Financial terminology intentionally opaque

By Al Portner

Ordinary "Joes" spend prodigious time worrying about the economy. Reporters and analysts speak a foreign language to most of us outside their confined bubbles of influence.

Banks need to strengthen their “balance sheets.” “Price earnings ratios” need to improve. “Hedge funds” lack of significant oversight. “TCE or tangible common equity” recently surfaced in news reports about the solvency of banks. Insider terminologies whizz past the understanding of most of us like a knuckleball hurled by a major leaguer.

A knuckleball (as metaphor) goes relatively slowly, but tends to make unexpected movements on its journey from the pitcher’s hand to the catcher’s mitt. And that describes our financial system.

I admit to a certain level of ignorance on these matters. Patiently explained, none of the concepts seems hard, but asking for explanations is discouraged. Balance sheet ratios and price/earnings standards are judged by industry within acceptable ranges.

Last week, I called a stockbroker friend and asked him for a list of industry sectors and normalized ratio values for those sectors. I hoped to analyze financial positions and make smart buy or sell decisions. He couldn’t access the information, and so far hasn’t found it. Financial folks don’t really want investors to know the definition of normal.

I will look also and bring what I find here in the form of short columns that begin to explain the economy that threatens to collapse around us.

The $50 billion Bernie Madoff fraud case/giant Ponzi scheme makes one wonder if many financial people who act like they know what they are talking about can be completely trusted. Certainly, not all financial executives are crooks. To steal a phrase from Ronald Reagan… “Trust; but verify.”

Al Portner is a former daily newspaper editor and publisher who has operated newspapers in seven states. He is currently the proprietor of The Assignment Desk, LLC, an editorial services consortium.

Portner is also the author the forthcoming non-fiction book “Mark Twain and the Tale of Grant’s Memoir.” He can be reached at alanportner@theassignmentdesk.net. The Assignment Desk URL address is http://www.theassignmentdesk.net/.

Nation needs new revenue streams

By Al Portner

President Obama has submitted a culture-changing fiscal blueprint to the Congress for consideration. The President’s priorities are appropriate and long overdue.

Healthcare costs as a percentage of GDP are double the rest of the comparable, developed world. Sending $700 billion dollars annually overseas to buy fossil fuels can’t be good for the economic health of the nation or the environmental health of the planet. That the financial future of the nation rests on the higher education of its people is tough to argue against when the entire history and prominence of America has been based on the notions of innovation and discovery.

But all these initiatives are mind-blowingly expensive. The markets and the people who control them are gasping. An already weakened financial system must be reinforced, re-regulated, or in some cases regulated for the first time.

President Obama plans to pay for this platter full of problems by programs of fiscal responsibility and taxes on those who are most able to pay. The top five percent of earning families will be resentful.

The country needs new revenue streams. Money is the mother’s milk of innovation in a digital age. If the nation achieves the goals enumerated in the budget and clearly stated before the 2008 election, we will have to fund the research that makes them possible.

The nation should benefit from a portion of the intellectual property that it pays to develop. And the use of that money should be limited to paying down or paying interest on debt.

Al Portner is a former daily newspaper editor and publisher who has operated newspapers in seven states. He is currently the proprietor of The Assignment Desk, LLC, an editorial services consortium.

Portner is also the author the forthcoming non-fiction book “Mark Twain and the Tale of Grant’s Memoir.” He can be reached at alanportner@theassignmentdesk.net. The Assignment Desk URL address is www.theassignmentdesk.net.

Bank nationalization new boogeyman

by Al Portner

Bank Nationalization is the new national boogeyman. If the largest banks are beyond repair, the government might have to take temporary ownership of some of them. Most depositors would be minimally affected. Investors (including large institutional funds) would lose their investments.

Sen. Chris Dodd intimated several large banks might require this to achieve stability. Market reaction was immediate. Shares values in Bank of America and Citigroup tumbled up to 25 percent in minutes.

The White House quickly reassured markets it favors private banks, but didn't absolutely rule out later action. Stocks reflexively recovered some of their lost value.

The root the banking crisis is probable over-valuation of toxic loan assets brought on by a lack of oversight. TARP was necessary because a very few large financial institutions were deemed “too large to fail.”

The $700 billion TARP program addressed this concern. So far, TARP has not worked as presented by Bush Treasury Secretary Paulson. Worse, banks refused to disclose what they did with their first $350 billion allotment.

A process, currently ongoing, will evaluate bank toxic assets before more taxpayer money is expended. Nationalization will hurt investors and should be avoided if possible, but it also presents an opportunity for taxpayers to recover emergency funding and for the government to break up any “institution too large to fail.”

Huge financial institutions may appear more efficient. They operate at the speed of light. Consequences of systemic errors can be catestrophic. They are also remote from most people who depend on them. Perhaps they should to slow down a tad. Perhaps financial markets need reasonable regulation. Completely free markets tend to implode on themselves in ever new and innovative ways.

Your thoughts on this and any other previous postings are always welcome.

Al Portner is a former daily newspaper editor and publisher of newspapers in seven states. He is the proprietor of The Assignment Desk, LLC, an editorial services consortium.

Portner is also the author of the forthcoming non-fiction book “Mark Twain and the Tale of Grant’s Memoir.” He can be reached at alanportner@theassignmentdesk.net. The Assignment Desk URL address is http://www.theassignmentdesk.net/.

Natural gas vehicles: A quick win-win

By Al Portner

Carbon emission reduction is a future national imperative. Meanwhile, what happens to America’s 250 million gasoline-powered vehicles? Americans, a famously impatient lot, can access a practical, environmentally superior alternative today. Gasoline engines can convert to natural gas. The distribution infrastructure is mostly in place for home heating.

Natural gas is available domestically, is more economical, and releases less carbon than gasoline. Government can encourage natural gas conversions by making available a “Conversion to Natural Gas Vehicle Tax Credit” and require installation of “Natural Gas Refueling Pumps” at service stations.

In addition to the native cost and environmental benefits, natural gas promotes economic activity, creates jobs, and slows the flow of energy dollars offshore. Conversion kits cost as little as $1000 per vehicle. Some “NG” conversions even allow drivers to switch between natural gas and gasoline.

Natural gas may not be a perfect, long-term energy solution, but it makes “Change-Now” available to many Americans and it allows us to utilize all that current hardware we already own. Americans can decide to personally make a difference.

Your thoughts on this and any other previous postings are always welcome.

Al Portner is a former daily newspaper editor and publisher of newspapers in seven states. He is the proprietor of The Assignment Desk, LLC, an editorial services consortium.

Portner is also the author of the forthcoming non-fiction book “Mark Twain and the Tale of Grant’s Memoir.” He can be reached at alanportner@theassignmentdesk.net. The Assignment Desk URL address is www.theassignmentdesk.net.

How did the press become non-partisan?

By Al Portner

The notion of a non-partisan press serving a watchdog function without inserting its own opinions into news stories is amusing when one digs a bit to find out from whence the idea originally came. Journalists are taught to report the Who, What, When, Where, How, and Why without regard to party or ideological persuasion.

Has it always been thus? Or is this just a part of the business cycle that is now completing its 1880 beginning orbit of its readers/viewers? How did the press become the whipping boy for all politicians? What causes all the animosity that seems to display itself against the media?

The notion of a non-partisan media took hold only after ownership consolidation of media outlets got rolling. This coincided with the development of big box stores. At first, we had J.C. Penney and Sears Roebuck, Kresge’s, Woolworth, and Montgomery Ward. The advertisers wanted to reduce the number of buys required to cover their cities.

In 1900 alone, sixteen daily newspapers circulated in New York City, not including the additional newspapers produced in the various boroughs. Additional specialty newspapers were produced in each of the five boroughs. Each of these newspapers had a very specific audience component whose interests were paired with the newspapers story selection and style. The circulation of each was very limited by their specialized readership and the technology of the day.

Over time, the newspapers consolidated. Speeds improved. Publishers gave News/Editorial departments the instruction to write stories from a neutral point of view so as to appear as if they were not promoting any particular point of view. The idea was to appeal to a broader audience segment and capture the big box merchants.

Prior to this time, newspapers printed whatever they chose to fill their space and the needs of their readers. It was common to see advertising on the front page. Fiction and hoaxes were enjoyed. Newspaper pages were limited. In 1884, Samuel Clemens (Mark Twain) asked the new Associated Press Bureau Chief in New York to place a promotional piece on the wire. The man demanded a $150 payment in exchange for doing so. Clemens was outraged. But this didn’t stop him from providing reviews of his books already written by friends (notably by William Dean Howells) to other publications.

The result was fairly predictable. As with the lover, “beauty is in the eye of the beholder.” The slant of a story is in the eye of the reader. Since newspapers after consolidation started were now writing for people who agreed, disagreed, or had no opinion… they were guaranteed to offend on average two-thirds of the readers at all times.

While this was probably always the case, if a writer just wrote for people who agree with his or her point of view (as before the beginning of consolidation), the writer could usually be assured that his or her story would be mainly well received. On the other hand, if he or she wrote about a political person or issue that would be disapproved of by the audience, he or she could be assured that he or she might be castigated. But the disagreeable person was not an important constituent and the writer didn’t care much.

This was also the beginning of the falling away of much of the audience. Who wants to read a publication with which you disagree two thirds of the time? The hostility began to grow.

The press has been damned as liberal. Media has taken on the role of adversary to whom-ever is in political power. A non-partisan media that reports news without opinion is a relatively new phenomenon. Prior to 1900, it probably did not exist at all. Up until through the Kennedy Administration, it lived up to certain ground rules which protected some pretty outrageous personal behavior.

This may be a built in bias. Actually, many writers are political conservatives. But conservatives are usually more certain of their positions than liberals. Living a life of asking questions tends to make a writer seem a liberal by itself.

Remember the old joke? I don’t belong to an organized party – I’m a Democrat.

The discussion is summed up by a great quote from Winston Churchill: “Any man who is under 30, and is not a liberal, has not heart; and any man who is over 30, and is not a conservative, has no brains. ...”

Al Portner is a former daily newspaper editor and publisher who has operated newspapers in seven states from Maryland on the east to Hawaii on the west. He is currently the proprietor of The Assignment Desk, LLC, an editorial services consortium with over 200 affiliate writers, photographers, and designers.

Portner is also the author of hundreds of articles and the forthcoming non-fiction book “Mark Twain and the Tale of Grant’s Memoir.” He can be reached at alanportner@theassignmentdesk.net. The Assignment Desk URL address is http://www.theassignmentdesk.net/.

The actual root of the banking difficulties...

By Al Portner,

Where did our financial system begin to go wrong?

I believe the root of the problem is the very business model that modern banks have adopted. It used to be a bank profited from the interest it earned.

Individuals made deposits of their savings on which they were paid interest. Credit-worthy businesses and individuals borrowed the deposited money and paid a higher interest rate than was offered to the depositors. The difference between the two rates was known as “the spread” or the bank’s profit.

The owners of the bank assumed the risk of default. They were required to put some of their own money into the bank as capital and because they did -- they were very concerned about the quality of the people to whom they lent money. The capital basis of the bank and pledged assets of the borrowers ensured that depositor’s monies were safe.

Periodically, depositors lost confidence in financial institutions for a variety of reasons and many demanded their money back simultaneously. This became known as a “bank run.” Overnight, a bank’s capital resources could be depleted.

President Franklin Roosevelt created the Federal Deposit Insurance Corporation (FDIC) to address this concern. Banks were required to pay an insurance premium to the government which then stood behind the bank deposits with its full faith and credit up to a certain limit.

To maximize profits, complex and/or exotic financial instruments were designed that spread out the risk of failure of a single business among all businesses. The theory was that this was less risky for investors. Over time, transactions became much more complex and the focus of the business model changed from retail to wholesale. Bank profitability structures began to depend more on "fees" than “the interest spread.”

No longer did banks want to hold the security interests that had been the basis of their loans. It was better sell the securities and re-loan the money. Better yet, fees collected were immediate and flowed directly to the profit line. The ability of borrowers to repay now mattered less.

If a prospective homeowner didn’t qualify under traditional standards, the bank could change the standards; stretch out the term of the note; or create an exotic payback scheme. The bank became mortgage originators who passed off risk to someone else and collected his or her fees up front. Home prices inevitably rose and it was in the interest of the originator to allow it.

Fast forward to today. Combining contingent liabilities to reduce risk works if standards for determining the risk remain sound. In other words, it is necessary a lender live with the results of his or her lending and make a good portion of profits from “the spread” if the system is going to work.

Financial instruments designed to reduce risk are only as good as the underlying assets. The sum of the total reflects only itself. To prove the truth of this axiom, just take a look at your investment account.

Your thoughts on this and any other previous postings are always welcome.

Al Portner is a former daily newspaper editor and publisher who operated newspapers in seven states from Maryland on the east to Hawaii on the west. He is currently the proprietor of The Assignment Desk, LLC, an editorial services consortium with over 200 affiliate writers, photographers, and designers.

Portner is also the author of hundreds of articles and the forthcoming non-fiction book “Mark Twain and the Tale of Grant’s Memoir.” He can be reached at alanportner@theassignmentdesk.net. The Assignment Desk URL address is http://www.theassignmentdesk.net/.

Surprising results on newspaper discussion

By Al Portner

About a week ago, I started a discussion about the newspaper business cycle among several relevant groups. There has been a great deal of interest and a number of replies.

My goal in starting the discussion was to stimulate discussion on three specific points.

First, do writers think reporting is an intrinsic need for a successful representative democracy? Second, if media is the watchdog, then its practitioners should be paid well for all the abuse they take in serving that role. Last, I was hoping for new ideas about sources of money to pay all those necessary salaries.

I don’t have any firm answers myself. Obviously, from what is happening in the economy generally nobody else has many suggestions either.

A non-profit, charitable, endowed model was suggested by a fundraiser op-ed in the New York Times. Not a terrible idea, but a tall mountain to climb. According to the article, the Times alone would need an endowment of about $5 billion to maintain its current newsroom staff. Nationally, the idea could cost about $114 billion.

A group from the American Press Institute called "Newspaper Next" has agreed that there is a problem. Another group of newspaper executives has announced through their website, http://www.newspaperproject.org/, that things are not as bad as they seem.

What is surprising, however, is the extreme vitriol with which a number of the replies to my discussion were written. Bottom line is that there is a tremendous built up anger and dissatisfaction out there towards media in general and newspapers in particular. Some comments are directed at management. Some replies are directed at the writers. Other anger manifests as being flat out general frustration.

There is a perception abroad in the land that the media used to be bi-partisan and non-judgmental. The opinion is that reporting was better in "the good old days." Was it ever thus? Should it be? Where did this "independent media" notion come from anyway?

Very few of the replies or comments from various quarters address any of the three questions posed. I suspect that the responses I did receive do speak volumes. Probably, they express a view akin to seeing forests from among the trees.

Al Portner is a former daily newspaper editor and publisher who has operated newspapers in seven states from Maryland on the east to Hawaii on the west. He is currently the proprietor of The Assignment Desk, LLC, an editorial services consortium with over 200 affiliate writers, photographers, and designers.

Portner is also the author of hundreds of articles and the forthcoming non-fiction book “Mark Twain and the Tale of Grant’s Memoir.” He can be reached at alanportner@theassignmentdesk.net. The Assignment Desk URL address is www.theassignmentdesk.net.