Saturday, September 27, 2008


During the Great Depression, the Glass-Steagall Act was passed to separate commercial banks from investment banks. Commercial banks gather FDIC Insured deposits in order to make loans whereas investment banks raise capital through the sale of equity shares, notes and bonds. Commercial banks are tightly regulated, investment banks are more free wheeling.

In 1999, Phil Gramm was the co-author of the final "nail in the coffin" bill that killed the Glass-Steagall prohibition against being both. Combination banks and investment banks such as J.P. Morgan/Chase Manhattan and Citi Bank/Shearson/Smith Barney/Drexel/Salomon Brothers/Travelers and American Express were the result (I listed only a small portion of the institutions that were combined over the many years to make these huge companies, Citi is a 2 Trillion Dollar Company.)

Even many of the smallest commercial banks have become sellers of stocks and bonds. Bear Sterns and Lehman Brothers were two investment banks that remained until recent transactions. Goldman and Morgan Stanley were the lone holdouts until last week, when an era came to an end.

Back in the early 1980's, when the wall between functions was breached when Merrill Lynch and others started offering "all-but bank products", such as money market checking accounts and "pass through" certificates of deposit, my Dad was one of many who was upset. The people who lived through the great depression and WWII tended to be very security conscious. Their priority was the safe return of their money, not the highest rate of return on their money.

Many how live through the Great Depression and WWII had parents who lived through the horrors of WWI and the Great Depression. Today, Americans express great concern about the economy while they live in debt up to their ears. Today, Americans have little concern about the threat of Islamic Fascist because they have lived in a relatively stable world and a very stable USA.

Last night while watching the debate with three others, it was clear how my mind set has been colored by the experience of Vietnam. I was never a Gung Ho GI Joe. I always had mixed feelings about Vietnam but I am sure that generations before had mixed feelings about Korea, WWII, and all others. It is hard but necessary to accept that wars are sometimes necessary.

Today, it seems that the average American deeply discount the possibility of WWIII. I hope it never happens, but Islamic Fascist are building armies in dozens of countries. Our success in Iraq is an important beginning in the war against these murderers. When we can, we must win by diplomacy. Leftist have enjoyed poking fun about terrorist following us home from Iraq, but terrorism continues to spread, even though hundreds of thousands have died in Iraq, Afghanistan and Pakistan.


US banks are not under capitalized. As I wrote yesterday, Americans should be thankful for the health and strength of our banking system. America is the banker to the world. A significant portion of the wealth we enjoy in America is the direct result of the profits we make providing services around the world.

Compare the capital ratios of US banks to European Banks to see how healthy our banks are. (We will not get off on the tangent of the horrible shape of banks in places like Russia, where markets have been closed.)

The asset to equity ratio at a few European Banks are:

UBS 46.9:1
ING 48.8:1
Barclays 61.3:1
Lloyds 34.1:1

Our American "almost traditional banks" have much better ratios:

BAC 10.6:1
WB 10.8:1

BBT 11.3:1
WFC 12.7:1

Our combo banks have slightly more aggressive postures.

JPM 13.3:1
C 15.4:1

Even our investment banks have better ratios than the Europeans.

GS 26.6:1 before the $10B infusion and 21:1 after the infusion of capital.
MS 33.7:1 before a couple of significant infusions of capital.


The democrats and the Russians have punted the ball down the field. For some time, it has been clear that the current ball game would end on or near October 1. A continuing resolution had to be passed, it could not be passed without drilling attached and the housing/financial crisis, caused by government intervention in the market place, made the prospects of Obama's tax and spend programs virtually impossible.

Today, the congress sent a 4 month, $630 Billion Dollar, spending bill to Bush; Bush is expected to sign. The spending bill will pushes the big battles forward to the next quarter. The bill permits off shore drilling while leaving the richest part of the Gulf of Mexico off limits. The leases for the new areas will not be let until 2011. As usual, the bill includes a lot of pork, including $6.6 Billion Dollars on "Pet Projects". If there was ever the need for someone willing to yield a veto pen, the time is now.

I suspect Bush went along with $23 Billion in disaster relief, $25 Billion in loans to car companies, double the subsidies for home heating and the 2,322 pet projects in exchange for assurance that TARP will be pushed through. TARP stands for Troubled Asset Relief Program (also known as the "big boy relief fund").

Every time I hear Barney Frank and others say the financial crisis is a result of inadequate regulation I want to scream. Frank was among those who voted to force banks into making loans to unqualified buyers.

The new "set-up" is that democrats are confident that they will control three houses after the elections. They were willing to suspend the moratorium on drilling for a few months until they will be more powerful. They did not pass an annual budget because they are foaming at the month at the prospects of big spending projects after the election.

Chances are high that some form of TARP will pass. It is likely that the republican house will get the size reduced but it is likely to pass. Over the next month, it will be the job of republicans to educate the people on the reason the ball out was needed. To the extent the facts get out, republicans will gain on democrats. My bet is that McCain will win the election and that republican losses will be small. According to the betting parlors, I am betting against 60:40 odds.


The USA and Russia has been engaged in a series of bluff and thunder moves since the invasion of Georgia. For example, the USS IWO JIMA traveled to Greece, near the entrance to the Black Sea, one of Russia's few warm water naval outlets before turning around.

Russia has cut deals to send oil from Kakiskstan and Turkmenistan through Russia and other supplies from Turkmenistan through Iran. The Russian plan is to become an important partner with OPEC. Russia wants to control as much oil as possible.

Russian ships have docked at Syrian ports, made deals to supply Venezuela with arms and, in general, tried to push US hot buttons. After a number of rounds, Russia and the USA have suddenly agreed to another statement to discourage Iran from building nuclear bombs. Russia and China refused to go along with new sanctions, but Iran is still being kept in the stew pot.

One of the important moves made by the USA was to back off in regarding to adding unilateral pressure on Iran. The USA has let Russia know that we will not do the heavy lifting. After all, we are a comfortable distance from Iran's nukes and Russia is not.

We also did a "double take" on Iran. If Iran wants to wait for many years before developing their monster fields of oil and gas, so be it. While Iran keeps trying to spin uranium ore, deals are being made by its neighbors for nuclear power plants and for oil and gas pipelines and drilling projects. Iraq made monster deals with China and Shell in regard to natural gas. I suspect that the deal between China and Iran was another deal to keep Iran barefoot and poor. China agreed to help Iran develop its natural gas fields a long time ago, but Iran is sitting while others are doing.

Iraq is preparing to increase production rapidly. Other western companies are likely to be involved in the near future. Brazil just keeps on finding more oil. World wide oil and equivalents will be up 5 million barrels per day this year (3 million or so after adjusting for depletion) and US product demand just declined 5.3% from last year.


This turn is slow. Iran is being allowed to stew, the US is focused on the banking bail out and democrats in control are content to wait until after the election. The passage of TARP will not cause the banking crisis to be suddenly over. The investment game in the weeks ahead will be the "guess who is going to be bought game". A corollary will be, how much will the buyer suffer in the short run.

All the while, commodity prices will slide. The broad averages will struggle to make progress as gains in some sectors will be offset by continued declines in energy, basic materials and capital goods.

The next bounce by McCain will be accompanied by a good move in the market. Keep in mind that most of the polls are biased toward democrats. One of the reasons republicans seem to always close so strong is because they were not so far behind in the first place. Dukakas had a 17% lead going into the home stretch run.

This turn has been slow but it is real. Take advantage while you can!