Leverage crisis hits Vegas, and China asks America, "Whose your Daddy?"

I'm not an economist, and only bring a primitive understanding of the economic crisis we face, and with that caveat I pose the following question: putting aside all the complicated explanations, isn't there a very simple explanation for the global recession and banking crisis: unreasonable and irrational levels of debt for individuals and companies?

Latest case in point: an article on page B5 in today's Wall Street Journal about billionaire Kirk Kerkorian's MGM Mirage gambling empire. Everything MGM owns is for sale, according to a source in the story. Kerkorian's 149 million shares were worth $14.9 billion in October 2007 when the stock was trading at $100.50. Today, his shares are worth $500 million and the stock is trading at $3.45.

What's going on?

The country's 18 largest casino companies -- including giants like Harrah's Entertainment Inc. and Las Vegas Sands -- are buckling under the weight of more than $65 billion in long-term debt. Casinos on average now owe $7 of debt for every dollar they project to earn. By comparison, the next most leveraged industries -- industrials, utilities and consumer cyclical -- are all levered at less than four times earnings, according to investment bank Houlihan Lokey Howard & Zukin.

Some of the industry's high rollers such as Harrah's Entertainment and Las Vegas Sands owe $9 for every dollar of projected earnings.

Ironically, on the front page of the same paper was a story about the Obama administration's fast efforts to allay the expressed concerns of the United States' single largest lender, and the lender who the Obama administration expects to significantly finance the Stimulus Package. On Friday, Chinese Premier Wen Jiabao stated that China is worried about its huge investment in the U.S. government's debt, and called upon the U.S. government to "guarantee the security of Chinese assets."

Faster than the Republican Party Chairman apologized to Rush Limbaugh, Obama administration officials quickly reacted and asserted the safety of U.S. debt as an investment.

Iran's Hearts and Minds

The weekend edition of the Wall Street Journal profiles four Iranians, three of whom can be described as opponents of the current Iranian regime, and one as a defender of it. Surprisingly, the profilees' views on the U.S. were not probed or shared, which disappointed me. I am curious to know how Iranian opponents of the current regime view President Obama's campaign promise to meet personally with Iran's leaders without precondition. Do they support it? Do they oppose it? We'll never know.

Pay Limits Music to European Ears

From an article in FT, the head of Germany-based Deutsche Bank is looking to recruit American banking executives who want to be paid more than Obama's new restrictions permit:

Josef Ackermann, chief executive of Deutsche Bank, predicted that the president’s proposed $500,000 (€390,000) cap on executive pay at US banks that accept large tranches of state aid could help it recruit their most talented people. “If you are only going to be able to pay a $500,000 bonus, I think talent will be happy to work for us. At the end of the day, this is a people business, about who has the best talent,” he said.

The argument for more foreclosures

In an WSJ piece entitled, "Why be a nation of mortgage slaves?," Ramsey Su makes the case for government non-interference in foreclosures:

If the intent is to help homeowners, then foreclosure is undoubtedly the best solution. Household balance sheets have been destroyed by taking on too much debt via the purchase of inflated assets. With so little savings, a household with negative equity almost implies negative net worth. Walking away from the mortgage immediately repairs the balance sheet.

Credit may be damaged, but homeowners can rebuild it. And by renting something they can afford, instead of the McMansion they cannot, homeowners are most likely to have some money left over each month that they can save toward a down payment on a house they can eventually afford.

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Finally, loan modification is not only ineffective, it is evil. Coercing borrowers to continue paying a mortgage on a home that is hopelessly overvalued and not informing them of alternatives is predatory lending.

Democracy is breaking out inside the Sunni Triangle

From a story in Friday's Financial Times:

Sunni-dominated Salahaddin, Sad-dam Hussein's home province, recorded the highest voter turnout in Iraq during last weekend's provincial council elections. About 65 per cent of its registered voters took part compared with a national average of 51 per cent, and only 40 per cent in Baghdad. Salahaddin, along with neighbouring Anbar, was the province most resistant to the US-led invasion that overthrew its most famous son.

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"It's the complete opposite of the last elections in terms of turnout - we are overcoming terrorism and moving towards democracy," says Sheikh Rasheed Usman al-Jabouri, the former chairman of Salahaddin's provincial council, who retired at the election.

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"Democracy is now being practised but our biggest worry is that people will lose their confidence in the council," Sheikh Rasheed says. "I told [the candidates] that if they make promises, they have to make sure that they can fulfil every single one of them."

The Laws of War

This opinion article from the WSJ identifies the challenges the Obama Administration will face in substantially changing the legal approach of the Bush Administration in dealing with captured terror suspects.

What Mr. Obama's national security team will quickly discover is that the civilian criminal-justice system is an inadequate tool to deal with terrorists. President Bush's policies -- particularly treating captured terrorists as unlawful enemy combatants and employing a military court system to try them -- were dictated by the very real need to defend American citizens, not by disdain for the rule of law.

[T]he law of war requires that enemies be "granted quarter" -- meaning prisoners must be taken if they surrender. But if these prisoners cannot be held until hostilities are concluded and must be released only to fight again, the military would be consigned to a deadly game of catch and release. Without a viable detention regime, the U.S. cannot fairly ask its soldiers to risk their lives in combat any more than we can send in troops with defective equipment.

How does the global recession end?

Martin Wolf from FT says that trade surplus countries with high savings rates like China must increase domestic demand:

So what happens now? The implosion of demand from the private sectors of financially enfeebled deficit countries can end in one of two ways, via offsetting increases in demand or via brutal contractions in supply.

If it is going to be through contractions in supply, the surplus countries are particularly at risk, since they depend on the willingness of deficit countries to keep markets open. That was the lesson learnt by the US in the 1930s. Surplus countries enjoy condemning their customers for their profligacy. But when the spending stops, the former are badly hurt. If they try to subsidise their excess supply, in response to falling demand, retaliation seems certain.

Obviously, expansion of demand is much the better solution. The question, though, is where and how? At present much of the expansion is expected to come from the US federal budget. Leave aside the question whether this will work. Even the US cannot run fiscal deficits of 10 per cent of GDP indefinitely. Much of the necessary expansion in global demand must come from surplus countries.

Obama and Europe

This was a particularly solid piece from the Financial Times on the challenge that Obama and Europeans face. My favorite three graphs:

Most Europeans want the US to continue to exercise global leadership. The alternatives, after all, are unappealing. The contradiction lies in the caveats: Washington must not challenge European sensibilities or ask too much of its allies.

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There are plenty of good reasons why Europe and the US should strive to build a new alliance. The central geopolitical truth of the coming years will be the progressive erosion of the effortless hegemony the west has exercised over global affairs for the past two centuries. There could be no more important time to champion the values it has embedded in the present multilateral order.

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For Europe it demands a recognition that the postmodern world of cuddly multilateralism that some imagined would come to pass after the fall of the Berlin Wall has not materialised. The US war in Iraq may have tested to destruction the efficacy of unilateral military might. But events since 1989 have shown also that normative, or soft, power is an inadequate answer to conflict and disorder. Europe needs to accept more of the burden of action.

Tougher government regulations hurting TARP effectiveness

There is a diminishing return on more stringent government regulations, and we're already starting to see it. From today's WSJ:

A growing number of healthy banks are rejecting funds from the Treasury Department's $700 billion bailout partly over concerns that the U.S. may impose tougher restrictions on institutions that take government cash.

The new reticence to take the Treasury's money shows how some banks are starting to push back against increasing federal control of the banking system, raising concerns about the bailout's effectiveness.

Not enough political jobs in Obama administration

"There are about 364,000 people who have applied right now for maybe 7,000 political jobs in the administration," he said. "There are not that many jobs."

Times' viewer warning

This New York Times article entitled, "Before speeches, a Bush strategy to regain edge," focuses on the communications strategy surrounding the five-year anniversary of September 11th. It's probably just my hyper-sensitivity to stories with these angles, but this story is part of a genre that waves a red "viewer discretion advised" flag to news consumers. Effectively, the implicit theme of the story is that the president's actions are motivated by partisan politics, and that Americans should understand that motivation as they watch the president's commemorative actions in the coming days. An alternative, more cynical headline of the article could have been "Everything GOP/Bush/Rove does is political."

I wonder how many stories the Times' has done on Pelosi, Reid, Dean, Clinton with a similar underlying "everything they do is political" theme. My guess, and I will confess it is just a guess and nothing more, is that Times' stories on the Democrats tend to be 'straighter' stories, that look at the policy positions being advocated, and not the politics behind them. To the extent there's a political angle, it's probably an internal Democratic party politic angle, or even a Washington angle, where someone in Washington is the 'victim' of the supposed political manipulation, unlike today's story on Bush, where the American people are the implicit 'victims' of the supposed political manipulation.

Reporters who blog beware

The L.A. Times has yanked the blog of a Pulitzer Prize winning columnist. Apparently, the columnist posted remarks under a name other than his own. I'm sure this is the first and only time that a reporter for a reputable newspaper has ever posted comments online using a name other than their own. I'm also sure that other papers would take similar action if they made the same discovery.