The well publicized problems in financial land may be seeping into newer areas according to today's Wall Street Journal. Lehman Brothers may have to write down some loans associated with commercial real estate and an obscure area of the credit markets known as auction rate preferred's is dramatically affecting the daily borrowing costs of several municipalities and their public projects because banks aren't participating in the auctions as they have in the past. (See
Lehman and
Auction Rate Turmoil if you are a subscriber.)
In other news, England nationalized troubled lender Northern Rock yesterday and is considering further legislation today to allow the government to take over other troubled banks. If England's taxpayers fund these bailouts, let's hope they similarly participate in any subsequent recoveries and/or sales. Like utilities, banks have never traded at much more than 10-12x earnings and as I've said before, now we know why. If the earnings aren't real, book values can't be too far behind.
On a related note, Fidel Castro has resigned as the leader of Cuba. While his successor is still unclear, the same could have been said of Citigroup only a few months ago. Can we expect Cuba to start privatizing its interests just as England starts to nationalize some of its own? Cuban cigars would certainly get a higher multiple than banks these days.
Speaking of communism, there were some interesting responses today to Art Laffer's
Op Ed piece last week on the nonsense of government rebates as a form of economic stimulus. From my home town of Peninsula, OH came this gem from George Cull, an eighth grade teacher.
I teach eighth-graders about Karl Marx's "take from each according to their means and give to each according to their needs."
The teacher takes away 20 points on a test from those who got 95 and gives those points to those who had 55. Therefore everybody now has 75. OK class, will the 55 students study for the next test? No! Why bother studying (working) if it will be given to you. And what will the 95 students do? The same thing. Why bother working (studying) when it will be taken away. What will happen to the class average (the standard of living) on future tests? The average will go down. Eighth-graders understand this.
George makes a great point. If we punish excellence and reward failure, the whole class suffers.
We reap what we sew.