Monday, November 30, 2009

Ben Bernanke Defends The Indefensible: The Fed

As we occasionally do with OpEd's intended for broad public distribution, we provide below the complete version of Bernanke's ridiculous defense of the Fed's ability to hide its actions from Congress and his table pounding support for the Fed's place as a regulator.

These ideas are of course ridiculous on their face, as the power to destroy our currency and thus our country should be watched closely (it should never be granted in the first place, but certainly we should have a right to understand what they are doing and who benefits). Further, The Fed has obviously been an abject failure as a regulator (a cursed job to begin with, admittedly).

Anyway, from The Washington Post.
The right reform for the Fed

By Ben Bernanke
Sunday, November 29, 2009

For many Americans, the financial crisis, and the recession it spawned, have been devastating -- jobs, homes, savings lost. Understandably, many people are calling for change. Yet change needs to be about creating a system that works better, not just differently. As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.

These matters are complex, and Congress is still in the midst of considering how best to reform financial regulation. I am concerned, however, that a number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions. Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers. And a House committee recently voted to repeal a 1978 provision that was intended to protect monetary policy from short-term political influence. These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States. The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution's ability to foster financial stability and to promote economic recovery without inflation.

The proposed measures are at least in part the product of public anger over the financial crisis and the government's response, particularly the rescues of some individual financial firms. The government's actions to avoid financial collapse last fall -- as distasteful and unfair as some undoubtedly were -- were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society. (I know something about this, having spent my career prior to public service studying these issues.) My colleagues at the Federal Reserve and I were determined not to allow that to happen.

Moreover, looking to the future, we strongly support measures -- including the development of a special bankruptcy regime for financial firms whose disorderly failure would threaten the integrity of the financial system -- to ensure that ad hoc interventions of the type we were forced to use last fall never happen again. Adopting such a resolution regime, together with tougher oversight of large, complex financial firms, would make clear that no institution is "too big to fail" -- while ensuring that the costs of failure are borne by owners, managers, creditors and the financial services industry, not by taxpayers.

The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis. We have extensively reviewed our performance and moved aggressively to fix the problems.

Working with other agencies, we have toughened our rules and oversight. We will be requiring banks to hold more capital and liquidity and to structure compensation packages in ways that limit excessive risk-taking. We are taking more explicit account of risks to the financial system as a whole.

We are also supplementing bank examination staffs with teams of economists, financial market specialists and other experts. This combination of expertise, a unique strength of the Fed, helped bring credibility and clarity to the "stress tests" of the banking system conducted in the spring. These tests were led by the Fed and marked a turning point in public confidence in the banking system.

There is a strong case for a continued role for the Federal Reserve in bank supervision. Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks, as demonstrated by the success of the stress tests.

This expertise is essential for supervising highly complex financial firms and for analyzing the interactions among key firms and markets. Our supervision is also informed by the grass-roots perspective derived from the Fed's unique regional structure and our experience in supervising community banks. At the same time, our ability to make effective monetary policy and to promote financial stability depends vitally on the information, expertise and authorities we gain as bank supervisors, as demonstrated in episodes such as the 1987 stock market crash and the financial disruptions of Sept. 11, 2001, as well as by the crisis of the past two years.

Of course, the ultimate goal of all our efforts is to restore and sustain economic prosperity. To support economic growth, the Fed has cut interest rates aggressively and provided further stimulus through lending and asset-purchase programs. Our ability to take such actions without engendering sharp increases in inflation depends heavily on our credibility and independence from short-term political pressures. Many studies have shown that countries whose central banks make monetary policy independently of such political influence have better economic performance, including lower inflation and interest rates.

Independent does not mean unaccountable. In its making of monetary policy, the Fed is highly transparent, providing detailed minutes of policy meetings and regular testimony before Congress, among other information. Our financial statements are public and audited by an outside accounting firm; we publish our balance sheet weekly; and we provide monthly reports with extensive information on all the temporary lending facilities developed during the crisis. Congress, through the Government Accountability Office, can and does audit all parts of our operations except for the monetary policy deliberations and actions covered by the 1978 exemption. The general repeal of that exemption would serve only to increase the perceived influence of Congress on monetary policy decisions, which would undermine the confidence the public and the markets have in the Fed to act in the long-term economic interest of the nation.

We have come a long way in our battle against the financial and economic crisis, but there is a long way to go. Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation.

The writer is chairman of the Federal Reserve Board of Governors.
End The Fed.

Inflation Vs. Deflation: Peter Schiff Gives The Definitive Interview

Peter Schiff apparently agrees with The Singularity thesis. This is the best interview I've heard about the inflation/deflation argument.

Schiff comes out on the side of inflation. He notes that deflationists are right, but only if they price assets in gold which is what their set of comparable history is relative to. Gold can't be printed and so credit collapses and their natural outcomes should be measured against that benchmark, rather than fiat currency.

Schiff also addresses why the U.S. will not be "fortunate" enough to have the Japan outcome (as TILB has said several times, Japan is our upside case). The differences are stark and important: Japan was a creditor nation, Japan had huge government and private savings, Japan had a budget surplus, Japan was a net exporter, the rest of the world didn't slow down with Japan, Japan's underlying economic engine remained robust throughout the period, etc., etc.


Sunday, November 22, 2009

Dr. Shetty's Free Market Health Care Shows The Way Forward

Below and linked is a fascinating, fascinating article that is the Wall Street Journal at its best. The reporting shows what happens when providers are actually free to compete on cost and service as opposed to the heavily restrictive and regulated model that we have here (and are moving deeper into).

Improved outcomes at one-tenth the price!

For whatever reason - even though freedom from government in other market segments continuously leads to improving quality at ever lower prices - we seem to believe healthcare is different and that less freedom and more government gets the best outcomes. This article is as clear a repudiation of that ideology as I've seen.

Great quote from the article: "In health care you can't do one big thing and reduce the price," Dr. Shetty says. "We have to do 1,000 small things."

Call us skeptical that government will successfully accomplish that. Government's batting average is 0.000 so far, but perhaps this enormously complex sector of our society will be the one they get it right on...

At this point though, the socialist movement has gained such enormous momentum that you could literally bring the proponents of nationalized healthcare into the future and show them they are wrong and they still would not change their mind. Commitment and consistency bias is that powerful.

Link to the WSJ article

The Henry Ford of Heart Surgery In India, a Factory Model for Hospitals Is Cutting Costs and Yielding Profits


Dr. Shetty, who entered the limelight in the early 1990s as Mother Teresa's cardiac surgeon, offers cutting-edge medical care in India at a fraction of what it costs elsewhere in the world. His flagship heart hospital charges $2,000, on average, for open-heart surgery, compared with hospitals in the U.S. that are paid between $20,000 and $100,000, depending on the complexity of the surgery.

The approach has transformed health care in India through a simple premise that works in other industries: economies of scale. By driving huge volumes, even of procedures as sophisticated, delicate and dangerous as heart surgery, Dr. Shetty has managed to drive down the cost of health care in his nation of one billion.

His model offers insights for countries worldwide that are struggling with soaring medical costs, including the U.S. as it debates major health-care overhaul.

"Japanese companies reinvented the process of making cars. That's what we're doing in health care," Dr. Shetty says. "What health care needs is process innovation, not product innovation."

At his flagship, 1,000-bed Narayana Hrudayalaya Hospital, surgeons operate at a capacity virtually unheard of in the U.S., where the average hospital has 160 beds, according to the American Hospital Association.

Narayana's 42 cardiac surgeons performed 3,174 cardiac bypass surgeries in 2008, more than double the 1,367 the Cleveland Clinic, a U.S. leader, did in the same year. His surgeons operated on 2,777 pediatric patients, more than double the 1,026 surgeries performed at Children's Hospital Boston.

Next door to Narayana, Dr. Shetty built a 1,400-bed cancer hospital and a 300-bed eye hospital, which share the same laboratories and blood bank as the heart institute. His family-owned business group, Narayana Hrudayalaya Private Ltd., reports a 7.7% profit after taxes, or slightly above the 6.9% average for a U.S. hospital, according to American Hospital Association data.

The group is fueling its expansion plans through private equity, having raised $90 million last year. The money is funding four more "health cities" under construction around India. Over the next five years, Dr. Shetty's company plans to take the number of total hospital beds to 30,000 from about 3,000, which would make it by far the largest private-hospital group in India.

At that volume, he says, he would be able to cut costs significantly more by bypassing medical equipment sellers and buying directly from suppliers.

Then there are the Cayman Islands, where he plans to build and run a 2,000-bed general hospital an hour's plane ride from Miami. Procedures, both elective and necessary, will be priced at least 50% lower than what they cost in the U.S., says Dr. Shetty, who hopes to draw Americans who are uninsured or need surgery their plans don't cover.

By next year, six million Americans are expected to travel to other countries in search of affordable medical care, up from the 750,000 who did so in 2007, according to a report by Deloitte LLP. A handful of U.S. insurance plans now give people the choice to be treated in other countries.Some in India question whether Dr. Shetty is taking his high volume model too far, risking quality."


But Jack Lewin, chief executive of the American College of Cardiology, who visited Dr. Shetty's hospital earlier this year as a guest lecturer, says Dr. Shetty has done just the opposite -- used high volumes to improve quality. For one thing, some studies show quality rises at hospitals that perform more surgeries for the simple reason that doctors are getting more experience. And at Narayana, says Dr. Lewin, the large number of patients allows individual doctors to focus on one or two specific types of cardiac surgeries.

In smaller U.S. and Indian hospitals, he says, there aren't enough patients for one surgeon to focus exclusively on one type of heart procedure.

Narayana surgeon Colin John, for example, has performed nearly 4,000 complex pediatric procedures known as Tetralogy of Fallot in his 30-year career. The procedure repairs four different heart abnormalities at once. Many surgeons in other countries would never reach that number of any type of cardiac surgery in their lifetimes.

Dr. Shetty's success rates appear to be as good as those of many hospitals abroad. Narayana Hrudayalaya reports a 1.4% mortality rate within 30 days of coronary artery bypass graft surgery, one of the most common procedures, compared with an average of 1.9% in the U.S. in 2008, according to data gathered by the Chicago-based Society of Thoracic Surgeons.

It isn't possible truly to compare the mortality rates, says Dr. Shetty, because he doesn't adjust his mortality rate to reflect patients' ages and other illnesses, in what is known as a risk-adjusted mortality rate. India's National Accreditation Board for Hospitals & Healthcare Providers asks hospitals to provide their mortality rates for surgery, without risk adjustment.

Dr. Lewin believes Dr. Shetty's success rates would look even better if he adjusted for risk, because his patients often lack access to even basic health care and suffer from more advanced cardiac disease when they finally come in for surgery.


In a second-floor operating room one October morning, Dr. Shetty finished sewing a new aorta onto the heart of his 11-year-old patient. The process provided an example of how he slashes costs. Four years ago, the sutures would have been bought from a Johnson & Johnson subsidiary. Today they are made by a Mumbai company, Centennial Surgical Suture Ltd.

Four years ago, Dr. Shetty scrutinized his annual bill for sutures -- then $100,000 and rising by about 5% each year. He made the switch to cheaper sutures by Centennial, cutting his expenditures in half to $50,000.

"In health care you can't do one big thing and reduce the price," Dr. Shetty says. "We have to do 1,000 small things."

He says he would also like to find lower-cost versions of his priciest medical equipment. But the Chinese makers that have brought good quality, cheaper machines to market don't yet have enough local service centers to ensure regular maintenance.

So he is still buying equipment from General Electric Co. He pays $60,000 for echocardiography machines, which use sound waves to create a moving image of the heart, and $750,000 for cardiac catheterization labs, which produce images of blood flow in the arteries and allow surgeons to clear some blockages using stents and other devices.

V. Raja, head of GE's health-care business in India, declined to comment on specific pricing, but says Dr. Shetty drives a hard bargain and wrestles some savings because he is such a big customer. Between Narayana Hrudayalaya and another hospital he runs in Calcutta, Dr. Shetty's group performs 12% of India's cardiac surgeries, Mr. Raja says.


Dr. Shetty also gets more use out of each machine by using some of them 15 to 20 times a day, at least five times more than the typical U.S. hospital.

Friday, November 20, 2009

George Will: Forcing Citizens To Buy A Product Is Unconstitutional

What George Will doesn't understand is that the Constitution is simply a recommended set of best practices; not the underlying foundation of our legal and governmental system. That latter concept has been misunderstood by freedom loving Americans for two-plus centuries. TILB suspects we're about to be collectively clued into the fact the former is the new truth.

Orwell would be proud.

Here's the link to Will's WaPo Opinion Piece.

Here's a highlight:
The court says the constitutional privacy right protects personal "autonomy" regarding "the most intimate and personal choices." The right was enunciated largely at the behest of liberals eager to establish abortion rights. Liberals may think, but the court has never held, that the privacy right protects only doctor-patient transactions pertaining to abortion. David Rivkin and Lee Casey, Justice Department officials under the Reagan and first Bush administrations, ask: If government cannot proscribe or even "unduly burden" -- the court's formulation -- access to abortion, how can government limit other important medical choices?

Democrats' health bills depend on forcing individuals to buy insurance or face severe fines or imprisonment. In 1994, the Congressional Budget Office said forcing individuals to buy insurance would be "an unprecedented form of federal action," adding: "The government has never required people to buy any good or service as a condition of lawful residence in the United States."

This year, the Congressional Research Service delicately said "it is a novel issue whether Congress may use the [commerce] Clause to require an individual to purchase a good or service." Congress has the constitutional power to "regulate commerce . . . among the several states." But a Federalist Society study by Peter Urbanowicz and Dennis Smith judges it perverse to exercise coercion under the commerce clause "on an individual who chooses not to undertake a commercial transaction." As Sen. Orrin Hatch (R-Utah) says, there is "a fundamental difference between regulating activities in which individuals choose to engage" -- e.g., drivers can be required to buy auto insurance -- "and requiring such activities" just because an individual exists.

House Majority Leader Steny Hoyer (D-Md.) says Congress can tax -- i.e., punish -- people who do not buy insurance because the Constitution empowers Congress to tax for "the general welfare." So, could Congress tax persons who do not exercise or eat their spinach?

Tuesday, November 17, 2009

Hermitage Lawyer Sergei Magnitsky Dies In Russian Jail

Disheartening news for freedom lovers everywhere. Bill Browder's Hermitage Capital Management, which has been unwittingly involved in an enormous sovereign robbery in Russia (see here for a must read/watch on this insanity), is mourning today and we mourn with them. Their legal counsel, Sergei Magnitsky, jailed for his work on behalf of the fund last year on trumped up charges, passed away in Russian custody.

It reminds of Stalinist gulags.

From the WSJ's article (link here):
She provided no further details, saying a release would be issued later. Sergei Magnitsky and his colleagues had accused authorities of denying him necessary medical treatment in prison.

Mr. Magnitsky, a 37-year-old partner at Moscow firm Firestone Duncan, was jailed nearly a year ago on charges of tax evasion related to his work for Hermitage. At a court hearing on extending his detention in September, he complained that he had been denied medical treatment for weeks for serious stomach pancreatic illnesses that he hadn't suffered from before his imprisonment. He also complained of inhumane conditions -- including the absence of toilet, hot water and windows -- at the Butyrskaya jail where he was then being held.

"They held him for 11 months, asking him to fabricate testimony against Hermitage," said Jamison Firestone, managing partner of Firestone Duncan. "The more he refused, the worse his conditions became."
Russia is a 7...

President Richard Nixon Ends The Bretton Woods Agreement

God bless YouTube - TILB had never seen this before.

To think that our non-existent respect for Nixon could go lower would have been a challenge, but listening to him help lay the groundwork for the dollar's destruction makes us sick to our core. The below is video of his infamous decision to end the dollar's convertibility. The talk resonates particularly powerfully today as the media celebrates Helicopter Ben's "stabilizating" debasement efforts.

Beware what you wish for.

Monday, November 16, 2009

Vaclav Klaus On Freedom, Communism, and Government

President Vaclav Klaus is the President of the Czech Republic and a man that lived under communist rule. He understands what freedom and the absence of freedom mean. Peter Robinson does a wonderful job getting him to reflect on that time, the sudden improvement in freedom and the recent sea change toward larger, more oppressive government.

President Klaus says, "the train has already traveled so far that it will not be possible to stop it or turn it around" in regards to the Lisbon Treaty (regarding the EU's existence and position). He refers to this loss of sovereignty as a stage of "Post Democracy". He also directly states that Vice President Gore's beliefs about global warning are wrong and warns that the mantra of environmentalism has the potential to be oppressive and controlling. That it is an ideology of alarmism and inherently unproveable, thus it is an ideology of control and the centralization of power.

A fascinating interview from a man that clearly loves freedom. How many presidents not only know who Frederich Hayek is, but have read Hayek? Amazing.

Long the Czech Republic, short the EU. TILB knows nothing about the Czech Republic's investment merits, but we assure you having this man at the helm is a competitive advantage. If anyone has any specific ways to exploit the opportunity, please let us know.

Sunday, November 15, 2009

The Singularity: A World Walking The Tight Rope Of Low Interest Rates

[What follows is a thought piece I spent two weeks writing and sent around to some colleagues on Sunday October 18th. It has been modified slightly to take some associate's names out. TILB believes the outcome of rising rates would be unusually horrible for risk assets and, frankly, our society in general.]

“Are you getting it? Armageddon it! Ooh, really getting it? Yes, Armageddon
- Def Leppard
We have spent a great deal of time reflecting on the lessons learned over the past two years. As I've contemplated those lessons and considered Hatch's recent point that after this recent risk-rally, it appears that market participants' behavior is seemingly unchanged, I began thinking about what we should do to prepare/adjust for the risks that remain in the world (assuming any do). I have many views about this but want to address one in particular.

Humans have a fairly well defined collective “nature” and we are all challenged to deal with our own tendencies within our nature. We have a tendency to self deceive – particularly in situations where we’ve already put ourselves out to the world as having taken a view. Among other things, we have a desire to be right, a desire to be liked, we anchor to the past – especially the recent past – and we act emotionally and generally as a herd. I suffer from all of these, especially self deception.

It's part of life.

Hopefully I have some advantage in dealing with my own tendencies simply by acknowledging them, being aware of them, and realizing that self-deception doesn’t help with my even greater desire to be right. When I frame something through those combined lenses, it helps me stop deceiving so that I can get on the side of “right”.

That’s me. But collectively it’s not possible for man to suppress its aggregate nature and so we muddle along doomed to commit the same mistakes over and over again. The mistakes may not be identical on the surface but they’re identical at their core. This reality was reinforced by Seth Klarman at a conference I saw him speak at back in 2004 or 2005 when he fielded the question (paraphrasing), "do you worry that with the rise of hedge funds and everyone looking for inefficiencies that you're not going to find fat pitches anymore; that the market has become more efficient?" with the following response, "I'm not worried that human nature has changed."


So what is it about human nature pre-2007 that led to the “crisis”. This doesn’t need to address the true “core” problems that I see of fiat money, fractional reserve banking, and unintended consequences of certain policy and regulatory actions. Instead, let’s look at the nature of the foundation those skewed incentives created and how those building blocks were set to crumble in the first place.

In summary, we had a lack of respect for risk, perhaps engrained from 25 years of a generally painless experience for capital (recency bias) where the speedbumps that were approached seemed to be flattened out by the all-seeing, all-knowing Federal Reserve. Howard Marks said that, "the fear of loss is to capitalism as fear of hell is to Catholicism." Collectively, our balance between fear and greed was eroded by this apparent government-gilded safety net and the scales tipped out of whack. This manifested itself in a variety of ways including too much leverage, too little diligence, too much faith in government, too much moral hazard, prices that appreciated too far above the associated intrinsic worth of the assets they represented, too much illiquidity, etc.

I think back on 2006 and remember having conversations over and over where smart investment managers told us that “spreads were too narrow” in the credit world. In fact, despite our repeated asking, we could find almost nobody who would admit to buying at then prevailing prices. This lack of opportunity caused these managers to hold cash or, more often, drift out of their competency in credit analysis into other areas like public equities, LBOs, etc. We spent a little time trying to figure out who was actually buying these assets but frankly did not do a thorough job. What bothered me about this was that I felt like this was a consensus view and my strong preference is to be contrarian.

I have been noodling on the paradox of what it means for me to agree with the consensus - perhaps it is possible that a consensus view point can actually be contrarian? My conclusion is it can. When very large unnatural forces impact the market, an artificial, "unseen" consensus may be created that opposes the traditional "seen" consensus, allowing the seen consensus to actually be contrarian.

I refer to the unnatural forces creating the artificial, unseen consensus as "dumb money". It is dumb in the sense that is not invested with risk-adjusted return generation as its north star; it serves some master other than unfettered economics, be it regulatory or political. In that regard, it is mindless and dumb.

As I mentioned, the view that credit spreads were too tight was a consensus view. However, a thorough research job would have shown us that there was, in effect, an enormous regulatory bid. It was a bid from ABS in the form of CDOs, CMBS, CLOs, RMBS, etc. This was and remains purely a regulatory game where assets that do not have the most attractive properties from a regulatory capital standpoint (e.g., sub-prime no doc mortgages, 2nd lien small cap bank lending to an LBO company, BBB tranches of other ABS) are pooled and re-crafted to rate very well from a regulatory standpoint. Generally 75-85% of these pools of unattractive regulatory assets receive an attractive regulatory treatment (A rated or better) and the balance of the assets are held by unregulated owners that are willing to take low- or un-rated risk.

When you think about this, it is a fascinating reality: buyers had all kinds of incentives that had little to do with the quality or price of what they were buying and a lot to do with interference in markets by regulators and government that drove buyers toward assets for unnatural reasons. In essence, they were price insensitive and it led to unsustainable outcomes.

So we learned a lesson: Follow the Dumb Money. It leads you to the excess (and perhaps to opportunities for shorting).

So Where is the Dumb Money Today?
All of the above was a preamble to establish the case that human nature is fundamental, it causes recurring problems, and the problems are identifiable if we’re willing to hunt down the Dumb Money’s most recent activities. We saw in the recent credit bubble a regulatory Incentive Caused Bias that led buyers to overpay for high ratings and over-trust ratings agencies. Where is Dumb Money today?

It has bothered me for some time that the "seen" consensus view point seems to believe higher rates and more inflation are inevitable. It bothers me because I completely agree with it. I operate more comfortably in a contrarian circle and yet here I find myself rubbing shoulders with the masses. Perhaps it's simply another form of self-deception but I believe we are witnessing a volume of Dumb Money buying ("unseen" consensus) that registers near the right tail on an all time scale. And the Dumb Money ring master is us - the US taxpayer - via our body politic and our printing press operations at the Federal Reserve.

One of the causes of truly great inflations is that in the early stages of rapid money-printing, the price of a typical consumer's basket of goods doesn't immediately respond one for one with monetary creation. The economist Murray Rothbard was a student of past inflations. He refers to that phase of apparent central bank induced nirvana of rapid money-printing and stable prices as a "heady wine" for those operating the printing presses*. It reinforces the logic and encourages a continuation of the practice and, by the time the inevitable result is obvious, it is too late and often too politically difficult to cease, much less unwind. Today we have a Chairman of the Fed that has all but promised to continue debasing the currency by interfering with the Treasury and Agency markets ("quantitative easing" or QE) and is in the process of fulfilling a nearly $2 trillion execution of his QE thesis. Two. Trillion. And I doubt he'll be able to stop there.

Today, I believe the Dumb Money is in sovereign debt, specifically US Treasury Bonds.

Similar to when AAA CLO tranches were issued at par paying 20 bps over LIBOR, Ten Year U.S. Treasuries today are priced to yield 3.3% - not exactly a glorious return, even if inflation is subdued. A while back, Jim Grant coined the term “return free risk” to describe Treasuries at these levels. I believe that return free risk extends well beyond simple Treasury Bonds but before we get to that, let’s talk about why these are the home for today’s Dumb Money buyers.

In a world of global trade imbalances, a dollar-based reserve currency, deleveraging and defaults, Treasuries hold a special place. Combined with unusually favorable capital treatment at regulated institutions, the artificially steep yield curve created by the Fed has given banks a taxpayer gift to put a bid on longer bonds. Near term deflationary fears have a foot on the head of the short end. Foreign central banks – flush with IOUs from the Fed (“dollars” exported by our trade imbalance) – have to buy Treasuries or other dollar denominated assets every single day. Capital raised by banks must find a home and when those banks either lack quality borrowers or are uncomfortable lending precious capital out (or both) they buy Treasuries. Scared by the run on commercial paper last year, money market funds have shifted toward Treasuries. Capital market participants have shifted away from risk assets and toward Treasuries. Etc., etc., ad nauseum. Most importantly, the Fed itself has announced that it will purchase hundreds of billions of Treasuries and even more of Agencies (the sellers of which then take the newly printed dollars from the Fed and themselves buy Treasuries).

In summary, there are a slew of buyers for U.S. government issued debt (including, confusingly, the government itself) and in the current environment of fear of “risk” assets, “risk free” assets have caught a hell of a bid. Most of these buyers are buying for reasons that have nothing to do with absolute value. They are mindless, Dumb Money buyers.

While the inflationary 1970s taught investors that fixed income securities could be “certificates of confiscation”, Greenspan and Bernanke’s Great Moderation brought us a slightly different lesson: From Oct. 1, 1982 through Sept. 30, 2009 (which is three generations, in Wall Street measurements), the Merrill Lynch 7-10 Year U.S. Treasury Bond Index returned 10.0% p.a. Over the last 1, 5 and 10 year periods, it earned 8.0%, 5.7% p.a. and 6.8% p.a., respectively. Stocks as measured by the S&P 500 did not manage to differentiate themselves, besting bonds over the 28 year period by just over 1% per annum, but trailing massively over the 1, 5 and 10 year timeframes.

As such, we have generations of Wall Streeters that have grown to appreciate and believe in the risk free return of U.S. Treasury Bonds, adding stickiness to their bid and reinforcing the mantra of “risk free” (another recent mantra, “home prices never decline nationally”). We have trade partners that are addicted to American IOUs ("dollars"), we have banks and insurance companies that are junkies for any regulatorily blessed capital rebuilding efforts and are now riding the yield curve dragon hoping to catch that old high, we have scared Boomers trying to preserve their precious retirement, we have a Fed that is encouraging the buying of Treasuries and that has itself become the global marginal buyer of Treasuries and Agencies. For the time being, the freshly printed money that is funding the Fed's purchases has not multiplied and filtered out to society, at least on a scale that has frightened the average American. We are in Rothbard's "heady wine" phase and so the process continues. As the merry-go-round spins, non-value oriented buying pressure is unnaturally manipulating prices, keeping them artificially high and yields artificially low.

The Dumb Money is in U.S. Treasury Bonds. They provide virtually no return and a ton of risk. They are, indeed, return free risk.

But, by definition, either this buying cycle will end voluntarily or a special dose of inflation will take hold. And when either of those occurs, what happens to rates?

Unlike other asset classes, U.S. Treasury Bonds denominated in dollars hold a special place in the world. They are considered the global Risk Free Return and are the benchmark for virtually every other asset class on Earth. Even to this day, despite the debacle of the past few years, homebuyers make their purchase decisions not on the economic return a house can generate, but on monthly payment affordability. That affordability is directly tied to Treasury yields and thus, homeowners are effectively short rates (or long long-duration bonds). Commercial real estate, when cap rates are in the 6-8% range as they are today, are attractive only if Treasury yields stay low. Today's price to earnings multiples of 17x or 18x (vs. historical averages of 15x) are implicit bets on low rates, all else being equal. Discount rates and WACC calculations for most people actually embed the 10 Year U.S. Treasury Bond into their calculation. Yield curve junkies are betting on stable or flattening curve-structure. How would floating rate borrowers perform in a rising rate environment, many of whom are skirting bankruptcy now on the backs of a sub 1.0% LIBOR?

And what about the U.S. Federal Budget? The average maturity on the Treasury’s debt is 50 months or so, meaning that the bulk of our issued debt has a four and a quarter year maturity or less, reflecting the U.S. Treasury’s attempt to take advantage of the most attractive end of the yield curve. Despite lower average rates, for the fiscal year-to-date through August (a September FYE), interest expense for the Treasury was $367 billion, eating up 20% of receipts.

We have built an entire world around the foundation of low rates. This is the thread that ties. The Singularity. This is the risk that could cause every asset in our portfolio to get face-punched, as diversity vanishes into the ether and the singularity saddles up.

If debasement activities continue much longer, inflationary expectations will take hold and rates will rise. They must to offset the losses created by monetary inflation, otherwise lenders will not lend and the government will not be able to finance itself. So rates will rise. Perhaps by a lot.

Imagine yourself in a world where instead of a 2s/10s yield curve of 0.9%/3.3%, we were in a world of 3%/6% or 6%/10%. What does that world look like? I’ll take a crack:

- Corporate profits suffer as financing costs skyrocket and customers pull back;
- P/Es contract massively and stocks get re-rated downward;
- Spreads widen on credit securities and absolute rates obviously back-up, leading to a severe decline in the value of credit securities;
- Homeowners get obliterated;
- Corporate borrowers get obliterated;
- Commercial real estate gets obliterated;
- This leads to giant holes in bank balance sheets;
- The annual Federal deficit gaps wider by nearly two-thirds of $1 trillion on U.S. Treasury interest alone (5% of GDP). That incremental deficit is the size of the entire deficit we suffered under Bush2 when we already thought the deficit size was unsustainable. Interest expense alone could theoretically consume nearly half of all Federal tax receipts. How do you ever recover from that?

As such, the Federal Reserve faces a Faustian bargain with a choice between letting nature take its course and walking away (allowing the deflation and liquidation phase of the cycle that the market demands) or to monetize aggressively. What do you think the Fed will do in that scenario? Abandon the Treasury and allow her to default? Monetizing is the Occam’s Razor outcome, despite the problematic result of reinforcing the higher rate regime. Bernanke has said again and again that he will not late the “mistakes” of the past recur. He has already and will continue to use freshly printed money to fill the money supply vacuum left by damaged, deleveraging banks. The government may struggle to find enough buyers to take on the new supply of debt the deficit would demand, forcing Bernanke to either let the Treasury deal with its own problems or to monetize the debt.

He will monetize.

As dollar holders rationally begin to question the value of their currency and the sustainability of its purchasing power, commodity prices will rise to reflect a weak dollar and the velocity of money will accelerate as demand for money diminishes**. Interest rates will rip, financial assets will face valuation headwinds, levered entities that need to refinance, sell or deal with floating rate obligations will spiral toward bankruptcy. The singular thread that ties virtually all asset classes is low rates. We need to be prepared for the pain that will occur when higher rates aggressively yank that thread and unravel the world.

Worst of all, this is a self feeding cycle that will persist as long as deficits grow as a percentage of output or the government continues to monetize debt. If nobody steps in to break the cycle (e.g., Volker), at some point utter devastation results.

I will go out on a limb and state that if rates rise too much and the monetization cycle loses control, a number of non-investment risks that can be difficult to mitigate may arise. These include the erosion of the dollar’s reserve currency status, cessation of tax-exempt status for not-for-profits, overtly confiscatory behavior by governments, much higher tax rates, a challenged system of fractional reserve banking, and the potential for civil unrest. Some of these are unavoidable and difficult to mitigate. But we should try.

How Can We Prepare?
As we consider preparing for the more pure investment ramifications of this outcome, the vast majority of preparations should not be around profiting, but instead should be built around preservation of purchasing power and asset protection/defense. From a macro standpoint, printing new money shifts a portion of every existing dollar's purchasing power to the hands of the person holding the newly printed dollar (the government and banks). This means the government will likely steal more and more of society's purchasing power through this particularly unconstitutional tax. Simply treading water from a purchasing power standpoint will take yeoman's work because we'll be fighting this backdoor wealth confiscation headwind. What are some steps we can take?
- Aggressively shift our equity exposure into high quality, unlevered, low capex businesses. Businesses with global or purely foreign operations may be preferred
- Immediately diversify a meaningful portion to non-U.S. domiciled custody, outside the grasp of our government if true tail risk arises (the new country’s stability must be considered as well). This is low cost, super high value insurance for a magnitude 10 Earthquake on the Richter scale. Seems like a no-brainer.
- On the margin, move our asset allocation toward cash and move “cash” toward select commodities and select foreign currencies as our "new cash". Don't be tricked into believing that just because our "new cash" seems to move everyday relative to the dollar means they have a special risk. Prices constantly move relative to the dollar for everything which means the dollar intrinsically holds the same risk. It just so happens that oil is quoted in dollars rather than dollars being quoted in oil. But the fundamental relative risk is the same, particularly if the dollar’s reserve currency status dissipates. Within commodities, focus on fixed or diminishing resources such as precious metals and energy resources, (maybe agricultural land).
- Avoid all Treasuries and, if we must hold some, keep it all in TIPS even beyond implied inflation levels where we might normally sell (recognizing that we are reliant on the CPI calculation, which is dangerous).
- Prepare for a distressed cycle - huge opportunity.
- Short long-duration Treasuries, perhaps through long-dated, well out of the money puts. Do it in a size that moves the needle and is perhaps surprisingly far out of the money. Long-dated is key. The issue is they are expensive today.
- Short a basket of credit spreads that are too tight, perhaps some sovereigns too - the U.S. isn't the only country going down this road.
- Economic unions like the Euro bloc could be blasted apart as different countries desire massively different monetary and fiscal policy actions.
- Raise the cost of our money yet further - we should be increasingly selective with investing "new cash". The implication of this is that perhaps we need to prune our portfolio and exposure even further and build our new cash exposure.

Where Are We Now?
It is impossible to assess exactly where we are now and when this interest rate/inflation risk might manifest itself. We can’t know with certainty that rates will rise – Japan has defied this experience for twenty years (as an aside, Japan faces this risk as well, perhaps moreso). I have been saying for some time that I think Japan is the U.S.’s upside scenario. In any case, Japan has two advantages on us: 1) they began with a lower level of government debt as a percentage of GDP; and 2) they began with a much higher personal savings rate with which to internally finance newly issued debt (they also had a bigger bubble which meant the deflationary headwinds were bigger to begin with).

I think the U.S.’s peculiar situation is that, because we’ve acted much more aggressively faster, we have already begun to scare off the marginal central bank buyer. The Chinese have aggressively curtailed Treasury purchases. For instance, for the four months through July 2009, China only purchased $33.6 billion of Treasuries (and actually was a net seller during the months of June and July). The oil exporting nations have only added $3 billion to their aggregate $189 billion Treasury portfolios through July.

Stepping into their shoes has been the U.S. Federal Reserve. The left pocket (the U.S. Treasury) is issuing bonds and the right pocket (The U.S. Federal Reserve) is buying bonds with newly printed money. In March, the Fed authorized $300 billion of Treasury purchases, $200 billion of agency debt (Fan and Fred) and $1.25 trillion of agency MBS. In the last week of September alone, the Fed reported buying $5 billion of Treasuries, $3 billion of agency debt, and $39 billion of agency MBS. Its 29 week average for these purchases has been $35 billion per week. Since the late March authorization was put in place, the Fed has bought $291 billion of Treasuries (out of $300b authorized), $700 billion in MBS ($1.25T authorized), and $130 billion of agency debt ($200b authorized). This totals $1.1 trillion and the Treasury bond specific buying authorization is basically used up, though the agency capacity is still ample to last another several months. Of course, the Fed can expand its authority at any time.

The point is, we’ve had $1.1 trillion of money brought forth by the Fed and put into the world over the last six months. The run-rate of the Federal deficit is not shrinking – so how can the Fed stop? Who will step into their shoes?

Imagine what the world would look like if that $1.1 trillion did not exist today.

And so we watch.

But one thing we know is this rate of monetization cannot continue indefinitely without being hugely inflationary, which leads to rising rates. We also know that if the Fed were to suddenly stop, marginal buyers that can step into the Fed's shoes do not seem to exist at today's yields. So a cessation would also lead to rising rates. The Fed’s obvious hope is that they can restart the economy (despite worsening employment and default trends) so that someone can replace their buying or so that the government can cut spending / raise tax receipts and bring the deficit back to more manageable levels. They would then theoretically slowly but steadily unwind their QE, somehow without tipping the economy back into crisis mind you, and take the inflationary risk out of the room. I suppose anything is possible, but I am skeptical.

Further, it is quite possible that we actually suffer from continued deflation, which would seem to justify low nominal rates. The issue, of course, is that a) this is bad for risk assets in general in a society as levered as ours; and b) if we suffer continued deflation, the ensuing inflation will be even worse because it will provide Bernanke cover for even more aggressive debasement tactics. He's playing with fire in a dry forest, but he obviously believes nothing major will come of it.

When this heady wine phase passes and the hangover comes, I hope we are prepared. We have no excuse not to be. It is the most obvious risk in the world, but we have been numbed to it by three decades of apparent stability. The Dumb Money is trying as hard as it can to keep the music on and the party going. However, the more drinks we have, the less fun tomorrow morning will be.

It is time to prepare.

* Rothbard's more full quote is from his book The Mystery of Banking and it reads as follows: "Unfortunately, the relatively small price rise often acts as heady wine to government. Suddenly, the government officials see a new Santa Claus, a cornucopia, a magic elixir. They can increase the money supply to a fare-thee-well, finance their deficits and subsidize favored political groups with cheap credit, and prices will rise only by a little bit!

"It is human nature that when you see something work well, you do more of it. If, in its ceaseless quest for revenue, government sees a seemingly harmless method of raising funds without causing much inflation, it will grab on to it. It will continue to pump new money into the system, and, given a high or increasing demand for money, prices, at first, might rise by only a little."

** "Demand for money declining" may seem non-intuitive, but what we are really saying is that people who sell things demand more money for the same good or service or, described from the inverse, that consumers will prefer goods and services that can be purchased today to the risk of holding dollars for more expensive goods and services tomorrow.

Wednesday, November 11, 2009

What Side Of History Do You Want To Be On?

Representative Paul Ryan gives an impassioned plea to vote for liberty, to vote for freedom, and to vote against statism and creeping dependancy. It's a solid use of two minutes of your time - sadly, his fellow Congressmen and women failed to fulfill their duty and protect citizens from their government.

Tuesday, November 10, 2009

Has The Gold "Bubble" Peaked?

This guy can't give away a ounce gold Maple Leaf. We think there may be a ways to go yet before Ben's mad experiment has run its course.

[HT: Cam]

Saturday, November 07, 2009

The Investment Linebacker Just Saved Or Created 491 Jobs

We stand by that 491 number until we are otherwise proven wrong.

Oops, it turns out someone is actually going around trying to verify these bogus jobs "saved or created" numbers and discovering that the numbers are exactly what we all inherently already knew: they are a fantasy.

"I am shocked, shocked that gambling is going on here."

Specifically, The Sacramento Bee has been busy researching the 26,156 that the Cal State University system claims to have created or saved with their share of Federal stimulus money. Only one problem: it seems only a fraction of those were actually ever at risk - so how can they be saved or created if they never would have been lost?

So what?

TILB guaran-damn-tees you that nobody cares that The Administration has no ability to prove the accuracy of its claims. Yet that does not seem to matter.

So what if the whole number is a fraud? So what if those jobs that actually are "saved or created" are really stolen or destroyed in other areas of the global economy*? Who even cares? Our president gives great speeches, after all. What else could you realistically hope for in a leader? Hint: see video below for an answer - then visit

Anyway, here's a link to the Sac Bee's article on the Cal State reporting debacle.

* Just think about it, the capital used for the stimulus program comes from three primary sources: 1) explicit tax dollars; 2) borrowed money via Treasuries (e.g., China lending us money); or 3) freshly printed money (which is simply the theft of some value from all pre-existing money). The implication of this three source limit means that in order to "stimulate" the economy, we are actually taking money or wealth from other parts of the economy.

Who is more likely to productively deploy wealth into job creation: private citizens or 500 odd horse trading politicians inside the beltway? The answer is obvious on its face. Thus we know that stimulus is actually the opposite: it is the suction of capital/wealth out of generally productive hands and redeployed by generally non-productive hands.

It is nearly universal that stimulus programs cost jobs always and everywhere.

We can do better than the status quo.

Friday, November 06, 2009

Two Enormous Weekends Of Bank Failures And The Response Is???


Sheila is getting good at her job. She's managed to drag this bank failure parade on for so long that we've collectively become numb to it. Nobody cares anymore. For instance, last weekend (10/30/09), we lost a $19 billion BHC (nine separate banks!) and nary a word was written about it.

This weekend, we lost another five banks including an $11 billion San Francisco based bank that caters to Asian Americans called United Commercial Bank (as an aside, check this out from earlier this week for a good laugh!). In addition to being a good sized bank, it actually has an international presence with a Chinese partner and branches in Hong Kong and Shanghai. What will the press say about this?

More crickets.

The Fourth Estate does not seem capable of simple arithmetic, as they rarely (never?) report the aggregate losses incurred since the end of the prior quarter, instead preferring to lean on the FDIC's quarterly reporting as their crutch. These are some hawkshaw pressmen if we've ever seen them!

So we will do the math for you.

In the five weekends since the end of last quarter (i.e., beginning on Friday October 2nd), we have suffered 25 failures with a total estimated loss to the FDIC deposit insurance fund (DIF) of $4.8 billion. During that period, the FDIC has managed to place the vast majority of failed assets at acquiring banks by entering into expensive loss-sharing agreements. In fact, the FDIC has entered into loss-sharing agreements during those five weekends covering $23.8 billion of assets.

But it has not been able to put all of the assets of failed banks to the acquiring banks, even with the incentive of loss-sharing agreements. The FDIC takes ownership of these residual assets. As you might imagine, an asset that someone won't acquire even when virtually all of the risk of loss is taken off the table is a wee bit more toxic than your average bear. The FDIC has inherited $2.7 billion of these assets in the past five weeks alone.

But, who really cares?


Wednesday, November 04, 2009

Jim Rogers Gives An Extended Interview To The F.T.

"At the moment, I'm terribly pessimistic for the foreseeable decade or two..."
- Jim Rogers

"...and I do expect a currency crisis or semi-crisis in the next year or two...If you were Icelandic, you'd know what a currency crisis was. Some currencies will just totally lose value. This time it may be the U.K., it may be the U.S."
- Jim Rogers

We cannot seem to find a simple way to embed the video, so here's a link to the interview.

Great stuff.

[HT: Max Headroom]

Tuesday, November 03, 2009

Happy Holidays: California Decides To Increase Income Tax Withholdings By 10%

In one of the stronger indications in a while that Schwarzies are likely to make a comeback, California decided to increase state income tax withholdings by 10%. As with all income tax withholdings, this is simply an involuntary tax-free loan to the government, since it's money that you wouldn't typically legally owe until April and you certainly would not choose to send to Sacramento in the meantime.

Laughably, California is positioning this as "temporary". For those of you that are unaware, the federal withholding was also enacted as "temporary." That was 1943...

The good news, of course, is that California's citizens were already swimming in cash, so this shouldn't cause any problems for them. Hell, why even borrow from the markets at an interest rate when you can issue Schwarzies and siphon off someone's income in the form of an involuntary loan at 0%?

Link to article here [emphasis added].
Starting Sunday, cash-strapped California will dig deeper into the pocketbooks of wage earners -- holding back 10% more than it already does in state income taxes just as the biggest shopping season of the year kicks into gear.

Technically, it's not a tax increase, even though it may feel like one when your next paycheck arrives. As part of a bundle of budget patches adopted in the summer, the state is taking more money now in withholding, even though workers' annual tax bills won't change.

Think of it as a forced, interest-free loan: You'll be repaid any extra withholding in April. Those who would receive a refund anyway will receive a larger one, and those who owe taxes will owe less.

But with rising gas costs, depressed home prices and double-digit unemployment, the state's added reach into residents' regular paycheck isn't sitting well with many.

"The state's suddenly slapping people upside the head," said Mack Reed, 50, of Silver Lake. "It's appalling how brash that is."

Brittney McKaig, 23, of Santa Ana said she expects the additional withholding to affect her holiday spending.

"Coming into the holidays, we're getting squeezed anyway," she said. "We're not getting Christmas bonuses and other perks we used to get. So it all falls back on spending. The $40 gift will become a $20 gift."

The extra withholding may seem like a small amount siphoned from each paycheck, but it adds up to a $1.7-billion fix for California's deficit-riddled books.

From a single taxpayer earning $51,000 a year with no dependents, the state will be grabbing an extra $17.59 each month, according to state tax officials. A married person earning $90,000 with two dependents would receive $24.87 less in monthly pay.

California will probably continue to collect the tax at a higher rate for many years -- or find an additional $1.7 billion to slice from a future budget, an unlikely occurrence.[editor's note: love the snarky, passive aggressive voice from the L.A. Times] All workers who have state taxes withheld will see their paychecks shrink.

"Many families are sitting at their kitchen table wondering how they're going to make ends meet," said state Sen. Tony Strickland (R-Thousand Oaks). "At the same time, the state of California is taking a no-interest loan."

The provision is one of numerous maneuvers state lawmakers and Gov. Arnold Schwarzenegger approved in the summer to paper over the state's deficit. Many of the changes, including the extra withholding, were little noticed outside of Sacramento.

Savvy taxpayers can get around the state's maneuver by increasing the number of personal withholding allowances they claim on their employer tax forms, said Brenda Voet, a spokeswoman for the state's Franchise Tax Board.[editor's note: have to love the incentive to encourage people to think about how to legally cheat the state]

"People can get out of this," she said, noting that most people would have to change their allowances through their employers. California's budget leaders are banking on the hope that most won't.

The increase is coming at a bad time for store owners, many of whom depend on the holiday shopping season to keep their businesses alive.

"I don't think there's any question it's going to impact consumers' spending," said Bill Dombrowski, president of the California Retailers Assn. "Any time you reduce people's disposable income, there's going to be a negative effect on the retail sector."

But Stephen Levy, director of the Center for Continuing Study of the California Economy, wasn't so sure.

"It's having a relatively small impact on people's income," Levy said, pointing out that many families will receive only $12 to $40 less each month.

Yet Erika Wendt, 28, of San Diego said she already lived on a tight budget: She rides her bike to work, for instance, to save on gasoline and parking costs.

"I am frustrated as this directly impacts my weekly budget -- what groceries I buy, how much I drive and can spend on gas," she said. "Now money will just be tighter, and I'm not sure where else I can cut back."

The extra withholding comes in addition to tax hikes the state enacted this year.

In February, state income tax rates were bumped up 0.25 of a percentage point for every tax bracket. The dependent credit was slashed by two-thirds. The state sales tax rate rose 1 percentage point. The vehicle license fee nearly doubled to 1.15% of a car's value.

Lawmakers and the governor also approved deep cuts to schools, social services and prisons to fend off one of the steepest revenue losses in California history.

Temporary budget bandages, such as the increase in withholding [editor's note: ha!], were included at several points this year to avoid higher taxes and deeper cuts, said H.D. Palmer, a spokesman for the state Department of Finance.

Sacramento, meanwhile, is awash in red ink again. The state controller recently said revenue in the budget year already had fallen more than $1 billion short of assumptions. Outsize deficits are projected for years to come.[editor's note: these assumptions were revised this spring in the heart of the recession and they're already under by $1 billion? SCHWARZIES ARE A COMIN'!]

Such temporary measures as the withholding tax increase don't really fix the budget gap, "they just more or less hid it," said Christopher Thornberg, a principal with Beacon Economics in Los Angeles. "I call it a fraud."
[HT: Directive 10-289]

Sunday, November 01, 2009

Happy November: CIT Files For Chapter 11 Bankruptcy

Too medium to fail? No. CIT files with "overwhelming" support of creditors. For some unclear reason, GMAC continues to get Chinese money via the U.S. Treasury but CIT gets something different: indifference.

In any case, here's the press release:
November 01, 2009 03:39 PM Eastern Time
CIT Board of Directors Approves Proceeding with Prepackaged Plan of Reorganization with Overwhelming Support of Debtholders

Nearly 90% in Favor of Plan; Emergence Sought by Year-End

Operating Entities Remain Unaffected and Highly Liquid

Continue Lending to Small and Middle Market Businesses

NEW YORK--(BUSINESS WIRE)--CIT Group Inc. (NYSE: CIT), a leading provider of financing to small businesses and middle market companies, today announced that, with the overwhelming support of its debtholders, the Board of Directors voted to proceed with the prepackaged plan of reorganization for CIT Group Inc. and a subsidiary that will restructure the Company’s debt and streamline its capital structure.

Importantly, none of CIT’s operating subsidiaries, including CIT Bank, a Utah state bank, will be included in the filings. As a result, all operating entities are expected to continue normal operations during the pendency of the cases.

All classes voted to accept the prepackaged plan and all were substantially in excess of the required thresholds for a successful vote. Approximately 85% of the Company’s eligible debt participated in the solicitation, and nearly 90% of those participating supported the prepackaged plan of reorganization.

Similarly, approximately 90% of the number of debtholders voting, both large and small, cast affirmative votes for the prepackaged plan. The conditions for consummating the exchange offers were not met.

Accordingly, CIT’s Board of Directors approved the Company to proceed with the voluntary filings for CIT Group Inc. and CIT Group Funding Company of Delaware LLC with the U.S. Bankruptcy Court for the Southern District of New York (“the Court”).

Due to the overwhelming and broad support from its debtholders, the Company is asking the Court for a quick confirmation of the approved prepackaged plan. Under the plan, CIT expects to reduce total debt by approximately $10 billion, significantly reduce its liquidity needs over the next three years, enhance its capital ratios and accelerate its return to profitability.

“The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy,” said Jeffrey M. Peek, Chairman and CEO. “We are enormously appreciative of the extraordinary support we have received from our many constituencies. This market-based solution allows CIT to enter into the reorganization process well-prepared and positioned for a swift emergence. I want to thank our customers for their support and express my gratitude to our employees whose dedication and hard work are crucial to the future of CIT. We also acknowledge our constructive working relationship with our regulators and look forward to their continued guidance as we move through this process.”

For more than 100 years, CIT has provided much needed capital to small business and middle market customers. These two sectors play a vital role in the U.S. economy and in overall employment and job creation, representing more than 90 million employees. CIT is the leading provider of financing to the retail sector and to women-, minority- and veteran-owned small businesses. Over one million customers depend on CIT to provide the financing needed to run their businesses. In addition to being one of the largest independent leasing companies in the U.S., CIT maintains the following leadership positions among others:

#1 factoring company in the U.S.;
3rd largest railcar lessor in the U.S.; and
3rd largest aircraft lessor in the world.
As previously announced, CIT expanded its $3 billion senior secured credit facility by an additional $4.5 billion on October 28, 2009. These funds, supplemented by cash generated from operations, will allow us to meet clients’ needs and to satisfy customary obligations associated with the daily operation of its businesses during the confirmation process. CIT has also secured an incremental $1 billion committed line of credit to provide supplemental liquidity as it pursues that plan.

In conjunction with today’s announcement, CIT has filed a number of first day motions that will allow it to continue to operate in the ordinary course during the confirmation process. These motions include requests to continue the payment of wages, salaries and other employee benefits. Additionally, the Company filed a motion seeking the necessary relief from the Court to pay its vendors and certain other creditors in full.

Under the proposed prepackaged plan of reorganization, all existing common and preferred stock will be cancelled upon emergence.

Treatment of Securities in Offers and Solicitations

The original CIT Group Inc. offers launched on October 1, 2009 have expired. Securities tendered in these offers will be released into their original CUSIP numbers as soon as practicable.

Securities tendered in connection with offers that have not yet expired, certain long-term notes maturing after 2018 and the Delaware Funding offers, are being retained in the CUSIP numbers for those offers; however, these securities can be withdrawn from the offers and returned to the original CUSIP number for trading. Any withdrawn securities can be re-tendered until the expiration date.

For Additional Information

Additional information about CIT’s restructuring can be found on the Company’s Web site, For access to Court documents and other general information about the Chapter 11 cases, please visit The Company has established a toll-free Supplier Information Line at 800-422-2738 or, if you are calling from outside the U.S. 973-422-3877 and a toll-free Restructuring Information Line for all other interested parties at 866-967-1786 or 310-751-2686.

Evercore Partners and FTI Consulting are the Company’s financial advisors and Skadden, Arps, Slate, Meagher & Flom LLP is legal counsel in connection with the restructuring plan and Chapter 11 cases. Sullivan & Cromwell advised CIT’s Board of Directors on the restructuring plan and will act as legal counsel to CIT going forward on certain corporate matters.

Houlihan Lokey Howard & Zukin Capital, Inc. serves as financial advisor, and Paul, Weiss, Rifkind, Wharton & Garrison LLP serves as legal counsel to the Lender Steering Committee.

Individuals interested in receiving future updates on CIT via e-mail can register at

About CIT

CIT (NYSE: CIT) is a bank holding company with more than $60 billion in finance and leasing assets that provides financial products and advisory services to small and middle market businesses. Operating in more than 50 countries across 30 industries, CIT provides an unparalleled combination of relationship, intellectual and financial capital to its customers worldwide. CIT maintains leadership positions in small business and middle market lending, retail finance, aerospace, equipment and rail leasing, and vendor finance. Founded in 1908 and headquartered in New York City, CIT is a member of the Fortune 500.


This press release contains forward-looking statements within the meaning of applicable federal securities laws that are based upon our current expectations and assumptions concerning future events, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. The words “expect,” “anticipate,” “estimate,” “forecast,” “initiative,” “objective,” “plan,” “goal,” “project,” “outlook,” “priorities,” “target,” “intend,” “evaluate,” “pursue,” “commence,” “seek,” “may,” “would,” “could,” “should,” “believe,” “potential,” “continue,” or the negative of any of those words or similar expressions is intended to identify forward-looking statements. All statements contained in this press release, other than statements of historical fact, including without limitation, statements about our plans, strategies, prospects and expectations regarding future events and our financial performance, are forward-looking statements that involve certain risks and uncertainties. While these statements represent our current judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results, and our actual results may differ materially. Important factors that could cause our actual results to be materially different from our expectations include, among others, the risk that the additional facilities do not provide the liquidity that CIT is seeking due to material negative changes to CIT’s liquidity from draw down of loans by customers, the risk that CIT is unsuccessful in its efforts to consummate the plan of reorganization. Accordingly, you should not place undue reliance on the forward-looking statements contained in this press release. These forward-looking statements speak only as of the date on which the statements were made. CIT undertakes no obligation to update publicly or otherwise revise any forward-looking statements, except where expressly required by law.

CIT Media Relations:
C. Curtis Ritter, 212-461-7711
Vice President
Director of External Communications & Media Relations
CIT Investor Relations:
Ken Brause, 1-866-54CITIR (542-4847)
Executive Vice President