In a book called Firefighting – The Financial Crisis and its Lessons written by Ben S Bernanke, Timothy F Geithner and Henry S Paulson published by Penguin Books, NY, 2019. The book offers lessons from a crisis. The 3 authors were the lead news daily in 2008 through 2010 as the financial industry went through losses, destabilization, recession and recovery. The 3 people had to come up with a variety of tools to fight the fires and to allow for recovery. In all industries including finance, regulations are there for the last crisis not the current one. If the crisis is worse this time, the regulations are less effective because all industry change from the last crisis. Finance is always a little different because much of finance is about confidence. Banks lend money, they have to have a level of confidence the counterparty will repay. When the confidence falls, investors run will their money to something safer. When money goes to something safer, it effects regulatory levels.

Not surprisingly, the 3 authors noted the system is more complex than ever and when they tried to do something, they quickly realized the tools in the toolbox were not sufficient for the job and needed to persuade politicians to give them better tools.

The story of Lehman was a nightmare because it was loosely regulated, heavily overleveraged, deeply interconnected nonbank, with too much exposure to the real estate market and running on short-term financing. It was not the start of the crisis, because Fannie Mae, Freddie Mac, AIG and Merrill Lynch were bigger and near collapse.

The reason why Lehman collapsed was because the policymakers could not save it, they had no powers. However after Lehman collapsed, the policymakers were given the power to end the fire. Lehman was highly profitable on subprime mortgages, commercial real estate and other highly leverage investments. If Lehman had been a commercial bank, the FDIC could have seized it, guaranteed its liabilities, and resolved it to avoid a messy bankruptcy. Lehman is a nonbank, no one had the power to help. Lehman needed a buyer, Bank of America (BoA) was considering then it bought Merrill. Barclays was considering but it needed a shareholder vote and there was no time for it, so the regulators in the UK said no.

AIG, the global insurer, had fallen through the cracks of our broken regulatory system. The 3 policymakers had not paid attention to the company, as Office of Thrift Supervision was its regulatory body. AIG insured the lives of 76 million people, 180,000 businesses that employed 2/3’s of America’s workforce and had $2.7 trillion derivative contracts through the Financial Products division. The insurance aspects were the reason the Fed gave a $85 billion credit line in exchange for 79.9% of the firm.

Some critics were outraged the Fed did not insist on haircuts that would reduce payments. Haircuts are a common feature during the normal bankruptcy process, but they a sure way to make the panic worse and the Fed did not have the power to insist on haircuts. The goal of a crisis response should be to alleviate fears, not to confirm and amplify them.

Eventually AIG paid back its guarantee and when the government sold its position made $23 billion.

The next step was the AMLF (Asset Backed Commercial Paper Money Market Mutual Fund Liquid Facility) This was designed to stop the run of money market funds with invested $3.5 trillion for 30 million Americans and the commercial paper market which is the lifeblood of many companies. The idea was to guarantee money market funds just as the FDIC guaranteed bank deposits. Within 2 weeks the program was up to $150 billion.

For months, the policymakers had been working on stronger emergency authorities, but Congress had not given anything. President Bush said the time had come to go to Congress and the TARP or Troubled Assets Relief Program came into being. It was designed to buy up to $700 billion of toxic mortgage-backed securities.

The process was for the House of Representatives to vote for it, then the Senate and the President signs the bills. The first vote in the House lost with Republicans voting against, then the stock market fell 9% or $1 trillion and some Republicans came to their senses. The bill passed the second time in the House and Congress and the President signed off.

For crisis managers, it is vital to have the tools you need before a crisis, so that they do not need to rely on political leaders to take political risks in real time under the public microscope.

Now that the policymakers had the tool of TARP the issue was hope to use it. Do they make assets, equity because the system needed more capital and buying assets was an indirect and inefficient way to boot capital levels. There was no easy way to determine which assets should be bought. Eventually Hank’s team decided to buy nonvoting preferred stock rather than common equity. This would calm fears of a government takeover, and do so on relatively attractive terms so that strong and weak banks would accept the capital and restore confidence in the system.

The 9 biggest banks were summoned to Treasury and were told to accept the equivalent of 3% of their risk-weighted assets for a total of $125 billion in TARP investments. If they did not take it, then the other government guarantees would be taken away from them. For the rest of the banking system $125 billion was available to smaller banks and eventually nearly 700 banks took financing. This was a critical step toward stabilizing and recapitalizing the banking system.

In Europe, banks were nationalized but not giving capital and were undercapitalized for years. This lead to a slower recovery.

The policymakers wrote about incoming President Obama and President Bush working together and then Obama doing a very good job both in understanding and continuing the regulations in his term.

In May, the Fed released the results of its stress test, and they were much better than many in the markets has expected. The Fed determined 9 of the 19 largest financial firms were already adequately capitalized to withstand the test’s worst case scenario and the other 10 needed $75 billion in additional capital which was given.

The economy was helped by the American Recovery and Reinvestment Act of 2009, $300 billion in temporary tax cuts along with $500 billion worth of new federal spending. By 2015 the economy had recovered to precrisis levels.

Linking to dividend paying stocks, when parts of the economy or the economy goes into crisis, it will take time to come back to precrisis levels. If you have invested in dividend paying stocks, you will have dividends that could go into some of the better companies that were affected by the crisis. Cash is king during a crisis, but patience is a virtue, because if you have done your homework in advance, you can pick up great assets for less money and continue with healthy dividends.

There are more questions than answers, till next time – to raising questions.

In a book called Firefighting – The Financial Crisis and its Lessons written by Ben S Bernanke, Timothy F Geithner and Henry S Paulson published by Penguin Books, NY, 2019. The book offers lessons from a crisis. The 3 authors were the lead news daily in 2008 through 2010 as the financial industry went through losses, destabilization, recession and recovery. The 3 people had to come up with a variety of tools to fight the fires and to allow for recovery. In all industries including finance, regulations are there for the last crisis not the current one. If the crisis is worse this time, the regulations are less effective because all industry change from the last crisis. Finance is always a little different because much of finance is about confidence. Banks lend money, they have to have a level of confidence the counterparty will repay. When the confidence falls, investors run will their money to something safer. When money goes to something safer, it effects regulatory levels.

Not surprisingly, the 3 authors noted the system is more complex than ever and when they tried to do something, they quickly realized the tools in the toolbox were not sufficient for the job and needed to persuade politicians to give them better tools.

In the spring of 2007, it was clear the housing boom was over and the subprime mortgage market was tanking. But other economic indicators were good such as job market was still strong and bank capital levels seem strong.

Our assumption that the carnage in subprime would bring some healthy discipline to a chaotic sliver of the credit markets without much broader damage seemed reasonable, given what we knew at the time. We did not foresee how the complexity and opacity of mortgage-backed securities would lead creditors and investors to run from anything and anyone associated with mortgages and not just subprime mortgages. Fear turned into panic. Subprime was a problem, but it would have been a problem just for subprime borrowers and subprime lenders. More than 50% of the US housing losses would happen after the failures and near-failures of September 2008. Without the panic, the problems would have been contained. Fear turned those sparks into an inferno.

Crisis do not announce themselves as either small brush fires that will burn themselves out or systemic nightmares with the potential to burn down the core of the financial system. Policymakers need to figure it out as they go along.

The first phase, the Policymakers said no to providing help and the Federal Reserve responded the traditional manner by injecting liquidity into the market. Treasury had very limited financial authority, most of the early action came from the Fed. The injection of liquidity is known as the discount window – it allows a commercial bank facing a cash crunch to access money to meet withdrawals by private creditors without having to sell assets in a fire sale.

Countrywide Financial, a $200 billion firm that originated 1 of every 5 mortgages in 2006. It was also overreliance on lower-quality mortgages and relied on short-term financing. Countrywide issued commercial paper and used repo financing. The policymakers forced Countrywide to draw down its credit line, upgrade its collateral and be sold to Bank of America. The troubling signs the policy makers saw was the $1.2 trillion commercial paper market and $2.3 trillion repo market could be vulnerable to runs.

The next step was to force all the banks to raise capital by selling equity to sovereign wealth funds in Middle East and Asia.

The TAF (Term Auction Facility) a program designed to overcome the stigma of the discount window by lengthening the terms of the loans but actioning them to eligible banks, rather than lending at a fixed rate.

The TSLF (Term Securities Lending Facility) an innovative program that would extend liquidity to nonbanks, allowing nonbanks, including 5 major investment banks, the ability to swap less liquid for more liquid collateral.

When Bears Stearns, the country’s 17th largest institution ran into problems as its cash reserves fell from $18 billion to $2 billion in 4 days, the policymakers had a problem there was a limit to what they could do. The Fed was limited to lending against solid collateral; Treasury need congressional authorization to do more; neither the Fed or Treasury had the powers to guarantee obligations, invest capital or buy illiquid assets to stop a run on a bank. The Fed did not have a standing facility to help an investment bank, it dealt with banks. The solution was for the Fed to lend $30 billion to Maiden Lane which would buy $30 billion of securities from Bear so JPMorgan Chase could buy Bear for $2 a share, down from $130 a few weeks earlier.

The good news for the Fed, since it lent to Bear, it had access to the power to examine the other large investment banks books and run stress tests. It was not good news, all were vulnerable to runs and the Fed pushed all firms to increase their funding or raise capital.

In a crisis, the policymakers must have an attitude to do whatever it takes. We all felt extraordinary times justified extraordinary actions. This lead to the nationalization of Freddie and Fannie. They had hoped it would show the markets that the government was willing to prevent chaotic failures and the result would calm the markets. The markets concluded there was more uncertainty and would happens if a business does not have federal charters? Fear continued.

Linking to dividend paying stocks, one of the reasons you invest in these stocks is they have been through many economic cycles and they have cash and credit in the bank. This credit allows when a sector or competitor has a crisis, they can buy assets at reduced prices and merge them into the company to produce continuing profits. Crisis happen, companies will the ability to access credit can capitalize on it, but only if it has been through the business cycles. As investors, hopefully the crisis does not affect you, but your company can broaden its size and scope at low prices. In the last crisis what did the company do?

There are more questions than answers, till the next time – to raising questions.

In all aspects of life, we hope to learn something because the definition of insanity is to the same thing over and over expecting a different result. If we actually learn something perhaps we can do it better next time. In the world of investing, the best investors have also lost money, no one is perfect, but the more you learn the less you will fail. However somewhere along the line, you will likely made a significant win and then you invest with more money. On the stock market all companies start the day with the same advantages – quarterly and annual reports are made available to the investing public. Many stories are told, some of them are better than others but storytelling is the key to attract multiple numbers of people to buy the stock. If an investor looks back over the years, they will likely same losing money helped me understand the functioning of the markets and over time I learn and prospered. For a new investing, while not encouraging anyone to lose money, if you lost money and learned something important, then it may be worth losing money. If you lost a lot a money it might be a crisis.

In a book called Firefighting – The Financial Crisis and its Lessons written by Ben S Bernanke, Timothy F Geithner and Henry S Paulson published by Penguin Books, NY, 2019. The book offers lessons from a crisis. The 3 authors were the lead news daily in 2008 through 2010 as the financial industry went through losses, destabilization, recession and recovery. The 3 people had to come up with a variety of tools to fight the fires and to allow for recovery. In all industries including finance, regulations are there for the last crisis not the current one. If the crisis is worse this time, the regulations are less effective because all industry change from the last crisis. Finance is always a little different because much of finance is about confidence. Banks lend money, they have to have a level of confidence the counterparty will repay. When the confidence falls, investors run will their money to something safer. When money goes to something safer, it effects regulatory levels.

Not surprisingly, the 3 authors noted the system is more complex than ever and when they tried to do something, they quickly realized the tools in the toolbox were not sufficient for the job and needed to persuade politicians to give them better tools.

In the financial world, too much debt is the biggest problem. The debt is tied to leverage and leverage is the double edge – leverage can increase both positive returns and negative losses.

The basic vulnerability of the financial system stems from the fact that banks provide 2 important economic functions that occasionally come into conflict. The banks allow people to place their money that provides safety and higher interest rates than leaving your money in your mattress; then they use the money to provide loans to finance riskier investments in homes, cars and businesses. In other words, they borrow short-term and lend long-term a process known as maturity transformation. The problem is even if a solvent bank, with assets more valuable than its liabilities, can collapse if those assets are too illiquid to cover its creditors’ immediate demands for cash.

The US has tried to reduce this risk regulation that limit the risks banks are allowed to take, coupled with government-provided insurance for depositors that reduces their incentive to run if their banks seem unstable.

Every financial institution can function without confidence, and confidence is evanescent. It can go at any time, for rational or irrational reasons. When it goes, it usually goes quickly, and it is hard to get back.

The 3 authors are remembering how the system where it was: with the benefit of hindsight. it is clear that the government failed to rein in the excesses that would help spark the crisis. For example, that the government let major financial institutions take on too much risky leverage without insisting that they retain enough capital, the flip side of leverage; the more an institution relies on borrowing, the lower its capital levels, and the greater its exposure to shocks. Capital is the shock absorber that can help an institution withstand losses, retain confidence, and remain solvent during a crisis. At the time, banks were easily exceeding their legally mandated capital requirements, and regulators did not think they could demand that they raise more.

It would later become clear that the backward-looking capital regime for banks, designed to protect against the kinds of losses created by relatively mild recent recessions, was not conservative enough. Regulators allowed banks to count too much poor-quality capital toward their required ratios, rather than insisting on loss-absorbing common equity. And supervisors failed to recognize how much leverage banks had hidden in complex derivatives and off-balance vehicles, which made them look better capitalized than they actually were. And most bankers were overconfident as their clients about risks in the housing market.

And the most damaging problem with America’s capital rules was not that they were too weak, but they were too weak and applied too narrowly. The institutions with the most reckless mortgage-related investments and the least stable funding bases also had the thinnest capital buffers, but they were operating largely outside the reach of the regulatory system.

The 3 of us learned, that reform is extremely tough to achieve without a crisis to make the case for it. Fannie Mae and Freddie Mac owned or guaranteed half of the residential mortgages in the US. We believed they were seriously undercapitalized and under-regulated. Market participants assumed the government that chartered them would rescue them if they ever got into trouble, so the companies felt safe piling up leverage. (there is a line in the movie – The Big Short – the Brad Pitt character says to a hedge fund client trying to short the market, if you right then everyone in the US will be losing money on their residential real estate, the US will be in a recession, do not be too happy). Just about everyone in the US was on the other side of the equation including regulators.

Linking to dividend paying stocks, the reason to initially buy the stocks is for defensive purposes, the companies have been through many economic cycles and continue to make profits. The fact they continue to make profits allows them to trade at higher multiples or the stock prices tend to increase overtime. We all have an expectation of some sort of balance in the economy tills it is not there, but we never are positive what sector will be affected. Once the sector is affected, we realize the economy is very interconnected and what we believe are regulations to protect everyone are not as strong as we hope. Dividend stocks prices will fall, but they tend to bounce back faster as the economy does recover and along the way dividends are still being paid.

There are more questions than answers, till the next time – to raising questions.

When the world was in COVID shut down, very few people travelled. When the restrictions were lifted, the travelling public has regained its pre COVID numbers. For anyone who has travelled, this is good. When you were travelling, you needed oil or gasoline to move about. During COVID, all the share prices for oil and gas companies fell and have since regain their previous positions and when the commodity price of oil goes up, share prices go up. The world still needs oil and gas. The biggest oil and gas company in the world is Saudi Arabia’s Aramco.

The easiest place to drill oil and gas in the world is still Saudi Arabia because of the very rich oil pools that cost less than $5 to drill. This has made Aramco – long a cash cow for the Saudi state.

In an article by Yousef Saba, Hadeel Al Sayegh and Maha El Dahan of Reuters, Saudi Arabia’s sale of shares in oil giant Aramco drew more demand that the stock on offer raising up to $13.1 billion. Aramco is selling 0.7% of its shares. The Saudi government directly holds just more than 82%, PIF (Public Investment Fund) owns 16%.

The world’s top investment banks are helping to manage the sale – Citi, Goldman Sachs, HSBC, JPMorgan, Bank of America and Morgan Stanley. In addition, local dealers in Saudi including Saudi National Bank, Al Rajhi Capital, Riyad Capital and Saudi Fransi are involved. Besides the big investment banks, Credit Suisse Saudi Arabia, BNP Paribas, Bank of China International and China International Capital Corp are seeking buyers for the shares. 90% of the shares were allocated to institutional investors and 10% to retail investors.

Saudi Arabia is producing about 9 million barrels a day of crude or 75% of its maximum capacity.

Linking to dividend paying stocks, as long as people have a desire to see the world or at least travel from their home location, there will be a need for oil and gas. With all commodities, supply and demand play a keep role, but if you can a low-cost producer which allows that even when prices fluctuate the company still makes money, it is definitely worth examining and investing in. Those are the type of companies you can buy and hold for a long time while you enjoy the dividends/

There are more questions than answers, till the next time – to raising questions.

Every large city develops a reputation for particular services and for a while they are a hub for that service, but it is never guaranteed. The clearest example is London, England before Brexit, London was the center for the financial industry, but the voters of England voted, and then alternatives seemed better.

In an article by Eshe Nelson and Michael J De La Merced of the New York Times News Service, London used to be recognized as the center of the finance world, but things have changed. By many measures, London is still a crucial financial hub, where prices are fixed every day for precious metals, trillions of dollars of foreign currency are traded and global insurance contracts are written. But, the global competition among cities such as New York, Hong Kong, Dubai, and Singapore is intense.

Amsterdam overtook London as Europe’s largest share-trading center according to Cboe Capital Markets.

In 2023, in New York 16 companies went public down 84% from 2022, in comparison to London 10 companies went public down 88%. In New York companies that went public raised $9.5 billion while those that went public in London raised $442.7 million according to London Stock Exchange Group data.

In New York, the magnificent 7 have led the markets, the mag 7 are tech companies. In London, the vast majority of companies are banking, mining and oil and gas with few tech companies. The British government has introduced reforms to make it easier for tech companies to list.

One tech company that is looking to go public in London is Shein, an online retail giant founded in China. It was going to go to New York, but geopolitical actions between the US and China made Shein look for alternatives such as London.

Linking to dividend paying stocks, companies are forever looking for the best place to list their shares to take advantage when stock prices go up and it makes sense to issue new shares. Just like every other industry, the companies which own the stock market have to adjust to the changing economic landscape of companies. All companies need access to capital to grow and all industries have companies known by their reputations. Are the companies that you own, reputation continue to be valid?

There are more questions than answers, till the next time – to raising questions.

If you think about China, you may think about the manufacturing center for the world and that means both taking raw materials from around the world processing them to basic materials such as chemicals and steel and then transforming the materials to products that business and consumers can buy and use. This growth in infrastructure in China needs the steel and chemicals, while the export of finished goods allows the cycle continue. Similar to most countries around the world, the basic materials or commodities will go up and down and when they are down for a number of years, they are used in production. Then the price goes up and suddenly alternatives are needed.

In an article by Patricia Cohen, Keith Bradsher and Jim Tankersley of the New York Times News Service, in the alternative energy production, in 2022 according to International Energy Agency, China accounted for 85% of all clean-energy manufacturing investment in the world. While other countries want to increase manufacturing, they face barriers.

China’s lead is built on earlier cultivation of the chemical, steel, battery and electronics industries, as well as large investments in rail lines, ports and highways.

From 2017-19, China spent 1.7% of its gross domestic product on industrial support, more than twice the percentage of any other country, according to an analysis from the Center for Strategic and International Studies. The spending included low-cost loans from stat-controlled banks and cheap land from provincial governments, with little expectation that companies they were aiding would turn immediate profits.

China has been charged with a willingness to skirt international trade agreements, engage in intellectual property theft and use forced labor.

All the above, China is a position today to flood rival countries with low-cost electric cars, solar cells and lithium batteries. For China controls 80% of the worldwide production of every step of solar panel manufacturing.

Gregory Nemet, a professor of public policy at University of Wisconsin, says there are enormous economies of scale by going big as China did. When the investments resulted in overcapacity. suppressing the profitability of China’s companies, Beijing was willing to ride out the losses.

China also benefited from the West’s lack of industrial policy – the west believed in open markets and minimal government intervention that the US has championed. The view is that an unfettered market always knows best.

Recently under former President Trump tariffs were imposed on goods valued at more than $350 billion a year. President Biden kept the tariffs and increased some of the tariffs.

Linking to dividend paying stocks, in many industries in the world once the dominant players are established it takes a long time before they are not dominate. As an investor, you have to accept what is and watch for signs of why that would change, if it is not changing investing in the dominate players is a very good strategy for long term wealth building. If you review the Fortune 500 of Forbes 400 over the decades companies change which means you need to review your portfolio at least every 6 months.

There are more questions than answers, till the next time – to raising questions.

In the world of real estate, there are always conflicting pressures on the market. If you buy in a reasonably good neighborhood and the price goes up over time, it is possible to sell the house and live off the capital gains. In many instances, the house can be inherited by one of the children of the family and it continues to be lived in and price is not that important till the person moves. In 2008 when the mortgage-backed securities market crashed, we saw house prices fall below their mortgages and people walk away from their homes. It took a few years till investors started buying up the homes and renting them out to stabilize home prices in the area. As a society, we believe home ownership is important, but most politicians do not believe housing is a right, but there should not be too many homeless. The housing market has many contradictions running it.

In an article by Alexandra Stevenson of the New York Times News Service, China has a complicated relationship to real estate. Technically the state or government owns all the property as it is a communist country, however apartments are bought and sold for profit. In China, 30 years ago, the bulk of the population lived in the country, however with the transformation of the economy and jobs in the cities, there was a great migration towards cities and they need a place to live.

This happened for decades and real estate became 1/3 of China’s economic growth. In 2020, the central government cut off easy money that fueled the expansion and this has set off a chain of bankruptcies that shocked a country of homebuyers. At the present time China has 4 million apartments no one wants to buy. There is also 10 million apartments that are in the stage of constructions that may or may not be finished. Billions are owed to builders, painters, real estate agents, small companies and banks around the country.

The biggest developer to go bankrupt was Evergrande, but it was managed carefully and quietly to allow Evergrande to finish many buildings. The issue is China has tens of thousands of smaller developers around the country that are in similar situation.

Dan Wang, chief economist of Hang Seng Bank believes the only way forward is for the state to bail out some mid-size developers in cities where the crisis is more acute.

China’s top leaders are encouraging state-owned companies to buy the apartments and rent them at lower rents or social housing. The senior level government has committed $41.5 billion to help fund the loans. The 4 million apartments is about 4 billion sq ft according to the National Bureau of Statistics.

According to Caixin, a Chinese economic news outlet, the government has tried out more than 300 measures to increase sales and bolster real estate companies. The measures include: cuts to mortgage rates, trade in old apartments and buy new ones, cheap loans to states to buy unsold apartments.

The central bank has committed $14 billion to buy apartments in 8 hard-hit cities, however only $280 million has been used. The states are not using the money for the same reason consumers are not buying, the apartments tend to be in smaller cities and no demand.

Linking to dividend paying stocks, investing in stocks includes investing in the property of the company and the expectation it will go up over the years. Some companies will hold on to property for generations and some of it could be sold off for capital gains. In every profitable company there are short term, medium- and long-term pressures, how it balances them is something worth considering? if not, likely a hedge fund will increase the short term pressures.

There are more questions than answers, till the next time – to raising questions.

At the start of 2024, one company you might have expected to do better was Boeing. The company has a duopoly with Airbus in commercial airlines. If you fly, then the chances are very high you are in an Airbus or a Boeing plane. The company had introduced the Max series, regulations had gone through to make it an even better plane and the order book was building to over 3 years. People were flying again and the large airliners were ordering new planes to replace the old ones. Boeing also has a robust military aircraft and defense budgets are not being cut. Then things changed, a door blew out in an Alaskan Airliner and the battery for cockpit voice recorders needed to be fixed.

In an article by Allison Lampert and David Shepardson of Reuters, Boeing will burn rather than generate cash in 2024. CFO Brain West told the Wolfe Research Global Transportation and Industrials Conference he expects Boeing’s free cash flow to be negative compared with March’s outlook for positive cash generation in the low single digit billions.

Mr. West said due to regulatory issues commercial jet deliveries will not step up in 2nd quarter compared with the first 3 months. We have frustrated and disappointed customers owing to the supply chain and production issues. We see progress, but everyone wishes it was faster.

Boeing was aiming for 38 jets a month at its assembly plant outside of Seattle, but that fell to low as single digits in April.

Linking to dividend paying stocks, execution of the business plan is a refrain you often hear. Even companies that have all the advantages in the world, need to execute on their business plans. While Boeing is fortunate there are few alternatives, once it does execute on its business plan it will be a stock which you can buy and hold and watch the planes go by.

There are more questions than answers, till the next time – to raising questions.