Filed under: Market matters, Politics, Headline news

Today, the U.S. Treasury Secretary presented a plan to overhaul regulation of U.S. capital markets. As I posted over the weekend, the plan does not really address the cause of all those economic problems.

However, it is very consistent with the administration’s tendency to use crises as a way to push its agenda. That’s what happened in 2001 when it used the recession to push its $1.3 trillion tax cut. And then there’s the biggest enchilada of all - using 9/11 as an excuse to attack Iraq - a move that’s cost the lives of 4,000 soldiers and is forecast to take $3 trillion out of the U.S. Treasury.

I don’t think the proposal will stand up for long but the deeper issue of what caused the problem and how to keep it from happening in the future remains. And while there are clear answers to either, I definitely think that serious analysis of these questions should be done before changes are made to the system.

From my perspective, the basic issue is that the financial system is set up to make gains private but losses public. If it changes that scenario - for example, to make gains and losses private - then the financiers who make the decisions will have an incentive to enjoy the benefits and the costs of their decisions.

Such a system would make it in financiers’ best interests to be more cautious. But as their incentives currently stand, they get rewarded for doing large deals and when some of those deals fall apart, the government steps in to clean up the system.

This is the result of the political power of financiers’ campaign contributions. Unfortunately, there are only two ways that the system can change from private profit/public loss to private profit/private loss. If the financiers demand that the government changes the system. Or if the campaign clout of those hurt by the current system exceeds that of the financiers.

Neither outcome appears likely at the moment.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

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Filed under: Market matters, Economic data, Headline news, Federal Reserve

The plan proposed by Secretary of the Treasury Henry Paulson to revise the United States’ financial system is meant as an initial step in reforming the current regulatory environment and institutions. This would be the largest overhaul of the system since the legislation implemented by the Roosevelt administration during the Great Depression. It is needed to deal with current challenges posed by the recent credit crisis.

This is only a first step in the process. Many government agencies will be merged to create even more powerful agencies. However, the key element that stands out in Secretary Paulson’s proposal is the new role of the Federal Reserve as a regulatory “Supercop.” In essence, the proposal makes the Fed formally responsible for the danger management of our financial system. This would be the third mandate for the Federal Reserve after price stability and full employment.

In several ways, the Fed has already undertaken this role of guaranteeing financial market stability with its assistance in the sale of Bear Stearns (NYSE: BSC) to J.P. Morgan Chase (NYSE: JPM) and the extension of discount window lending to the investment banks acting as primary dealers. This would merely grant the Fed the regulatory authority necessary to do this on a formal basis.

After the elimination of the Glass Steagall Act separating Commercial Banks and Investment Banks, this proposal simply grants the Fed regulatory authority over similar risky activities by both types of institutions, not just that of Commercial Banks.

This proposal is merely the first step in a long birthing process. There will be long discussions between the legislative and executive branches of government. This will occur no matter who wins the White House in November. No one knows the exact form that this legislation will take.

However, this is a good first step in the process of adjusting the existing regulatory environment to financial reality. It also confirms the Federal Reserve’s role as the premiere global central bank, giving something to take into account for those people claiming the Fed is losing its power to influence world financial markets.

Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.

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Filed under: Politics, Headline news, Housing

Alphonso Jackson resigned this day as Secretary of Housing and Urban Development, becoming the latest Bush administration official to leave under a cloud. No word on a replacement.

Jackson, who most Americans couldn’t name in a bar bet, is under investigation by the FBI. He allegedly helped a friend who was paid $392,000 by HUD in New Orleans after Hurricane Katrina and allegedly punished the Philadelphia Housing Authority (PHA) for nixing a deal with another friend, the record producer/developer Kenny Gamble, according to The Associated Press. The PHA filed a lawsuit.

“At a congressional hearing this month, Jackson repeatedly refused to answer questions about the Philadelphia redevelopment deal,” the story said. “Last year, the inspector general at Jackson’s department found what it called ’some problematic instances’ involving HUD contracts and allows, including Jackson’s opposition to money for a contractor whose executives donated exclusively to Democratic candidates.”

Jackson was a disgrace who should have been forced out months ago. Instead, the Bush administration stood by its man even though most of Washington was calling for his head. This is particularly unfortunate since the American people need HUD at a time of turmoil in the housing market.

Let’s hope that the administration can find a skilled, competent HUD leader who can help the agency become the eyes and ears for the government’s efforts to deal with the subprime mortgage crisis. Nearly anybody would be a significant improvement.

Notice how this announcement came out at about the same time as the Administration’s overhaul of financial services regulation. This wasn’t an accident. Bush officials are hoping that the media will focus on that rather than yet another in a never-ending series of scandals.

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Filed under: Ripoffs and Scams

As a longtime subscriber to Newsweek and a frequent reader of Time, I’ve been appalled at the rapid diminishment of both magazines. Issues once running to well over a hundred pages, full of international news, have shrunk to a shell of their former selves. The latest news from Silicon Alley Insider adds another note to the death knells.

The blog reports that 111 Newsweek veterans have accepted a buyout to retire from the mag. This reinforces my conviction that it has given up on comprehensive, detailed reporting in favor of People Magazine-type copy, heavy on Brittany and such pseudo-entertainment. I’ve also noted a drop in advertising quality. Where once any consumer company worth its salt would place ads in these two giants, we see ads for products once reserved for late night cable TV and supermarket tabloids.

Fortunately, my favorite news magazine, The Economist, continues to provide wide-ranging, authoritative news. As far as Newsweek and Time magazines go, I’d jump on a buyout of my subscriptions if I had the opportunity.

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Filed under: Deals, Venture capital industry, Private equity industry, Public or private?

AirNet Systems, Inc. (AMEX: ANS) has entered into a definitive merger agreement with an affiliate of Bayside Capital. The size of this deal is little when you compare it to the massive billion dollar club deals, but deals of this size also have a much better chance of being able to be financed and the size is such that banks won’t have to come up with three million excuses not to fund.

AirNet Systems is a provider of specialized cargo airline and expedited transportation solutions for time-critical shipments like people that must get somewhere 10-minutes-ago, items like canceled checks and other key parcels. Here is their route structure that it operates in a spoke system if outside of that group. The website says that the company operated 130 aircraft, although that appears to be an old figure.

The company will be acquired for $2.81 per share, a transaction valued at $28.7 million. The offer represents a 94% premium to Friday’s $1.45 closing price.

As already noted, the size here is little. But this niche is one that sees steady interest from public companies and private companies in what feels like a “regardless of the economy stance” over the last decade. What is even more interesting is that the size of a deal like this crosses over with venture capital players, even if it is already a developed company. VC’s have funded many logistic and niche shipping companies over the last decade and there has been a major consolidation of the smaller players.

The Board for the approved the transaction and awaits shareholder approval in a future special meeting. The current management team will continue to manage the company upon completion of the transaction which is expected to close in the second quarter of 2008. AirNet shares are up over 80% this day to $2.63, representing a $26.7 million market cap. The 52-week range is $1.38 to $3.69, so this might not be a 100% assurance that all shareholders will vote along with the deal.

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