The New Welfare Queens

I keep ticking off the industries Obama and his cohorts in Congress want to control, and it makes me wonder where it's safe to invest. An arbitrary government action can cut the value of an investment in half in a matter of minutes, and such actions are happening with increasing frequency. Witness the affect of recent government actions on the stocks of health care, energy, financial, and auto companies.

Will the government crush the profitability of health care companies or put the insurance companies out of business altogether? Likely to the former, and very possibly to the latter. Will they bankrupt utilities that generate most of their power with coal? Quite possibly. In fact, Obama promised to do so during a campaign interview. Which banks and financial services companies will they bail out and which will they kill? Who knows? So how does one invest in this environment?

Congress recently voted for a measure to impose a 90% income tax on AIG executives to recapture their bonuses. Many cheered. I did not. Not because I am a fan of AIG. I am not. But this is a very dangerous and disturbing precedent. If the government can impose a 90% tax on an arbitrary set of individuals, it can and given time, will, be used as a weapon against many other disliked individuals, companies, or industries.

This action was quickly followed by murmurs that the government might impose pay caps on people throughout the financial industry. If that happens, let's guess where the U.S. financial industry ends up. In the toilet? Yes, but that wasn't my actual answer. Hint: it will not be on Wall Street, or any other street in the U.S. That may suit many people just fine given the amount of anger towards the culpable individuals in the financial industry, but the real world effect of this outcome would not be positive for anyone in the U.S. But that is where we may be headed.

Admittedly, parts of the economy are a mess. Venerable financial companies have failed due in large part to their own mismanagement of risk. U.S. auto companies are a disaster. But I would argue that this calls for a rapid bankruptcy process for the insolvent companies, followed quickly by reemploying the good assets in new corporate entities, not for propping them up like so many marionettes on government controlled strings, and turned into today's version of Ronald Reagan's “welfare queens”. Meet the welfare queens of 2009 -- AIG, Fannie Mae, and Freddie Mac.

Over the weekend, Obama fired the CEO of General Motors, Rick Wagoner. Let that sink in for a moment. The President of the United States fired the CEO of a private U.S. based company! Well, you might say, GM is a mess and Rick Wagoner is obviously to blame. Perhaps. But I do find it curious that the GM board has been very supportive of Mr. Wagoner. I would imagine that they must know something about what's going on there, and since when has the government been able to fire private individuals from their place of employment. Answer: since never. This is unprecedented.

In Gerald Seib's excellent commentary in today's WSJ, he talks about the political considerations of the government's actions regarding the auto companies. He notes that the government cannot be seen as becoming too deeply involved in running private companies, while they must also be seen as protecting taxpayer dollars. However, states Mr. Seib, 'in his announcement, Obama said his aides will be “working closely” with GM to devise a business plan, one involving making many more environmentally friendly cars.”' Holy cow! Did you read that? Obama says he doesn't want to be too involved in running a private business. Should we believe this statement? I think not. With barely the chance to exhale, he tells us that his aides will be working with GM to devise a plan to make more environmentally friendly cars.
The message? The government will not run GM on a day-to-day basis, but they want to arrogantly impose the overall business strategy on GM to further their environmental aims. Who cares if GM makes money? We can just give it more billions, if necessary. We figured out a great new source of money to hand out. It's called a printing press!

So who's left that's not under the government's increasingly large thumb? Not the agriculture industry. They've been a welfare queen for years, under both Republican and Democrat administrations. Not the real estate industry. They've been a welfare queen for years, too, with incredibly generous tax breaks for homeowners (that in part helped caused this catastrophe we now find ourselves in). To add whipped cream on top of the pie, the government has now instituted programs to give homeowners money to help with their mortgage payments, and is bankrupting the country to try to drive mortgage rates down low enough to avoid the inevitable further drop in real estate prices.

I find its always good to save the best for last. The biggest industry of all, unionized government workers at all levels of government keeps on growing and growing and growing – America's growth industry in 2009 and beyond. And we keep on paying and paying and paying and borrowing and borrowing and borrowing to keep it all propped up.

So where can we invest without excessive government interference and uncertainty? Several areas come to mind. Technology has been and probably will continue to be relatively untouched. U.S. manufacturing companies who support the global infrastructure build out, such as Caterpiller, Deere, and many others are probably safe from interference. Retailers are probably safe, as well. Of course, this is not necessarily an endorsement to invest in these companies at the current time for other reasons, but one should be able to invest in them on business fundamentals rather than trying to predict unpredictable government fiat.

I think I need a shower...or maybe just a government job.

A trillion here, a trillion there...

Can someone please send our Treasury Secretary, Timothy Geithner, away for the weekend? Every weekend he spends in Washington costs us a bundle of money. There are 300 million people in the U.S. with about 100 million households. Every time Tim Geithner opens his mouth to announce another trillion dollar giveaway, the average household is $10,000 more in the hole, and the average taxpayer a lot worse off than that.

As far as I can tell, the latest one, the March 23, 2009, Public-Private Investment Program, looks to me to be the biggest giveaway in history...again. Read the treasury department's fact sheet. As I understand it, the government (that's you) will lend money to specially qualified investors (i.e. their friends) to purchase "toxic" assets that banks want to unload. Here's the good part -- for these special investors. They only need to put up $1 of capital at risk for every $6 they borrow to buy the "toxic" assets.

Where does the partnership part come in, you might ask? Well, that's the funny part. These special investors will borrow money to buy the toxic paper from the public markets, but the government will guarantee these loans, secured by the possibly worthless paper. Should the special investors lose money on these assets, the government (again, that's you) will pay off the loans. Should they make money on these assets -- hey, great news! They get to keep it!

In the interest of full disclosure, I will point out that the government will also buy 1 out of every $8 in assets with the possibility of making money, too, should these assets turn out to be worth something in the future. But of course, the government will also bear the full exposure to losses on this paper.

Here are two related data points to back up my contention that this is a great giveaway deal. I read somewhere on Monday morning (Wall St. Journal, I think) that The Blackstone Group (BX) (among other named companies) would be potential investors. After reading that, I decided to watch BX stock price -- up 18% end of day Tuesday (and up further after hours). I also happened to catch a TV interview with BX head of fixed income investments (he manages $400B). The guy was absolutely giddy over the prospects, practically salivating right there on TV! Yes, he will likely make a lot of money on this deal -- and if he doesn't, don't worry, you'll pick up 6/7ths of the tab.

On another humorous note, I watched an interview with James Galbraith, Prof at U Texas (son of famed John Kenneth Galbraith). Being the brilliant fellow I expect he is, he brought up a brilliant idea. If I got this right (and I'm pretty certain I did) he expects the banks that own the toxic assets to put the worst of them up for sale and if nobody else buys them, they would buy them through an intermediary so we won't realize what they did. Should the toxic assets later prove worthless, as expected, the poor overburdened banks will no longer be responsible for them. They will now belong to you. Congratulations! So the banks will get to eliminate the assets from their balance sheets in terms of the possible losses they entail, but will actually get to keep the profits should they become profitable. What a deal!

Carl Rove was supposed to be the evil genius, but he's now old news. The new title has to go to Tim Geithner. Knowing full well that he couldn't just spend a trillion dollars buying the toxic assets from the banks -- certainly not less than a week after his role in the AIG bonus flap came out (and not two months after we discovered that he conveniently forgot to pay his taxes)...No, Mr. Geithner couldn't just spend another trillion dollars of our money out in the open. So instead he cooked up a byzantine plan to spend our money in the shadows. The best part is how he managed to hide the key facts of the plan in his half page editorial in Monday's WSJ. In the 1/8th of the article about this plan that he actually spent talking about the plan, not once did he tell us about how the taxpayer is actually on the hook for almost all the potential losses. So much for openness and transparency.

Mr. Geithner, you've been working really, really hard. Why not take a little vacation...it's on us.