Man or machine

Today’s Financial Times has this interesting story about man versus machine — in the financial area – Faith in trading floor returns:

Investors have responded to market turbulence by routing a rising proportion of trades on the New York Stock Exchange through people rather than computers, reversing the recent trend toward automated trading.
The explosive growth of electronic trading had resulted in an ever-shrinking role for NYSE “specialists”, who match buyers with sellers in particular stocks, and floor brokers, who execute buy and sell orders.
But the 105-year-old maple trading floor of the NYSE has roared back to life as market volatility has reached unprecedented levels and investors have sought out prices quoted by human intermediaries.
. . .
One trader noted that in recent weeks, there have been several trading glitches and erroneous orders in all-electronic markets – including so-called “dark liquidity pools”, off-market trading venues that have grown in popularity this decade. He said human traders could have spotted such problems.
“The combination of hi-tech and high touch has been shown in recent weeks to be the best model,” the trader said. “People are becoming a little suspicious of dark pools where at times like these there really is not enough transparency.”
. . .
Todd Abrahall, vice-president for specialist liaison at the NYSE, said: “At no other point in history has the investment community needed this building more. The combination of automated trading with brokers on the floor has recently been an indispensable part of the market in terms of price discovery, aggregation of volume and dampening of volatility.”

High-tech; high touch. That is one of the characteristics of the I-Cubed Economy. Apparently even in the stock market.

Wrong way on GM-Chrysler deal

GM Chairman Rick Wagoner was in Washington yesterday to press the case for immediate aid to the automaker. As I noted yesterday, car companies are looking for help from TARP as well as the loan program.
At the same time, there was this gem – Chrysler ends hybrid adventure before it can begin – Los Angeles Times:

Before it even started selling them, Chrysler is spiking its hybrids.
The troubled automaker said Tuesday that it would discontinue production of its Dodge Durango and Chrysler Aspen hybrid sport utility vehicles at year-end, when the company shuts down the Delaware plant that makes the two trucks.

What!!!! The loan program for the companies was specifically tied to new energy-efficient technologies. And now they are closing plants that build hybrids?
In fairness to Chrysler, it appears that they are still going ahead with hybrid and electric models for 2010. But still …
Is someone at Treasury and the Energy Department paying attention? Yesterday I said that TARP funds should be used to help auto credit purchases. But, with this news, we need to add new criteria: any funds from TARP need to be tied to the same criteria as the loan program — namely, new energy-efficient technologies.
For another take on the pending merger, see Steven Pearlstein column today – Detroit Bankruptcy Beats a Bailout. I’m not sure that I agree with Steve that bankruptcy might be the better way to go. But if the government aid is going to end up moving automakers in the opposite direction of where they have to go on new energy technology, then we should start considered the “b” word.

Is direct infusion working?

The answer to that question is a qualified “we don’t know.” Today’s Wall Street Journal
notes – “Much Bank Aid May Not Go to Loans”:

The federal government’s bank-rescue plan will spread more than $15 billion among 10 regional banks, those companies announced Monday. But some banks acknowledged that perhaps only a small chunk of the money would be funneled into loans.
. . .
Nearly $35 billion in capital infusions have been disclosed since Friday, led by the $7.7 billion in cash that PNC Financial Services Group Inc., Pittsburgh, is using to buy National City Corp. for $4.69 billion in stock.
. . .
Several banks said Monday they plan to use their new capital to make loans and possibly buy weakened rivals. Others suggested a substantial increase in loan volume is unlikely as long as the U.S. economy is troubled, since that is likely to worsen loan delinquencies and charge-offs.

In the meantime the Journal also reports that the “Rescue Plan Faces Delays In Hiring Asset Managers”:

Several hurdles have arisen, including concern over the fees the government will pay asset managers, as well as a lack of manpower at Treasury, said people familiar with the matter. The delays have contributed to investor uncertainty about how effective the rescue plan will be.

So it goes. It will be an interesting time when the Treasury comes back to Congress for the second $350 billion tranche of funding for the TARP.

Aiding US automakers

Yesterday, the Treasury Department announced that US automakers are eligible for financial assistance under the TARP program. As the Washington Post reports:

“The law grants the secretary broad authority to purchase troubled assets that he deems important to improving financial stability,” said Treasury spokeswoman Jennifer Zuccarelli.
Ford and General Motors are eligible because they are both chartered as thrift holding companies, so they can establish banks to make car loans nationwide. Other businesses, such as General Electric, Nordstrom, John Deere and Macy’s, are chartered in the same way to issue credit cards or make loans to their customers. Chrysler would also be eligible, Treasury officials said.

It is unclear at this point exactly what form the financial help might take. According to the New York Times:

Another option under consideration is to tap a $25 billion loan program that Congress just created to help the auto companies modernize their plants. A third option would involve going back to Congress, immediately after the Nov. 4 election, for authority to spend funds aimed specifically at the auto industry. But officials have not yet decided how much assistance to provide or how to structure any aid program.

Under the TARP program, the funds would likely go to the automakers’ credit arms to financial new car purchases. Under the Congressional loan program, the money was supposed to go to production of new energy-efficient vehicles (see earlier posting). Those are two very different activities with two very separate outcomes.
Maybe we need to do both – given the vastly different targets. TARP was created to get credit flowing again – so maybe helping make auto loans is an acceptable use of the money. But the loan program was targeted at the future of the industry. Unless US automakers start producing the products we need, no amount of credit will stave off their decline.
The loan program came with strings attached. When we were giving such aid to other countries (either directly or through the IMF and World Bank), we used to call that “conditionality.” People would complain – but we would insist. Now it is time for US recipients of government aid to get a taste of some of the same medicine.
Give the auto companies the aid. But force them to live up to their side of the bargain. And by the way, let me repeat my other condition: the US taxpayers get a part of the intellectual property. If the taxpayers are going to assume the risk, the taxpayers should reap some of the benefits — both financially and in the introduction of new technologies.

More on mark-to-market

Allan Sloan’s column in today’s Washington Post – Don’t Blame Mark-to-Market Accounting:

Mark-to-market is a business rarity — an accounting term that draws reactions from people who don’t know spreadsheets from bedsheets. Mark-to-market, which we’ll call MTM, evokes images of Enron’s made-up profits and the other corporate scandals that marred the first years of this decade. Not pretty.
Now MTM — which means valuing marketable securities at market prices — is a hot item again, but for the opposite reason. This time financial companies and their allies are claiming it’s too strict. They argue that marking the value of complex, illiquid securities to artificially low market prices has unnecessarily crippled the U.S. and world financial systems by creating billions of illusory losses on perfectly fine (albeit illiquid) securities, such as collateralized debt obligations linked to mortgages. Markets for these things, the argument goes, are depressed way below true economic value.
. . .
Credit markets have been frozen much of the past 15 months largely because banks haven’t trusted the balance sheets of other banks and have thus been afraid to lend to them. I can’t imagine that confidence problem being resolved by changing MTM.
There are problems with MTM: It’s relatively new, and parts of it seem arbitrary. But its problems have been exaggerated. It’s easier to blame accountants for your problems than to admit you made your institution vulnerable by overleveraging its balance sheet and buying securities you didn’t understand. Ironically, many of today’s whiners adopted MTM a year before they had to, partly because of an arcane provision that let them count as profit the decline in the market value of their publicly traded debt.
The bottom line: Despite MTM’s flaws, blaming it for the world’s financial problems isn’t the answer. Neither is shooting the messenger — or, in this case, the accountant.

Amen. The way to deal with thinly traded markets (including intangibles) is to work out acceptable methodologies which mimic the market. The folks who are pressing for a repeal/suspension of mark-to-market don’t want to mimic the market; they want to ignore it all together. Why? Because, as Sloan notes, the market is telling them that their assets are actually worth a lot less than what they paid for them. So rather than face up to that fact, they want to hide behind an accounting change.
Now, tell me again how “cooking the books” is going to make things better?

Assets of the U.S.A. – intangible and otherwise

In this weekend’s edition, the Financial Times published a short bit on “America’s best assets”:

At the end of last year, there were $1,580bn of assets on the government’s balance sheet. The fact that printing presses can be switched on at any time makes the number pretty arbitrary. Still, the near-trillion dollars of inventories, property, plant and equipment is real enough, of which almost 70 per cent is defence-related. Obviously, the US is not about to sell its uranium stockpiles but, according to the Government Accountability Office, the government – including the Pentagon – has “many assets it doesn’t need”.
That is only the half of it. Not even included on the balance sheet are the properties, land and heritage assets held in stewardship. How to value the Constitution is anyone’s guess. But neither is a monetary value placed on the 28 per cent of the US landmass owned by the government. Selling national parks (or Alaska) for mineral resources would be controversial but many environmental studies conclude wilderness areas are no better managed under state ownership than they are privately.

I would disagree that we should think about privatizing these assets; what part of the word “stewardship” does the FT not understand.
However, the piece indirectly raises a different point when it asks about how to place a monetary value on the Constitution. The US government has a large collection of intangible assets that do not show up on the books. Like any organization, the Federal government needs to manage those assets well.
A first step would be to know what we have. In the past, I have called for a review of how much the government spends on developing intangible assets. An intangible asset budget would help tell us how we are doing in fostering the development of intangibles within the larger economy. We need an inventory of government-owned intangibles as well. That inventory would give us the baseline for better internal management. Both reviews would help bring the government into the I-Cubed Economy.

Patent trolls and rental car companies

I was at an event this morning where the subject of so-called “patent trolls” came up (see also an earlier posting). Trolls are creatures who live under bridges and demand payment from travelers who wish to cross the bridge. Patent trolls are companies and/or individuals who buy patents for the purpose of making money off of infringement claims (rather than for the purpose of marketing/developing the invention). As such, trolls are a subcategory of (and take the organizational form of) the patent holding company. A good example of a patent holding company is Royalty Pharma, which makes its money off of the royalty stream. However, defining a troll, and differentiating it from a holding company, is sometimes tricky.
At the conference this morning someone made the analogy of patent holding companies and rental car companies. The rental car companies don’t operate those cars — just like patent holding companies. The cars, in fact, sit around, not being utilized, for periods of time — just like the patents being held by those companies.
Interesting analogy, but incomplete. I have no problem with holding companies serving an important market-making function of essentially renting out patents – just like an airport rental car company. I agree with the argument that patent holding company provides a valuable service (see IEEE Spectrum: Hooray for the Patent Troll! – which unfortunately equates trolls and patent holding companies).
But the analogy quickly breaks down. I don’t have a problem with rental car companies, of course. But I would have a problem if that rental car company parked their cars in such a way as to block all of the entrances to the airport and said that the only way into the airport was to rent one of their cars, at whatever price they wanted to charge you — and by the way, if you got out of your car and walked, you would be trespassing and they would shoot you dead.
That is the business model of the patent troll.