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“Justice, sir, is the great interest of man on earth.  It is the ligament which holds civilized beings and civilized nations together.” - Daniel Webster

July 15th was a big day in case you didn’t notice.  Most important by a mile, British Petroleum reported that “no oil was leaking into the Gulf of Mexico from the Deepwater Horizon oil spill” for the first time since it began on April 20th.  It is hard to imagine than anyone would not be relieved to learn this, but of course some could care less.  While the leak is now plugged, it is estimated that nearly 5 million barrels of crude oil gushed into the Gulf at a rate of up to 62,000 barrels per day.  The market value of this oil would have been approximately $350 million - instead the cleanup and litigation will cost many tens of billions.  It is so dreadful to think of the mass destruction, pain, suffering and death this tragedy has caused and by no means should this be minimized, but at this very moment it is nice to know that the leak is stopped and a little sun is peaking through.

On this very same day, the SEC announced that Goldman, Sachs & Co. will pay $550 million and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was beginning to collapse.  It is rather ironic that in agreeing to the largest ever penalty to be paid by a Wall Street firm, Goldman merely acknowledged that the marketing materials for the subprime product contained incomplete information.  While this is a setback for our friends at Goldman, I suspect the firm had the best (and most expensive) minds working on this little resolution.  After all, Goldman makes money going up, they make money coming down and they will always find a way to get back on their feet - bet your bottom dollar.

July 15th was pretty good if you ask me.

“Complex societies are focused on a center, which may not be located physically where it is literally implied, but which is a symbolic source of the framework of society.  It is not only the location of legal and governmental institutions, but is the source of order and the symbol of moral authority and social continuity.  The center partakes of the nature of the sacred.”  - Joseph A. Tainter, The Collapse of Complex Societies

It was a rather frantic month for me and most of the headlines missed my attention.  I did notice one rather curious article about JP Morgan Chase’s $1.4 billion tax refund.  Apparently JP Morgan Chase is capitalizing on a provision in the American Recovery and Reinvestment Act which allows the mega bank to take losses from 2008 and 2009 and apply them against taxes paid during the previous five years instead of the previous two.

And the train has departed from the station because according to an analysis of security filings by Wall Street Journal, more than 250 companies expect $12 billion worth of federal tax refunds under the provision.

Maybe I am foolish to be concerned that the provision (…gift, whatever) is expected to cost taxpayers $33 billion during its first year.  I suppose everything is relative and we are playing with trillions now - right?

“For if the trumpet give an uncertain sound, who shall prepare himself to the battle?”  - 1 Corinthians 14:8

There are still many that believe the U.S. Government should have allowed the big banks along with Fannie and Freddie and AIG to go under.  I recall one colleague explaining to me that the “invisible hand” would have corrected the situation.  He went on to suggest that any institution responsible for this disaster should have to pay for their foolishness anyway.  Being somewhat of a Keynesian, I never believed the government should look the other way and now I am more convinced than ever that we were on the brink of complete global financial wipeout that would have truly changed the course of human history.  The current environment is unpleasant but it could be far, far worse.

For those that think this was all some grand conspiracy to change the political landscape or that our leaders are really in control, a recent article by Laura Blumenfeld in the Washington Post about Neil Kashkari, former Interim Assistant Secretary of the Treasury for Financial Stability, and a book by Henry Paulson, Secretary of the Treasury during the darkest hours of the crisis, tell a different story.

“Seven hundred billion was a number out of the air,” Kashkari recalls.  “It was a political calculus.  I said, ‘We don’t know how much is enough.  We need as much as we can get [from Congress].  What about a trillion?’ ‘No way,’ Hank shook his head.  I said, ‘Okay, what about 700 billion?’  We didn’t know if it would work.  We had to project confidence, hold up the world.  We couldn’t admit how scared we were, or how uncertain.”

And according to Paulson, after he and Timothy Geithner failed to find a buyer for Lehman Brothers, “My stomach tightened up and it was one of those times during the crisis where I was momentarily overcome by fear.”  He then called home to his wife Wendy: “And I said, ‘Everybody’s going to be looking to me for answers, and I don’t have any.  Please help me, pray for me.’  But boy, that was, that was a dark, dark hour.”

We will never know what would have happened with a different group of leaders - but I for one am grateful it didn’t turn out worse.  The question is: did we learn from our dreadful mistakes?

“After the pact, the Royal Navy was required to scrap the Grand Fleet’s backbone.  The Admiralty pledged itself never to build a naval base in Hong Kong.  England’s absolute command of the seas, so vital to the Empire, was over.  Britannia no longer ruled the waves, not because world opinion objected, but because, having spent 5,000,000 pounds sterling during the war, it simply couldn’t afford to.” - William Manchester, The Last Lion

It might not be apparent why I included this passage which describes how dramatically Britain’s course was altered following World War I.  I would like to believe this isn’t indicative of where the U.S. is heading following the second Gulf War, but there are certainly parallels that should be considered.  While I don’t believe a diminished future is sealed for the United States of America quite yet, it should be clear that our current course could easily lead us to become a second-rate world power.  It is not possible for a single country, no matter how big and powerful, to please and/or protect all the humans on the planet.  Enough said.

I think most will agree that 2009 is ending with a slightly positive momentum compared to where we were a year ago.  Just for fun, here is my annual recap…and here’s to a better 2010 - because we all know there is plenty of room for further improvement.

January 2009 - 1.  The U.S. Congressional Budget Office estimates the federal government will run a $1.2 trillion budget deficit in fiscal year 2009 and that the enactment of the economic-stimulus plan would increase that deficit; 2.  The Bank of England cuts interest rates to 1.5%, its lowest level in its 315-year history; 3.  Icelandic prime minister Geir Haarde announces the collapse of his coalition government in the wake of the country’s financial crisis.

February 2009 - 1.  California’s government goes broke and issues IOUs on all expenditures not required by law; 2.  Bankruptcies in the United Kingdom rose during 2008 by 50% to an all-time high; 3.  The Dow Jones Industrial Average and S&P fall to their lowest levels since 1997.

March 2009 - 1.  The UK’s government increases its ownership stake in Lloyd’s Banking Group from 43% to approximately 60%; 2.  Japan’s economy posts a record deficit of 172.8 billion yen; 3.  Premier Wen Jiabao says China may introduce a new stimulus package if the current financial crisis intensifies and he also expresses concern over U.S. Treasury securities.

April 2009 - 1.  The Group of 20 announces a US$1 trillion agreement to combat the current financial crisis; 2.  China imposes pay limits for executive officers of state-owned financial institutions; 3.  China’s economy grows by 6.1% in the first quarter 2009, the lowest increase since 1999.

May 2009 - 1.  The Eurozone’s 16 national economies contract by 2.5% throughout the first fiscal quarter of 2009.

June 2009 - 1.  General Motors, once the largest and most powerful corporation in the world, files for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code; 2.  Iceland’s rate of unemployment reaches 11.8%.

July 2009 - 1.  General Motors emerges from bankruptcy protection after 40 days under court supervision; 2.  China’s foreign exchange reserves reached a record US$ 2.13 trillion; 3.  The Dow Jones Industrial Average closes above 9,000 for the first time since January.

August 2009 - 1.  Hong Kong posts 3.3% growth over its previous quarter, far exceeding predictions, signaling an end to its recession; 2.  The U.S. budget deficit will reach $1.6 trillion, the highest ever recorded; 3.  The Democratic Party of Japan wins 308 seats in the 480 seat House of Representatives, ending nearly 50 years of control by the Liberal Democratic Party.

September 2009 - 1.  The G-20 Finance Ministers outline plans for banking reform, including tougher regulation of financial institutions.

October 2009  - 1.  The International Monetary Fund states that the global economy is “recovering faster than expected”, raising its forcast for global growth to 3.1% for 2010, up from 2.5%; 2.  The Dow Jones closes above 10,000 points for the first time in more than a year.

November 2009 - 1.  Dubai World, the state-owned real estate and ports giant, asks for a moratorium on its US$59 billion in debt until at least May 30, 2010; 2.  The Central Bank of the United Arab Emirates announces it will provide liquidity to Dubai banks.

December 2009 - 1.  The FDIC, which insures deposits in U.S. commercial banks, runs a deficit of US$ 8.2 billion; 2.  Japan unveils a 7.2 trillion yen stimulus package to strengthen the country’s economy amid signs it is weakening; 3.  140 U.S. banks failed in 2009.

And so…raise your glass to a better 2010 for all.  Cheers!

“Gratitude unlocks the fullness of life.  It turns what we have into enough, and more.  It turns denial into acceptance, chaos to order, confusion to clarity.  It can turn a meal into a feast, a house into a home, a stranger into a friend.  Gratitude makes sense of our past, brings peace for today and creates a vision for tomorrow.”  - Melody Beattie

From now until the New Year we are expected to contemplate the good things in our lives and hopefully bring some happiness to those we care about.  If this is not on your agenda then you are certainly missing out.  There is plenty of time for striving and dissatisfaction - so make the most of this gift.  Be grateful and generous every chance you get.

Much has changed since the financial meltdown began in September 2008, just over a year ago.  And while it remains less than rosy, I think most will agree that recovery has come sooner than expected.  This is not to suggest that the millions of people around the world that are unemployed, bankrupt, or both are feeling good right now - but it could easily be far worse.  I predict it will be a long time before we get back to an easy time of prosperity for nearly all.  In fact, I seriously doubt real estate will be the same in my lifetime - but overall it will be better for most.  In the meantime (especially during this Season), I suggest you thank God for the good things in your life and be a source of encouragement for others.

“Lehman’s fall over a nerve-racking weekend a year ago pushed the financial crisis, which had begun months earlier with the subprime mortgage meltdown and the rescue of Bear Stearns Cos., to a terrifying new level.  Lehman’s bankruptcy, the largest in U.S. history, shocked investors who had expected the federal government to step in with a Bear-like 11th-hour rescue.  Its fall unleashed fears of a depression triggered by a domino-like toppling of battered financial institutions.” - Walter Hamilton

Having been born when I was, I missed the Great Wars, the first Great Depression, and the Cuban Missile Crisis.  My memories actually begin during the war in Vietnam and except for a few bumps here and there, I have enjoyed a relatively stable and secure life.  I took much for granted in my progressively improving life until exactly September 11, 2001 - and suddenly it was all so interrupted and uncertain.  I wasn’t personally impacted.  I didn’t lose any family or friends, nor was my career in jeopardy - but no matter how hard I tried to convince myself everything would be fine again, I couldn’t get back to where I had been.  Gradually over the next five years or so, despite growing turmoil around the world, I started to feel more settled once again.  Then in the summer of 2008, it was apparent we were in for a rough ride.  Once again the month of September delivered a world-altering event.  This time it fortunately didn’t bring physical death and destruction but it did bring the end of several storied financial institutions along with hundreds of banks around the globe - and no one will ever know just how close we came to a complete financial collapse.

Here we are a year later and I would be very interested to learn how others feel.  I have been doing my best to focus on work and family without dwelling on all the troubling news.  On one hand I recognize that the economy has stabilized and the stock market is recovering quite steadily, but on the other hand it seems many of us are quite apprehensive and anything but confident or carefree.  There is no silver bullet to fix all our economic woes.  In fact, many organizations and individuals will be forced to deal with the de-leveraging process for years to come.  Our governments can only do so much and it scares me to think of the growing deficits around the globe.  At the same time, everything seems to move faster in the Internet age, so just maybe the recovery will quickly gain traction.  I predict that we are two years away from real recovery (significant job and economic growth) - but I would be happy to be wrong as long as it happens sooner.  What do you think?

“Of all the inventions that have helped to unify China perhaps the airplane is the most outstanding.  Its ability to annihilate distance has been in direct proportion to its achievements in assisting to annihilate suspicion and misunderstanding among provincial officials far removed from one another or from the officials at the seat of government.” - Madame Chiang Kai-Shek

It occurred to me recently while I was watching coverage of the G-20 in London that despite the reality that the United States and China are something less than allies in a diplomatic sense, the two countries are certainly joined at the hip economically.  This amuses me greatly when I think about what many of us in the U.S. - at least of my generation - were taught in school about China and communism in general.

Coincidently, yesterday I received an article published by Wharton Business School that included some very interesting facts and figures that support my observation above.  Most amazing, “China’s foreign exchange reserves have increased sharply over the past decade, from $216 billion in 2001 to $1.52 trillion in 2007, then $1.95 trillion in 2008.  Some estimates put the current figure as high as $2.3 trillion.  As a percent of GDP, China’s foreign exchange reserves grew from 15.3% in 2001 to 45% in 2008.  Economists estimate that about 70% of those reserves are held in dollar-backed assets.  China now holds as much as $1.36 trillion in U.S. securities and government debt.”  For more, read Attached at the Wallet: The Delicate Financial Relationship between the U.S. and China.

Most believe that China merely considers U.S. Treasury-backed debt the safest investment they can make, but others are suspicious that China is primarily keeping the value of the Yuan low and the U.S. economy as liquid as possible in order to sell more Chinese goods.  I am convinced the truth lies somewhere in between.  It is quite clear that unless China just wants to wipe out the whole global economy (which seems unlikely) - then these two super powers will continue to operate in much the same manner.  The U.S. certainly needs China to continue buying her debt and China needs the U.S. to keep buying Chinese products - and all the other countries are essentially on the sidelines hoping that nothing happens to damage this relationship beyond repair.

“Since Thomas Rowe Price, Jr., founded our company in 1937 - in the heart of the Great Depression - the firm has witnessed many market downturns, including the long slow 1973-74 bear market…the bursting of the technology bubble in the early 2000s and subsequent broad market decline.  Although the magnitude and duration of the declines have varied, one thing has held true.  The markets have always come back.” - Edward C. Bernard, Chairman, T. Rowe Price

It has been a rough ride now for a long time - so much and for so long that I am reluctant to make any suggestions or even mild predictions on when we will begin to see anything significantly positive.  I don’t know about you, but it is impossible for me to grasp the enormity of the trillions of dollars of “toxic” debt that we are only beginning to understand.  The financial casualties and corresponding numbers are so far-reaching and incomprehensible that it makes my head spin.  I think it is safe to say that every individual and institution on this planet has been affected by now.

Of course this major economic mess has become the ultimate political debate in the U.S.  Finger-pointing and highly charged theatrical accusations prevent constructive consensus.  If there is a proper path for steering the world out of this mess - we can’t even come close to agreeing on what it is.  I tend to believe this is a classic example of a situation where “there are no answers - only choices.”  Being more of a Keynesian economist than anything else, I do believe that it is in the best interest of everyone for the government to step in and take action - to ensure liquidity, minimize systemic failures, and support the creation of jobs.  The real question for me is - how far should the government go?  Just maybe the burden being created is too great.  Maybe this is deficit spending beyond what we can ever hope to recover from - I just don’t know! 

In the early 1930s, President Roosevelt was criticized for not preventing more bank and business failures - which prolonged the Great Depression.  Some (Democrats) are convinced that Roosevelt acted brilliantly, while others (Republicans) blame him for everything bad that has happened over the past sixty years.  One thing that most seem to agree on is that it took World War II to bring prosperity back - at least in the U.S.  Well…I for one would rather not experience a world war - so let’s hope and pray we have taken the proper course of action.  Please feel free to post your good news!

“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principles of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” - Thomas Jefferson

A friend of mine, who happens to run a local BB&T bank, sent me an interview of the recently retired Chairman of BB&T Corp, John A. Allison that was in American Banker - The Financial Services Daily.  I have read that Mr. Allison is a somewhat highly regarded bank executive and this might be debatable, but one thing is for sure - he is confident that he knows what caused the financial mess we are now living through.  I didn’t find this article online when I searched, so I thought readers would find some of what he said quite interesting.

Mr. Allison’s views on the root causes of the mess we’re now in:

“There are certainly individual financial institutions that have made some pretty serious errors.  But the root causes, however, are government policy, and I think there are four primary culprits in this regard: 1.  The Federal Reserve, which has, in my opinion, mismanaged the interest rates and monetary policy by driving rates down too low and raising them too high and that has distorted economic calculation.  2.  The existence of FDIC insurance, which has allowed people to raise money they couldn’t have in a true free market.  3. Housing in a broad context where the government tried to encourage above-market rate of homeownership under the theory that homeownership is always good.  Homeownership in general is good, but giving someone a home is not necessarily good, and particularly if they’re not able to pay for it…Fannie Mae and Freddie Mac are the No. 1 villians because of their magnitude…They were the ones who created the subprime crisis.  4.  Finally, the Securities and Exchange Commission is largely to blame.  Fair-value accounting has certainly accelerated the problems.  If we had had it in the early 1990’s, we would have had an economic collapse.  It is a very poor accounting concept.  Personally, I would just get rid of it tomorrow.”

Mr. Allison’s comments on which banks will survive:

“Through a very non-market-driven process, you have potentially created an oligopoly in the banking business, with four to nine institutions depending on how you look at it…Look at Citigroup.  It failed twice last year and even more times during my career.  That’s not good, and it creates a challenge.  While there are some economies of scale, you can say it’s not obvious that having more than a trillion dollars in assets is a good thing.  BB&T can compete very effectively against these big banks, but they have a…fundamental, long-term, potential competitive funding advantage if they are basically perceived as being subsidized or protected by the government.  It’s artificial, and you can argue that it is adverse selection.  Citibank shouldn’t be here…”

Mr. Allison’s thoughts on redeeming qualities to the Tarp:

“Only in one context.  Tarp wasn’t necessary except that the government created a panic and they probably had to do something about it.  But they didn’t need to create the panic to begin with.”

Mr. Allison’s views on when we will know we have hit bottom and how much longer until things get better:

“I think the biggest indicator will be the stabilization of real estate prices.  It is amazing to me how little focus has been put on fixing these real estate markets.  Until you bottom real estate, you’re not going to fix the economy.  I think the market will bottom in less than 18 months, but it will take at least 18 months before we see a meaningful recovery.  I think BB&T will be very advantaged on the other side.  We have an operating model and a culture that can compete more effectively over the long term.”

DBP Disclaimer: Although I generally agree with Mr. Allison’s comments, I am not suggesting they are correct, nor do I have any reason to believe that his timetable for recovery is valid in specific terms.

“And ye, who have been met with Adversity’s blast, And been bow’d to the Earth by its fury; To Whom the twelve months, that have recently pass’d Were as harsh as a prejudiced jury - Still, fill to the Future! and join in our chime, The regrets of rememberence to cozen, And having obtained a New Trial of Time, Shout in hopes of a kindlier dozen.” - Thomas Hood

For me personally, and I suspect for countless others as well, 2008 was a year that will be hard to forget.  As with any period of time, there were good things that happened, but the widespread economic distress, a number of devastating world events and a particularly nasty U.S. presidential election leaves me grateful that 2008 is behind us.  I haven’t a clue what is just around the corner, but for the moment let’s all be hopeful that 2009 will be a better year.

Before we completely move on - I thought it would be fun to list a few events from each month…lest we forget completely.  So hold onto your seat!

January 2008 - 1.  Crude oil prices surge past $100/barrel on New York Mercantile Exchange; 2.  Gold reaches new record of $865.35/ounce; 3.  Dow Jones Industrial Average fluctuates around 12,000 with several significant drops upon news of probable recession.

 February 2008 - 1.  President Bush announces Federal Budget of $3.1 trillion and near-record deficit of $410 billion; 2.  U.S. Congress approves $168 billion Economic Stimulus Package; 3.  The Northern Rock Bank is formally nationalized by the British Government.

 March 2008 - 1.  A U.S. Dept. of Labor report shows that the U.S. economy lost 63,000 jobs in February; 2.  The price of Gold reaches $1,000/ounce for first time ever; 3.  U.S. investment bank Bear Stearns gets emergency funding from J.P. Morgan Chase with Federal Reserve Bank of New York backing.  Bear Stearns is ultimately purchased by J.P. Morgan Chase for $10/share.

April 2008 - 1.  EU announces investigation into bailout of Northern Rock Bank in United Kingdom; 2.  The World Bank announces a package of emergency measures to tackle the dramatic rise in basic food prices which has led to civil unrest in much of the developing world; 3.  The S&P/Case-Shiller Index of U.S. real estate pricing shows decline of 12.7% from February 2007 to February 2008 with 12 of 17 regions showing declines.

 May 2008 - 1.  U.S. Federal Reserve System auctions off over $24 billion in treasury securities to help relieve the subprime mortgage crisis; 2.  Crude oil futures contracts reach $120/barrel on the New York Mercantile Exchange for the first time; 3.  The U.S. Fed reports that the industrial output of factories, mines and utilities fell by 0.7% in April in a broad-based decline led by motor vehicles.

 June 2008 - 1.  Bank of England says that new mortgage approvals in the U.K. in April were at record lows; 2.  Ireland’s ESRI says the country is in grip of a recession for the first time in 25 years; 3.  General Motors announces it will close pickup truck and SUV plants in Canada, U.S. and Mexico eliminating over 10,000 jobs.

 July 2008 - 1.  Fed Chairman Ben Bernanke assures U.S. House of Representatives Financial Services Committee that Fannie Mae and Freddie Mac are in “no danger of failing”; 2.  Zimbabwe introduces new 100-billion-dollar bank note as annual inflation rate hits 2.2 million %; 3.  Governor of California Arnold Schwartzenegger acts to end budget crisis by firing 22,000 state workers and cutting the pay of 200,000 more.

 August 2008 - 1.  United Kingdom home repossessions rise by 48%; 2.  Unemployment in U.S. rises to 5.7% which is highest rate in 4 years; 3.  New York Attorney General Andrew Cuomo reaches a $7 billion settlement with Citigroup to buy back auction rate securities from about 40,000 clients.

 September 2008 - 1.  Despite growing unemployment and economic woes, Boeing machinists strike against Boeing over outsourcing, job security, pay and benefits; 2.  AIG seeks emergency $40 billion loan from the U.S. Federal Reserve; 3.  Bank of America negotiates to buy Merrill Lynch for $38.25 billion in stock; 4.  Lehman Brothers files for Chapter 11 bankruptcy after British Bank Barclays and Bank of America pull out of emergency buyout talks; 5.  Goldman Sachs and Morgan Stanley, the last two independent investment banks on Wall Street, become bank holding companies as a result of the subprime crisis.

 October 2008 - 1.  President Bush signs $700 billion bailout bill after it passes the House of Representatives; 2.  German Chancellor Angela Merkel announces that Germany will explicitly guarantee the deposits in banks held by its citizens; 3.  Dow Jones Industrial Average drops 800.06 points, its biggest intraday drop ever; 4.  Dow Jones Industrial Average falls to 8,579.19 points; 5.  Global markets fall steeply on fears of a major global recession; 6.  G7 finance ministers announce a plan to combat financial crisis by using “all available tools” to support key institutions and prevent their failure.

 November 2008 - 1.  Barack Obama is elected President of the United States of America and promises to do everything possible to stabilize the economy and bring greater prosperity to all Americans; 2.  U.S. Government announces second bailout of AIG Group for roughly $150 billion which is the single largest bailout of a private company in U.S. history; 3.  Crude oil futures close at $54.95/barrel; 4.  Citigroup announces it will cut 75,000 jobs by early 2009; 5.  IMF approves $2.1 billion rescue package for Iceland following its complete financial wipeout.

 December 2008 - 1.  U.S. Dept. of Labor reports non-farm payrolls contracted by 533,000 in November, worse since 1974; 2.  President Bush announces $17.4 emergency bailout of General Motors and Chrysler to protect each from bankruptcy; 3.  On the final day of the year, the Dow Jones Industrial average ends up 108 at 8,776.39.

Let us ring in the New Year with optimism and never in our lifetimes forget what created the Great Financial Tsunami of 2008.