Wednesday, May 13, 2009

Useless Predictions and GM Bullying

Last week I posed a question about why we listen in awe to Bernanke's economic predictions when he has already demonstrated his inability to make accurate predictions. Today, Barry Ritholtz has a brief and simply impossible to argue with post regarding a similar prognosticator: Alan Greenspan.

"Why does the public — and the Press — constantly seek out reassurances from the same people who misled them time and again in the past?

That was the question on my mind as I pondered yet another declaration from Alan Greenspan that the Housing Market has bottomed. That he has consistently made similar such statements before is cause for doubting him here. That these prior bottom calls were as far back as 2006 is cause for ridicule."

Anal_yst @ 1-2 Knockout addressed another concept that drives me crazy: that of economists who base predictions based on the length of the "average prior recession," or the "typical length of a bear market rally."

"Contrary to the claims of others, I think its quite clear that global (and regional) dynamics and fundamentals are materially different than they have been at any earlier period of human history, which means these analyses constitute at least one type of logical fallacy, and are thus of little or dubious value...I'm of the belief that such forms of analysis - and those who propagate their use - do more harm than good insofar as almost any conclusion reached is, at best, a non sequitur, and may introduce or reinforce false beliefs to the investor population. "

Finally, I found this Bloomberg piece "GM Retirees Bully Bondholders," to be very well written.

"GM’s likely bankruptcy filing is being cast in some quarters as a fight between “money people” intent on making a killing and honest efforts by the government to save a company and jobs. In reality, GM’s demise comes down to a fight between retirees. On one side are GM’s unionized retired workers. On the other, are the rest of us -- either in retirement or savings for it. Guess who will lose as things now stand? Under the restructuring plan on the table, GM’s retirees would get 39 percent of the company, along with the promise of a $10 billion payment into their health-care trust fund. That is in exchange for $20 billion GM owes the fund. Not making out so well are current or future retirees who depend on the performance of mutual funds, 401(k) plans and insurance companies that invested in GM bonds. These debt investors, who are owed about $27 billion, will get just 10 percent of the company."

You don't have to be a math major to see that the GM retirees, who hold junior obligations (that means that the SENIOR bondholders will get the first proceeds from any funds GM has), are getting many multiples on their stake compared to the senior bondholders. The difference is that the Obama Administration has labeled the senior holders as big money Wall Street types, and pitted the bond negotiations as a battle of good "poor GM retirees" vs bad "big bad Wall Street," although Reilly points out that this claim is incorrect.

Karl Denninger takes a slightly more aggressive approach to the GM debacle here, although he's no less correct. The VEBA is GM's pension plan, and the boldface is Derringer's, not mine.

"This despite the fact that the UAW is going to get somewhere between 80 cents and the full buck for every dollar they are owed for their VEBA. VEBA obligations are unsecured and subordinate to yours under the law. That means that under the law the UAW is entitled to exactly nothing until you get every dollar you are owed."

Ahhhh... If only the populist rantings from the Administration weren't so blatantly wrong and illegal... The sweet irony in this GM case is that many who will pick up their pitchforks chanting "Yeah! Down with the rich Wall Street bastards!" in response to Obama's decree may be the same folks who actually own the senior GM debt in their own pension funds.



Anonymous said...

I like your writing and analysis but I think you are prejudiced to defense of the old line firms. Perhaps because that's how you made your living? Reading you regularly a person would quite naturally come to the conclusion that Wall Street was just giving the people what they want ie the equivalent of the heroin dealer just providing the dope that was demanded. "No responsibility here. If they didn't want it I'd be out of a job...."

Kid Dynamite said...

well, i'm certainly in favor of PERSONAL responsibility when it comes to blaming people for what goes wrong in finance (you have read this post of mine right:

???) , and i think it's ridiculous for people to blame Wall Street for doing what everyone wanted them to do: make it easier for people to buy homes!

i'm not exactly sure why you mention that on THIS specific post though - the point of the GM article is that the GM Senior Bondholders are funds that represent normal American retirees- NOT big money wall street interests.

I happen to not care who owns the senior bonds though - they are senior and should be treated as such - when we enact populist policies that nullify the laws regarding financial treatment, it destroys the financial system.

Anonymous said...

Purely coincidence that I posted here, nothing to do with the GM situation.

I believe in personal responsibility as well. One cannot have someone else do your thinking for you. But there is culpability on behalf of Wall Street. Simply stating that Wall Street is very good at figuring out which of its clients are smart and which of them are stupid and treating them accordingly avoids the problem. Lots of scoundrels on the street. Lots.

Anonymous said...

"when we enact populist policies that nullify the laws regarding financial treatment, it destroys the financial system"

Gotta love this - so that is how we got into this situation.
Poltical dogma pure which ignores some basic truths and presents no real analysis. Like why was it necessary to ease lending requirements and loan money to people that would not otherwise qualify. Your answer: Wall Street was "doin what everyone wanted them to do." Right - out of the kindness of their hearts - led by such generous souls as yourself. Willing to take financial risks with other peoples money so the poor could have homes. Such a noble endeavor - too bad it failed.

Ignores the million dollar question: What was wrong with the economy/society to begin with that led bankers and borrowers down that road.

Kid Dynamite said...

whoa whoa - perhaps one thing is unclear - I wanted the government to let the wall street firms fail and die for their decisions - THAT is how capitalism works. The reason that they COULDN"T do that, is because Mom and Pop America owns the debt (and stock) of all these firms in their pensions and retirement accounts.

the reason lending standards were lowered as a result of initiatives to increase homeownership is precisely BECAUSE that's the kind of populist bullshit that gets people elected! that is exactly my point!

the problem with those saying "capitalism failed" is that we didn't let capitalism work! that's the beauty of capitalism- you are accountable for your bad decisions... All these firms should have gone bankrupts - customer deposits should have been protects, and the Gov't funds should have been used to start NEW banks unimpeded by mismarked balance sheets.

It has nothing to do with the kindness of peoples souls - people do things to make money. Again, the beauty of our system (the way it's SUPPOSED to work) is that if you don't like the way someone does business, you don't have to transact with them!

If you think "Wall Street" is taking advantage of you by giving you hundreds of thousands of dollars you should not be given in order to buy a home - guess what - YOU DO NOT HAVE TO BUY THAT HOME! do NOT to business with them!

the problem with America is the victim mindset and desire to blame others for our own incompetence. until we take responsibility for our own idiotic actions, we can never learn and progress.

and what i meant about destroying the financial system is that when the President decrees that senior bondholders do not have the rights they are entitled to - guess what - the NEXT time someone needs money, either 1) the senior bondholders aren't there because they KNOW that their rights can be erased by presidential decree, or 2) they demand to be compensated higher for this increased risk - which means the company raising the debt has to pay more. Law of Unintended Consequences.