Don’t cancel your vacation to Southwest Florida, if you have one planned!

Oil from the BP spill has not yet reached this beautiful region of Florida and, ideally, never will. This past week, while there on a short visit, we saw a mother manatee with her calf, dolphins, osprey, a bald eagle, tarpon, mullet, otters, egrets, ibis, herons, frigate birds, snapper, catfish and sharks.

This region of the country, which depends heavily on tourism, has already suffered a one-two punch from Hurricane Charley in 2004 and the ongoing recession.  Its economy is struggling.  Many people are out of work or barely scraping by on seriously reduced incomes.  Don’t add to their troubles by canceling a trip to Southwest Florida now!

Early morning from Useppa island, looking back at Pine Island.

This past Saturday, I attended the monthly meeting of the Long Island Breakfast Club, which describes itself as an organization providing advocacy, support, career and employment counseling, referrals with good old-fashioned laughter to prepare mature individuals for productive employment.  I went to recruit interviewees for my Over 50 and Out of Work project.

Kenny Moore, a former monk and now a business consultant, spoke at the meeting on “Keeping Your Sanity, Sense of Humor and Soul — While Looking for a Job.”  He was a terrific.  An engaging and intelligent speaker who didn’t offer the customary advice to older job seekers.

Moore is funny, pragmatic and insightful.  Check him out — he has a free online webinar coming up on March 23.

All my friends know I don’t follow the financial markets closely, nor do I read all of the financial papers, magazines and blogs about finance and the economy on a regular basis.

Over the past few days, though, I’ve read three articles carefully in quick succession — Vanity Fair’s Wall Street’s Near-Death Experience by Andrew Ross Sorkin and two New York Times stories:  Bailout Helps Fuel a New Era of Wall Street Wealth by Graham Rowley and Volcker Fails to Sell a Bank Strategy by Louis Uchitelle.

Sorkin’s story is an excerpt from his soon-to-be-published book, Too Big to Fail. The article is a depressing saga of unpreparedness and hasty decision-making by both the business tycoons who lead the country’s financial behemoths and by the governmental leaders who shape the country’s economic policy.

The excerpt ends with the rescue of Morgan Stanley by the Japanese, who infused $9 billion into the sinking firm, to the great relief of Jamie Dimon, CEO of JPMorgan.  Dimon was being aggressively pressured by the government to buy Morgan Stanley because the Chinese had backed out of making a larger investment in the firm (Mitsubishi already owned a 10 percent stake in Morgan Stanley) during the crisis. While this drama was unfolding, Lloyd Blankfein, CEO of Goldman Sachs, exhorted John Mack, Morgan Stanley’s chairman, to hang on, because if Morgan Stanley failed, Goldman’s collapse was only 30 seconds behind.

Doesn’t just even this brief summary make the whole “rescue” of Morgan Stanley seem hectic, desperate and crazy?  We’re relying on the Chinese and Japanese to safeguard the soundness of our financial institutions and our economic security?

Almost immediately after finishing the Vanity Fair article, I read the NYT story about the bailout.  The gist of this article is that Goldman Sachs is quickly returning to big earnings and bonuses because it’s using the bailout money and its ability to borrow cheaply from the Federal Reserve (now that it has been transformed into a bank holding company) to take big trading risks!  in fact, even bigger trading risks that its competitors who seem to have been scared into some sense of responsibility and decorum by their recent near-death experiences.

Whoa!  I left banking behind 22 years ago, but this outcome doesn’t seem right to me.

Nor apparently to Paul Volcker, an infinitely more informed, experienced and knowledgeable financial expert than I am.  He is recommending that the government reinstate some form of the Glass-Steagall Act that kept commercial and investment banks separate.  Glass-Steagall allowed only commercial banks to borrow money from the government at lower rates, but then they were required to use the money to fund loans that, hopefully, fueled the economy.  Investment banks borrowed and traded at market rates and weren’t allowed to use cheaper government money to fund their trading operations.

Maybe I’m missing something, but sounds like sensible advice, doesn’t it?

Yesterday, the last group of New Jersey Army National Guard soldiers who were deployed late last summer returned to New Jersey.  They landed at McGuire Air Force Base and will spend the next week at Fort Dix for demobilization briefings.

Two of the three soldiers whom I have been following came home yesterday  — Eli Viera and David Pinero of the 250th Brigade Support Battalion. ( Jeff Mullins, who was detached from the battalion and reassigned in Iraq, returned home earlier last week.)

The soldiers flew to the United States from Kuwait via Germany on a contracted commercial airline, Northwest.

The families were not allowed to greet their returning soldiers at air field, but waited for them at Fort Dix.  The first few soldiers off the plane — home at last.

Top brass from the New Jersey National Guard greeted and thanked all the soldiers when they stepped back onto American soil.

Most of the deplaning soldiers climbed down the steps soberly.  They seemed tired and subdued at this point in their journey.

Not the fellow below, though, who lifted his arms and cheered, as he clambered down.

Eli Viera (in center), coming home

and shaking hands back on American soil.

And David Pinero (second from left) coming home

and making his way down the long line of greeters.

Buses and trucks transported the soldiers and their gear to Fort Dix, where they turned in their weapons and listened to a short briefing about base demobilization protocol.

Many families had shown up hours earlier, and they waited for the moment of reunion anxiously.

Clara and Ethan Viera arrived, accompanied by Eli’s mother and nephew.

The soldiers marched in formation to the meeting place.

Kiera waited with a sign, en route.

When the soldiers reached the meeting point, they stood, waiting to be dismissed, tilted toward their tense and expectant families.

When the command was given, the ranks broke and both lines rushed forward into embraces and kisses.

Kiera and David

Kiera and David with their friend

Eli and Clara

Eli, Clara and Ethan

Clara reaches out to Major Stephen McKenzie, commander of the 250th Brigade Support Battalion.  Both he and Eli received Bronze Stars in Iraq, just before they returned to the United States.

Eli and Ethan, getting ready to readjust to life together again at home

Today, Dwight and I attended the New Yorker’s daylong “geekathon” (David Remnick’s description of the summit) held at NYU.

Malcolm Gladwell kicked it off with a speech about the financial crisis.  Said most people were ascribing the problems to 1) incompetence or 2) lack of adequate regulation.  He blames it on overconfidence, a characteristic, he said, of experts, or smart people.  He compared the current economic slump to the crushing military defeat that the British suffered at Gallipoli during WWI, which he also attributed to overconfidence.

Great, entertaining talk, but not convincing.  He described his own remarks as the amuse-bouche of the day, which was apt.

More financial types commented on the mess for most of the morning.   My resident expert (Dwight) wasn’t impressed with their analyses.  I was interested for a while, but then eager to move on to other matters.

Hooray!  Geoffrey Canada talked about the Harlem Children’s Zone (HCZ).  Fantastic!

[Aside:  I wanted to do my Columbia's master's project on the Baby College at the HCZ, but couldn't get access.  Buttonholed Canada today and tried again (even with no guaranteed outlet for a freelance piece).  Made some progress.]

Canada is charismatic, persuasive, intelligent.  He is anti teachers unions, pro merit pay for teachers, pro longer school day and pro longer school year, especially for his HCZ kids.

Very interesting panel composed of Jeffrey Sachs, director of Earth Institute at Columbia University, and Esther Duflo, a professor of poverty and alleviation and development economics at MIT.   I’ve never heard Sachs speak in person before.  He seemed discouraged, maybe even bitter, — 40 years of fighting poverty and trying to protect the environment haven’t produced the commitment to these problems that he expected from the American public.  Duflo — loved her and wished my girls could have heard her this morning!  She spoke (with a French accent) very factually, very unemotionally, about her economic research on poverty in India.  She didn’t try to jazz up her compelling work at all.   She gave economics, the dismal science, a good name today.

Another panel on the environment (bleak outlook, as always) after lunch, then a health care panel followed.

Howard Dean, Elizabeth Edwards and Neera Tanden (advisor to Obama).  All three foresee progress toward a public healthcare insurance option during the Obama administration — movement toward universal healthcare coverage, although they differed on details.  Edwards said that currently her cancer is stable, but she looked (understandably) tired, I thought.  Lots of media showed up to film her; she will be on Oprah tomorrow promoting her new book, Resilience.

The late afternoon was devoted to foreign policy: defense and diplomacy.

Thomas Pickering, former ambassador to the UN and  many countries:  Worried about Pakistan, Afghanistan, Iraq. Working on a “second track” solution to the Israel/Palestine morass. (Speaks many languages, including Swahili*)

David Kilcullen, served in the Australian army and was a military advisor to General David Petraeus.  Blunt.  Analytical.  I thought his overall theme boiled down to that the U.S. should figure out how to keep the local population safe in the dangerous countries of Afghanistan and Pakistan.  In Pakistan — work with the police, not the army.  In Afghanistan, stay out of the remote regions and help restore order and security to settled areas.   He said that most Afghanis (65%) still like Americans, and we want to keep them feeling good about us.  Talked about increasing violence in Iraq.

Vali R. Nasr, professor of international politics at Fletcher School of Law and Diplomacy at Tufts.   Spoke about the upcoming election in Iran and how its outcome will affect Iran and the region for years to come.  Informative, persuasive.

Last, but not least, Seymour Hersh was interviewed by David Remnick.  Highly ineresting and entertaining.  To my surprise, Remnick abruptly brought this interview to an end, 20 minutes earlier than the endtime listed in the program.  Remnick said he did not want Hersh, who was was rambling on and jumping from one tantalizing topic to another, to reveal any of the stories he is working on for the magazine.  Hersh, like Pickering and Kilcullen, is very concerned about Pakistan.  Said Pakistan is building more weapons than any other country in the world and that we don’t trust Pakistan and that Pakistan doesn’t trust the U.S. …

All-in-all, a good, meaty day (although I chose the vegetarian option for lunch, naturally)!

*Lala salama!  (Sleep well, in Swahili)

In the late afternoon, we set out with Jimmy again to explore the Serengeti:

Hyenas, lying about near their den.

Watching animals in Africa, sometimes I had the odd feeling that life was imitating art, because the human puppet animals in Disney’s Lion King so accurately mimic the habits and gaits of hyenas, giraffes, lions, wildebeest and elephants.

Cape buffaloes mysteriously on the move, as we returned to camp:

and a gorgeous Serengeti nightfall:

Before I turn to the the following day, a note about laundry, especially for my female readers.  At this camp, we had been told (and it was written in the camp info package) that the staff might not launder ladies’ underwear.  Well, sometimes they did and sometimes they didn’t.  Even if I separated the laundry and kept underwear out of the basket, the staff sometimes picked it up, took it away and washed it.  Other times, they didn’t.  However, you pay a price for getting your underwear washed –  your bras.  They disappear in Africa.  Both socks in a pair come back, but bras do not — be forewarned.

Ladies’ lingerie became an even bigger issue at our next destination — Zanzibar, a mostly Muslim country.

On December 29, our last day on safari, we drove out onto the Serengeti to locate the great migratory herds.  Zebra and wildebeest below, wending their way across the vast plains — a curving river of animals, flowing across the grass.

Drinking at a waterhole, nervous and alert, keeping an eye out for predators:

Continuing the Lion King theme, we drove on to what looked like Pride Rock.  Two big male lions, probably brothers, rested on top.  Up until now, we hadn’t been too wowed by lions — they are so lazy during the day in real life!  But these magnificent beasts were impressive.

Look at this big male that turned to look gaze directly at us, sleepily curious, but wholly unperturbed.

A hyena prowled along next to a family of zebra, sized up the foal’s vulnerability, gave up and slouched on.

We had now reached the central area of the Serengeti, where there is more varied geography, but more safari traffic, too.   A beautiful leopard, but jeeps in the background, unfortunately.

An amazing African panorama — acacia in the foreground, a herd of elephants in the background.

Hippos.

The sun was beating down on the Serengeti, and the day grew even hotter, drier, dustier, as we turned back toward camp.  We found a pair of lions, right next to the road, hanging around to drink out of its drainage ditch — a thin trickle of muddy water.  Jimmy said they were a mating pair.  The female wore a radio collar.

The male was keeping a close eye on the female’s every move.

He followed her across the road and tried to approach her.

But she turned around and snarled.  They both settled down and panted in the heat, under the brilliant blue sky.

“Maybe she’s not ready,”  Jimmy suggested.

Or maybe she just didn’t like him!  He did not have the dignified, royal look one expects of lions — he was a little dopey looking, I think…  Here’ s a closeup …

We spent the rest of the day back in camp, enjoying its shade and preparing to depart the next morning.

Here’s part of the camp’s energy supply:

All the wonderful meals we ate in this camp were cooked by Chef Paul, shown standing in front of his tent, below.  For lunch and dinner every day, he baked delicious fresh bread in the oven visible on the left side of the photo.

Tomorrow –  on to Zanzibar, the beach and the Internet again — hallelujah!

We had a heated debate over dinner on the topic of Obama’s cap of $500,000 on executive pay for companies that receive federal bailout money. I was FOR, another household member was strongly AGAINST.

Here’s a Reuters story on the subject: Obama to Set Executive Pay Limits

ANY VOTES OR COMMENTS FROM MY READERS?

Deep in Debt, and Now Deep in Worry

Take a look at this column by Ben Stein from yesterday’s Times.  There are two reasons I like to read Ben Stein — his sensible take on many (not all) topics and the fact that his father, the noted economist Herbert Stein, went to Williams College.

Ben Stein frequently writes about the necessity of savings.  He warns that savings (which have been seriously out of fashion, as we all know) are necessary to cushion you from unavoidable economic downturns. He also urges us all to “Be prudent” — advice he heard from his father.  Old-fashioned virtues, very much in keeping with one of the themes in Obama’s inaugural speech.

So I found Stein’s personal disclosure in yesterday’s column quite unexpected.  His 21-year-old son just married a 20-year-old woman, and Stein’s supporting them.

As a parent of five children, I know that the virtue of consistency is over-rated.  It’s impossible to treat five  young people, who are at different levels of emotional, physical and intellectual development, alike.  A fact they decry.

But the inconsistency between what I know of Stein from reading his words and now getting a glimpse into his actions seems vast and imprudent.  I am surprised.

Any thoughts, dear readers?

What’s happening today?

As I write, the global financial markets are caught in a downward vortex.  This cycle was triggered initially by the rise in defaults of subprime mortgages in the United States (See prior post:  “The Bailout”), but has  spread to stocks, corporate debt, leveraged loans, etc. and become global in scope.

The linkage has been an over-leveraged global financial system.

Most global banks and financial institutions borrowed too much money to make loans of all types - mortgages, credit cards, student loans, leveraged buyout loans, loans to emerging market countries and companies, you name it.

Not only have financial institutions borrowed too much, many investments banks borrowed $30 to $40 for each dollar of equity or investor capital on their balance sheets, but also much of this borrowing was very short term and due to be repaid in less than a year.

When investors became alarmed at the risks that many banks were running, it became difficult/impossible to roll over maturing debt and banks had to sell assets (loans) to raise cash.  Many banks took all of these actions more or less simultaneously.  Consequently, the value of the assets for sale dropped dramatically and the banks began to take large losses, which worsened investor perception of risk … and so on.

Globally, governments have stepped in to break this cycle before the entire financial system collapsed and we reverted to the Stone Age with a cash or barter economy.  Governments around the world have bought stock in their own large banks to boost public confidence in the banks’ viability and to allow the banks to pare down debt without selling more of their assets (loans).  Governments have also guaranteed bank borrowings, so banks can roll over their debts.  Finally, governments have forced weaker banks to merge with stronger ones.

It is a reasonable bet that this approach has staved off systemic collapse, although the reality remains that too much debt has been created and that a significant amount of it is not going to be repaid in full.  As consumers and companies pull back on spending to increase saving or pay down debt, Main Street, the real economy, will suffer as aggregate demand for goods and services drops.  As a result, we are undoubtedly, going to have a severe recession in the developed world and, perhaps, globally.

Did Hedge Funds Do This?

Hedge funds have gotten a lot of attention, but have been peripheral to the crisis.  You’ll notice that the major financial institutions that have gotten into trouble are banks, among the most highly regulated institutions on the planet.

Regulators and bank managements were asleep at the switch and failed to notice how the world and risk were changing.  (This narcolepsy isn’t political or ideological and goes back at least 15 years.)

Hedge funds do invest with borrowed money, and they have been selling securities to pay down debt, but so have corporate CEOs who borrowed against their holdings of company stock and big retirement funds, like Calpers, which is selling stock to meet future commitments to invest in leveraged buyout funds.

So far, unlike 1998, no single hedge fund has become a radioactive systemic risk.  The financial hall of shame has dozens of new members, but they are mostly commercial and investment banks, AIG (the world’s largest insurance company) and the enablers of these financial institutions  — the credit rating agencies (Moody’s and Standard & Poor’s), and the regulators.

What Lies Ahead for Hedge Funds?

Like all other sectors of the financial world, the hedge fund industry is going to be transformed.  It will shrink dramatically and borrow less money on a longer-term basis.

But this is an adjustment that all of us will have to make as the world recalibrates to a world of more costly and less available credit.

The transition to an economy that saves more and invests more is painful, but, if supported by thoughtful and creative government policy, can lead us to a better balanced, although more sober economic future … and maybe even to a more competitive America with a higher sustainable long term economic growth path that elevates living standards for everyone.

However, there is a significant risk that government will fight the last war, propping up a rickety and obsolete consumption-driven economy with yet more debt (government debt this time) because our governmental leaders fear that we Americans can’t bear to hear the truth.

I am keeping my fingers crossed.

Dwight Sipprelle can be reached directly at dsipprelle@gmail.com.

In the preceding post, I mentioned that hedge funds can borrow money to increase the size of their bets.  This is called leverage.

Leverage means that if a hedge fund likes stocks, for example, but only has $1 million of investor capital, the fund can borrow money from banks to buy more stocks - sometimes as much as ten times its investor capital.

In this instance, a hedge fund with $1 million of investor capital and $10 million of borrowed money could buy a total of $11 million of stock.

The fund’s Balance Sheet would look like this:

Assets                                                 Debt

$11,000,000 stocks                           $10,000,000 bank loan

                                                       Capital

                                              $1,000,000 investor capital

_______________________                     _______________________________

$11,000,000 total assets                  $11,000,000 debt + investor capital

This structure works wonderfully for the hedge fund if stocks go up in value at a rate higher than the borrowing cost of the bank debt.

To illustrate, let’s assume stocks go up 10 percent over the course of the year, and the cost of bank borrowing is five percent.  In the above example, the hedge fund owns $11 million of stock that goes up 10 percent.  At the end of the year, its stock portfolio is now worth $12.1 million (an increase of 10 percent).  The hedge fund also pays the bank its five percent interest on the borrowed $10 million, or $500,000 of interest expense.

The difference between the increase in the value of the stock portfolio and the interest expense on the bank borrowing is the net investment income of the hedge fund for the year.

The fund’s Income Statement would look like this:

                        $1,100,000 increase in value of stocks
                          (500,000) interest expense on borrowings
                        _______________________________________                                                                                                    ___________________________________________

                         $600,000 net investment return

Since the fund started with $1 million of investor capital, the $600,000 net investment income is the equivalent of a 60 percent return for the year.  Not bad when it works.

Note that the fund returned 60 percent versus the 10 percent return for the stock market.
The hedge fund also keeps 20 percent of the $600,000 for itself and probably raises a lot of new investor capital for the following year because its returns were so high.

However, this much leverage/borrowing is a disaster if stocks go down and can easily wipe the fund out.  Stocks only have to go down more than 4.55 percent to bankrupt the fund.  A decline of 4.55 percent on $11 million of stocks and the $500,000 of interest expense owed to the bank allows the bank to recover its loan plus interest, but completely destroys the investor capital base.  Investors get nothing back, down 100 percent.

Dwight Sipprelle can be reached directly at dsipprelle@gmail.com.