bizzXceleration: Performance, Value and Profit

Wall Street’s Near-Death Experience With the implosion of Lehman Brothers, in September 2008, the realization dawned: Morgan Stanley and Goldman Sachs could be next. In an excerpt from his new book, the author reveals the incredible scramble that took place—desperate phone calls, seat-of-the-pants merger proposals, flaring tempers—as Washington got tough and Wall Street titans Lloyd Blankfein and John Mack fought for survival.‘This is an economic 9/11!” There was chilling silence in Treasury Secretary Hank Paulson’s office as he spoke. Nearly two dozen Treasury staffers had assembled there Wednesday morning, sitting on windowsills, on the arms of sofas, or on the edge of Paulson’s desk, scribbling on legal pads. Paulson was seated in a chair in the corner, slouching, nervously tapping his stomach. He had a pained look on his face as he explained to his inner circle at Treasury that in just the past four hours the crisis had reached a new height, one he could compare only to the World Trade Center attacks, seven years earlier, almost to the week. While this time no lives may have been at stake, companies with century-long histories and hundreds of thousands of jobs lay in the balance.

The entire economy, he said, was on the verge of collapsing. Paulson was no longer worried about just investment banks; he was worried about General Electric, the world’s largest company and an icon of American innovation. Jeffrey Immelt, G.E.’s C.E.O., had told him that the conglomerate’s commercial paper, used to fund its day-to-day operations, could stop rolling. Paulson had also heard murmurs that JPMorgan Chase had stopped lending to Citigroup; that Bank of America had stopped making loans to McDonald’s franchisees; that Treasury bills were trading for less than 1 percent interest, as if they were no better than cash, as if the full faith of the government had suddenly become meaningless.

Paulson knew this was his financial panic. The night before, chairman of the Federal Reserve Ben Bernanke had agreed it was time for a systemic solution; deciding the fate of each financial firm one at a time wasn’t working. It had been six months between the implosions of Bear Stearns and Lehman, but if Morgan Stanley went down, probably no more than six hours would pass before Goldman did, too. The big banks would follow, and God only knew what might happen after that. And so Paulson stood in front of his staff in search of a holistic solution, a solution that would require intervention. He still hated the idea of bailouts, but now he knew he needed to succumb to the reality of the moment. “The only way to stop this thing may be to come up with a fiscal response,” he said. Paulson, who had been living on barely three hours of sleep a night for a week, was beginning to feel nauseated. Watching the financial industry crumble in front of his eyes—the world he had inhabited his entire career—was getting to him. For a moment, he felt light-headed. From outside his office, his staff could hear him vomit.

 Stalingrad - the Stimulus Package & Sausage-Making

Another thing we need to be very clear about is the next time we were dancing on the edge of the abyss and how close run a thing it was and still is, as well as how much cleanup and ripple effect we're going to be dealing with for a long time. Now we've taken some really deep dives into fiscal policy, the stimulus package and the effects it's had as well (Between Stalingrad and Kursk: Real Economy, Policy and Outlook) so we won't re-review those in any detail. But despite all the ideological arm-waving it's been the early tax cuts and transfer payments that saved us from much...much worse (and yes we're talking GD 2.0 here), in conjunction with the Fed's unusual actions. It's also going to be Federal spending that keeps the wheels on the wagon for the next two years while we hope a more natural organic recovery begins to emerge from the bombed out rubble. The accompanying chart on job losses hopefully brings home the point of deep the chasm is as well as how far we've got to go to get to the other side. But the excerpt below should make clear the human dimensions of the policy-making and sausage-grinding that went on.

Inside the Crisis:Larry Summers and the White House economic team The most important question facing Obama that day was how large the stimulus should be. Since the election, as the economy continued to worsen, the consensus among economists kept rising. A hundred-billion-dollar stimulus had seemed prudent earlier in the year. Congress now appeared receptive to something on the order of five hundred billion. Joseph Stiglitz, the Nobel laureate, was calling for a trillion. Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010. Because of the multiplier effect, filling that gap didn’t require two trillion dollars of government spending, but Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion.

There were sound arguments why the $1.2-trillion figure was too high. First, Emanuel and the legislative-affairs team thought that it would be impossible to move legislation of that size, and dismissed the idea out of hand. Congress was “a big constraint,” Axelrod said. “If we asked for $1.2 trillion, it probably would have created such a case of sticker shock that the system would have locked up there.” He pointed east, toward Capitol Hill. “And the world was watching us, the market was watching us. If we failed to produce a stimulus bill, that in and of itself could have had deleterious effects.” There was also a mechanical argument against a stimulus of that size. Peter Orszag, who was celebrating his fortieth birthday that day, said that, while the argument for a bigger stimulus was sound theoretically, there were limits to how much money the government could practically spend in the near future. Summers brought a third argument to the debate, one that echoed his advice to Bill Clinton sixteen years earlier, when his Administration was facing persistent budget deficits that Summers believed were suppressing economic growth. He, like Romer, was guided by an understanding that in financial crises the risk of doing too little is greater than doing too much. He believed that filling the output gap through deficit spending was important, but that a package that was too large could potentially shift fears from the current crisis to the long-term budget deficit, which would have an unwelcome effect on the bond market. In the end, Summers made the case for the eight-hundred-and-ninety-billion-dollar option. “A lot of my research has been figuring out what policymakers did, why they did it,” Romer told me. “I have a whole new level of sympathy. Until you’ve experienced it, you don’t realize how hard it is. It’s humbling.”

Geithner proposed an alphabet soup of programs to entice the private sector to take bad loans off the balance sheets of struggling banks. The crux of his plan was the stress tests. The Federal Reserve and other regulators would examine the nineteen biggest banks to reveal how much capital they would require if the economy worsened, and the results would be publicly released in May. The idea was that the process would restore confidence in the banks and reassure investors. But throughout the spring the plan was attacked by a growing number of economists and members of Congress as a pale alternative to nationalizing the weakest banks. In February and March, Paul Krugman alone wrote seven columns in the Times deriding the plan and calling for nationalization. What was more troubling for Geithner was that the White House seemed to be losing confidence. The political advisers dreaded the bailouts. In the end, though, Summers acknowledged that there were no better options, and Geithner’s plan survived intact. On March 31st, Summers sent the President a page-and-a-half memo outlining the reasoning behind the decision not to nationalize any banks. Obama was on his way to the G-20 meeting in London, and he wanted to be prepared with the best case against it.

 Getting Ready for Kursk: Economic Repair plus Regulatory Reform

The final section of the readings is a set of video clip addresses that we highly recommend you make the time to watch, though the accompanying CNBC short interview should set the stage. In it some key players from both sides of the House discuss the state of things and their outlooks. One observation by Barney Frank we found especially interesting is that he expects a House Bill to be brought to the floor this Fall - and further that they've been working on it since the Spring of 2008, when it was kicked off based on Sec. Paulson's suggestions! Think about the implications of all that for a minute.

Now this is a topic we've spent considerable time and horsepower on, to the point of post after post. (Ask Not For Whom the Siren Shrieks: Let the Finance Wars Begin, Refreshing the Economic Outlook: Fundamentals to Business Outlook) So we won't re-visit that ground but you might want to refresh yourselves a bit.

Planning for the Future

But there are several bottom lines here that need to be considered.

1. Regulatory reform is coming and it'll be significant.

2. The Finance Industry as we know it will, or at least should, not be the same. Not just because of changes in the regulatory framework but even more so becasue a) the debt-driven, leverage-based financial engineering of the last three decades didn't work and b) because the business models of the major lines of business are broken.

3. The US economy has floated on a sea of debt, triggered by de-regulation, and balance sheets will be re-built and de-leverage will be the order of the day. That'll reduce demand in the intermediate term and make the jobless recovery even more jobless but result in a healthier foundation.

4. This structural evolution is likely to take a decade to work out.

5. Right now, nobody is paying attention to these factors or preparing for them. The "New Normal" is being met with the "Old Normal" rules of thumb, behaviors and strategies.

6. So, not only do you need to re-think your own strategies, e.g. for investment, job and business development, etc. but you need to re-think them in a world of mal-adjusting laggards.

7. This too is advice and observation that will likely be ignored and so on around the circle until denial is no longer credible, new rules of behavior emerge and adaptations are forced.

David Wessel covered some of these bases in a Capital column story from last week from which this graphic is drawn, which is excerpted in the readings. BtW any resemblence between that column and our previous post (Debt, Wealth, Finance & Outlook: Sixty Years of Bubbliciousness) on the topic is purely coincidental. Put it down to great minds converging on the same set of worries when examining the same realities.

 

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Other Tales of Abyss Dancing

 Britain Risked `Bank Runs, Riots' as RBS, HBOS Neared Collapse Last Year A year ago today, Royal Bank of Scotland Group Plc and HBOS Plc were close to collapse, causing a chain reaction that could have ended with riots in U.K. cities, security analysts and economists said.Bank failures would have forced the government to cancel police leave and deploy troops as the breakdown of the financial payments system threatened the ability of utilities to provide essential services, said David Livingstone, a fellow at the Royal Institute for International Affairs in London, a former adviser to the government’s Cobra crisis response committee.“You are talking about a situation with mass disorder and panic,” the former Royal Navy officer said in an interview. There would be “riots, pandemonium, everyone fending for themselves.”Chancellor of the Exchequer Alistair Darling, Bank of England Governor Mervyn King and Financial Services Authority Chairman Adair Turner met at 5 p.m. on Oct. 7, 2008, and readied a 250 billion-pound ($398 billion) rescue for the banks in the 16 hours before they opened for business the following day. In response to a Freedom of Information Act request from Bloomberg News one year on, the Treasury declined to say if it had a contingency plan for the two banks, then or now.Releasing such information would probably “have a destabilizing effect on financial markets,” damage the government decision-making process and cause commercial harm to the banks involved, the Treasury said in a letter.

•  RBS Faced Risk of Full Seizure by Brown at 2008 Crisis Climax, Gieve Says

The Credit Crunch Continues Anyone counting on a meaningful economic recovery will be greatly disappointed. How do I know? I follow credit, and credit is contracting. Access to credit is being denied at an accelerating pace. Large, well-capitalized companies have no problem finding credit. Small businesses, on the other hand, have never had a harder time getting a loan. Since the onset of the credit crisis over two years ago, available credit to small businesses and consumers has contracted by trillions of dollars, and that phenomenon is reflected in dismal consumer spending trends. Equally worrisome are the trends in small-business credit, which has contracted at one of the fastest paces of any lending category. Small business loans are hard to find, and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year. Unfortunately for small businesses, credit-line cuts are only about half way through. Home equity loans, also historically a key funding source for start-up small businesses, are not a source of liquidity anymore because more than 32% of U.S. homes are worth less than their mortgages. As is true in most recessions, banks' commercial lending portfolios shrink as creditworthy customers pay down their debts and the less-worthy borrowers are simply denied loans. Banks, in other words, want to lend only to those that don't want to borrow. Challenging as that may be, in the last cycle small businesses at least had access to their credit cards. Small businesses primarily fund themselves through credit cards and loans from local lenders. In the past two years, credit-card lines have been cut by over $1.25 trillion. During the same time, 10% of all credit-card accounts have been cancelled. According to the most recent Federal Reserve data, small business lending is down 3%, or $113 billion, from fourth-quarter 2008 peak levels—the first contraction since 1993. Credit cards are the most common source of liquidity to small businesses, used by 82% as a vital portion of their overall funding. Thus, it is of merit when 79% of small businesses surveyed tell the Small Business Association that credit-card lending standards have tightened drastically and their access to credit lines has decreased materially. I believe that we are only in the early stages of the second half of this credit cycle. I expect another $1.5 trillion of credit-card lines to be removed from the system by the end of 2010. This includes not only the large lenders reducing exposure but also the shuttering of several major subprime credit-card lenders. Beginning in the fourth quarter of 2007, lenders began reducing available credit by zip code. During the past four quarters, lenders have cut "inactive" accounts (whether or not the customer viewed the account as a liquidity vehicle). The next phase will likely be credit-line cuts as lenders race to pre-emptively protect themselves from regulatory changes associated with the Credit Card Accountability, Responsibility and Disclosure Act, passed in May of this year, and the 2008 Unfair and Deceptive Acts and Practices Act.

• Consumer Credit Crumbles
• Consumer Credit Declines Sharply in August

Paralysis in the Debt Markets Is Deepening the Credit Drought A year after Washington rescued the big names of American finance, it’s still hard to get a loan. But the problem isn’t just tight-fisted banks.The continued disarray in debt-securitization markets, which in recent years were the source of roughly 60 percent of all credit in the United States, is making loans scarce and threatening to slow the economic recovery. Many of these markets are operating only because the government is propping them up.But now the Federal Reserve has put these markets on notice that it plans to withdraw its support for them. Policy makers hope private investors will return to the markets, which imploded during the financial crisis.The exit will require a delicate balancing act, government officials said.The debt-securitization markets finance corporate loans, home mortgages, student loans and more. In good times, they enabled banks to package their loans into securities and resell them to investors. That process, known as securitization, freed banks to lend even more money.Many investors have lost trust in securitization after losing huge sums on packages of subprime mortgages that had high default rates. The government has since spent more than $1 trillion trying to restore the markets, with mixed success.Until more of the securitization market revives, or some new form of financing takes its place, a wide range of loans needed to secure a lasting economic recovery will remain elusive, experts said. Enormous swaths of this so-called shadow banking system remain paralyzed. Depending on the type of loan, certain securitization markets have fallen 40 to 100 percent. “The securitization markets are dead,” said Robert J. Shiller, the Yale University economist and housing expert who predicted the subprime collapse. The government is supporting them, he said, but it’s unclear what will happen when it extricates itself. “We’re stuck,” he said.“The market is coming back, but a lot of it is because of TALF,” said Hyun Song Shin, a Princeton economist who studies securitization. “The big question is, Will the private issuance market stand on its own two feet without TALF, or has there been a fundamental change in the market that it is somehow hobbled permanently?” Securitized Credit Markets Graphic

• Securitization Drought Exposes Policy Bind, Threatens Recovery

The State of Things: Jobs, Debt & Outlook

The Jobs News Gets WorseOn Friday, the Bureau of Labor Statistics delivered its latest revelation that the jobs picture was far worse than it had previously reported. Using newly available data, the bureau now estimates that during the 12 months ended last March, the economy lost 5.6 million jobs, 824,000 more than the 4.8 million previously reported.It was just the latest change, although the largest. When that estimate is reflected in the published job figures early next year, it will show that there were 130.1 million civilian jobs in the economy last month. That is eight million jobs — 5.8 percent — below the peak reached as the recession began in December 2007.It now appears that during the first half of 2008, when the recession was getting under way, job losses averaged 146,000 per month. That is nearly three times the average of 49,000 jobs shown in the initial estimates.How did the government get it so wrong?The official job numbers are based on a monthly survey of employers, augmented by something called the “birth-death model,” which factors in jobs assumed to have been created by employers who are too new to have been included in the survey, and subtracts jobs from employers assumed to have failed and therefore not responded to the latest survey. For the 12 months through last March, the birth-death model added 717,000 jobs to what the bureau would have reported had it relied solely on its survey. The government’s data since 1939 shows only one time when there was a larger percentage decline in civilian jobs. That fall, of 10.1 percent, came at the end of World War II when defense contractors laid off workers no longer needed for the war effort — a total of 4.3 million lost jobs. In no downturn since World War II did that many jobs vanish, until the current recession.

The "Real" Economy Is Dying: Q4 "Going to Be a Bloodbath," Whalen Says But all is not right in either the economy or the banking sector, according to Christopher Whalen, managing director at Institutional Risk Analytics. In fact, Whalen says most observers are drawing the wrong economic conclusions from the stock market's robust rally. "Why is liquidity going into the financial sector? It's because the real economy is dying [and] everyone is fleeing into the stocks and bonds because they're liquid at the moment," Whalen says. "That's not a good sign." The banking sector's assets shrunk by about $300 billion per quarter in the first half of 2009, a sign of banks hoarding cash in anticipation of additional future losses, according to Whalen. "The real economy is shrinking because of a lack of credit." The shrinkage will continue into 2010, Whalen predicts, suggesting the banking sector hasn't yet seen the peak in loan losses. Institutional Risk Analytics forecasts the FDIC will ultimately need $300 billion to $400 billion to recoup losses to its bank insurance fund. (In other words, the $45 billion the FDIC sought to raise last week by asking banks to prepay fees is just a drop in the bucket.) "Investors should think about this because the fourth quarter in the banking industry is going to be a bloodbath," says Whalen, who believes smaller and regional banks like Hudson City Bancorp may come into favor vs. larger peers, which have dramatically outperformed since the March lows. "When you see the markets rallying when the real economy is shrinking that tells you this [recovery] is not going to be very enduring," Whalen says.

• "Astounded" by Goldman's Upgrade: Banks "Heading Into the Storm," Whalen Says
• Citi, BofA Still Face Huge Losses: Bondholders Must Share Taxpayers’ Pain
• Goldman Sachs: The “Smart” Money?!

The Downside of Reducing Debt The story of the past few years in a few sentences: U.S. financial firms, other businesses and families went on a borrowing binge. It was fun. Lenders and investors lent too freely and didn't charge enough to cover risks they were taking. When borrowers couldn't pay the loans and the collateral they pledged wasn't sufficient to cover the loans, a lot of lenders lost money. That wasn't fun. Now, it's harder to get a loan. And many Americans, most banks and some other businesses are reluctant to borrow. They are trying to lighten their debt loads, to "deleverage." This prudent reaction to a borrowing binge that proved unwise hurts the economy. Financial institutions, which basically borrow from some to lend to others, are borrowing less and, thus, lending less. Consumers are skimping to pay down debt, and, thus, spending less. The result is an economy growing too sluggishly to reduce unemployment. The U.S. government can't stop this deleveraging, but it's trying to ease the pain by borrowing more while everyone else tries to borrow less. Deleveraging is in its early stages. Big finance has done a lot. Especially after the Lehman Brothers calamity a year ago, highly leveraged firms pulled back. Many had no choice. The latest Federal Reserve data show the domestic financial sector reduced borrowing at a 12.2% annual rate in the second quarter after cutting it at a 10.4% pace in the first quarter. But banks remain skittish. "Even though bank earnings are recovering," the International Monetary Fund said this week, "they are not expected to be big enough to offset fully the anticipated write downs over the next 18 months." The combination of "insufficient earnings" and "continuing deleveraging pressure" means "banks are not yet in a strong position to lend support to the economic recovery," the IMF said.American families, who account for about 40% of all borrowing in the U.S., aren't nearly as far along the deleveraging road as big finance. Either because they want to or because they can't get credit, households began reducing debt a year ago, the Fed says. In the second quarter, which ended in June, household debt shrank at a 1.7% annual rate -- a far cry from 10%-plus pace of increase in the mid-2000s. There is more to come. "Deleveraging in the household sector has barely begun because it's hard for households to lower debt burdens, other than declaring bankruptcy," says Martin Barnes, who has been monitoring the credit cycle for years for the Bank Credit Analyst, a forecasting journal.

A Bit Better, But Very Far From Best My assessment of where things stand today is mixed. On the positive side, the financial markets are performing better and the economy is now recovering. In fact, the improvement in financial conditions has caused usage of the Fed’s special liquidity facilities to fall considerably. On the negative side, the unemployment rate is much too high and it seems likely that the recovery will be less robust than desired. This means that the economy has significant excess slack and implies that we face meaningful downside risks to inflation over the next year or two. The vicious cycle we had a year ago—in which the deterioration in financial markets led to economic weakness and that weakness reinforced the tightening of financial conditions—has been broken. In fact, to some extent, it has been replaced with a virtuous cycle. I see three major forces restraining the pace of this recovery. First, households are unlikely to have fully adjusted to the net wealth shock that has been generated by the housing price decline and the weakness in share prices. The second force that could restrain the recovery is the fiscal outlook. The fiscal stimulus that is currently providing support to economic activity is temporary rather than permanent. This has to be the case if we are to ensure that fiscal policy is on a sustainable path over the long-run. This means that the positive impulse from fiscal stimulus will abate over the next year. The third, and perhaps most important factor, is that the banking system has still not fully recovered. Bank credit losses lag the business cycle and are still climbing. Thus, while banks’ access to the capital markets has sharply improved, banks are still capital constrained and hesitant to expand their lending. Most importantly, some significant classes of borrowers—namely commercial real estate and small business—are almost wholly dependent on the banking sector for funds, and those funds are not easily forthcoming.

Roubini Sees Stock Declines as Soros Warns on Economy New York University Professor Nouriel Roubini said stock markets may drop and billionaire George Soros warned the “bankrupt” U.S. banking system will hamper its economy, highlighting doubts about the sustainability of the global recovery. “Markets have gone up too much, too soon, too fast,” Roubini, who accurately predicted the financial crisis, said in an interview in Istanbul on Oct. 3. U.S. stocks may suffer a “major decline” after climbing to the highest levels in almost a year two weeks ago, according to technical analyst Robert Prechter, founder of Elliott Wave International Inc. “The real economy is barely recovering while markets are going this way,” Roubini said. “I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U-shaped. That might be in the fourth quarter or the first quarter of next year.” U.S. and European stocks gained today after reports showed service industries expanded on both sides of the Atlantic. “Stocks are very overvalued,” Prechter, who advised betting against U.S. equities three months before the market peaked in October 2007, said in an Oct. 1 telephone interview. “Stocks peaked in September and are back in a bear market.” The S&P 500 will probably fall “substantially below” 676.53, the 12-year low reached on March 9, he said. His projection implies a drop of more than 34 percent from last week’s close of 1025.21. It rose to 1031.77 at 10:05 a.m. in New York.

• Earnings above low expectations? Probably. Revenue growth? Unlikely. Will that be enough for a rally?
• Bulls Ignore Warnings from Soros, Roubini and Other Skeptics
• What Does the Economy Have to Do with the Market?

Stiglitz Says Markets Are `Irrationally Exuberant' About Economic Recovery  Nobel Prize-winning economist Joseph Stiglitz said U.S. unemployment will keep rising and should be the focus for policy makers, and gains in the stock market show investors have been “irrationally exuberant” about a recovery. “There’s a lot of risk going ahead of some big bumps,” he said yesterday in a Bloomberg Television interview from Istanbul, citing housing, commercial real estate and consumers’ inability to pay off credit cards because of job losses. “There’s a very big risk that markets have been irrationally exuberant.” His comments echo New York University Professor Nouriel Roubini’s view that “markets have gone up too much, too soon, too fast,” and billionaire George Soros, who warned yesterday that America’s economic recovery will be “very slow.” It’s “pretty clear that the situation will continue to get worse,” Stiglitz said, citing elements of the jobs report such as the number of people who can’t find a full-time job and the pace at which Americans are dropping out of the labor force. Economic growth this year and next will “fall well short of what we need to stop unemployment from growing,” he said. The likelihood that the U.S. economy will be “out of the woods” before most of the measures in the Obama administration’s stimulus package expire in 2011 is “very small,” he added. Soros said in Istanbul that U.S. consumers are “overdebted” and that the “bankrupt” American banking system will hamper thee economy. “The United States has a long way to go,” he said.

• U.S. Economy Is Better, Not Cured
• Recovery May Be Slow and Painful
• Dropping Rents Will Drag House Prices Down with Them
• NRF Forecasts One Percent Decline in Holiday Retail Sales
• The Unemployment Dilemma

Obama Weighs Spending, Tax Cuts to Stem Job Losses Without Second Stimulus  President Barack Obama is considering a mix of spending programs and tax cuts to respond to widening job losses that would amount to an additional economic stimulus without carrying that label. The discussion of the initiatives, including a boost in transportation spending and an extension of an expiring tax credit for first-time homebuyers, comes as the White House is balancing rising concern about unemployment and a budget deficit the Congressional Budget Office estimates will total $1.6 trillion for 2009, and $1.4 trillion in 2010. Administration officials have told allies in Congress that a broader transportation bill, and extensions of a homebuyer tax credit and unemployment benefits are all on the table, a Senate aide said.

• Obama Can't Pass the Buck ,Stimulus Approval Graphics
• Despite Success, Stimulus Is Unpopular , Stimulus Good vs Bad Idea Graphic

Managing Risk: When to Put Your Money Under Your Mattress For decades, the prevailing wisdom held that the way to sleep at night was to buy and hold stocks for the long term while ignoring market gyrations. But investors who had implicit faith in this philosophy of long-term investment had a rude awakening during the Great Recession. Even the remarkable rally from the March 2009 market low has not repaired all the damage to their investment portfolios. In despair, many have concluded that the investment climate is just too uncertain to trust their hard-earned dollars to the vagaries of the stock market. That is a great pity, because managing the risk to a stock portfolio is not as hard as most believe. The simple fact is that the worst bear markets are normally associated with recessions. Therefore, if possible, you should sell your stocks in anticipation of a recession, and buy stocks ahead of a recovery. Fortunately, good leading indexes are designed to flag recessions and recoveries before they arrive. But it is still worth examining what would have happened to the value of a stock portfolio over the course of the last two recessions and recoveries if an investor had simply sold stocks on the day that ECRI publicly predicted a recession and bought back stocks on the day ECRI publicly predicted an economic recovery. It is instructive to compare this to a long-term buy-and-hold strategy for the S&P 500. The results are compelling. If you had started with $100 in stocks on the day in September 2000 when ECRI publicly warned of recession and followed the standard buy-and-hold strategy, those stocks would be worth just $72 nine years later, at the end of September 2009. Alternatively, suppose you had sold all your stocks on that very day in September 2000 and put the cash under your mattress until the day in early 2002 when ECRI announced a recovery, at which point you used all of that money to buy stocks. Then, suppose you once again sold all your stocks on the day in March 2008 that ECRI made its next recession call, and used all of that money to buy stocks on the day ECRI made its 2009 recovery call. Following that simple buy-low-sell-high strategy, your stocks would be worth $148 at the end of September 2009 – more than double what a buy-and-hold strategy would have given you. You can do the math – over the nine-year period, you would have beaten the buy-and-hold returns by more than eight percentage points a year, on average – and even more if you had put your money in money market funds instead of your mattress. Of course, this strategy would miss sizeable rallies and corrections. It is hardly the best possible way to manage money – investment professionals with the time and resources to analyze an array of specialized state-of-the-art leading indicators should be able to do better still.

Financial Reform Vidclips

Wall Street Reform and You This week, David Brancaccio sits with Zanny Minton Beddoes, economics editor for The Economist magazine, to review the proposal and its ramifications for America. Beddoes encourages streamlining the regulatory system, leaving fewer but more efficient overseers. But where powerful interests are at stake, nothing is a sure bet.

Previewing the Superpower Summit The world's economic superpowers are preparing to meet--will they devise a fix for the financial mess? On March 13, financial ministers and central bankers of the world's economic superpowers will meet in London to lay the groundwork for next month's crucial meeting of their country's leaders, known as the G20. Will their work revolutionize the global economy and lift us out of this economic hole, or will politics get in the way? David Brancaccio interviews Kenneth Rogoff, Harvard economics professor and former chief economist of the International Monetary Fund, about how high we should raise our hopes and what's at stake for America and the world.

Pecora Part II? Pecora — it's a name that's all over the media these days; THE NEW YORK TIMES: "Where Is Our Ferdinand Pecora?" Condé Nast PORTFOLIO: "Congress Should Keep its Cotton-Pickin' Hands Off the 'Pecora' Commission," Wealthdaily.com: "The Ghost of Ferdinand Pecora." Calls for modern-day Pecora hearings have increased since Speaker of the House Nancy Pelosi called for congressional investigation into the financial meltdown. But many average citizens might not know the name and accomplishments of Ferdinand Pecora.

Georgetown University Conference on Future of Global Finances The White House's top economic adviser Lawrence Summers delivered a keynote address about the future of global finance. A number of Obama administration decision makers attended this Georgetown Univ. conference. Earlier, FDIC Chair Sheila Bair and SEC Chair Mary Schapiro spoke.

World Bank Group Pres. Zoellick on the Impact of the Economic Crisis World Bank Pres. Robert Zoellick spoke at Howard Univ. and gave a region-by-region analysis of what the financial crisis has meant around the globe and offered some ideas for preventing future crises. He discussed both U.S. regulatory reform and his thoughts on int'l economic cooperation.