Lieutenant Island Views : Commentary About Finance, Politics and Baseball

Spitzer for Treasury Secretary? Are You Joking Katrina?

March 25, 2009
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Recently Katrina Vanden Heuvel, Editor of the the Nation, has been suggesting that Treasury Secretary Tim Geithner should be replaced by Elliot Spitzer. We know that she and her husband have been his friend since their days at Princeton but her suggestion is an embarrassment. Perhaps she is letting friendship cloud her judgment. Aside from the fact that Spitzer pleaded no contest to several of the crimes (Mann Act violations, illegal currency wire transfers, aiding and abetting prostitution etc.) that he often used to coerce his targets when he was New York Attorney General, he may have been the root cause of AIG’s demise. His actions, which forced out AIG’s long time CEO, Hank Greenberg, led to new management which took the company in the wrong direction. Greenberg’s successors had a difficult time maintaining his earnings record. They went for what they saw as easy money in credit default swaps and other esoteric insurance products. This was a large and real deviation from the way Greenberg ran the company. We all know the rest of the story.

The laws of unintended consequences really can be punishing when you act in a vindictive manner rather than as a result of a deliberate strategy.

As a secondary question, does Katrina expect an easy confirmation for her friend Elliot? Larry Summers was kept away from the Senate confirmation process because he spoke out about the gap between women and men in scientific fields of study. Imagine if he had broken multiple laws to hire $5,000 per hour hookers! At least Elliot paid his taxes.

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If Goldman Returns its TARP Funds, Will Others Follow?

March 24, 2009
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Given that Wall Street functions largely as a “Land of Lemmings” where one idea, regardless how good or bad, is usually criticised and then copied if it is seen as potentially beneficial to either personal pecuniary interests or corporate revenue generation. Right now, many on Wall Street believe that repaying TARP money certainly addresses the first point and could serve the second (or give a competitor a leg up if not followed). The article attached goes into detail on many of the implications of possible paybacks. One that seems to be missing is details on how many of the banks can raise the capital quickly. One needs only look to a bank’s loan book for the answer. To the extent that a bank can find a way not to “roll” a large revolver, use a technical covenant default to reduce exposure, not reapply toxic loan sales to new credits or generally accellerate a cutback in corporate lending (because that’s where the large loans are and Congress is not focusing on corporate liquidity), it can free up capital for repaying the government. Unfortunately, the casualty of this is a major reduction in corporate credit just when we need to help corporations make it through the downturn with available loan capital. In no small way is this part of the “unintended consequences” we addressed in our earlier piece on Congress’ compensation legislation. Even if the bill does not become law, the simple passage by the House has put the fear of God into banks. The really bad news is that the Lemmings of Wall Street may march their corporate clients into the sea to rid themselves of the yoke of TARP!

http://www.nytimes.com/2009/03/24/business/24sorkin.html?_r=1&scp=2&sq=if%20goldman%20returns%20aid,%20will%20others?&st=Search


From Whence Cometh Our Financial Mess?

March 22, 2009
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Beneficiaries of a Jesuit education learn early that logic and careful analysis are predicates to better judgments and conclusions. Jesuit pedagogues would also suggest that careful analysis and judgments are also necessary for appropriate corrective actions in addressing major problems. When it comes to our current national and global financial mess, blaming the usual suspects (George Bush, greedy CEOs, Wall Street, high executive compensation et al) or pandering to mass frustration may be cathartic but can never be confused with analysis or be a basis for corrective action.

In the coming days, we hope to address the nature of many of the issues that we believe contributed to our current economic troubles. We will endeavor to do so in a clear, simple and concise manner. Please do not be offended if we do not cover each issue in the first or second post. We believe that the issues fed on one another and are best examined seriatim rather than in one fell swoop.

What then were some of the most significant issues?

• The Growth of Leverage, Particularly in the Last Five Years
• Credit Default Insurance
• Mark to Market Rules
• CDOs (Collateralized Debt Obligations) and CLOs (Collateralized Loan Obligations)
• Failure to Guarantee Fannie and Freddie Preferred Shares
• Letting Lehman Fail
• Delayed and Insufficient Action on AIG
• Treasury “Crying Fire in a Burning Building” to Pass TARP
• TARP Mismanagement

From these issues flowed incremental and very significant problems and issues including:

• Bank Failures and Capital Inadequacy in the Financial Sector
• AIG Insolvency
• Sub-prime Surge and Failings
• Mortgage Foreclosures
• Stock Market Meltdown
• Post-TARP AIG Compensation Levels

In the coming days we will deal with each issue and seek to expand our discussion by building on each issue and reflecting on subsequent problems that flowed from them. Stay tuned!!

(Note: While the author has long admired the discipline, training and learned nature of the Jesuit Order, he is neither a Roman Catholic nor the beneficiary of a Jesuit education.)


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About author

Mr Thaler is currently the Managing Partner of Lieutenant Island Partners, an organization providing corporate finance advice and general consulting to corporations and not-for-profit organizations. Mr Thaler retired as Vice Chairman of Deutsche Bank Securities in early 2008. His background includes experience as an investment banker, senior manager, business builder, college professor, not for profit board chair and trustee. In his thirty plus years as an investment banker for Deutsche Bank and Lehman Brothers, he has been involved in numerous significant debt and equity financings, mergers & acquisitions, leverage buyouts, restructurings and cross border transactions. Of particular note, Mr Thaler has been one of the most active participants and strategic advisors to the homebuilding industry. In a period of significant turmoil and losses, he was one of the few active bankers to the industry who did not have either a loss or credit write down. He is currently advising several public builders on strategic matters and is an adjunct professor of finance at Morehouse College in Atlanta, Georgia. Though he lives in New York, he is a life long Red Sox fan! www.LieutenantIslandPartners.com

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