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November 17th, 2011

Is The Full Monti Sufficient?

Is the Full Monti sufficient to avoid the next shoe falling in Europe or only to avoid the EEU giving Italy the boot? To his credit, Monti has formed a government that does not include any professional politicians, yet the huge per capita debt heaped on Italy coupled with a culture of tax evasion leaves little room into which optimism can creep. To the southeast the answer to the aged question, “What’s a Greek urn?” is now likely to be “much less” than in the past. Regardless of which of the two Amherst roommates run Greece, austerity policies have been foisted upon them by the EEU removing any hope of a consumer led charge re-inflating their economy.

Retreating to our shores, we dip back into the quagmire of financial market regulation. The mythical perception seems to be that financial regulation is a vaccine, which, once administered, inoculates against any future occurrence of a designated financial disease. The second myth is that regulation leads to measures which prevent a problem; instead, it identifies the agency that gets to most loudly declare its incredulity when a disaster occurs. MF Global has been fully regulated both pre and post Dodd-Frank. Yet regulators were not seen until the hearse had parked in front of MF headquarters. Remarkably, MF Global had issued bonds in the third quarter, blessed by regulators, on which the interest rate would rise one percentage point if Jon Corzine left to become Secretary of the Treasury! MF Global shareholders are relieved to have dodged that interest rate penalty. Clearly, the concept should have been revised to offer a lower rate if he left his position. The third myth: “systemic risk” can be identified and eliminated by regulators. MF Global had $41 billion in assets, yet its ever-shrinking liquidity, high leverage and thin capital base did not result in any significant regulatory action to avoid a crisis. Fortunately, systemic risk is not as pedestrian as Dodd-Frank would have one believe as the system absorbed the bankruptcy with minimal disruption. Yet Dodd-Frank requires firms with small multi-million dollar PE investments in taco stands to be monitored in order to sniff out systemic risk at great expense to those firms. While regulators are seeking detail on small leveraged taco stand investments, Warren Buffet is granted the right to avoid publicly reporting the purchase of a $10 billion position in IBM, and is he not required to value his position at the market stock price if he feels the price will recover. Perhaps the Forestry Service should be consulted, as officials continue to have a problem distinguishing the forests from the trees.

Despite the flurry of legislation in the last few years creating the illusion of action to mitigate the national debt crisis, municipal entities are dropping like flies into bankruptcy or increasing their and the national debt problem by engaging in bidding wars for jobs in the same fashion the Yankees bid for A-Rod. Birmingham, Harrisburg, Central Falls, East Providence are the latest additions to the bankrupt or insolvent list. CT is reeling from the highest per capita debt in the U.S. Yet its newest job policy is not to make it conducive for commerce, it is to buy jobs with taxpayers funds. It paid UBS $20 MM to keep 2000 jobs in CT in a building UBS already occupies and which would be virtually unsaleable, if UBS vacated, except to a large trading/brokerage firm. CT is providing $20 MM of financial support to NBC Sports to bring 450 jobs to Stamford and $291 MM to bring Jackson Labs, a not for profit research lab that will not pay any state taxes, and its 350 jobs, to CT. This is not a zero sum game for the state coffers. For example in the case of UBS, it is a direct revenue sacrifice of $20 MM for people who already work in CT. CT is not unique in this payment for jobs masquerading as a job creation program. It is a zero sum game for U.S. jobs and a net loser for revenue, yet it is a popular policy for the broke. Unfortunately, the tax increases required just to offset these winning corporate lottery tickets remove even more cash from the consumer’s hands, making thoughtful PE transaction underwriting forecasts very conservative.

I’m Rob Morris and I approved this blog.

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