Monday, December 22, 2008

Ideology and Facts: Coexistence Not Allowed/CIT/ F & FCZ/Bought 30 GE at 15.85 with Cash Flow

There are many who will in a deliberate fashion refuse to learn anything from the history lesson being taught in real time over the past two years. The basic problem is that political orthodoxy and ideology prevent the assimilation of information inconsistent with cherished beliefs.

Those who believe in free markets with little or no regulations to curb abuses will cling to their beliefs concerning the virtues of deregulation regardless of the dangers highlighted by innumerable factual examples over the past several years. Just allow the Wall Street geniuses to police themselves again and put a Chris Cox clone back at the SEC in a few years. They do not draw any connection between the 2004 SEC rule change for example Continuation of Prior Post from Last Night:, which was a culmination of Reagan's deregulation philosophy accepted by Clinton Democrats, to the current economic downturn and the implosion of the investment firms skewered by gorging themselves on the excessive leverage that was the object of their desires.

Instead of examining the evidence and accepting it for what it demonstrates, unfiltered by a preconceived ideological filter, the True Believers will ignore the overwhelming evidence and simply find some convenient target to blame. In the words of Ann Coulter, one of their messiahs, the current mortgage crisis originates from loans being given based on borrower's ability to sink a jump shot or to have a missing child named Caylee. They Gave Your Mortgage to a Less Qualified Minority - HUMAN EVENTS

 Or when expressed by Rush Limbaugh, my Congressman Marsha Blackburn, and a typical GOP intellectual like Michele Bachmann. Michele Bachmann: Sarah's Soul Sister, there is a clear racial overtone to assessing blame for the current financial crisis, where blame is targeted against the poor and particularly poor minorities. Limbaugh, being his usual comic self, blames the current economic crisis on a left wing conspiracy that wants to impose marxist social engineering in a sinister plan to deny middle aged white men a mortgage, or what Limbaugh calls affirmative action by mortgage. This rant comes from Limbaugh's transcript of the 10/3/08 show. (I do read what passes for conservative thought in our society today and would find it amusing if it was not so offensive.) See, weekly online

(a few posts are Marsha Blackburn's views on this subject are discussed in these posts: Marsha Blackburn and the Bailout and LIBOR AND THE MET LIFE FLOATING RATE PREFERRED STOCK )

Instead of modifying their orthodoxy to take into account new information, the True Believer will instead rewrite history- contemporaneously as it happens -so as to keep their orthodoxy zealously frozen in time, not subject to any modification to fit a changing reality even to the point of just sounding foolish.

 Some say that is the essence of conservatism while I would just call it being boneheaded. It will not be long before the True Believers are back arguing in their typical two word cliches (or as many as four to capture their deeper thoughts) that a particular financial regulation is hurting American competitiveness or dampening the growth of the American economy.

The lessons learned from the Great Depression and the last five years will be forgotten or dismissed as governmental intervention in the "free market."

Possibly, a label will be attached to what they do not like, usually socialism or liberalism are two of the favorites, and that is always viewed as a coup de gras to win any argument. Any rule promulgated to curb the excesses of Wall Street will once again be relaxed or repealed to allow whatever practice is desired, not for the benefit of America, but for the sole benefit of the same ridiculously compensated class of people who helped to create the current fiasco, and I do not mean minorities and the poor who are just the typical scapegoats for the venom spewed by the ideologues.

The vitriolic ones will snarl, calling the regulations socialism or marxism, or some other "ism" they fail to understand, in the most disgusting sounding voice where the words are just spit out in a hissing sound, rather than actually debating the regulation as a limited and sensible rule to curb excesses which could lead to serious financial dislocations as shown by an impartial non-ideological rendition of historical evidence. The former rule on limiting leverage at investment banks to no greater than 12 to 1 was such a rule, and there are many other sensible ones which have been abandoned.

I suppose my point is the following. If I was a scientist, and some indisputable facts arose which challenged the validity of some theory of mine, I would not disregard the facts or belittle their mere existence, irrespective of my attachment to the theory, but I would change my theory to incorporate a new observed reality.

I try to approach both investing and political issues with that frame of reference.

Oddly, millions of ideologues have no interest in facts inconsistent with their orthodoxy and will simply take all necessary measures to justify their avoidance of even a cursory contact with any inconsistent fact, or they will just change-even invent- the facts to fit their ideology, or make a conscious effort to disregard any fact which challenges the foundation of their ideology, anything and everything other than changing or adapting their ideology as a result of new information.

There is a word for such people.

We call them Republicans.

Give a Republican a slogan, and he has what passes for an idea or even a complete belief system for life. The Democrats are more open minded and amenable to challenging themselves and evaluating new information but they also have a mindset that is impossible for them to shake-eventually needing the Republicans to shake them up causing them to make a course correction.

The underlying Democrat theology will generally involve throwing money at a problem to solve it. That would mean just about any problem that does not involve rich people. If decades of data show that the problem is being made worse in some way by a program started and nurtured by the Democratic party, like welfare, they might change their approach to the problem as did Clinton on that issue. If their tax policy makes little sense after a few decades, they will adapt by adopting some of Reagan's beliefs about marginal tax rates without ever admitting it of course. From my vantage point, and generally speaking since this is not universal, Republicans have a closed system whereas Democrats are more open minded.

As a fiscal conservative, however, I no longer have a home in either party. I will simply challenge both parties which is where I am the most comfortable.

I do not own common stock in CIT. I may have made a mistake buying some of its short term debt. I monitor what is happening to the company because of my senior debt position. I hope the news today that the FED has approved CIT's application to become a bank holding company will improve the likelihood of being paid at maturity. This is one step that is a predicate for CIT to receive TARP funds. UPDATE 1-US Fed grants CIT Group bank holding company status | Markets | Markets News | Reuters This may make the short bonds more attractive for some to purchase now, while they still sell at deep discounts to par value. I already have my fill of them.

I will be very interested to see whether the bondholders for Ford and GM will accept a major haircut without having it crammed down their throats by a bankruptcy judge. I am not sure why they will voluntarily agree to do it and it is hard to visualize the UAW making big cuts without the other stakeholders feeling the pain too. A term of the recent loan to GM from the U.S. government requires substantial concessions from the bondholders which means converting a lot of debt into equity. Bloomberg.com: WorldwideWhy would anyone who has not already been forced to take a major haircut under mark to market rules want to do that when the debt is now senior and the equity may be worthless paper? I would agree that the long term viability of GM is dependent on a reduced indebtedness and labor concessions but will be surprised if the bondholders agree to it outside of a bankruptcy court. I do not have a position in GM or its debt and I have no plans to start one notwithstanding the recent Barron's article. Barrons.com

Moody's did downgrade Ford debt based on the possibility that it will have to negotiate some kind of similar arrangement with its bondholders to appease the UAW.

Ford Motor Credit was cut further into junk also. Bloomberg The rating is now Caa3, nine notches below investment grade. If you held a gun to my head and told me I had to buy some security connected to an American auto company other than secured debt or you would pull the trigger, and mean it, I would buy FCZ only under those circumstances, which has a $25 par value.

It is unsecured senior debt of Ford Motor Credit currently yielding 24% and maturing in 2031. I really would not want to do it but it is possible that this sub could be sold in whole or in large part to a more financially stable company down the road.

Also, it was not long ago that Ford Motor Credit was profitable. The ratings agencies are basically saying that the debt of Ford Motor Credit is dependent on the viability of Ford Motor. There are many reasons supporting that conclusion.

One that does not is an event where the credit company is separated from the parent and funded through a more viable entity. I do not know whether that will happen but GM did sell a large chunk of GMAC to Cerberus. At least Ford Motor Credit does not have a black hole like ResCap: Reuters It is conceivable that if I have a moment of temporary insanity that I would buy 50 shares even without the gun to my head. I will let Dan Fuss play GMAC and Ford Motor Credit.

I did not note the specific price paid for the GE shares bought earlier today, mentioned in the prior post.  I added 30 shares with cash flow at $15.85.

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