Experts Agree Everything is Fine

These people get paid for these opinions?  A bevy of local experts has met and concluded that SLC will face no more than an economic bump and will soon be right as rain.  They quickly gloss over the vacant lots, vacant storefronts, and aging "For Lease" and "For Sale" signs.  They focus on all the construction cranes downtown.  Never mind that there is no logical connection between the LDS Church's ability to build City Creek and merchant's and consumers' abilities to populate it.  Of course one of these "experts" is Frank Gray who has been completely outflanked on the Sugarhouse pit fiasco by Craig Mecham, who isn't the sharpest knife in the drawer, so logical conclusions shouldn't be expected.  In the mean time, the county's revenue projections are down nearly $11 million due to the economy.  Yeah, that sounds fine to me.

If you're in business, there are times when you need experts: an accountant here, a lawyer there, an HR adviser some other time.  When it comes to determining if you have enough business, though, or what your customer traffic is going to look like when half the tenants in your shopping plaza go dark, you are the expert, and if someone tells you things are fine when you know otherwise, turn down the sound.

The Rate Cut Is No Fix

The headline in today's Trib screams, "Rate cut won't be a quick fix." I beg to differ. It won't be any kind of a fix. Time for a lesson every business owner should sit through: the difference between liquidity and solvency.

A rate cut reduces the cost of money and encourages people to borrow. This would be a fix if the problem were lack of demand, but that isn't the problem. There's plenty of demand, but people can't find credit.

So the problem must be supply, right? And you encourage supply by encouraging lenders to lend more, such as by providing them with cheap capital to land and guaranteeing their loans (Which is what the recent bailout does, except it goes a step farther and says, "We'll guarantee you loans no matter how idiotic they are." Also, the federal government, by encouraging both demand and supply, is now moving in opposite directions simultaneously, which should surprise no one.). But the problem isn't supply, at least not that kind of supply. The problem isn't that the supply is there but the pump needs primed to get it flowing so everything can get back on track.

The problem isn't liquidity. The problem isn't that the system is strapped until pay day and needs something to cover until then. The problem is solvency: There aren't enough assets to cover the liabilities. The only way you can get a lender to bring more to the table in those circumstances (to allow you to increase your liabilities) is to bring more assets. And we're talking about hard assets, not IOUs and other paper.

For example, my cousins in Iceland have ridden the finance boom like Viking raiders. Unfortunately, the longship has sprung a leak, and they might not be able to bail fast enough. Iceland's three main banks are all in trouble, and the government shut one of them down yesterday. Personally, I think they're going to have to go back to herding sheep and eating rotten shark for a couple of generations, but in the mean time they're desperately trying to maintain the status quo. They've even asked Russia for money, but Russia wants real assets, not paper. Iceland has offered the old, US airbase at Keflavik. Think a bit about the irony of that one. But that's the way it will be, even for the US. In order to increase our liabilities (budget deficit, trade deficit), we shall have to give up assets (land, factories, companies). That's the difference between being illiquid and being insolvent. You can paper over illiquidity, remain intact, and move on. If you are insolvent, people will take pieces of you until there is no more you.

Liquidity problems are short term. There is no such thing as long term illiquidity (Back to the Trib headline. If the rate cut doesn't solve things quickly, it won't solve things at all, because the problem isn't liquidity.). If you are constantly borrowing to cover operating costs, your problem isn't illiquidity but pending (or existing) insolvency, and if you don't correct it right away, you're spinning in.

Choosing a Bank

This used to be a fairly simple process. Convenient location probably dictated your choice. Maybe you knew somebody at the branch. If you were really interested, you'd check interest rates and fees.

Not so simple any more. Now you have to worry about whether the bank is going belly-up.

Case in point. I've banked at Washington Mutual for years. Now it's gone, swallowed by Chase. Now I could stay, and turn into a Chase customer, except that I don't like Chase and don't trust it any farther than I can drop kick an anvil. So I'm shopping.

The obvious choice around here is Zions Bank. But I'm not going to go with the obvious choice. Some people out there are saying, "Oh, it's because you're not LDS." That has nothing to do with it. Zions doesn't care about my religious affiliation, and I don't care about its. My concerns are strictly what any business person's should be when making such a decision: business.

Zions has made a lot of loans. If SunCrest is any indication, a lot of those loans are garbage. I know there is a substantial amount of collateral tied up by the ANB receivership because ANB and Zions have the same collateral. That isn't good.

Zions also seems to have become the FDIC's local go-to guy for buying up problem banks, Silver States being the latest example. The FDIC's demands for those services are about to go up, and the value of the takeovers is about to go down. I'm wondering if Zions will find a way to just say "No."

Finally, Zions has engaged in some creative accounting, as evidenced recently by its having to pull off-books investments back onto the books. How can I tell what its liabilities actually look like?

If you aren't going through an analysis like this, you're asking for it. It simply isn't simple any more.

Coincidence?

So Wachovia agrees to be taken over by Wells Fargo instead of Citi. And unlike Citi, Wells won't use FDIC assistance for the takeover (At least not yet. Watch for something down the road when all the dust has settled and it can slip under the radar.). And now Wachovia has put partial freezes on Commonfund's Short and Intermediate Term Funds.

How does all this tie together? 1) The FDIC can say, without needing Botox to maintain a straight face, "See, the system works. We aren't insolvent. (Yet.);" 2) Instead of three banks (JP Morgan Chase, Citigroup, and Bank of America) holding nearly one third of the deposits in the US and Citi weighing in at over 11%, you will have four (Add Wells.) at nearly 40% and none over 10% (Appearance is everything when looking at market concentrations.); 3) The presidents of the 1,000 or so colleges and universities with investments in Commonfund will be calling Congress today screaming, "Do something!"

All this just in time for the House revote on the bailout.

Coincidence?

Naked Shorts

No, it isn't a porn film.  Short selling is selling something (typically stocks) you don't have in the hope you can buy it later for less than you already sold it for and pocket the difference.  In a regular securities short sale, the seller borrows the stock from somebody who already owns it, closes the sale with the borrowed stock, then buys stock and gives it to the guy he borrowed from.  In a naked short, the seller doesn't bother borrowing; he closes the sale when he buys the stock down the road.

A lot of people think naked shorts have caused much of the recent market downturns.  As I've noted previously in this blog, Patrick Byrne, CEO of Overstock.com is one of them.  He's convinced naked shorts are what have driven down Overstock's stock (conveniently ignoring Overstock's chronic inability to turn a profit greater than the neighborhood lemonade stand).  And the SEC announced on 17 September that it is piling more regulations on "abusive naked short sales."

Byrne is feeling his oats about this now and is lecturing on the evils of naked shorts today at the U and tomorrow at the Miller Business Center.  I read about these lectures in yesterday's Tribune in an article by Steve Oberbeck.  Oberbeck says in the article that naked shorts are "an illegal trading tactic."  I emailed him to correct him; they aren't illegal, just restricted.  He hasn't bothered to respond or correct.

A word of caution to those of you who count on PR: If you turn an item over to the media (print or broadcast, it doesn't matter) and it contains a legal issue, it will get screwed up.  And chances are they won't correct it.

No, Not Everyone Believes The Same Way You Do

Let's face it folks, whether you like it or not, the workplace is becoming more diverse, and with that come culture conflicts.  Observant Jews begin Sabbath at sunset on Friday (which comes mighty early in Seattle in the Winter) and don't have much use for your Spring and Winter vacations that "just happen" to coincide with Easter and Christmas.  They want other days off instead.  Muslims have similar issues, and they're also supposed to pray five times a day.

Managers really need to get out in front of this.  Eventually, somebody will be asking for religious accommodations, so you might as well come up with a plan now.  Give it some though, get some help from an HR professional and/or an attorney.  And don't think you'll solve the issue by simply refusing to hire them thar ferners.  All that approach will get you is a visit from another attorney and someone from the government who isn't there to help, and they'll tell you to open your check book and write however many zeros they tell you to.