Lending to Friends

Banks are not lending and owners of companies suffer.

Why is this not happening? If you could lend a $1M to an entrepreneur and get back that sum plus a measly 2% interest for your trouble, would you lend that amount of money with even a small risk that you might not get it back?

No, of course not.

So, for the Bank of Canada to keep cutting rates, it does not help capitalism that does need a healthy return for lending risk.

"At the moment, banks can borrow money at 0.25%," says Clemens Kownatzki, "But yet, they lend it out at 5.5% for a 30 year mortgage (rough average this week), if they lend at all. To me this is almost criminal and really calls for a complete elimination of the "middle man" i.e. the bank in between ultimate lender and the consumer."

Clemens suggests, "If a bank made poor decisions and took on too much risk, it should deal with the consequences. Instead of bailing out banks, governments should consider lending to the consumers directly. Eliminate the mortgage broker or mortgage bank altogether and give out a mortgage at 4% directly from lender to consumer, but obviously with reasonable down payments say 20% or higher."

"As the credit situation unfolds," says Jacoline Loewen, author of Money Magnet, "It does seem that governments may be favouring sectors and specific companies who seem to have the highest influence over elected officials. Paulson is such a case. It is whispered that he hated the head of Lehmann and that it was a personal decision to let the firm collapse."

Bum Rap for Gen Y

I have been thinking about this economy and if it will affect the work needs of the so-called most entitled generation ever – Generation Y or the Millennial – those born in the late 70’s onwards?
Many Baby Boomers will say, “Those kids need to learn it’s tough and you don’t get a trophy just for turning up for work. No one’s there to applaud and video their every step.”
What about my generation – the Baby Boomers – will our work needs change? Millennial might say, “They destroyed the environment, let greed override ethics and are maxing out the credit, leaving Millennials to pay the tab.”
With four generations working together, we need to get beyond this tired cycle of thinking your own generation is the best and you have to fix the others because they don’t have clue. How can we understand each generation in order to blend the best of our talents?
I put this question to a Millennial engineer, Michael Keenan, whose employer, Arcelormittal Dofasco Steel, is actively addressing the generational gap. “We look at the pivotal events during the formative years of each generation,” says Michael. “Once you understand each generation’s shared geography, cultural and economic environment and the impact on their needs, it is much easier to work together because you understand why they are different.”
Dofasco is using Maslow’s hierarchy of needs to frame each generation’s work behaviour. Each level of needs must be fully satisfied before you can move up to the next level. First level of needs are the physical - which means having a full stomach, for example, or being comfortable. The next stage is the need for safety – to have a job, a home, a family and shared morality with your neighbours. For Canadian-raised Millenials, the luxury of growing up in the most peaceful and affluent time in Canada means that they can move past the safety level right up to esteem needs for recognition for their work and self motivation. They can even reach self actualization which is the need for self governance and the bigger issues of society like justice or peace. Since up until the economic melt down, Millennial have not been afraid for their jobs, they have enjoyed the space to explore these higher level needs.
Hollywood movies help us to put ourselves in those first twenty years of other generations and the early life experiences which shaped the rest of their lives. When supporting actors from the World War II movie Defiance talked about how miserable it got while filming in the forests of Lithuania, you know this is Generation X and The Millennial speaking about their work. It would be tough to imagine John Wayne complaining about the hardships of his movie location. Yet, on the other hand, these young actors are far more nuanced about the deep meaning of their movie and able to probe and question.
Now imagine if you were in that forest and hungry too, with real soldiers with real guns hunting for you. Even snuggled up next to Daniel Craig, smoothing back your hair and letting you check out his bikini briefs – you may find your needs are not so much about having a house with a white marble kitchen or a job that follows your dreams or even the rules of the Geneva Convention. You are at the bottom of Maslow’s hierarchy and after such a trauma, you would be grateful for any darn house, a solid job and you would faithfully work for the boss without question.
Baby Boomer journalist, Tom Brockaw, called people raised during the war “The Greatest Generation” which may sound like overblown hyperbole to Generation Xers and Millennials as they look at Grandfather slumped in his armchair. But WW II is within the memory of humans living today and I meet many of them still working, running poultry, transportation, construction companies, as well as law and finance firms.
In extraordinary contrast, Canadian born Millennial had no war, no fear for their lives, for their family, for their neighbours turning on them or their country being taken by force. Since parents may be funding their lives, they have the luxury of moving way up Maslow’s hierarchy of needs past the Baby Boomers’ level of social needs, to the esteem set of needs and for some, even to self actualization. It is not a surprise then that Millennial in the workplace have smaller social distance between others and have little fear of authority or of others. It is a great place to be.
Companies can benefit if they understand this level of needs. Boomers, once they get this, tap into Millennia’s energy which is team-based and seeking to be the best.
The Millennials I meet are in the finance industry and are exciting because they do question, can hold a range of views not just black and white, pick up work to do on their own initiative and for their own career development. This Canadian generation thinks globally, questions social issues, are challenging, want a balanced life but are there when the work needs to get done by midnight. I may have a slanted view but I think calling Millenials Most Entitled Generation gives them a bum rap.
In sum, it certainly helps me to understand work behaviour by using Maslow’s hierarchy of needs and to see how each generation’s context was completely different. It helps explain a great deal. I know I will be able to work together with more purpose. What do you think?
[1] http://www.abraham-maslow.com/m_motivation/Hierarchy_of_Needs.asp
[2] http://www.amazon.com/Greatest-Generation-Tom-Brokaw/dp/0375502025

Private Equity Increasingly the Place to Go for Money

At 12:32 PM, George and Laura Bush will take their last helicopter ride away from Capital Hill by helicopter. Already, approximately 2 million people have converged on Washington to witness this historic moment when power gets handed over to Obama. The Americans know how to do their pomp and pageantry well, but when tomorrow comes, Barack Obama will have some heavy lifting to do with two wars and a crisis not seen since the Great Depression.
The banking black hole is far from over. NYU Professor Nouriel Roubini who bet his career describing the reason for a poor outcome for the U.S. housing market and outlined that U.S. financial losses from the credit crisis could reach U$3.6 trillion, half by banks and brokers dealers. Roubini says, "If that's true, it means the U.S. banking system is effectively insolvent because it starts with capital of U$1.4 trillion. This is a systemic banking crisis…In Europe it's the same thing."

In the New York Times, economist and Nobel Laureate Paul Krugman wrote that many U.S. financial institutions, "are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover."
Former Securities and Exchange Commission head, Arthur Levitt echoed that view saying we are witnessing a "slow but inevitable nationalization…we will see it and see it soon."

The U.K. is already well down that road.
Yesterday the government announced it was converting its Royal Bank of Scotland preferred shares into ordinary shares, potentially increasing its stake to 70%. They U.K. government also has a 43% stake in the combined Lloyds TSB and HBOS. Shares of Royal Bank of Scotland (RBS) fell almost 70% yesterday on the news. RBS also said it does not expect to pay a dividend on its ordinary shares this year.

While Canadian Banks are not in the same position, Canadian Bank stocks are lower on this news this morning. The banks will be under extreme pressure, making it a difficult time to get money.

"For smart business owners wanting capital to take advantage of this econmy by buying competitors or cheap assets," says Jacoline Loewen, author of Money Magnet, "Increasingly, the private sector will be the place to go for money. This money will be different from banks - it will work with entrepreneurs to build competitive Canadian businesses that will not be eaten for lunch by global competitors."

Ben Bernanke's Beard

Ben Bernanke and his beard have been working like dogs lately to pump out over a trillion dollars and save ourselves from a recession.  These extreme measures should be no surprise to many, he was hailed as a radical by The New Yorker long before he assumed his current responsibilities, but you can't be blamed for thinking he was just another boring bureaucrat keen on never rocking the boat.  Many have been fooled by that beard, the looks of which give the impression of a highly meticulous, erudite man that very likely wears inappropriate swimwear to the pool (I don't know Ben, I'm just guessing).  His current monetary policy is certainly radical but time will tell if his decision to print and pump trillions of dollars into the economy will have him hailed as an equal to the world's bearded legends (Lincoln, Karl Marx, 'Macho Man' Randy Savage, etc) or a pariah with whiskers.

There are two opposing opinions in response to his monetary policy; those who support the Fed and those who are wary of the consequences.  If you are seriously concerned about a difficult, painful recession (and possibly depression), then you are likely to agree with the amount of 'new' money being pumped into the system.  However, others who believe that the world isn't headed for so much gloom are concerned with the impending economic implications of increasing the money supply at a seemingly unrestrained rate, such as problems with high inflation and a crash of the U.S. dollar.

It's not a little bit of extra pocket change either, it's bags of it.  Even relative to what has been printed in the past, it is an astounding amount of money.  The chart below illustrates, essentially, the U.S. monetary base since the Second World War.  

That's right....vertical.  

As a result of all this money filtering into the market through vehicles like the $700 billion bailout package, a T-bill 'bubble' has been created.  T-Bills are attractive right now for a variety of reasons, but mainly because they are liquid, big, and you are guaranteed not to lose your money.  The government pledges the bond will be payed back to you and as a 'thank you', depending on what you paid for it, they include a little return for good measure.

These days, the returns have almost entirely been wiped out of the bonds, the 2 year U.S. T-Bill, for example, is yielding around  0.70% right now, as opposed to almost 2% 9 months ago.  That's minuscule.  The reason for this, of course, is that investors are chasing the T-Bill's security, which has driven the prices up, and dropped the yields.  Some may argue that the price is artificially high, or unsupportable, and is driven by all the 'new' money being pumped out by the federal presses, hence a 'bubble'.  However, it's not actually a bubble since the U.S. government is unlikely to default on its obligations, and everyone is virtually guaranteed to receive at least the face value of the bond at the end of their terms.  Ultimately though, these prices indicate that once investors feel there is some stability in the market and it is safe to come out from under the wing of the T-Bills, there will be high inflation and the U.S. dollar will fall. 

So, for those that find themselves intoxicated with Ben Bernanke's beard and current monetary policy, they should really think to restrain this unbridled love affair.  We only need to look at history to see how things may wind up.  In 2004, Alan Greenspan did much of the same as his successor to spurn the crash after the tech bubble burst.  A lot of the money that was produced by the Federal Reserve was loaned out to credit-worthy people who wanted homes, and when all of those people had been satisfied and there was still money left in the coffers, the non-credit worthy people received loans.  It turns out, people with bad credit don't usually pay their bills on time, some not at all.  

If his decision to churn out so much money does eventually result in a huge loss in the dollar and  $150 oil, high food prices, and other forms of painful inflation, the beard may be the only respectable thing left.  

Light at the End of the Tunnel

The first morsel of light poked through the darkness today.  It was reported on CFO.com that the bond market is showing signs of thaw.  According to the article, a "number of energy companies this week tapped the slowly thawing fixed-income market."  One such company, Nabors Industries Inc., an offshore and onshore drilling company, raised $1.125 billion in senior unsecured notes due in 2019.  What is encouraging is that the coupon rate is 9.25% while the bond is expected to yield 6.76%, impying the bond is priced at a premium.  

What is also remarkable is that the company was downgraded to a BBB-plus rating from an A-minus as a result of the added debt, meaning that this company was able raise a significant amount of capital at a premium price while being considered a lower-medium investment grade.  This was just one example among a number of others that have been able to tap into the bond market at premiums over par though not being considered high investment grade.   

These are promising developments, though by no means sure signs of relief, they do indicate that there is appetite in the market.  It should be noted that these are striclty energy companies, which generate revenue from a commodity that has a price right now that is unanimously considered to be poised for significant appreciation, namely oil.   But what is encouraging is that there are pockets of optimism brewing.