "the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." Subsidies and tariffs tend to lead to a sub-optimal allocation of resources, to stubborn inefficiencies. "Free prices and free profits will maximize production and relieve shortages quicker than any other system."

If we must subsidize something, perhaps we should move away from corn ethanol and toward cellulose ethanol derived from crop wastes, wood wastes, and perennial grasses. Corn currently gets ten times the subsidy as the other biofuels combined. A more balanced program would allow different regions of the country to match their R & D to the available feedstocks. As it stands now, corn-belt agribusinesses get fat while the rest of the world starves.

[update, May 15:]
The U.S. Senate today passed the Food, Conservation and Energy Act of 2008 by a lop-sided 81-15 margin. Among many other things, the bill reduces the tax credit for ethanol refiners from 51 cents a gallon to 45 and expands subsidies for cellulose ethanol, steps that Senator Collins would presumably support. However, she voted against the entire package, perhaps because it proposes to spend roughly $300 billion over five years and preserves subsidies to farmers making as much as $750,000 in annual farm income. Currently there is no limit whatsoever; President Bush had proposed a limit of $200,000. The President has threatened a veto, but the Senate has enough votes to override.

Pain in the ARS

Why can't we ever get lawyers like that? I ask on behalf of all Mainers, who can only watch with envy as Massachusetts Attorney General Martha Coakley adds another notch on her belt. This time it is UBS Financial Services Inc., the latest Wall Street firm to be nailed for marketing "enhanced" cash investments to municipal entities. As reported on the front page of this morning's Boston Globe, UBS has been coaxed (sorry, couldn't resist) to repay $37 million to 17 cities and towns for auction-rate securities (ARS) for which there is no longer a market. Towns had been parking excess cash in ARS, which rolled over weekly or monthly until the market seized, to juice returns.

The settlement with UBS follows an earlier deal with Merrill Lynch whereby the City of Springfield was refunded $14 million for money invested in collateralized debt obligations (CDO). In each case, the broker/dealer was forced to admit that the investments in question were not permitted by state law, which restricts municipal cash to highly liquid accounts that guarantee the principal. Also in each case, the broker/dealer admitted only to a one-time misdemeanor. "UBS is pleased this matter has been resolved," said a company spokesperson.

Maybe it has, maybe it hasn't. Massachusetts Secretary of State William Galvin has issued subpoenas to UBS, Merrill Lynch, and Bank of America regarding the sale of ARS to individual investors and businesses. Conducting its own investigation is the Securities and Exchange Commission. If a pattern of abuse is revealed, then aggrieved investors, public and private, will be lining up for restitution.

The State of Maine continues to wait for resolution of the MainSail II fiasco. Creditors were alerted in March that "no valuation of the Issuer's asset portfolio [...] provides any reasonable expectation" that senior secured parties will get all their money back. Other investors may get nothing. The assets (which have shrunk in value by two-thirds since Maine jumped into the pool) are now in receivership, so the eventual outcome for investors will be, if not entirely satisfactory, at least orderly. Price discovery awaits.

Meanwhile, Maine Treasurer David Lemoine, still ticked off at Merrill Lynch for pushing the MainSail investment, has blackballed the firm. The State will be selling nearly $120 million in general obligation bonds later this month, and Merrill will be getting no piece of that action. “Until the Mainsail II matter is fixed and I am satisfied that the Merrill Lynch brokerage culture is trustworthy," said an exasperated Lemoine, "this office will not bring Merrill Lynch into any of our bond deals.” Take that, Merrill Lynch.

A Class Act

This morning's Globe has a must-read piece on Dan Doyle, a Bates College grad and trustee whom I had the good fortune to meet, quite by happenstance, three years ago--at Pep Boys in Auburn. It was a Saturday night, just before closing. He was there for a new tire prior to driving back from campus to his home in Connecticut. I had arrived by tow truck, my Taurus in need of a new idler pulley after breaking down on the Maine Turnpike in Gray.

After making the Bates connection (my son, Brett, was then in his first year), our conversation was off to the races. Dan's knowledge of New England sports is encyclopedic; he was able to name the coach and best player of the Yale basketball team that I had watched as a student (1967-71). Dan wanted to know all about Brett, whose budding tennis career he promised to follow. I gave Dan a tip about a high-school hoop phenom in the River Valley, a gal named Kaubris, but we ended up letting her get away. She went to Bowdoin instead.

Dan is all about appreciating and respecting people. There is no greater ambassador of sportsmanship, as you may read here:
Dan Doyle draws up a game plan for sports parenting - The Boston Globe

Flight Suit, Pants Suit...Whatever

Five years ago today the war in Iraq ended. We know that for a fact because our president told us, right there on the deck of the USS Abraham Lincoln. And so said the sign behind him, "Mission Accomplished." Ever since then we have simply been mopping up. Good thing, too, that we got it over with as quickly as we did. There is no telling how much a five-year war would have cost us.

P.S.--That circus stunt in a jumpsuit, obviously staged for a future campaign ad, debased the office of the Presidency almost as badly as Tricky Dick's dispatch of his "plumbers" to the Watergate complex.

"Fill 'er up, it's on me!" said Hillary Clinton yesterday to a sheet-metal worker in South Bend, Indiana. Actually, she said it to the cameras. But Jason Wilfing did not mind being a mere stage accomplice; he was getting 63 bucks worth of free gas for his boss's Ford F-250. Good deal.

And has Hillary got a great deal for the rest of us, too! With no bandwagon of her own, she jumped on John McCain's and seconded the call for a moratorium on federal motor fuel taxes this summer. That's right, Mr. Middle Class Consumer, you should get a break from having to pay 18.4 cents per gallon of gasoline into a fund that pays for highway repairs. Put that money right back into your pocket. We will offset the resulting revenue shortfall by, now get this, billing the OIL COMPANIES!

Believing that Exxon will not pass a new windfall profits tax right back to the consumer is like believing that the Iraq War is over. Exxon charges what it does because it can. It is a matter of supply and demand. Removing the fuel tax will not increase supply, but may very well increase demand, bringing the pump price back to the original balance point. We will be right back where we started, except with new costs of compliance for extracting a new tax. McCain's proposal would be even worse: what is now being paid as a federal tax will eventually go to the oil companies instead, inflating their profits and executive compensations. This favors the little guy?

When Hillary has time actually to think a little more about a gas-tax holiday, she will recognize the proposal for what it is: a bad idea. But who has time to think? Hillary is campaigning 24/7, trying to survive from one primary to the next, hustling votes any way she can. Her fixation on the short term reminds me, indeed, of Aviator Dubya himself.

Are We There Yet?

The bottom in the housing crisis is nowhere in sight, according to data released today. Take your pick, the stats are all bad:

* Foreclosure filings: up 112% in the first quarter compared to 2007.

* Home prices: down 12.7% in one year (Case-Shiller index).

* Vacant homes: up 5.7 % in 2007.

* Owner-occupied homes: stuck at 68%--and headed lower.

The vacancy rate is the one that really gets me. It is a capsule summary of the colossal, almost obscene misallocation of capital (aside from war spending) that took place in the U.S. over the past decade.

Let's look at the vacancy numbers more closely. In 2007 the number of vacant homes increased by one million to a record 18.6 million. If we take out seasonal homes, we are left with 13.9 million vacant homes that are suitable for year-round occupancy. Of those, 4.1 million are for rent (over 10% of the total rental stock). Another 7.5 million are off the market for one reason or another; they may be second homes, homes in foreclosure, or homes in undesirable locations. Bottom line: there are 2.3 million vacant homes awaiting buyers, an overhang that is nearly double the usual.

How did it happen? The Federal Reserve helped with its loose monetary policy, encouraging risk-taking among lenders and borrowers alike. Artificial demand was created as homes (particularly at the high end) morphed into something else: fungible assets that investors could swap in and out of. In other words, these homes were not built for occupancy. Wall Street fueled the boom by securitizing home loans and hence increasing the velocity of all that easy money.

Many (most?) of these home loans were structured to serve quick flippers, not long-term occupants. These so-called "exploding ARMs" (adjustable rate mortgages) came with low introductory interest rates good only for two or three years before resetting much higher--no problem if you can get out before the reset. Oh, wait, you mean you actually want to live in that house? Then you had better be ready for higher monthly payments. Hybrid ARMs worth $362 billion will reset in 2008 and will devour a lot of those IRS rebates going out in the mail starting this week. Unless these loans can be reworked, many will fail.

Vacant homes lose value in many ways. Not only do they have to be repriced (downward) according to the law of supply and demand, but they are beset upon by squatters and vandals. The physical deterioration, in the words of a Boston attorney, is "like Katrina without the water." And it will get worse before it gets better.

These Lips Are Not For Reading

"Read my lips," said Republican presidential nominee George H. W. Bush 20 years ago, "no new taxes." The man got himself elected largely on that pledge, then was dismissed by the electorate four years later after, you guessed it, raising taxes. It was an infamous, though hardly unprecedented, example of saying one thing and doing another. Happens all the time in American politics.

And also in American finance. Two weeks ago Merrill Lynch's Chief Executive Officer, John Thain, reassured investors in Tokyo that his company had no plans to raise further capital, that the $12 billion already obtained from sovereign wealth funds would suffice. At that moment Merrill's Chief Financial Officer, Nelson Chai, squirmed in his seat. Chai knew the numbers, which have no lips and thus do not lie. "I wish he didn’t say that," Chai said later of Thain's remark.

Chai's caution was understandable in light of last Thursday's earnings update (see my April 18 post). Despite the reported losses and writedowns, Thain insisted that the firm is "well-capitalized" and that "we do not have any plans to raise any additional common equity, and Nelson actually agrees with that"--at which point Chai squirmed again. During the Q & A segment of the conference call, a Citigroup analyst pressed Thain on the possible need for additional capital. No problem, said Thain, who pointed out that the $12 billion already raised exceeded losses in 2007 by $4 billion. "That capital, that excess capital, was intended to reassure the market that we didn't have to come back into the equity markets and it'd give us the capital base to go forward into 2008. And that continues to be the case."

Given Thain's hope for restored profitability in 2008, Merrill's stock was up on Thursday and Friday. It retreated this morning, however, after the company's announcement of a preferred-stock offering at 8 5/8%. Oops, so much for Thain's reassurances. One wonders if his loose lips in recent days might provoke more shareholder suits. Meanwhile, bean-counter Chai continues to fret over Merrill's balance sheet and the $44 billion of debt maturities coming due in 2008. "We obviously continue to roll commercial paper and repo [repurchase agreements]," said Chai during the conference call.

How long can the juggling continue? Merrill is lunch, in my opinion.

[update, April 24:]
Merrill Lynch announced today that it will continue to pay out a quarterly dividend of 35 cents a share to holders of common stock. No matter that it is rolling over short-term debt at 6% and offering preferred stock at almost 9%. The dividend, which makes no sense from a business standpoint, is obviously meant to buy investor confidence.

[update, May 6:]
Minyanville's Bennet Sedacca has an updated scorecard on the need for new capital and the prices being paid by troubled Wall Street firms:

They just keep coming and coming and coming.
Legg Mason, Fannie Mae, Freddie Mac, Fifth Third, Citigroup. I'm hearing JPMorgan too.
Insurance companies are gobbling up this paper, but at some point they'll say 'no mas'.
What seemed 'cheap' at 7% is now getting done at 9%.
They're on their way to 12%. Or until companies just can't justify paying those yields and start cutting dividends and selling common stock.
As they should.

It Ain't Over

Has it really been three weeks since I last made fun of Merrill Lynch? Well, I am back to fix that. Merrill reported first-quarter earnings yesterday, and it was another disaster. The third-largest investment bank lost almost two billion dollars, compared to a profit of over two billion in the year-ago quarter. It was the firm's third straight quarterly loss. Another $6.8 billion was written off for troubled assets (CLOs and mortgage-backed securities for those of you keeping score), raising the nine-month total to over $30 billion. Money heaven is running out of room to keep all that wealth.

Still, Merrill's CEO said that he was "optimistic" about the remainder of 2008. His remarks harmonized with those heard earlier this week from the CEOs of JPMorgan Chase, Lehman Brothers, and Goldman Sachs, all of whom sang the same tune: the worst of the credit crisis is behind us. This was music to the ears of Wall Street investors, who bid up stocks all week.

Don't be fooled. Nobody's dancing at Merrill, where 4,000 employees will be laid off. Today Citigroup (Q1 loss of $5 billion and write-downs totaling $12 billion) compounded the damage by announcing lay-offs of as many as 6,000. Add another 5,000 at Goldman and 7,000 at Bear Stearns, and pretty soon you're talking about some serious unemployment--over 30,000 up and down Wall Street.

The cheerleading by overpaid executives is a pathetic attempt to buoy investors' confidence and somehow to disrupt the negative feedback loop that threatens to take the financial sector down. The fact is that all these firms hold impaired assets for which there is no market. These collateralized debt/loan obligations--little more than cleverly formulated perfumes to mask the stench of worthless loans--amount to "your basic, garden-variety nuclear waste, which isn't trading," points out Minyanville's Bennet Sedacca. "So how you can you say the crisis is over when the market is frozen? To me, it will be over only when all of this garbage trades, defaults and clears the market. Not until."

So much for the banks on Wall Street. How about the ones on Main Street? On Wednesday Wachovia announced a quarterly loss and slashed its dividend. Particularly ominous were remarks during the conference call by Wachovia's Chief Risk Officer, Don Truslo, who noted that even their most creditworthy customers are abandoning upside-down mortgages. "When a borrower crosses the 100% loan to value," said Truslo, "their propensity to just default and stop building their mortgage rises dramatically and, I mean, really accelerates up." The bank's risk models did not see that one coming, so capital is being hoarded to boost reserves. That means less for business investment, which spells S-L-O-W-D-O-W-N.

At least Wachovia has a Chief Risk Officer. Merrill finally hired one of its own, but only after the sh-sugar hit the fan. And if Merrill wants me to stop picking on them, all they have to do is give Mainers our $20 million back.

Quick Hits: Slots, Minimum Wage

Not on my watch, said Governor John Baldacci yesterday as he vetoed legislation to allow slot machines on Indian Island, the Penobscot reservation near Old Town. Baldacci insists that gambling is too important an issue for mere legislators to decide. In his view, a new gambling venue should be created only through a ballot initiative passed in a statewide election, such as the 2003 referendum that allowed the Hollywood Slots racino in Bangor. The message to Native Americans: get your own referendum. Any exception to the referendum process, in the Governor's words, "sends Maine down a perilous path, fraught with risk of unfair, arbitrary treatment among future gaming proposals."

His logic escapes me. The slippery slope was created when Maine first introduced a lottery in 1974. That was when Maine voters decided that gambling was OK. All regulation since then has been "unfair" and "arbitrary." I may be running against her, but I agree with Representative Sheryl Briggs of Mexico when she sees discrimination against the Penobscots. "What gives us the right to tell them no?" she asks.

The "path" that we are on right now leads us to annual referenda on specific gambling proposals. Last year it was a casino in Washington County; this year it's one in Oxford County. Let's stop cluttering our ballots ad eternam and settle the question once and for all. Either gambling is allowed anywhere in Maine, subject to local approval, or it is allowed nowhere in Maine, in which case we dispense with the Maine State Lottery. It is a matter of fairness and consistency.

Raising the minimum wage gets votes, but is it the right thing to do? The State Legislature on Friday gave initial approval to a plan to raise Maine's minimum wage from $7 an hour to $7.50. Setting a minimum wage is a form of price control (in this case the price of labor), and government has never been good at price controls. Artificial prices interfere with free-market pricing and are ultimately self-defeating. Wages propped up by fiat eventually lead to fewer jobs.

According to U.S. Census data, over 98% of employees whose wages would be increased by this proposal live with working parents or relatives, live alone, or have a working spouse. Less than 2% are sole earners in families with children, and each of these sole earners has access to supplemental income through the federal and state earned income tax credit (EITC). Economists generally agree that the EITC is a better way to target resources at poor families than boosting the minimum wage.

Politicians jumping on the minimum-wage bandwagon will argue that rising wages are needed to counteract inflation in the costs of food, energy, and housing. But will they lower the minimum wage when deflation sets in (as I believe will happen in the coming depression)? Not likely. Ultimately, the ones best able to determine the fair price of labor are employers and employees freely negotiating between themselves.

Pigging Out Is All Too Human

Be careful what you wish for, the saying goes, because you just might get it. So what is so bad about wishing for food? Can't survive without it, right? Throughout human history survival meant successfully finding food--and packing it in when you finally found it. Days of gluttony would get you through weeks or months of scarcity. You became adept at identifying and favoring energy-dense foods. At the end of the day, you burned enough calories hunting and foraging that you never worried about crushing your bathroom scale.

But that was then. Or maybe now, just not here. In 21st-century America a huge caloric imbalance has come to exist, with more energy consumed than expended. And the imbalance is killing us. Two-thirds of American adults are at least 20% over their ideal body weight, an ominous statistic since obesity is a risk factor for diabetes, heart disease, and stroke. What's worse, their kids are being groomed to follow along. "This generation of children," says Yale Psychologist Kelly Brownell, "may be the first in American history to live shorter lives than their parents."

Blaming folks for a lack of willpower, according to Brownell, misses the point. He argues that we are genetically programmed to prefer dense diets. Our bodies still think scarcity even though we live in an age of abundance. Add to that an economic system that strives for surplus and capitalizes on consumption, and you have a recipe for excess. Brownell suggests that we address the problem of overeating the same way we do tobacco consumption: regulate product advertising (especially to children), raise student awareness in public schools, and tax empty calories.

Some may think that a public-policy approach may be too heavy-handed. But if we are looking for ways to share or socialize the costs of healthcare, then we also must make a collective commitment to manage risk. Let me say it another way. If you want society to pay your medical bills, then you have to do your part by adopting a healthy lifestyle. Of course you are free to choose prehistoric pig-outs. Just don't ask the rest of us to pay for the consequences. "Eat less and exercise more," says Arthur Frank, medical director of the George Washington University Weight Management Program. "You cannot violate the laws of thermodynamics."

For more on Kelly Brownells' work, check out:
The Belly of the Beast

Making Money the Old-Fashioned Way (Not)

Remember the old Smith Barney commercial? "We make money the old-fashioned way," a dignified John Houseman solemnly asserted to the camera, "we earn it." He enunciated with such gravitas (we UHR-RN it!) as to signify peerless professionalism and unstinting performance--earnings into eternity. You just knew that it was safe investing with him.

He may just as well have been speaking for General Electric, a veritable icon of American ingenuity and industrial engineering. But the U.S. economy has evolved during the years since the Houseman ad. This morning we got a reminder that GE, like so many American companies, has been juicing earnings by straying from its roots. It doesn't just make stuff anymore; it also plays with its excess cash, hoping to boost the bottom line with vigorish. It has become a financial company in drag.

GE's first-quarter earnings came up light. Net income fell by 5.8% compared to a year ago even though revenue grew by 7.8%. How can that happen, you ask? Answer: only through a markdown in paper assets--or, in the words of Chairman and CEO Jeff Immelt, "higher mark-to-market losses and impairments" in the financial-services side of the business. In truth, GE's global infrastructure business peformed admirably, with revenue up 23% and operating income up 17%. But when your betting operation turns south, you suffer.

GE's stock is getting hammered today, off over 10%, largely because of its tepid guidance for coming quarters. But it is not just GE investors who should be concerned here. If a triple-A credit like GE is struggling, then imagine what will happen to other companies who made money by financial legerdemain and not by earning it. Profits will vanish, as will the corporate tax payments they generate. State governments used to receiving their piece of the action will continue to see revenue shortfalls. Taxpayers will have either to ante up or to lose programs.

Meanwhile the Wall Street firms who specialize in financial alchemy are still at it. The Wall Street Journal reports this morning that Lehman Brothers has repackaged $2.8 billion in unsold debt--stuff that no one wants--into a collateralized loan obligation called "Freedom." The new debt securities issued by Freedom have been given investment-grade ratings by Moody's and S&P, qualifying them to be offered to the Federal Reserve as collateral in exchange for U.S. Treasuries through the Fed's new Primary Dealer Credit Facility. That's the way to do it, as Mark Knopfler sings in Money For Nothing.

Governor Proposes Increased Funding for Bridges

One bridge in seven in Maine is structurally deficient, according to data gathered by the Federal Highway Administration in 2007. This compares to a nationwide average of one in eight. To address the problem, Governor John Baldacci yesterday submitted a bill to the Legislature that would raise an additional $40 million a year through increases in fees for motor vehicle registrations, titles, and vanity plates. The new revenues would boost spending on bridges to over $100 million annually.

Car registrations would jump 40% from $25 to $35. Reviewing registration fees in other states, one cannot easily determine whether the new fee in Maine would be above or below average. Some states charge a flat fee, while others have sliding scales based on vehicle weight, age, horsepower, or sticker price. Comparisons are apples-to-asparagus, at best. While a fee proportional to vehicle weight makes sense--after all, heavier loads have greater impacts--such a fee is better collected at the pump, where fuel usage captures both weight and miles driven.

35 bucks seems cheap to me. Last fall Delaware doubled its fee from $20 to $40. California Governor Arnold Terminator wants to go from $41 to $52, Wisconsin DOT from $55 to $80. Colorado Governor Bill Ritter has floated the idea of a one-hundred-dollar increase. Triple-digit registration fees, I predict, will be commonplace within five years.

And for good reason. As long as we pour hundreds of billions of dollars into securing and rebuilding Iraq and trillions of dollars into treating and managing lifestyle diseases, we will not have enough left to restore our transportation infrastructure without new user fees. Massachusetts Governor Deval Patrick wants to borrow to build now and figure out the revenue sources later. This morning he is unveiling a $3.8 billion bond proposal to repair more than 400 bridges over the next eight years.

Governor Patrick points out that aside from the issue of public safety, the initiative will create jobs during an anticipated economic downturn. We should be doing the same in Maine: putting people to work in order to pave the way to future prosperity.

Chalk Up Number 3

This Jayhawk fan is smilin'. Last night the University of Kansas men's basketball team erased a nine-point deficit with two minutes remaining in regulation, forcing overtime and eventually pulling away from Memphis to claim its third NCAA title ever.

I joined the Jayhawk fan flock as a grad student in 1971-72. Even then Kansas was a storied franchise, with such celebrated alums as Clyde Lovellette, Wilt Chamberlain, and Jo-Jo White and a coaching succession going back to the game's creator, James Naismith. They were coming off a Final Four appearance in 1971, and the highlight of my season in Lawrence was a 50-point blitz by All-American Bud Stallworth against arch-rival Mizzou in the season finale. There was no three-point arc then. Bud was throwing up heat checks from all over the court, and making them. I have been bleeding K.U. blue ever since.

Title Number Two came twenty years ago when Danny Manning carried a dark-horse Kansas team to an upset over favored Oklahoma in the championship game. The first half of that game was played with as much energy as you will ever see in a basketball game, with each team scoring fifty. This year's team brought similar intensity to the Final Four, nearly running a very good North Carolina team out of the gym in the first fifteen minutes of their semifinal. They did it with hyper-alert help defense and breakneck transition. That same ferocity eventually wore down Memphis in the final. The Tigers had no legs at the end and could not hit their shots.

"That's a T-E-A-M, if I've ever seen one," writes the Boston Globe's venerable hoops guru Bob Ryan. Indeed, teamwork has been a trademark at Kansas since forever. This year's edition can be viewed as the Clydesdales of the tournament, pulled together by pedigree, practice, and purpose, perfectly harnessed. Such is the esprit de corps at Kansas that very few players leave early--Paul Pierce, Drew Gooden, and Julian Wright (who would have been a junior on this year's team) are the only ones that come to mind. The Jayhawks seldom want for senior leadership.

So what happens now? First of all, expect a lot of newborns named Mario in the Sunflower State soon after New Year's Day 2009. As for the basketball program, rumors are flying that Coach Bill Self will move on to his alma mater, Oklahoma State, and that Brandon Rush and Darrell Arthur will follow Wright into the pros. We'll see. Sad it would be if rock-solid Allen Fieldhouse were to be retrofitted with a revolving door.

Privatizing Gains, Socializing Losses

Will homebuilders get a mulligan? That's golf-speak for a do-over. When a golfer hits a truly horrendous shot, his buddies (once they get done laughing) might graciously ignore his shot, pretend it never happened. He gets to hit again from the same spot without a penalty--a mulligan.

The U.S. Senate wants to grant a similar reprieve to two industries that conspired to create a bubble in housing. Builders and lenders made fat profits for several years by putting up houses faster than Americans could occupy them. It got to the point where houses were bought not for mere shelter, but for the prospect of resale at a higher price. Why bother moving in when (a) you already had a decent home and (b) you were just going to flip the property anyway? Easy money created by the Federal Reserve led to an artificial demand and, eventually, an over-supply of unaffordable homes.

It was a train wreck in slow motion. We all knew the pace of building was unsustainable, but the lenders kept lending and the builders kept building. The activity served no useful social purpose, but dished up immediate profits. Company executives got mega-salaries and stock options. Investors saw rising share prices, and Uncle Sam collected rising corporate tax payments. Short term, steroids are awesome.

Now come the consequences. Homebuilders and mortgage lenders are reeling from a falloff in demand and the failure of borrowers to keep up with their payments. For these companies, the bad news that they are now losing money outweighs the good news that, hey, at least they don't have to pay income taxes anymore. But wait, Congress has a solution in the Foreclosure Prevention Act of 2008: how about if we refund to these companies the taxes that they paid when times were good!

That's right, we will expand the so-called "tax loss carryover," an accounting tool by which companies are allowed to deduct net operating losses retroactively against earlier profits. Ordinarily companies can reach back two years to erase earlier profits (hence, earlier tax liabilities), but the Senate bill hashed out on Wednesday would double that to four years. Lobbyists had failed to get the new provision included in the economic stimulus bill passed two months ago. But lobbyists are nothing if not persistent. Only once before, in the wake of 9/11, has Congress extended the carryover timeframe.

This is yet another case of taxpayers bailing out risk-takers, this time to the tune of $6 billion. In the words of Minyanville's Fil Zucchi, "if ever there was an action that should undermine investors' confidence in the U.S. market system and reinforce the view that the government exists to grease the palms of those who pay their way into influencing the government, this is it."

What's In Your (Candidate's) Wallet?

"Clean" money has its own agenda. If my candidacy accomplishes nothing else, it may at least disabuse you of the notion that public funding of political campaigns somehow purifies the process. No matter where it comes from, money is money. By itself it is neither "clean" nor "dirty." It is a means toward an end, a means by which people motivate and influence each other. More money means more influence.

The State of Maine spends about $6 million each election cycle in public financing of campaigns for the Legislature. Of the 305 House candidates who have registered thus far in 2008, 258 are seeking public financing (about 85%). The intent of the Maine Clean Elections Act is to level the playing field by limiting campaign expenditures and equalizing contributions, thereby empowering ordinary folks who might not otherwise have the resources to run.

If every candidate were required to run "clean," then the field would indeed be level. But such a requirement would be an unlawful abridgment of a candidate's First Amendment rights. So privately financed campaigns are still part of the political landscape, and any spending limits pertaining to these are strictly voluntary. It is still possible for a candidate to outspend his opponent and for "outside" money to impact a race.

But even a "clean" system can be gamed, and Maine's Democrats have shown that they are quite good at it. Of the 154 Democrats seeking House seats, 146 want house money (95%), compared to 75% of Republicans, 70% of Green-Independents, and 67% of Unenrolled candidates. If you are a Democrat thinking about running, you will be directed by party leaders to the public trough.

Let's look at our local House District as an example. LD 93 serves the towns of Mexico, Dixfield, Peru, Canton, and Carthage. The seat became vacant last August, prompting a special election. Democrats and Republicans had one month to hold their caucuses and nominate their respective candidates for the November election. The Democrats picked a first-timer named Sheryl Briggs and within 48 hours had her seed money of $500 taken care of: $100 from Speaker of the House Glenn Cummings (of Portland), $100 from Rumford Rep. John Patrick, $50 from House Majority Whip Sean Faircloth (of Bangor), $50 from County Sheriff Wayne Gallant (Rumford), $40 from Roy Gedat (Norway), and the other $160 from contributors residing in the district.

Think of it. Two-thirds of Sheryl's seed money came from outside the district. To whom does she owe her loyalty? How about to career politicians with future plans. Cummings is posturing for a gubernatorial run, Faircloth would like to be the next Attorney General, and Patrick is running for County Commissioner. These guys are players. When they tell Sheryl to jump, she will ask "how high," not "what for?"

Counting her seed money, Sheryl spent almost $8,000 on a ten-week campaign. She was authorized by the Ethics Commission to spend $7,495.18 of public funds; of that, she spent $7,493.99 and returned $1.19 to the MCEA kitty. This year she will do it all over again. I expect to spend much less, and none of it will be taxpayers' money.

Tug of War Over Lehman's Stock

Some see a white flag, others a red cape. Late yesterday afternoon Lehman Brothers announced a stock offering to raise up to $4 billion. This is usually considered a sign of trouble for a seasoned company such as Lehman, which has repeatedly denied over the past several months the need for fresh capital. While yesterday's move was not telegraphed by management, it was anticipated by speculators.

Check out the chart above, which tracks Lehman's stock price over the past year. See that downward spike about two weeks ago? Option traders were frothing at the company's prospects, halving and then doubling the share price in a 48-hour period. Newbies tempted to swim with the sharks got a serious case of whiplash.

Strangely, Lehman reiterated its mantra of "no problem" even as it announced its offering. Chief Financial Officer Erin Callan insisted that the capital was not needed to offset the impacts of write-downs or losses. Rather, the deal was meant to end questions about the bank's balance sheet--to restore investor confidence, as it were. "We have not changed our view on our real need for capital, but we have changed our view from a perception perspective," Callan told Reuters. In effect, the firm is double-daring speculators to press their bets.

Lehman is issuing convertible preferred stock that will pay quarterly dividends at a rate of 7.25% per annum, a cost of capital more favorable than that obtained by either Citigroup (11%) or Merrill Lynch (9%) in earlier deals. Holders will have the option of swapping the preferred for common stock at an initial conversion price of just under $50 a share. Should Lehman's stock recover sufficiently to trigger conversions, shareholder equity will be diluted by as much as 20%. For that reason, the common stock should be selling lower today. However, LEH is opening up 10% as I post this, indicating that short-sellers may be covering.

Lehman may be safe for now, but see how times have changed. Six months ago Lehman was offering to buy back stock at $65 a share. Clearly management has revised its idea of what the company is really worth. For preferred shareholders, the risk is minimal. They get paid to wait and are first in line if the company is forced to liquidate. And the short-sellers will be back. Says one: "How can we have confidence in a firm that just diluted shareholders who have been just obliterated in the last year?"