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Warren Graham's Legal Blog

Warren Graham's Legal Blog

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Location: New York, New York, United States

I am a practicing lawyer who lives and works in Manhattan, and specializes in Bankruptcy, Corporate Restructuring and Creditors' Rights, Commercial Litigation and Real Estate Law. I grew up in the New York City Area, and am a graduate of the University at Buffalo (B.A. 1976) and Fordham University School of Law (J.D. 1980). I have a wide variety of interests, but am particularly interested in history, politics, economics/finance and religious affairs, and am a frequent writer on a variety of those topics, and others. On a personal note, I'm a 54 year old man, married for 27 years, with two daughters, ages 24 and 20, respectively. Legal topics of interest may be found on my blogsite,, while non-legal commentary may be found at The content of these sites will be centralized and easily accessed locations for both legal and non-legal analysis and commentary, as well as a description of my legal practice for clients and potential clients. Keep checking back, as I expect the content to change and grow regularly.

Friday, January 02, 2009

A Special Word to Clients and Prospective Clients

From: Warren R. Graham

I am, as you can see from my profile, an attorney specializing in bankruptcy and creditors’ rights, although my firm, Cohen Tauber Spievack & Wagner LLP, is a full-service commercial firm which can help your business solve your problems efficiently, economically, and with a practical understanding of your business needs. I invite you to e-mail me or contact me by phone in connection with any legal needs that you have. Consider the following:

What can my colleagues and I do to solve YOUR problem?

Our bankruptcy and creditors’ rights practice has several components:

--In representing distressed enterprises, we partner strategically with ailing, closely-held or family-owned businesses to save their companies, by keeping the ‘wolves from the door’ while working to recapture the value that made the companies succeed in the first place.

--In representing creditors, we help develop strategies to assist creditors caught in the bankruptcy/restructuring maze to recover on their claims quickly and to minimize their problem receivable.

--In representing Landlords, we help real estate owner/developers minimize, or even eliminate the risk of getting stuck in protracted tenant bankruptcy cases, in which the owner/developer frequently has to deal with uncertainty, while ultimately realizing little or none of the leasehold value.

--We help develop strategies for buyers of distressed assets to maximize the realization of value while defraying legal and due diligence expense through the vehicles of ‘break-up’ and ‘topping’ fees.

If any of these solutions sound right for your particular issue, please feel free to contact me to schedule a complimentary consultation. Also, feel free to request your absolutely free subscriptions to the two e-books I have published, one crafted especially for the creditor and landlord who need to understand their rights under the new bankruptcy laws and the other directed at owners/managers of closely-held family businesses in financial distress. Feel free, at the same time, to ask to be placed on our list for monthly updates and bulletins from our bankruptcy and creditors’ rights practice. There is no obligation, of course, and you can always “opt out” at any time. All you need to do is leave your name and contact information with us, and we will take care of the rest.

Also, let us know whether your organization might be benefited by receiving an in-person presentation or seminar by attorneys from our creditors' rights and bankruptcy department at our firm to help you understand these changes, and what they might mean to your business. You simply cannot afford to rely on your understanding of the bankruptcy laws as they existed before October 17, 2005. The changes are, quite simply, too profound and wide-ranging. Please do not hesitate to bookmark this site, and check back regularly for recent developments and reports which will, I expect, be of value to you in your business. I look forward to hearing from you.


Thursday, January 01, 2009

The Harvest of Failure: Why We Need to Re-plant Now!

In the midst of the economic downturn and chaos, our Government (and, most likely our Government-in-Waiting), is pinning its hopes for recovery on a seemingly endless stream of bail-outs and stimulus packages. In short, the same old failed ideas are being trotted out to address our problems. Predominant among these ideas is that, if only the public could once again begin to spend, everything would be alright. To date, the consumer, plagued by fears of imminent layoff, has failed to take the bait. The solution, according to the conventional wisdom, is to “fund” the spending spree by printing more money, sending it to Joe/Jane Sixpack, and expecting him or her to revert to the old habit of spending more than is affordable. At the same time, the Government is embarked upon what appears to be a bail-out of nearly every type of business in America. It started with the banks (which prompted nearly every financial institution to “become” a bank), and expanded to the automobile industry. Now, calls for bail outs are, predictably, coming from the retail and real estate industry. Where does it stop? The answer is that it doesn’t. This was, from the outset, an idea doomed to failure and a slippery slope, indeed.

What led us, in large measure, to the current pass in the economy was overspending and over-consumption by the consumer. The result of this was far too much debt. The consumer, in turn, used increasingly appreciating home values as a “piggy bank,” by serial refinancings to retire high-interest, non-tax-deductible credit card debt. This “system” worked fine until home values started to fall, as a result of over-development and over-leverage. This was inevitable, and was precipitated mostly by a false sense of security by the public in its ever-increasing income, asset values, and a steady rise in the financial markets. Never mind Madoff; the entire American economy, before recent events took their predictable toll, was built upon a house of cards and a giant Ponzi Scheme.

Now, the Government offers us more of the same as an antidote. It proposes to flood the economy with dollars, hot off the presses, so as to “encourage” (meaning: force) consumer spending. There is talk of governmental rewriting of mortgage obligations, even to the extent of reducing principal balances (the constitutionality of governmental interference in private contracts notwithstanding). Let’s not worry about inflation, our leaders say; we will cross that bridge when we come to it. In the meantime, let’s prop up failing (and doomed to fail) businesses by incentivizing consumer spending, guaranteeing asset values and rescuing everything from General Motors to Sal’s Pizza Parlor. But make no mistake about it: there will be a day of inflationary reckoning, and we will have to “cross that bridge” sooner than most of us think. The flooding of paper money into this economy can only end in a disastrous inflationary spiral at some point down the road. Moreover, the issuance by government of an endless supply of money, and assumption of unlimited debt by loan guarantees and sale of debt instruments will encumber several generations of Americans, at least.

No, the last thing this Country needs is to return to a day when more than two-thirds of its economy was driven by extravagant, excessive irresponsible consumerism. That, friends, is what got us in this fix to begin with. Our consumerism is a weapon, though, which, if properly used, can do what is necessary to improve our economic lot. I speak, of course, of the creation of industry and jobs. For too many years, this Country has failed to manufacture almost anything within its borders, and for the benefit of domestic owners. The so-called “Global Economy” has served as a mechanism for exporting jobs to take advantage of cheap labor in the developing world, or to allow foreign companies to operate freely here, unencumbered by, among other things, our labor costs. This has all been justified by the illusion of “free trade.” Free trade, you see, implies a two way street. Does China allow us a level playing field for our exported goods? Does Japan? The EU? Of course not. The result, then, is that we are “free trading” only with (and against) ourselves.

We have one economic weapon, and one only, in our arsenal: our rampant consumerism. So long as foreign manufactured goods can be made more cheaply overseas, and sold here in such a manner as to make American industry non-competitive, it is naïve to suppose that we will buy American-made goods out of a sense of patriotism. We have to level the playing field HERE, and for our own benefit. China will not stop selling here no matter what we do. The Chinese consumer base is too small to purchase all those goods, notwithstanding all that overblown talk about a burgeoning Chinese middle class. The same goes for all our trading partners. They must, and will, sell to us, even if the cost of doing so rises, and as we begin to protect our labor force and industry by (yes, I said it), protectionism. Foreign business should be made to “pay to play.”

Once the economy improves, we will no doubt return to our over-consuming natures. One hopes, of course, that this conduct will be somewhat tempered by recent events, much as the spending and saving habits of our parents and grandparents were informed by the Great Depression in the 1930’s. But no matter what, we will still be a consuming nation. Let foreign countries export to us. Let U.S. companies move their jobs overseas. But let’s at least charge them for the privilege. And for God’s sake (and America’s), let’s start consuming our own stuff for a change.

Unlimited government interference in our markets, in the form of printing more money, throwing it at consumers and businesses to induce us all to wallow even more in a sea of debt is a short-sighted and ultimately a destructive policy. Aside from its ultimate inflationary consequence, and creation of a debt burden which will long outlive us, it virtually guarantees the destruction of private industry as we know it. Government will have a share in nearly all U.S. business, leading to over-regulation, and a commitment by John Q. Taxpayer to throw good money after bad, in an attempt to protect our nationalized “equity” in dying businesses. When the smoke clears from this orgy of easy money, and staving off of natural business failure, I fear that the America we all love will be unrecognizable. This would be the biggest tragedy, indeed, especially given that a real, long-term solution is right under our noses. Let’s hope that our elected representatives, for once, have the sense and intestinal fortitude to see it, and to implement it.

The future of this nation depends on it!

Warren R. Graham
Copyright 2008

Tuesday, December 16, 2008

Hey, Dude, Where's My Bailout?

Yesterday, the Federal Reserve Board revised its target rate for the Fed Funds Rate down to 0% to ¼ %. This represents an historic low (in more ways than one) for a quasi-governmental entity charged with exercising independent monetary (as opposed to fiscal) policy of the United States. The Fed, in addition to the reduction of an interest rate already priced in to the government paper yields, took the unprecedented step of issuing a statement to the effect that it would keep its rates low for the foreseeable future in order to fight the endemic weakness in the economy, and that it would use “quantitative easing” (whatever that means) to implement emergency measures to stimulate the economy. It has now thrown everything but the kitchen sink at this problem. I can’t imagine what the additional measures might be. I daresay that I would not be much surprised to see the Fed soon offer to hand every American a bag of cash, rewrite all our mortgages, give us all new, higher paying jobs, offer us unlimited credit lines (guaranteed by Uncle Sam), so that we can go back to decadent overspending, re-grout our bathroom tiles, sweep our floors and pleasure our wives.

I live in New York; yet I could smell the sweat pouring from Mr. Bernanke’s pores all the way from Washington. The desperation implicit in all these statements, which have no precedent in the Fed’s 95-year history, is shocking to behold.

The upshot of all this is a recognition that everything has been done to date by the Fed and its partner, the Treasury Department (more about that later), has utterly failed to alleviate an economy in serious recession.

In addition to the near-certainty that these measures (even the ones we can, at this juncture, only guess at), will fail, nobody seems to consider the long-term effect, both financial and yes, constitutional, of these endless attempts to rescue this economy from the natural, and indeed, necessary difficulties occasioned by the outrageous excesses of the last ten years. I have written extensively on this topic, and will not bore my readers with a rehash here. I must say that it pains me to advance this argument, as I have many friends and family members who are suffering from the financial turmoil in which we find ourselves. Nevertheless, the only way back is to swallow the bitter pill and wait for the inevitable recovery. The longer the government tries to ameliorate it and stave off the agony, the longer that recovery will take. Moreover, when the dust clears, we may well find that America, as we know it and loved it is no more.

Anyone paying attention has long since realized that capitalism as an ideal is something of a quaint and nostalgic concept in 21st Century America. I am not overly troubled by that; the robber barons of the 19th Century and unregulated securities markets never served us well, and need to be reined in. Nevertheless, until recently, we still recognized a concept known as private enterprise. Corporations, even public corporations, were expected to succeed or fail based upon the competence of management and the desirability of the product or service offered to its buyers.

Nobody, a century ago, would seriously have advocated a governmental salvation of the buggy whip industry for the purpose of saving jobs. Yet the President and his minions, in the waning days of an otherwise listless and sleepy (if that’s not oxymoronic) administration, propose to throw money at failing industries, so that it can pass off the mess to Messrs. Obama & Co.

Our Treasury Secretary, Mr. Paulson, making no pretense at acting in concert with the Fed, (presumably with the President’s approval—although who knows these days?) has thrown sacks of money at financial institutions, without any meaningful conditions. These institutions, our officials say, were “too big to fail,” even though their conditions were entirely of their own making. These disasters were a result of unprecedented financial gluttony at all levels, and of the SEC’s and other regulators’ mind-boggling ineptitude (perhaps also with the President’s approval) at questioning transactions which, on their face, violated fiduciary responsibilities to shareholders.

What have these financial institutions done with the money that John Q. Taxpayer has “leant” to them? Have they started making loans to the public? Not a chance. Rather, they’ve borrowed the money and put it in the drawer, so they might say that they are “adequately capitalized,” given the current “mark to market” accounting standard.

Exactly how has this benefitted the American Public?

Now, in the face of overwhelming public opposition (some polls put it at 90%) and the refusal by our duly elected representatives, the executive branch of our government, acting on its own, has determined that it must unilaterally save us all from ourselves, and bail out the “Big Three” automakers (I put “Big Three” in quotes, because their combined net worth is a small fraction of that of Yahoo).

Let us first ask ourselves the question of whether such a scheme will succeed: Any attempt to pump taxpayer dollars into an industry that (whether we like it or not) is not selling its products is an exercise in futility and, moreover, a complete and utter waste of what little remains of the public weal. It may be a hard truth to face, especially given the potential for the substantial loss of jobs, both in the auto industry, and those other business who depend upon it. Nevertheless, it is also true that a number of foreign owned auto companies, which also provide employment and benefit to other businesses, are holding their own, in an environment which is, to say the least difficult. None of them, to the knowledge of this writer, is on the verge of bankruptcy or of exhausting its cash. The distinction if, of course, obvious: labor costs. And while one might be hard-pressed to blame the UAW for looking out for the interests of its constituency, one has to wonder whether its leadership has a clue as to what those interests are. The conventional wisdom (which, for a change, is probably correct), is that the UAW has confidently called the government’s bluff—a “no-brainer,” to be sure—in the expectation that, come late January, a more labor-friendly administration will be on the job. But the inevitable conclusion is, that in an environment of increasing unemployment and fear of unemployment, coupled with the general unavailability of credit terms, the public is simply not about to start buying cars, especially given the $2000 labor cost differential and the uncertainty about the future of the “Big Three.”

The second question is whether this scheme is appropriate. One has to start with the problem of the Fed and the Administration exceeding their respective briefs. The Fed is not supposed to be in the business of “rescuing” the economy. Rather, it is charged with the responsibility of adjusting rates and increasing or decreasing the money supply to walk the tightrope between inflationary pressures and a weakening economy. Instead, the Fed has decided to become the lender of last resort, pouring vast sums of money (which remains unaccounted for) into financial institutions with no obligations to put that money out as loans either to business or to the public.

The Treasury Department’s conduct is even more outlandish. In blatant defiance of the will of the public and of Congress, the Administration is determined to ram the auto bailout down our throats. It’s easy for the government to do this; it has, after all, a printing press. You and I, alas, do not. What is the consequence of this proposed bailout (the details of which, as of this writing are either unresolved or being kept under wraps)? Endless sums of freshly minted money being thrown at financial institutions and the auto companies can only have two results: ultimate hyperinflation (caused by an excessive money supply), or the mortgaging of our future and probably that of our children and grandchildren for what is doomed to be a futile, though well-meaning gesture.

It may be trite and cliché to say so, but this kind of governmental meddling is a “slippery slope.” Firstly, it justifies nearly every kind of business is justified in asking for a governmental bailout, if it can successfully argue that significant numbers of jobs are at stake, and that it represents a “vital” American industry. Secondly, in taking a stake in those companies it chooses to save, the government has cynically relegated the idea of private enterprise to an illusion. The nationalization of American enterprise, believe me, is not what we want. The Government is already far too intrusive in our lives. It should, rather, make do with the regulatory powers it already has, and actually enforce them.

Larry Kudlow, on CNBC, daily argues for a “prepackaged” bankruptcy for the automakers, followed by a termination of the union contracts, but, as is usually the case with the fatuous gasbag (in this writer's opinion) that is Larry Kudlow, he does not have any understanding of what a “prepackaged” bankruptcy is, how long it takes to put one together and what is required to terminate union contracts.

Once all the “important” industries are bailed out with increasingly valueless currency, we can all get on line for a bail out. But be warned: there’s no such thing as a free lunch; especially when Uncle Sam is “buying.” At the risk of quoting the villain John Wilkes Booth:
Sic Semper Tyrannous!

Copyright 2008

Warren R. Graham

Monday, November 17, 2008

The American Consumer as Bankruptcy Roadkill

In the midst of the recent around-the-clock, 365 day-a-year, 4-year presidential campaign cycle, it is nearly impossible to hear anything over the din of paid chatterers and candidates’ spinmeisters posing as news analysts. But recently, and finally, there has been some small and largely unnoticed public discussion about a subject which has flown below the radar screen for years, except, perhaps, among certain lawyers, judges and academics. I refer to the Federal Bankruptcy Code, as substantially rewritten and enacted in 2005.

This despicable piece of anti-consumer, anti-middle class legislation kicked around in Congress for a number of years. President Clinton, to his credit, pocket vetoed it several times. The law, which Congress was please to call, without embarrassment, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or BAPCPA, was ultimately signed into law by President Bush. In a perfect world, and for the reasons discussed here, it should be a legitimate subject of public discourse in the current political and (especially) economic climate. But here’s the rub: both political parties are equally to blame for this outrage masquerading as “reform,” foisted upon an unsuspecting public and on the middle class, in particular.

BAPCPA is, first and foremost, a calculated attack by the credit card industry on consumers. It imposes a “means test” in order to qualify a debtor for bankruptcy relief and discharge of debt. If a debtor flunks the means test, he or she must file, under Chapter 13 for what can be a long-term, onerous debt repayment plan. The means test, which references, on a state-by-state basis, median income, ends up excluding nearly all but poor people (as we all know, the “middle class” ain’t what it used to be). There are numerous other obstacles, too technical and extensive for this treatment, to simple discharge in bankruptcy for the “average Joe.”

In the halcyon days of 2005, when everyone in America, it seemed, was a real estate mogul, gaining paper wealth from unprecedented appreciation of home values, the ever-increasing credit card debt load did not really pose a problem, except for the poor and assetless. After all, virtually anyone who owned a home could use it as a “piggy bank” to retire credit card debt periodically through serial refinancings, which was made unbelievably easy by lenders, mortgage brokers and charlatans. The charlatans, of course, cheated both the borrowers and the lenders, by arranging for no-verification loans for unreliable borrowers, to the ultimate detriment of lenders, while simultaneously building in adjustable variable rates or balloons, which set traps for the unwary homeowners, but which could be evaded by yet more serial refinancings. This system worked just fine, on the unsupportable and profoundly naive theory that home prices would continue to rise indefinitely.

We now see, of course, that home prices are, in fact, subject to the vagaries of the business cycle and, in our current case, the irresponsibility of the lending industry, the securities industry (subprime, anyone?), the Federal Reserve Board and yes, the borrowers themselves. As a result, the ballooning credit card debt can no longer be retired with the wave of a refinancing wand. Many consumers cannot make even the minimum payments on the large balances they are carrying on their credit cards, and their houses, in many cases, are not worth the debt they owe against them (especially in the case of owners who bought houses at the top of the market in the last year or two). Foreclosures, as we all know, are at record levels, with no end in sight.

Against this cheerful backdrop, we have a middle class, the perennial losers in nearly all economies in decline, now coming face to face with the cruel realities of BAPCPA. The prime political mover behind this “reform” was Senator Chuck Grassley, of Iowa. One might infer from this that Iowans, who have for years been chowing down on the plentiful pork that is federally subsidized, corn-based ethanol, have no need for bankruptcy relief. The ultimate prime mover, though, was the credit card industry; perhaps foreseeing an increase in default rates down the road, with the ever-ballooning national credit card balance. The legislation was accompanied by some other interesting developments, such as large increases in “overlimit” fees and late payment fees, which, in some cases, exceeded the total balance due on the credit cards. Overlimit fees, moreover, were actually triggered by accrual of interest on balances which were not even over the limit, but which, in and of themselves, took a balance over the limit; a real slap in the face to customers. Another outrage visited on these borrowers, made drunk on free and easy credit pushed on them by credit card companies, could be found in the exorbitantly high interest rates on balances. These rates could be increased, without notice, on the whim and caprice of the lender, even if the borrower had never missed or made a late payment, but simply on the basis of a periodic review of the borrower’s FICO score, or a missed or late payment on a different credit card. Particularly galling is the fact that the highest rates were imposed upon people increasingly most hard pressed to carry the balances. Citibank, in fact, took the unusual step of redomesticating itself to South Dakota, which overtly campaigned for big bank business by eschewing a usury limit. Citibank was thus able to assess against its most financially overextended customers, an interest rate of 32.99%, roughly equal to what one might expect to be offered by someone working the waterfront (except for the knee-breaking).

Unfortunately, and with this swollen credit Sword of Damocles hovering over the head of the American public, Congress allowed BAPCPA to become the law of land; allowed, I say, because Congress did not really write the legislation. It handed over its legislative pen to teams of lawyers working for the credit card industry. The price? Campaign contributions, of course. And the profound shame inherent in this falls equally on both Democrats and Republicans, in both houses, who passed the legislation with sweeping majorities. Chuck Schumer (inadvertently, one assumes), derailed BAPCPA for awhile, by tacking on a rider denying discharge to individuals who were liable for damages due to destruction of property of abortion clinics. This rider forced the conservative Republicans to abandon their support for the Bill. When that provision died in the next version of the Bill, and in the Senate/House reconciliation version, Schumer came around, and voted for BAPCPA. Joe Biden, a Democrat and that party’s current contender in the vice-presidential sweepstakes, presents an even more interesting case. Delaware has long been the home of big Chapter 11 Cases. It is a debtor-friendly jurisdiction, and large companies have traditionally been able to file there simply by virtue of Delaware’s being the state of their incorporation, whether or not that company has an office there, or has ever transacted business there. Of course, such “mega-cases” pay off handsomely for Wilmington, Delaware’s capital city and home to its Bankruptcy Court (an otherwise pretty poor and blighted city), as high-priced lawyers, accountants, and consultants come to town, stay at luxury hotels, patronize the better eateries, and are forced by a very protective local bar to engage local counsel for all court hearings. At the same time, Wilmington is the world capital of credit card companies, and therefore, an important constituency and contributor to Senator Biden’s political coffers. The original iteration of BAPCPA eliminated state of incorporation as a sole basis of venue for filing; in other words, a multibillion dollar Texas company, for example, which had no connection with Delaware other than on its certificate of incorporation (Delaware is a favorite choice for incorporation for reasons beyond the scope of this piece), would have to subject itself to Texas-style rough justice. This did not sit well with Senator Biden, who had vested interests, it seems, on both sides of the bankruptcy street, debtor and creditor. As a condition to his support of BAPCPA, Senator Biden insisted on the removal of the offending venue provision. As a result, Delaware remains the comfortable home for mega-case, complex Chapter 11’s; a sure source of delight to both Senator Biden and the Wilmington Chamber of Commerce.

Both Senator Schumer’s and Senator Biden’s stories are testament to that phrase famously uttered by that well-known wit, and craftsman of the bon-mot, Otto von Bismarck (huh??) to the effect that: “If you like laws and sausages, you should never see either one made.”

BAPCPA also made injurious changes to the business bankruptcy laws, which make reorganizations both more expensive and less likely to succeed. Nobody cared when this legislation was passed, as there were precious few business bankruptcies. Nobody cared about the anti-consumer provisions of BAPCPA either, when the middle class had no need for bankruptcy relief, and only the poor (who, alas, have no political lobby), were nearly the only constituency turning to the bankruptcy courts for help.

Now, our middle class is terribly and visibly squeezed, in a vise of falling home values and exploding debt. Its members will soon learn that bankruptcy may not be a viable course available to them for the discharge of obligations they can no longer meet. Do not feel sorry for the credit card companies; they brought this on themselves and upon their customers. In any case, the losses they will experience from increased defaults will be nicely cushioned by their unconscionably high interest rates and outlandish fees. Do not feel sorry for our politicians who will soon (and rightly) feel the backlash and outrage of their constituents for supporting a law that blocks any path to financial recovery. They have already been compensated for their efforts. By all means, do feel sorry for the overextended, honest working stiff, who has been suckered into the maw of rampant easy credit and gross consumerism. But do not expect this issue to make its way into the public consciousness until after the election, as neither party wants to bring it up. Nearly everyone, in both parties, has his or her dirty paw prints all over the “reform” that is BAPCPA.

Copyright 2008
Warren R. Graham

Friday, September 19, 2008

Never Fear, Paulson's Here!

Imagine the following scenario: You’re in the “high limit” room of a Las Vegas casino, shooting craps. The table is hot, hot, hot! You’ve got a pile of black hundred dollar chips spread out over the pass line, and the numbers 5, 6, 8, 9 and 10, all with full double odds. The point is 4. The numbers keep hitting, and the pile keeps growing. You continue pressing your bets. Now, you’ve got thousands of dollars riding on every roll of the dice. More numbers hit, more money piles up, and the bets increase. “Press the bets,” you tell the croupier. .“Yes, sir,” says he. “You’ve got a bet.”

“C’mon, little Joe from Kokamo,” you pray, to the gods of chance.

Then, OOPS, the inevitable happens: “Seven out!” says the boxman. “Take the line, pay the don’ts.” The croupier, reaching over the table with his dreaded rake, takes all your chips off the table. After a long hot run, suddenly you’ve given back all your winnings and lost your entire stake.

But, fear not: your luck hasn’t yet run out. You turn around, and there, standing right behind you is Treasury Secretary Hank Paulson. He is beaming with a beatific smile. He reaches into his jacket pocket and pulls out a checkbook.“How much have you lost, my friend, he asks?” When you tell him, he says: “No problem. Here’s a check, courtesy of the United States of America. If you are able, pay it back someday. If you can’t, no worries! Your losses are covered in any case. In fact, why don’t you go back to the table, and play some more? I’ll stick around, just in case you need me again.”

A full understanding of the intricacies of the dice table might make this a more vivid illustration, but I’m “betting” that you get the picture.

Let’s see: Bear Stearns, Freddie Mac, Fannie Mae, AIG and now, the ultimate: your benevolent Uncle Sam is about to backstop all those troubling, nasty, panic-inducing, balance sheet-wrecking, impossible-to-value, junk-rated, securitized pools of sewage, which have generally become known as “subprime mortgages.” At the same time, Sugar Daddy Hank issues orders from on high to those nasty, hateful short sellers: “OK, now there’ll be no more of that! After all, short selling might make the Stock Market go down, and worse, engender public pessimism about the economy. And on the eve of an election, no less.”

Isn’t this all wonderful news?

Remember those Gen-Y, 30 year old investment banking captains of industry who made tens of millions, plus or minus, in each of the last couple of years? They did so, in large measure by packaging as “securities,” pools of subprime mortgages, built on a house of easy money cards, sold by hucksters and bought by people gullible enough to believe that “[y]es, Virginia, there is a Santa Clause;” that they, too, could realize the American dream of owning a home without the pesky nuisance of having to accumulate savings for a downpayment, and earning an income sufficient to support their debt service when the sucker-teaser rates reset. Those same young’uns then sold those gift-wrapped-with-a-pretty-bow securities to financial institutions, who were, in turn, too greedy and stupid to do what financial institutions are expected to do: sell their most valueless assets out to an unsuspecting public.

How about those other barely-old-enough-to-shave hedge fund managers, raking 40% off the top, plus a very handsome management fee, in exchange for producing enormous profits in a spiraling bull market for their well-heeled clients, in the expectation of endlessly appreciating home values and stock prices? Remember how those guys ended up paying taxes on those towering stacks of money at the capital gains rate of 15%? Remember how, at the same time, the sanitation worker continued to pay his taxes at the fully indexed federal income tax level, got socked with a “marriage penalty,” and teetered on the yawning abyss generally known as “Alternate Minimum Tax,” so that his meager and pitiful itemized deductions might be disallowed by that same Sugar Daddy Hank?

Well, folks, the government would certainly love, on the eve of election, to return us to those halcyon days of yore, but it can’t. The housing values won’t support the subprime mortgages, those beautiful gift-wrapped pools of those same mortgages (belying the pieces of coal within) are depriving the financial institutions (who are largely responsible for this financial “Pearl Harbor”) of the capital requirements to allow them to continue in business, and the coupon clipping investors won’t stand for their fund managers taking those big chunks of their money in a foundering market.

So, what is our gang of merry pranksters in Washington to do? The Wall Street “houses” are burning, threatening high six and seven figure bonuses, and in many instances, even jobs themselves, the quasi-governmental “corporations” who had backed up these garbage mortgages are teetering on the verge of bankruptcy, insurance companies, ostensibly in the business of {gasp} selling insurance (a highly profitable business), are discovered to be, instead, in the business of making foolish investments, at the expense of trusting stockholders, not to mention policyholders. So Sugar Daddy Hank fires up the printing presses, opens up the public wallet and agrees to backstop the collapse of Bear Stearns, Freddie Mac, Fannie Mae and AIG. Somehow, poor old venerable Lehman Brothers fell between the cracks and, for some reason was, alas, not “too big to fail.”

Nevertheless, and notwithstanding Hank’s commitment of John Q. Taxpayer to untold billions (and maybe trillions) of dollars to rescue these mismanaged businesses, the infection simply could not, and would not be contained. The Stock Market appeared to be in free fall, and every investment house looked like easy pickings for other investment houses, corporate LBO raiders or vulture funds.So Hank, hankering for more, has apparently agreed to put the national weal behind the entire subprime debacle, thus relieving investment bankers, brokerage houses, banks, insurance companies, and other houses of ill repute, of the inconvenience of having to explain their foolish decisions, or to suffer their punitive consequences. In most cases, it is the unwitting shareholder who will have his or her asset erased. But have no fear. The CEO of AIG is walking away with a $7 Million severance package.

And yet, it gets even better. Now, our kindly own uncle has decided to nip this virus right in the bud: It will shoulder the entire burden of all these reams of valueless paper. The cost of this, as of this writing, is estimated to be in the trillions. The Stock Market is euphoric with the news that its most illustrious (and negligent) denizens will be freed of the shackles of these problem assets.

Still better yet, the cast of characters who brought us this national debacle will be able to hide under Uncle Sam’s skirts, while Americans, already overburdened with soaring fuel and energy costs, will surely foot the bill. Of course, there is another alternative: the government can float more bonds (which might or might sell, given the unattractive interest coupon that all these machinations have engendered), or continue to sell off pieces of our national treasure to such “friends” as Dubai and China.

What a country, eh?

Well, friends, lest this all sound like the rantings of a socialist, don’t be misled; it is, in fact, exactly the opposite. I am a capitalist to the core, and a conservative. Where I come from, those values suggest that risk takers are sometimes rewarded, and sometimes punished. The bigger the risk, the bigger the reward (or loss). Regrettably, our “Republican” administration has forgotten all about that and, instead, has abandoned its “shrink the government and keep its damned hands out of my pocket” mantra in favor of government-as-guarantor of all private losses. This government, which has steadfastly refused to intervene (via the SEC) in enforcing laws already on the books and neglected to seek some oversight over opaque hedge fund shenanigans (remember those capital gains rate tax loopholes?), has now decided to jump into the fray, by lending a parachute to the mismanagers and coddling the malfeasors. In addition, because “a rising tide lifts all boats,” Hank has, yet again, engaged in naked market manipulation by seeking to prohibit short selling (particularly in financial stocks), and releasing news at the end of nearly every trading day, designed to promote glee in the trading pits. Such activity, if engaged in by a private individual, would have the SEC seizing computers and pursuing federal investigations in a New York minute.

If all of these increasingly desperate efforts to prevent Darwinian inevitability in the financial world prove unavailing, as they likely will (after, in passing, tripling the national debt), the government might consider, for example, prohibiting ANY selling of stock, so as to ensure endless price rises. Perhaps, our government will, as the Democrats in Congress are urging, will place a moratorium on foreclosures. This will enable people to continue to live in their homes they cannot afford, and which have no equity without paying for them, while those with better credit ratings and “prime” mortgages continue to meet their obligations, month in and month out. While this moratorium is underway, of course, the government, which will have, one assumes, have bought this paper at a discount, will derive no income whatever from them, thus having laid out trillions for no return. It’s a good thing that Hank doesn’t have to answer to shareholders and a board of directors for his actions as CEO, for he’d surely be canned for that level of non-performance of his loan portfolio; rather, he reports only to the President (and he, in turn, is no longer running for anything).

We are surely on the path of virtual nationalization of each company that is about to fall in the row of dominoes that is our ill-used financial services industry. The solution lies elsewhere, and it’s not pretty and it will hurt. Sick companies must be allowed to sink or swim. Otherwise the concept of any vestige of a free economy is an illusion. It will be painful, indeed. People will lose jobs, the Stock Market will fall (quite a lot, perhaps), shareholders (many of them, sadly, relying on their holdings for retirement) will absorb serious losses and people will have to give up homes they can’t afford. But the government cannot and must not try to solve every problem, stem every loss and plug every hole in a leaky dike. We will pull out of this by mostly letting nature take its ugly course. The current policy of “shifting the deck chairs on the Titanic” will only prolong the agony.

Alas, that is not how Hank sees it. Remember the crap table metaphor? Hank will bankroll you endlessly, but you better not play the don’t pass line. “Wrong” bettors are not welcome here.

Warren R. Graham
Copyright 2008

Tuesday, November 27, 2007

Our Loss is Abu Dhabi's Gain

The Stock Market rallied strongly today. The Dow finished up about 215 points, on the heels of a very poor showing during the prior session. What accounts for this burst of optimism? A strengthening dollar? Rampant Holiday Season consumer spending? A revived housing market? Increased corporate profits? An end to the credit crunch? If you guessed any of those, you are dead wrong.

No, my friends, the exuberance exhibited on Wall Street today was occasioned by the formal announcement that we are selling our assets to the Arabs. That’s right. And it bears repetition: We’re selling our assets to the Arabs! And what’s more, Wall Street is excited, because it’s likely that, if we’re lucky, we’ll soon be selling more to them.

This morning, it was announced that an equity fund domiciled in Abu Dhabi, which apparently controls somewhere between several Hundred Billion and One Trillion dollars (apparently, when the numbers reach this magnitude, a few Hundred Billion more or less can be rounded off to the nearest Trillion), has made a $7 Billion investment in Citigroup, which will yield 11% over the next few years, and will then be convertible to stock. The source of the “up to a Trillion” fund is, of course, ourselves, and represents years of transferring our national treasure to the various and sundry royal families of the Middle East, in exchange for the privilege of driving our gas-guzzling monster vehicles. So now, the funds are coming back to this side of the Atlantic, except in the form of foreign ownership of our banks and financial institutions.

This, my friends, is what they really mean by “A Global Economy.”

Our government’s debt instruments are owned by the Chinese, and our real estate by international consortiums (or is it consortia?) of Europeans and Asians. Our labor force has been exported to India (have you called Microsoft Tech Support recently?) and now, we are only too happy to sell off our much-weakened financial institutions to the Leaping Lords of the Levant, who are only too happy to lend us back our (much lower-valued) dollars for a whopping 11% guaranteed return. Indeed, why wouldn’t they?

I don’t know about you, but I am finding it hard to feel exuberant about this state of affairs. By most accounts the economy is on a downward trajectory, and while the pundits can argue daily, as they do, about whether we are going to have a recession or merely a slowdown, it is clear that something is not right about the economic trend here. Larry Kudlow can continue to “believe in a strong America” (God, what a fatuous gasbag!), and the other CNBC chatterers (who, not coincidentally, are in the business of selling securities) can tell us how a collapsing dollar is really good for us, because it enhances exports, but John Q. Public knows better. That’s why the retail industry is quaking and shivering in its fine (unsold) leather boots and cashmere scarves.

The bull market case for today is that if Abu Dhabi is prepared to commit Billions to Citigroup, the situation cannot be so bad. After all, such an investment brings the Citigroup capital reserve requirements back up to snuff, notwithstanding its exposure in the subprime space.

The rationale, therefore, is that the Arabs know something we don’t: that this is merely a short-term blip in the running of the bulls on Wall Street, and that everything is really OK. But does this analysis bear even superficial scrutiny? Nobody really thinks that Citigroup is going under. In the final analysis, the U.S. Government could simply not allow that to happen. So what really is going on is that an Arab investment consortium is making an investment, yielding a fat and juicy 11% return, effectively guaranteed by the Full Faith and Credit of the United States of America. You don’t need to be T. Boone Pickens to spot a bargain like that. All you need is to be flush with Petrodollars.

We all know, in our hearts, that our beloved America has been for sale for quite some time now. The danger to all of us is that this time, it is now ON sale.

Warren R. Graham
Copyright 2007

Monday, October 01, 2007

Irrational Exuberance Redux

Well, it’s official. The traders (mostly large institutions and funds) who move the Stock Market have now lost all touch with reality. This morning, after new of an enormous write-down and profit warnings by Citigroup, UBS and many economists, near panicky price-slashing by Wal-Mart in anticipation of a lackluster holiday season, the cancellation of several high profile deals, and a public statement by Greenspan expressing concern that a housing meltdown in the U.S. might well hurt the entire global economy, these traders reacted by blowing the Dow right through the previous 14,000 level, and as of the time of this writing, taking it up over 200 points.

The reason, say the generally clueless Wall Street analysts employed by various media outlets is the prospect of lower interest rates to come; perhaps much lower. And they’ll probably get it, now that Ben Bernanke has proven himself unable to stand any pressure from the banks and the hedge funds. The markets, in fact, have been bubbling with pie-eyed optimism nearly every day, since the recent interest rate cuts.

It follows, they say, that with fixed income securities becoming less attractive, and real estate in trouble and generally illiquid, equities will continue to be the only place to be. Never mind oil prices heading up to $100 a barrel. Never mind the increasing prospect of recession. Never mind that stocks are trading at near historically high multiples, and that is based on profits that are nearly guaranteed not to increase, but to decrease in 2008. Never mind that the U.S. Dollar is in free-fall, with no apparent end in sight.

The reason for this buying frenzy, however, is much more basic than a reasoned analysis of the benefits of easy fiscal policy. It is, quite simply, mass hypnosis, short covering hysteria, and outright denial. “Buy now, or miss the party!” “Buy tech, it’s a safe haven.”

Tech, a safe haven??! Have we really gone so off the rails, that the term “flight to quality” now means that widows and orphans should stake their retirement nest eggs on the prospect of endless good times at Cisco, rather than U.S. Treasuries? Is Red Hat the new Municipal Bond?

Apparently so. And, to use a hackneyed metaphor, the financial world is “fiddling while Rome burns.”

Lower interest rates (and remember, we’re talking only about short-term rates. The Federal Reserve has little or no control over long-term rates, which are actually trending higher) cannot, by themselves, enhance home values. They cannot induce lenders to lend to non-creditworthy customers anymore, at least in the near term (presuming that those lenders have learned some kind of lesson from the sub-prime crisis). They cannot really spur consumer spending either. Credit card rates rarely go down much with the Fed Funds Rate, and Americans are already drowning in a sea of unmanageable credit card debt. In fact, the falling dollar is likely to substantially increase the cost to consumers of goods, especially those imported from abroad. Foreign banks and investors are already reducing investment here because they are losing money every day, as the dollar declines against their own currencies. They also do not want to hold dollar denominated instruments for the same reason.

If lower rates do somehow turn out to stimulate the economy meaningfully (a dubious proposition, to be sure), one likely result is, of course, renewed inflationary pressure. And while we are all told that food and energy should be stripped out of the inflation measure, very few of us can get by without food and energy. Food prices have gone up dramatically in recent months, and the suggestion that gasoline and heating oil prices will continue lower notwithstanding $80 a barrel oil is just plain mendacity. Nothing spooks the Fed like inflation. And at the first sign of it, the trend will start to tightening, no matter how much the markets recoil at it.

It may be that lower rates will have a beneficial effect on the Merger and Acquisition business and may reignite the crazed “urge to merge” mania of the last year or two. That remains to be seen. The beneficiaries of those deals, of course, are not Mr. & Mrs. John Q. Public. They are, rather, the same (very few) folks who made tens or hundreds of millions in the last couple of years, in an era of almost cost-free money, charging their clients whopping fees, and paying low taxes. Even for an unabashed capitalist like myself, there does seem a certain excess and decadence in all that. The clients, of course, never complained, so long as their returns were high. Only when the quality of some of these investments came into question, and investors started pulling their money out, did these funds scream for Bernanke to ride to the rescue. Which he has, thus far, done, in spades.

Meanwhile the markets go on in a gleeful upside rampage, blissfully ignoring all bad news, or worse, interpreting all bad news as good, because financial weakness leads, they suppose, to easy money.

Hey, how about those Mets, eh?

Warren R. Graham
Copyright 2007

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