Howzit Howard

It ' s primary day in Hawaii!

A message for anyone who knows which candidates I may support and feels otherwise: please vote today. I would rather have my choices lose and know that the people have spoken than have them get in because of apathy. Tonight my role in KGMB9 coverage will be to stream results on the Web and offer a few remarks on the air from time to time. I'll be watching this space for your intelligent comments on the outcomes.

Why oil prices have been falling

Crude oil fell below $95 this week, one third below the record highs of April, despite the fact that more than a dozen refineries were still offline in the wake of the hurricane. This is yet more evidence that the most powerful driving force behind the prices of contracts to deliver oil at a future date has been, not the demand for the oil itself, but the demand for the contracts as investments. Oil prices fell -- prices of oil contracts, really -- because Wall Street investors got scared of stocks and commodities alike and began shifting funds out of these suddenly risky-looking investments. They took so much money out of the oil commodity exchanges, removed so much demand for simple oil delivery contracts, that oil prices fell despite a major interruption of Gulf Coast refining.

How independent is the Fed?

A caller wanted to know if the Fed was part of the government. He said he was under the impression that it wasn't. I thought you might be curious about the Fed's role, too, so I'm answering the question here. The Federal Reserve System is part of the government but it's semi-autonomous. It's currently a little less autonomous than usual, but in a nice way, by which I mean, a spirit of cooperation. Presidents name the Federal Reserve governors, who must be confirmed by the Senate. Once in office they have 14-year terms and can act independently of White House policy. In the current crisis, Fed Chairman Ben Bernanke, Treasury Secretary Henry Paulsen, the head of the SEC and the chief commodities regulator have been meeting regularly to coordinate what they do. In the bailout of AIG, the Fed took the action, but the Treasury came up with cash to make sure the Fed had enough to keep its promises in the deal.

The big bailout

First of all, in case you were worrying, the crisis did not stem from all that change you saved by switching to AIG Hawaii. Please feel free to keep fishing coins out of your noisy dryer. AIG isn't just one of the busiest insurance companies in Hawaii, it's the biggest in the world, with more than $1 trillion in assets, and there is nothing wrong with its bread-and-butter insurance business. If it had gone broke, it would have had no trouble selling your policy and mine to some competitor. We would have continued to be insured. It's moot now, because the Fed decided not to allow AIG to fail. Unable to find a buyer for this company that is several times bigger than Lehman Brothers, the Fed more or less decided to buy AIG itself. The New York Federal Reserve Bank has committed up to $85 billion, enough change for billions of laundromats, in return for a 79.9% stake in the company. The AIG management remains in place but the only shareholder that counts from now on will be the Fed, and if the Fed wants someone to go, he will clear his desk. It was Treasury Secretary Henry Paulsen who decided he was done bailing out Wall Street investment firms and spent the entire weekend telling Lehman Brothers "no" over and over again. I get the impression that AIG didn't even bother asking Paulsen for help, but went straight to the Fed, which is an independent agency that needs no White House sign-offs to do what it thinks best for the economy. This had to be done, as near I can tell, and it was done neatly, and even rapidly, minimizing market turmoil. But it provides one more example of how lax regulatory control, often mistakenly confused with "free market policies," led to reckless behavior by professional investors, which in turn led to a crisis so big that the government has wound up, in the words of one economist, privatizing profits while socializing losses.

How stock plunges affect you

You know less about stocks than the baby in the E-Trade commercials and that suits you fine. How does the market plunge affect you? If you own mutual funds or any of several other kinds of investments, then you do own stocks; you just delegate the buying and selling to someone else, a "professional," like those rocket scientists at Bear Stearns and Lehman Brothers and Merrill Lynch, and we all know how smart THEY were. Next time you get a statement, you might want to actually read it and see how much "negative growth" they managed for you. Everybody's taking a bath right now but some of these bozos are even dumber than others, and it's easier to sort them out in a downturn like this. If you're unsure if you're getting truly professional advice, shop for a Hawaii-based investment counselor at a bank, someone you can meet face-to-face when you've got questions. If you've got a pension plan, your future benefits aren't exactly ballooning right now. When you hear talk of speculators, think "pension funds." The pension fund for California state workers is the mother of them all and can move markets with its decisions. The pending acquisition of Longs Drug Stores by CVS has been held up by a police pension fund in Louisiana. But no matter how sharky they are, in stock downturns they turn downward, too. If you've got health insurance, a major stock plunge that lasts could actually lead to higher premiums. Companies like Kaiser and HMSA maintain investment funds to provide income to cover medical expenses when they exceed premiums. The more stocks go down, the less cushion there is. Stock plunges affect liquidity, a word that would be number one on my list of words that financial people use which prevent regular people from understand what in the blazes they're talking about. So I'll explain it without using the word liquidity any more. Banks have to maintain a certain amount of cash in reserve. And beyond the legal amount, they have their own desire to keep a little extra on hand so a problem doesn't suddenly put them on regulators' bad side. But would be silly to let ALL of their money just sit there when they invest it and get more money. So banks are major owners of stock. Federal regulators recently estimated that there are 16 banks and savings and loans in America that put 10% or more of their assets in shares of Fannie Mae and Freddie Mac. I don't know if any of those banks will fail. They all ought to. Haven't they ever heard of "diversified portfolios"? But I digress.  The point is that when stocks plunge, it's like someone robbed the bank. The next morning a guy in green eyeshades opens the vault, gasps, and runs to the bank president. "We lost more than $10 million!" he gasps. "What, were we robbed?" asks the bank president. "No!" replies the bookkeeper. "Our stock portfolio lost that much money!" Yup, the money is still gone, and you can't get even the FBI to make you feel better by gunning somebody down. Of course, some of it could return the next day in an upward correction, too. But what if it doesn't? A prolonged stock market contraction will mean that lending institutions need to bolster their reserves, and they'll be less likely to lend. This is especially true since stock downturns are usually accompanied by economic slowdowns, like we have now, which means lenders also worry about borrowers getting caught in a downdraft and not being able to meet the payments. So they have two reasons to think twice before lending. I want to end on a happier note. There is at least one way that plunging stocks can actually benefit you. If you have really good credit, and you were thinking of refinancing your mortgage, be advised that uncertain times like this often make the bond market stronger, and when bond sales rise, their payback rates fall, and when their rates fall, mortgage rates fall with them. Hawaii APRs have already fallen back below 6% to watch that.

The 500 yard crash

The Dow lost more than 500 points Monday and the broad market lost 5% of its entire value, as investors watched two more ginormous investment firms lose their independence while another financial giant went crying to the Fed. Here the three things that made the computer sell programs jump out of the window:

1. Merrill Lynch, in such deep doodoo only an optimist could imagine a bull beneath it, sold itself to Bank of America for "$50 billion," which really meant, "stock we're guessing is currently worth $50 billion." There was no actual cash money in the deal, which brings the world's largest brokerage house under the control of the nation's largest bank.
2. Lehman Brothers, unable even to find a buyer, filed for protection from creditors under Chapter 11 of federal bankruptcy law, the largest Chapter 11 filing in history. Its brokerage division was excluded.
3. American International Group, owner of AIG Hawaii and the nation's largest insurance company, went to the Fed asking for tens of billions of dollars to remain solvent. AIG stock lost 61% Monday.

As I write this Monday night, Hawaii time, I can see that the Monday stock plunge could last longer than one day, because the always panicky Tokyo and Hong Kong stock exchanges were on holiday Monday. This -- Tuesday, which has arrived already over there -- is their first opportunity to get the vapors over all this. And AIG, a company that was actually founded in China, is well-known in Asia so its tribulations will cause fibrillations around the Pacific Rim.

When the Fed rescued Bear Stearns by arranging its sale to J.P. Morgan, and then the Treasury Department brokered a massive rescue for Fannie Mae and Freddie Mac, Wall Street commentators were outraged at all these companies being deemed too big to fail, and called on Washington to please, please, let one of these dumb-ass financial giants get its just desserts "pour instructer les autres." Now this has happened. Lehman has been allowed to fail.

Treasury Secretary Henry Paulsen flew to New York and spent Friday, Saturday and Sunday in talks with Lehman Brothers, but on Monday he said he never for a moment considered rescuing the company. It could actually be argued that he picked a good company to let fail, if only because its CEO, who has played a few too many dehydrating rounds of racquetball, maintained that everything was fine long after everyone else in New York knew otherwise including the cab drivers.

But now some of the same writers who wanted one of the financial fat cats to accept consequences of risky investments are talking about AIG as if it is too big to allow to fail. The Fed hasn't said, but the Reuters news service reported Monday night that the Fed hired Morgan Stanley to cost out some options after being approached by AIG on Sunday night.

I know a lot of people in Hawaii have insurance policies with AIG, which has long been a major player in the islands. My own car insurance is with these guys. So what happens to your policy if AIG goes bankrupt? Probably nothing. The vast majority of AIG's policies constitute assets, collectively of great value, and even more important to a bankrupt company than one that isn't. When a smaller insurance company that sold policies in Hawaii went broke over hurricane payouts in the Gulf states, another company was more than happy to buy its other policies, with service continuing uninterrupted. If my car insurance came up for renewal next week I'd renew it.

The losers in this will either be shareholders, if the market is allowed to play this drama out, or taxpayers, if the government, the same government that bungled the job of watchdogging these boys, keeps bailing them out.

Business reports: back on the radio

It has been a year since I left Pacific Business News to join KGMB9, and, since the newspaper has not assigned anyone else to supply business reports to Hawaii Public Radio, I'm going to do it from the television station. As you probably know, I did maintain a relationship with my friends at public radio by helping with their pledge drives and volunteering time for a classical music show on Saturday mornings. And Michael Titterton, the head of public radio, is a personal friend, while Derrick Malama, the morning news anchor, was best man when Bernadette and I married. So eventually I asked my bosses if I could essentially reconstruct the system I had at PBN. There, I wrote local business stories for the website, then repurposed the information on radio and television. Here, I'll repurpose the stories I'm doing for you on TV. The service is beginning this week as part of the lead-up to Friday, the first anniversary of "Sunrise on KGMB9."

The Rex Johnson controversy returns

In a state where two thirds of arrivals are repeat visitors, we seem doomed to revisit the unsavory matter of Rex Johnson's x-rated emails to and from his fishing buddies. Because there was more to it than that. The Honolulu Advertiser, which has actually seen hundreds of emails after filing a Freedom of Information Act request, reported Friday that the content was not only racy but racist. Johnson says he already apologized, and that's true. He repeatedly apologized, and furthermore it seemed genuine, for inappropriate email in his office computer. The problem is, the new information goes beyond what the public knew, and may go beyond what members of the tourism authority board knew when they cut Johnson's pay but kept him on the job. An email that calls Barack Obama a "coon," if known earlier, probably would have gotten Johnson fired. Even someone who can adopt a "boys will be boys" tolerance of x-rated emails may draw the line at that. The matter will be particularly sensitive if it turns out that the tourism board members already knew that some of the content was this boorish. I assume they didn't. If they didn't, they're going to be angry. In the face of calls for Johnson's resignation they sucked it up and kept him on the job, and all the while this other content was waiting to break onto the front page.

Oil, sex and crime

Federal officials who collect billions from oil companies have also been collecting liquor, pot, cocaine and sex, the government itself said this week. The scandal in the Minerals Management Service involves public servants who helped themselves to goods and services commonly associated with bordellos though the goods and services were provided by companies that pay for oil, gas and mineral leases, the Interior Department said. The inspector general of the department, Earl Devaney, said a third of the employees of the MMS went to oil company parties, drinking and having sex with oil company representatives. Devaney memorably noted that a sexual relationship "cannot, by definition, be arms-length." Nick Rahall, the West Virginia Democrat who chairs the House Natural Resources Committee, said the report "reads like a script from a television miniseries" and added, "no wonder that the office was doing such a lousy job...the employees had other priorities." Chevron, Shell, Gary-Williams Energy and Hess were named as companies giving gifts. The IG also said Chevron refused to cooperate with the investigation. Chevron says it did cooperate. The IG said Chevron "ultimately" did not cooperate while Chevron said it provided documents requested "months ago," and I note that both statements could be correct if Chevron provided documents at the beginning of the investigation but then drew the line at a some point. Randall Lufti, director of the MMS, on whose watch these shenanigans occurred, said he took the report seriously but undermined that by saying he saw no evidence that the partying hurt the taxpayers. Only idiot would fail to recognize that the partying hurt the taxpayers even if it could be proven that it didn't affect the money collected -- because it COULD have. There is a sign that there was monetary damage: companies are frequently permitted to modify bids after turning them in. It happened 121 times in five years and favored the government only three times. A former official in the service pleaded guilty to breaking conflict-of-interest laws, admitting he planned his retirement from the agency by working with an energy company to design a consulting job for himself. The agency needs a new director and, in the words of the field agent who learns about the mole in "Tinker Tailor Soldier Spy," it may need a whole new organization. I did not intend to make a political story of this -- wrong is wrong -- but the New York Times says one of the officials implicated is the wife of the top procurement official in the White House budget office.

More on the debate, having slept

I've had a chance to sleep on it -- three hours last night and three more hours today! -- and have spoken with or read emails from scores more viewers. So here are some additional thoughts on the debate. After reading more than 100 more questions from viewers that we didn't get to, and filtering out a large number that were planted (by partisans of all three campaigns and by others who were not partisan but had their own issue axes to grind) I am favorably impressed by how deeply everyone cares about the issues, some of which we didn't even get to in the debate. I don't think it is telling tales out of school to say that my bosses independently reached the same conclusion and we've all quietly resolved to get more viewer questions onto future debates. This morning, after a well-rested Dan Boylan gave a genial and generally complimentary analysis of all three candidates' performances, I countered with a grumpier one. I felt that Panos Prevedouros betrayed his lack of knowledge of issues other than rail (the telling moment came when he was asked about police staffing); that Ann Kobayashi was unremittingly negative and hard to pin down on what she's for while giving lots of specifics about things she doesn't like (even when asked about the Akaka bill she couldn't say she was for it without adding that it needed several changes, so in its current form she doesn't like it); and that Mufi Hannemann is too thin-skinned (as shown by his bullying response to being called a bully). So the takeaways for the candidates remain: Panos, diversify; Ann, be for something; Mufi, lighten up. Having been uncharacteristically negative myself, I thought I would throw in some positive observations. One thing Prevedouros says resonates with me: that Greeks understand antiquities and he understands the importance of proper treatment of iwi. I believe him, and I say good for him. And that's from a rail supporter. Kobayashi deserves credit for this: on the council she has been miserly, and you need a few good misers in a job like that. So helpful is this that even the mayor felt obliged to credit her with that during the debate. And the mayor? Say what you like about his pothole and sewer fixation, heaven help us if future mayors don't share it.