TheWalk.com

Laguna Beach, California

• Send your dollars on a holiday and watch them return with interest,
• How much does the rest of the world care about the feelings of
  Americans investors?
• Avoiding the snares of the over-gimmicky marketplace and more…

Eric Fry, reporting from Laguna Beach, California…

“As international investors wake up to the relative weakening of America’s
economic power,” The Economist recently remarked, “they will surely question
why they hold the bulk of their wealth in dollars…The dollar’s decline
already amounts to the biggest default in history, having wiped far more off
the value of foreigners’ assets than any emerging market has ever done.”

To us Americans, The Economist’s unflattering analysis may feel a bit harsh
and unfair. But the rest of the world is starting to care less and less about
how we Americans feel. The rest of the world despises losing money, just as
much as any American. So when foreign investors watch their dollar-
denominated investments tumble in value, they become a little grumpy. And if
they become really grumpy, they sell their dollar-denominated assets and take
their capital elsewhere.

They take their capital to jurisdictions and asset markets that treat their
capital more kindly. They take it to places where the profits are larger and
the deceptions are smaller.

American-style capitalism has evolved into a bizarre marriage of financial
gimmickry and governmental coddling. Very few companies produce much of
anything, other than derivatives and press releases. This situation would not
be so bad if the derivatives possessed a bit of value and the press releases
possessed a bit of truth. Instead, the U.S. economy lurches from greed to
deception to disaster, and back to greed, without ever eliminating all the
flaws and the felons that cause all the problems.

When we should be lopping off heads (so to speak), we dispense multi-million
dollar severance packages; when we should be marking to market we mark to
mark-up; when we should be allowing idiotic speculations to fail we devise
new ways to finance idiotic speculations.

But the path to economic salvation and rejuvenation is not so complicated; it
begins with truth-telling and real-world pricing.

Just yesterday, for example, HSBC Holdings, Europe’s largest bank by market
value, agreed to absorb $45 billion of assets from the structured investment
vehicles (SIVs) it controls. (For more on this topic, please see the following
edition of the Rude Awakening, SIV-Positive). In other words, the big bank
agreed to take responsibility for $45 billion worth of questionable asset-
backed securities (ABS).

By contrast, Citigroup has refused to assume direct responsibility for the
$83 billion of questionable ABS that it controls inside its SIVs. Instead,
America’s largest lending institution has concocted an elaborate “Super-SIV”
ruse, the purpose of which is to dump the detritus of its ill-conceived
financial gimmickry into a vehicle where the floodlight of full disclosure
and accountability will never shine.

“I like what HSBC has done,” says Ed Ketz, associate professor of accounting
at the Smeal College of Business at Pennsylvania State University, “It’s a
very simple solution. It’s one that’s transparent. We can see the promise of
liquidity. That’s something that, to me, would create a feeling of trust.
Citi could go a long way in following this example.”

Jack Ciesielski, publisher of the industry newsletter The Analyst’s
Accounting Observer, concurs: “With someone like HSBC throwing in the towel,
going for transparency… it makes Citi and the other parties look
conspiratorial at this point if they don’t ‘fess up and do that.”

But Citi’s maneuvers-to-date reflect no inclination to “fess up.” To the
contrary, Citigroup devotes itself to creating deceptions and securing life-
lines. Late yesterday, Citi agreed to sell part of itself to the Abu Dhabi
Investment Authority for $7.5 billion – a recapitalization deal which,
conveniently, admits to no crisis, acknowledges no error, eliminates no
executive positions, reduces no executive bonuses and solves absolutely no
problems. The deal merely perpetuates the status quo – the same inept and
broken status quo – a system that nourishes corrupt mediocrity, while
squandering shareholder capital and crowding out legitimate economic
endeavors.

To the extent that Citi’s gimmicks and theatrics succeed, America’s economy
fails. No first-world economy can thrive on the power of price-fixing,
bailouts and deception. The largest bank in the land should not be colluding
with the Treasury Secretary to conduct a game of “hide the toxic waste.”

Instead, it should be acknowledging its errors quickly, writing down its bad
loans, and leading the crusade to restore liquidity to the financial system.

But Citigroup has not embraced HSBC’s ethos. Citigroup has opted to obscure,
rather than confess; to deny, rather than to deal. Citigroup, like so many
other American corporations and institutions, knows all about rolling dice,
but nothing about landing “snake eyes.” The big American bank, like so many
other American corporations and institutions, knows all about million-dollar
options grants and compensation packages, but nothing about adversity or
crisis, or how to prepare for either one.

The American economy may be facing a crisis it is not prepared to meet.

And because the American economy is not prepared for crisis, confidence in
the American economic system is waning, confidence in the American economy is
withering, and confidence in the American dream is waffling. The land of
opportunity is losing is allure…just like the dollar.

Perhaps that’s why an increasing number of Americans are shifting their
assets overseas. Are these “early adopters” showing the way to the rest of
us, or are they just “traitors” and “quacks?”

Let the readers decide…and after deciding, let the readers please send us
their perspectives on the topic. We suspect this topic will draw an
impassioned response from both sides of the ledger. And we’d love to publish
these impassioned views in upcoming editions of the Rude Awakening…

I broke this article into two parts, because of its length and the obvious break in content. Part 2 can be seen here.
- Ed

Source