With the price of Thanksgiving dinner up 11% this year over last, the Fed won't help consumers because it's confident that inflation -- as measured by Personal Consumption Expenditures (PCE) will range between 1% and 2%. Meanwhile, Washington is happy to create lucrative business deals for Wall Street -- in the form of arrangements to manage and keep records of its Structured Investment Vehicle (SIV) bailout.
What is the Fed smoking? I don't know any personal consumption expenditures that are growing at 1% to 2%. The price of oil has quadrupled since January 2001 to $99.29 a barrel, gasoline prices are up 40% since last year, airfares have more than doubled -- a flight from Boston to Florida that cost $300 last year is now $700 -- and the dollar has lost 61% of its value since January 2001. I guess the Fed has decided to define PCE in a way that conveniently confirms its pro-inflation interest rate policy.
Meanwhile, the Treasury Department has backed a Super-SIV plan to bail out banks, such as Citigroup Inc. (NYSE: C) which created the $320 billion SIVs industry and invested the proceeds of SIV-issued commercial paper in now-worthless mortgage backed securities (MBSs).
Now the New York Times reports that BlackRock (NYSE: BLK) will probably get the lucrative job of managing the Super SIV, a job that includes the following duties:
- Managing the securities sold into the fund's portfolio,
- Deciding whether to sell an asset at a particular price or hold it to maturity, and
- Possibly determining the prices of the securities.
This last duty is the key. If Blackrock can determine the price of these securities it will be in a position to profit enormously. This is the ultimate irony that a Republican administration that allegedly believes in free market principles would dole out a government contract to let one firm set the price for these MBSs.
The whole reason that the SIVs need a bailout is that nobody is willing to buy them. Why not just let the market work by writing them down to zero and moving on? Not when there's political pork to be paid out.
Meanwhile, the lucrative job of custodian to the Super SIV -- which would oversee the financial record-keeping and other back-office operations for the Super SIV -- has yet to be assigned -- although speculation centers on Bank of New York Mellon (NYSE: BK).
Enjoy this good news for Wall Street as you fill up with $3.08 or more a gallon for gas on your drive to grandmother's house.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup securities and has no financial interest in the others mentioned.
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Reader Comments (Page 1 of 1)
11-21-2007 @ 10:53AM
Janeg said...
I’m hopeful that Citibank’s change of leadership will lead to new practices. The NewsVisual article http://www.newsvisual.com/newsvisual/2007/11/robert-e-rubin.html on Citigroup gives one hope for a turnaround, since it shows that Robert Rubin, the interim leader, has experience in both the private and public sectors. So it would be hard to replace him.
11-21-2007 @ 1:18PM
william lindblad said...
At the moment, things are pretty confusing.
Data and reports make the public eye and, depending on who is doing the reading, are seen as both good and bad. In the case of the SIV's, let's remember that Moody's put "AAA" ratings on a good deal of them. That made them top shelf investment grade securities. As it turned out a lot of this was really something else in disguise - junk bonds.
Oversight or on purpose the result is going to be around for awhile. Housing starts just came out. If one feels that building more into a market with excess inventory, than the report is positive although I expect there are few that feel that way. Employment figures look decent but they never take into account how many have exhausted benefits nor does this report consider those that do not pay into these funds. With good reason, the government and it's agents are making all attempts to maintain economic calm. If one considers the estimates of potential monetary damage, they have good reason.