Will The Bernanke Haters Please Shut Up?

Nobody has a more thankless job than Fed Chairman Ben Bernanke. His critics have no clue how bad shape we'd be in if he'd sat on his hands as they wish.

Read the full post here on Forbes.

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AIG's Resuscitation Quite a Surprise

By Eric Jackson, Senior Contributor01/19/11 - 06:00 AM EST

NEW YORK (TheStreet) -- AIG(AIG_) used to be a four-letter word.

No one liked American International Group as little as a year ago. It was the poster child for everything that went wrong before the financial crisis. Politicians and pundits assumed that the Federal Reserve's hasty rescue of the company --- to prevent a terrible crisis from spilling over into a catastrophic one -- would be a financial burden all taxpayers would carry for years, if not decades, to come.

The idea that AIG might one day be actually able to pay back the government was laughable.

Consider these facts:

• The Federal Reserve, with the help of the Treasury Department, had to step in to orchestrate a $182.3 billion bailout to keep AIG going;
• For this loan, AIG has been paying 14% interest to U.S. taxpayers;
• In exchange for the bailout, the government took preferred shares which give it effectively 92% control of the company.

Robert Benmosche was appointed the CEO of AIG on Aug. 3, 2009. He was immediately self-confident.

"The government might even make a little bit of money when we're done," he said at the time of his hiring.

Such a notion at the time seemed preposterous to many.

Financial blogger Barry Ritholz appeared on Yahoo! Finance's popular Tech Ticker on Aug 20, 2009, and called Benmosche's claims that AIG could one day repay all its loans to the government "totally absurd."

Benmosche has been a colorful CEO. He remained at his Croatian vacation home for the first few weeks on the job, even inviting reporters into his home and holding impromptu press conferences. Stories were written about the fact that his home had 12 bathrooms that were gold-plated. He talked about his vineyard. The image Benmosche projected wasn't one of a government bureaucrat living at below-market salary rates.

He immediately started holding internal town hall meetings with AIG employees, promising that the government wasn't going to bully them around anymore or get in the way of them running a great company. He promised to fight for employees to get the compensation they deserved. Stories also circulated about him pressing his own board for a better pay package for himself. Finally, AIG's board -- made up of people selected by the government -- told Benmosche to cool it. He stopped being so public, except for when he had to admit a few months ago that he was being treated for cancer and would leave the company when a proper successor could be chosen.

.......

[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

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QE2's Unintended Global Consequences

By Eric Jackson, Senior Contributor11/10/10 - 06:00 AM EST

Fed Chairman Ben Bernanke did the right thing in launching QE2 last week. Nevertheless, it's spawned a rash of criticism from the likes of Kevin Warsh, Germany's finance minister, and Sarah Palin.

On a recent trip to China, I got a chance to read the excellent In Fed We Trust by David Wessell about Bernanke and his recent years at the Federal Reserve. What was clear in the profile is that, while Bernanke acknowledges that he was slow to see the extent of the subprime problem coming in 2006 through the first half of 2008, he has been aggressively doing "whatever it takes" ever since to slay the dragon of a deflation-driven recession.

After a life in academia studying the Great Depression and -- more recently -- Japan's travails from a 20-year deflation slide, Bernanke has good reason to fear an economy falling back into a quicksand pit.

Bernanke knows two things about his public perception. First, he, like politicians, gets no credit for any actions he took that prevented problems from happening two years ago and second, there's an inherent bias that the Fed and certainly among the mainstream press and the public to fear inflation much more than deflation.

As late as early September 2008, Bernanke was fighting fellow Fed governors' hearts and minds against the imminent threat of inflation. Runaway inflation is a much easier concept for Glenn Beck to diagram on a chalkboard compared to runaway deflation. What's the schematic for that?

So, three cheers for Bernanke taking action last week. He and the Fed governors have a dual mandate: full employment and price stability for the US economy. Given the data and where we are in this recovery, the Fed made the right call.

But Ben Bernanke doesn't have responsibility for the rest of the world and, unfortunately, there will be challenging unintended consequences of his actions last week on other emerging economies.

Specifically, China and other economies -- like Hong Kong -- with their currencies pegged to the US dollar will feel added inflationary pressures on their already strong economies. Simply put, Bernanke's explicit prescription for healing the U.S. economy is now gas being poured on to already hot economies who bounced back remarkably quickly from the crisis two years ago.

In a recent letter to his investors, renowned hedge fund manager Paul Tudor Jones complained about the Chinese yuan's peg to the US dollar: "On January 1, 1994, China devalued its currency by 50% in a single day, and since then has experienced a manufacturing boom. After 15 years of impressive productivity gains relative to its trading partners, though, it now resists the smallest appreciation.... "As someone who has traded foreign exchange since 1980, I believe the RMB/USD rate is currently the single most important of all exchange rates. It not only drives the largest foreign trade relationship in the world, it also drives virtually every other exchange rate globally. Dozens of other emerging market countries suppress their exchange rate against the US dollar because the RMB is effectively pegged to the dollar."

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[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

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Sounding the Alarm About Japan

By Eric Jackson, Senior Contributor

05/26/10 - 11:35 AM EDT

Europe has captivated the headlines the past six weeks with concerns about whether Greece will be able to pay back its debts given the required austerity measures it has been forced to take and its already slow-growing economy. Investors also have worried about the ramifications this thorny situation could have on richer countries in the European Union like Germany and France if they decide they no longer want to be on the hook to bail out Greece or another weak sister country such as Portugal, Spain, or Italy.

We know this situation has been brewing in Europe for some time. We've known about the fiscal situations in these southern European countries, yet the problems have always been off in the future so that we could ignore them. It wasn't really until there were riots in the streets of Athens that the markets really got awakened to the gravity of the situation.

The drop in the euro has been so severe that the other members of the EU have been forced to look into the abyss which those of us in America did in September 2008. Nothing focuses a man's mind like knowing he's going to be hung in the morning, said Samuel Johnson. That's exactly right. The situation in 2008 forced America to act and Europe is now forced to do the same.

I suspect the rescue package, which still has to be formally ratified by all the countries, will take hold. Frayed nerves will calm over Europe with time, just as they did following the Troubled Assets Relief Program in the U.S. and the Federal Reserve's quantitative easing campaign. The can of Europe's problems has been effectively kicked down the road so that we'll be able to go back to collectively forgetting about Greece for a while.

However, there is potentially a bigger and more dangerous sleeping giant out there for world markets: Japan. Despite a few hedge fund managers sounding the alarm about Japan last year, little attention has been paid to it of late because -- just as with Greece -- nothing bad or newsworthy (like violent street riots) have occurred there yet.

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[This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.]

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Hey Fed, What's Going On?

By Eric Jackson

12/30/09 - 06:05 AM EST

Stock quotes in this article: WFC , C

Last week, Canadian hedge fund manager Eric Sprott published a white paper titled, "Is it all just a Ponzi scheme?" . The document digs into who is actually purchasing the recent Federal Reserve U.S. Treasury auctions and concludes that the biggest new buyer this year vs. last year is actually the U.S. government. Hence the Ponzi scheme allusion: One arm of the federal government is running huge deficits and quantitative easing programs that are being financed in part by another arm of that government. How can this story not get more attention from others in the press, in politics, or in the market?

Sprott is an unapologetic bear. He and David Rosenberg must hang out in the same coffee shops of Toronto and share notes. Therefore, his views regularly get dismissed by some with a rosier view of life. At some point, if you're a relentless bear -- like Roubini, Rogers, Rosenberg, Abelson, and probably Whitney now -- people stop listening to your content.

"This is the 'end-of-the-world' guy again," you think, "I know what he's about and don't have to listen." Yet, Sprott is also Canada's most successful hedge fund manager and clearly someone who does his homework. Here's his argument about what's gone on with the Fed and Treasury purchases this year.

In order to fund bigger deficits, the U.S. government in 2009 has had to sell three times the amount of debt it issued in 2008. That amounts to an extra $1.89 trillion in debt sales as of December, according to the U.S. Treasury.

[This post is an excerpt of the full article, which available on TheStreet.com by clicking here.]

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Trading Tax Stiffs the Little Guy

By Eric Jackson, Senior Contributor

11/27/09 - 11:15 AM EST

Jim Cramer came out earlier this week with the view that he could live with a trading tax that imposed a 0.25% surcharge on any trade made in America. The main reason he cited for being willing to go along with the tax was that he thought it would help the government create jobs.

He said,

"If we do not create jobs in this country we will fall horribly behind all others in the world. I think we will be doomed to permanently low growth, if no growth at all. I believe that it is incumbent upon everyone to sacrifice at this time."

Cramer also said that if sacrifice is needed, people trading stocks can afford to pay such a tax.

While I support Cramer's interest in seeing job creation flourish in America, I completely disagree that the "trader tax" will accomplish this aim. To the contrary, I think allowing such a tax to take root here would accomplish just the opposite. In my view, such a tax would encourage large amounts of capital to relocate outside of America, jobs would be lost (not gained) and total government tax revenue would likely go down.

For a preview of what could happen in the U.S. if this trader tax was imposed, look at Britain. At the moment, the U.K. is in even worse fiscal shape than the United States. Because of that, its Labour government recently introduced additional taxes that specifically target hedge funds' trading profits. Government bureaucrats assumed this was an easy way of generating tax revenue. What they failed to appreciate is that capital has never been more fungible than in today's global market.

London-based hedge funds immediately announced they were relocating to Switzerland in droves, where they would face none of the new taxes levied in the U.K. With those funds go certain administrative and back-office jobs. But more important, ask London bankers how they feel about losing the many profitable revenue streams attributable to doing business with hedge funds that will now be sent to Swiss banks.

The U.K. banks also will likely lose jobs tied to serving those hedge funds. And the U.K. government, in one fell swoop, just lost a host of capital gains, personal income and payroll taxes. Congratulations. An article in a London hedge fund industry newsletter from earlier this week had the headline: "Will the last hedge fund manager leaving to leave London please turn out the lights?"

Should the U.S. impose a trader tax, we'll see a similar exodus of U.S.-based investment firms and hedge funds to locales that don't require such a tax. And, believe me, many jurisdictions will be competing for the tax revenue those firms bring with them.

But this trader tax also will weigh heavily on smaller traders, as well as the big hedge funds. It's not fair that this tax will stick it to the little guy while the big banks got to run themselves like badly managed hedge funds, taking in mom-and-pop deposits and then leveraging up those assets 32-to-1 so they could trade and then lose billions of dollars on bad bets. If these big banks had actually been hedge funds, or smaller traders trading their personal accounts, they'd be gone right now. They wouldn't have been shown any sympathy. They'd be toast. Instead, they get bailed out, made whole, lent money at zero interest indefinitely, and now they get to report record profits for the year. Their taxes aren't raised, but small-time traders have to pay for their mistakes? Come on. The fairness of that escapes me.

Can you imagine if someone like Rupert Murdoch, chairman of News Corp.(NWS Quote), had been running the Federal Reserve or acting as Treasury secretary when the financial meltdown occurred last year? When the banks came running for a bailout, Murdoch (or any business executive) overseeing the taxpayers' money would have said, "Sure, we can arrange for a loan, but I want equity and warrants, I want control over management, and before you guys pay any bonuses to yourselves for the next 10 years, you're going to pay out a special dividend to me first. If you don't like my offer, try to find another U.S. federal government to help you."

I saw a story the other day that FDIC chief Sheila Bair was urging banks to start lending to create jobs. Urging. I thought of Murdoch again. Do you think if he had control of any bank he would "urge" management to take certain actions? No, he'd tell them what he wanted. And at the moment, he'd be telling the banks to lend money instead of stockpiling cash.

Finally, as much as I want to see job creation (as Cramer does), I don't see how paying any more taxes to the government is going to directly lead to creating more jobs. Look at the track record so far. After Congress approved $800 billion in stimulus last year, only 24% of that amount has been spent to date. We have no new jobs -- just slowing job losses. The administration keeps telling us about jobs saved. I can't recall ever hearing that statistic quoted before this year. Wouldn't it be quicker and more immediate if the Fed told the banks -- which they control -- to start lending out money to small businesses again, instead of stockpiling cash and cutting their credit lines?

There is a problem looming on the horizon for the U.S. and all Western countries. Debt as a percentage of gross domestic product is on the rise, big time. The current spending trends, combined with expected lower tax revenue, cannot continue indefinitely. The time to pay the piper will come. As a society, we are going to need to sacrifice in the years ahead. This sacrifice will come through lower benefits due to lower government spending on programs, or it will come from higher taxes.

Personally, I'd rather see less government spending, which would allow taxes to stay lower to spur business investment. This will require politically unpopular decisions, however, and it's not clear that short-term-thinking politicians will have the stomach for that.

If higher taxes are needed, we should all pay up -- not just traders. But the banks who got us in this mess -- and who are still on the government dole while paying themselves record bonuses -- should pay more.

At the time of publication, Jackson had no positions in any stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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