Umair Haque / Bubblegeneration
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Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.


 
Monday, March 17, 2008

The Fourth Horseman of the Macropocalypse, Redux


Guys, I'm going to write the Bear/macro situation in detail later. It's really too depressing to dwell on at the moment.

Here's the quick version. You will read a lot of complicated analyses today.
Some are very, very good. The real story is, I fear, pretty simple, and very scary.

As simply as I can put it: the Fed has just signalled with absolute certainty that it has absolutely no interest in helping disinfect the financial system.

The Fed just signalled, with absolutely certainty, that it will do anything and everything in it's power to help stave off the accounting that's long past due. And without that accounting, there is no incentive for new DNA.

Bailing out Bear comes, ultimately, at the expense of every security holder across the larger economy. Because the Fed just vaporized (again) the incentive for a true process of settlement and valuation of the infected assets to really begin.

Do you think JPM has different incentives than Bear? Of course not. The machine's just as broken as it was last week - there's just more grease in the gears.

That's the Japanese story: spending almost 20 years trying to avoid a recession by devaluing the economy into oblivion - because the truth of broken balance sheets and infected DNA was too painful to face.

Or, a little more darkly - because the cronyism between banks and central banks was intense enough to let both parties abdicate their fundamental responsibilities.

It's funny, isn't it - how the Fed's bailout makes no mention of Bear management. What a coincidence.

We are now entering dangerous waters - the kind where economies get blown up for decades.

I suggest you all spend a few hours thinking first about how to make sure Bernanke's shock and awe approach to policy doesn't end up...ummm...destroying you personally - and then we can chat about strategy, finance, etc, later tonight.

-- umair // 10:10 AM // 12 comments


Comments:

At least for me, this is not simple to understand.

From what I read so far, Bear Stearn stockholders just lost pretty much everything (sold for $2/share was $170/share a year ago). So who Feds did not bail out Bear Stearns stockholders, but bailed out institutions that worked with them?

Is the argument that stockholders did not have accounting data to see that they were investing in a company that was making very bad decisions?

You state the JPMorgan has no incentive to behave differently. Surely their stockholders don't want to loose everything as well.

What am I missing? Are all bailouts created equal? Is there a way to prevent financial collapse without rewarding bad behavior at this stage?

Dazed and confused ...
// Blogger Berkay // 12:48 PM
 

i am curious as to why you have expected any kind of change in the "dna" of the american financial system.

were you expecting something to be different? based on what?
// Blogger gregory // 2:40 PM
 

Great analysis, as always.

But - The Fed is a business. It is in the business of extracting real value from the economy and leaving behind false value (under the pretense that is it in fact real value.) The stock in trade of The Fed is the current value of money which it manipulates over time for eventual profit, i.e., "the business cycle".

Your argument and expectations run counter to what The Fed was incorporated to do.

The Fed is working by the rules of its DNA. The Fed is on plan. The Fed is in profit.

For The Fed, this is business as usual, so why the surprise at its actions?

http://en.wikipedia.org/wiki/The_Fed
// OpenID adamcrowe.com // 4:15 PM
 

Until we have 'real' price discovery for the dark matter sitting on everyone's books, we are stuck. Market-based economies must have failures to clean out the system. It doesn't appear that the Fed will let that happen. Thus the "new" DNA Umair references can not take root. Instead we are stuck in no-mans land with a worthless currency. Sad.

Anton
// Anonymous Anton // 4:49 PM
 

Curious to see what the medium term impact is on the Yen/Euro/RMB
// Blogger Charles Frith // 4:57 AM
 

now is the time for a discussion of how to change the "dna" of an organization or institution or "enterprise" or political structure

can it be done by the same people, the same minds, that created the dysfunctional situation?

i don't think so. what do you think?
// Blogger gregory // 5:23 AM
 

Be happy. Just buy solars.
http://beanieville.blogspot.com/2008/03/2008-year-of-solar.html
// Blogger Beanieville // 6:40 AM
 

If you go back to Greenspan's pumping of ARM mortgages and promotion of subprime as a tool for economic prosperity, then it's karmic goodness that the fed has to take a major role in cleaning up the aftermath.

I'm not endorsing continuation of broken/corrupt/bastardized behavior. Just acknowledging that there is an inescapable "what goes around/comes around" story here.
// Blogger Scott Crawford // 1:15 PM
 

Umair,

I just can't stop laughing. I have tears rolling out my eyes, and my ribs hurt so bad.

We WANT more than we NEED. We are selfish, deplorable, greedy human beings, never content w/ our keep.
We turn a blind eye to tyrannical inequity and have transformed ourselves, from humans...to consumers.

I apologize for my language, but I think we've let ourselves get fucked by the corporation, as much as the corporation has enjoyed fucking us.

And now that we're left to clean up the nasty mess, have a look at the massive corporate orgasm we built up: Visa set for massive IPO
// Blogger preetam // 5:44 PM
 

This strange deal needs as much light as can be directed on its core. Could we dream that an insider during the weekend's bailout shenanigans writes an anonymous blog?

It may likely have been a case of a panicking or overfriendly Paulson, simply nudged by Morgan into spending his “whole” weekend structuring a deal that will gradually surface and become the centerpiece of a “how-not-to-negotiate-on-behalf-of-the-tax-payer” handbook.

Much remains hidden when bankruptcy is averted. There are percepts that Wall Street would rather not encourage. Too many questions would be raised, leading to further examination of abusive behavior. Strangely the deal makes no mention of anyone at the top of the Bear food chain.

It remains that there are some simple common sense repairs that can be made and should be made to the Boardrooms of all public companies.

“WE THE SHAREHOLDERS OF YOUR COMPANIES…… >>


http://pacificgatepost.blogspot.com/2008/03/letter-to-c eos-of-fortune-1000-cos.html


Shareholders, tax payers and employees are holding their breaths in anticipation of a resurgence of due diligence, oversight and good governance. We should expect it from directors. If you don’t nurture the system, it will fail.
// Anonymous James Raider // 4:33 AM
 

in the ten days since this post, we can see business-as-usual continues merrily on its way

except as a "amrketing concept", i think "edge economy" as espoused by umai haque is a paper tiger, with zero practical value

am i wrong?
// Blogger gregory // 10:54 AM
 

Umair,

Where are you? We miss you!!
// Blogger preetam // 4:30 PM
 
 

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