nfi

President-elect Obama wants his economic team to develop a plan to create 2.5 million jobs by January 2011. Such a plan has the virtue of providing a specific goal -- and with 1.2 million jobs lost so far this year and more on the way, such a goal would more than offset the lost jobs.

But setting the goal and achieving it are two different things. In the next two months, Obama's economic team -- which will reportedly be announced on Monday -- will need to flesh out the details of a strategy to achieve this goal. And these details will involve using government money to rebuild roads and bridges, upgrade schools and build wind farms and alternative energy technologies.

If Obama is to achieve his goal, he will need to get legislation passed soon after he takes the oath of office. And the legislation will need to provide concrete answers to many questions: Which projects will the government invest in? How many jobs will the projects produce? How much money will be required to finance these projects? Where will the money come from? What profits will these projects generate? How soon will the government get its investment paid back? How much economic growth will these projects create?

I think Obama is certainly focusing on an important priority here. And I look forward to seeing his administration's answers to these questions over the next few months.

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

The FDIC took over three banks yesterday, bringing the total number of bank failures so far this year to 22. As I posted, the FDIC likes to close banks on Friday after hours so they can reopen as branches of the acquiring bank on the following Monday morning. But the U.S. better be working overtime this weekend because Citigroup (NYSE: C) is going to need a merger partner or a government rescue to keep it from becoming history's biggest bank failure.

Of the three banks that failed Friday, two were in California -- Downey Savings and Loan Association (with $12.8 billion in assets and deposits of $9.7 billion), based in Newport Beach, and PFF Bank & Trust of Pomona (with assets of $3.7 billion and $2.4 billion in deposits) -- and the third was in Georgia: The Community Bank, with $681 million in assets and $611.4 million in deposits in Loganville.

In each case, the FDIC arranged for a healthier bank to take over the deposits, branches, and some of the assets of the failed one. U.S. Bancorp (NYSE: USB) acquired the deposits of the two California banks that were brought down by Option ARM mortgages -- which allow a borrower to skip payments and add the amount to the loan principle -- and housing construction loans. Bank of Essex, of Tappahannock, Va., bought all the bank deposits and $84.4 million of The Community Bank's assets -- the FDIC took on the rest.

This post is part of a feature in which he wonder whatever happened to some notorious financial felons. See all 17.

Mike Milken turned the market for bonds issued by less creditworthy companies into a gold mine for himself and his firm, Drexel Burnham. As I posted, this did not end well. But in the past several years, Milken has worked hard to rehabiliate his reputation -- putting money into prostate cancer research and talking about the economy.

Who is Milken and how did he get here? Mike Milken was an academic star. He used to take the bus back and forth to classes at Wharton and came in to school before dawn with a miner's hat on his head because the bright light helped him read annual reports. Milken and I studied with the same management professor at Wharton.

That professor predicted that Milken would either make a huge amount of money or go to jail. He did both -- eventually agreeing to pay $650 million in fines and plead nolo contendere to six felonies -- three counts of stock parking and three counts of stock manipulation. Milken went to jail from March 1991 until January 1993. But that's ancient history. Where is he now?

There is no way to know why stocks go up or down every day. That's why I always find it somewhat silly when I see simple explanations for the movement in prices. The explanation offered for today's 494 point rise is that investors are celebrating the rumor that Timothy Geithner will be the next Treasury Secretary. How does the media know that investors are only celebrating Geithner's appointment and not that of Bill Richardson as Commerce Secretary?

Make no mistake. I agree with the choice of Geithner and made a case for him over former Harvard president, Lawrence Summers, and former Fed Chair Paul Volcker. My reasoning for Geithner was that he had excellent interpersonal skills and high energy coupled with an intimate familiarity with the current financial crisis. Unlike Summers, Geithner is highly unlikely to alienate people, and having picked Hillary Clinton as Secretary of State, President-elect Obama will have enough drama on his hands with both Clintons.

Geithner shares something with current Treasury Secretary Hank Paulson -- he graduated from Dartmouth. I hope that he makes far better use of that Ivy League education in the Treasury Secretary's role than his predecessor. While Geithner will be left with a huge mess that was not helped by his fellow Dartmouth alum, it will be difficult for him to do a worse job than Paulson. The world will be depending on him.

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

Have any of your stocks recently tumbled below $5 a share? If you own Citigroup (NYSE: C) stock, then you know that it is among the former blue chips like General Motors Corp. (NYSE: GM) and Ford Motor Co. (NYSE: F) that have breached that $5 limit. They currently trade at $3.88, $2.84, and $1.45 a share respectively. And there's a good chance that if that company has breached $5 a share -- it will drop further.

How so? It turns out that under some circumstances, big institutional investors such as pension funds, endowments, and asset managers must sell a stock when it drops below $5. I have not been able to find out exactly why, however it's likely that these institutional investors owe their shareholders a fiduciary duty to act prudently to protect their investments.

So if there is not enough trouble as a stock approaches $5, institutional selling will make things worse -- and represents an obvious profit opportunity for short sellers. If a stock is dropping fast below $10, for example, a short seller can borrow the stock and sell it short -- which puts further downward pressure on the shares. If it then tumbles below $5, that represents a quick doubling if the short seller can buy back the shares and repay the loan as institutional investors dump the stock.

Citigroup (NYSE: C) recently revived advertising slogan is reassuring: "Citi never sleeps." The idea is that since it operates in 100 countries, there is always a Citi employee on the job. But even if you have 300,000 employees, a company can only survive if those people are doing the right things when they're on the job. If not, Citi might never sleep, but it could take a dirt nap.

Citi stock has lost half its value this week and, at $4.71, is down 92% from its September 2000 high of $57.50. Prince Alwaleed said it was dramatically undervalued -- and that was yesterday morning before it lost 26% of its value. I suggested yesterday that the Prince may have miscalculated. How so? If you think that value can be measured by comparing the stock price to potential earnings growth, then I think the Prince overestimated the earnings growth part . For instance, its global cards and consumer lending business makes up 67.3% of net revenues, and global cards shrank 40% in the third quarter.

Since the prince has so much of his diminishing wealth -- his investment fund was down 63% as of yesterday -- tied up in Citi stock, he may have decided that people's memory of his 1991 investment killing based on buying at split-adjusted $2.98 -- will draw in buyers. But things are different now. Citi has posted huge write-downs in four consecutive quarters of losses totaling $20 billion; nine of its investment funds have collapsed this year; it will lose money due to write-offs of consumer loans, commercial real estate, and mortgages; and it has trillions of exposure to derivatives and illiquid assets.

Congress just announced that if the automobile industry comes up with a restructuring plan by December 2nd, it could discuss an industry bailout in December. For now this means, no bailout until next month at the earliest. In the last three months, the industry has burned through $18 billion in cash. And Congress does not want to provide taxpayer money to the industry unless it can figure out how to transform itself.

I guess the CEOs will need to work over the Thanksgiving vacation if they have any hope of getting taxpayer money. But as I posted, there's a way that General Motors Corp. (NYSE: GM) could follow a six step restructuring plan to save $16 billion. If its two smaller competitors could come up with a similar plan, there's a good chance that the industry could cut itself back to a profitable core.

I am relieved that Congress has reached this decision because I do not like the idea of throwing taxpayer money into an industry that will not change the way it operates and thus will keep coming back to Congress asking for more money every time it gets close to running out. By putting the pressure on the industry to reach its own restructuring plan fast -- Congress can test the mettle of industry leaders. This will help determine whether the industry is capable of saving itself.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in GM securities.

Based on October wholesale and consumer price reports, July 2008 marked a shift from inflation into full-blown deflation. This has much to do with the declining price of oil, which in turn is related to the collapse of speculative buying of oil while shorting the dollar; the decline in demand resulting from a global downturn; and the failure of producers to cut supply fast enough.

However, as I posted, there's a vicious cycle underway which leads to:

1. Excess inventory,
2. Price cuts,
3. Capacity and job reductions,
4. Less spending power,
5. Lower demand -- followed by a return to step 1.

And with jobless claims at 542,000 and the price of oil down below $50, it's pretty clear that this cycle is well underway. What can the Federal Reserve do to turn this vicious cycle into a virtuous one? It is likely to cut the Fed Funds rate to zero or very close to it -- 0.25% -- in January. But in a 2002 speech, Bernanke said that there are other ways the Fed could try to boost overall demand, which would reverse the deflationary cycle.

Berkshire Hathaway Inc. (NYSE: BRK.A) stock fell 12% on Wednesday -- dropping by $11,550 in one day. The stock has not fallen this much on a percentage basis since the 1987 crash. (It fell 18.51% on October 19, 1987 -- down $720 that day to $3170.) Last month, Warren Buffett was advising Americans to back up the truck and buy stock. Since then, Berkshire has lost 30% of its value and the S&P 500 has tumbled 14%. This does not inspire confidence.

Last December -- when Berkshire peaked at $151,650 -- I questioned whether the stock was overvalued. But I did not think it would fall to its $84,000 Wednesday close (BRK.A is falling again today -- over 8% to $77,000).

Buffett has since made deals to buy stakes in General Electric Company (NYSE: GE) and The Goldman Sachs Group (NYSE: GS), which don't look so great now. He did get a nice 10% yield, but the conversion prices of the warrants he took on were much higher than their current prices -- $22.55 and $14.45 for GE and $115 and $55.18 for Goldman, respectively.

As a Citigroup (NYSE: C) shareholder I know that Saudi Prince Alwaleed bin Talal made a killing back in 1991 when he backed up the truck and bought shares of Citi at what was then a low price of $10 a share -- $2 adjusted for splits. He is no doubt unhappy with the 90% drop in the value of the stock since its September 2000 peak of $57.50. Now he's trying for a repeat of his previous success by boosting his share of Citi from 4% to 5%. Unfortunately, it won't work this time.

Alwaleed's stock holdings have plummeted. For example, his Riyadh-based Kingdom Holding Co. has lost 63%, wiping out $13 billion in value. Citigroup, his largest holding, has fallen by more than 75% since January 15, when Alwaleed increased his stake. His concept that Citi is dramatically undervalued does not hold much water. The reason for that is that given its complexity and exposure to derivatives, off balance sheet entities and Level 2 and 3 assets -- which total $36.8 trillion, $1.2 trillion, and $1,195 billion (88.6% of total assets) respectively -- Citi is impossible to value.

Meanwhile, the steps that Citi has taken are not going to be enough to help it survive. Sure it has raised $75 billion by selling assets and equity stakes since December and plans to cut 52,000 jobs. But Citi has only $98.6 billion in common equity, and unfortunately, an 8% decline in the value of those Level 2 and 3 assets will wipe that out. Things are not good for Citi and that does not bode well for Alwaleed or Citi's other shareholders.

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

Banks around the world have been raising capital in the last few months. If the market is efficient, then the cost of capital for these banks should tell us something about how risky they are. Based on the relative cost of capital of banks in the U.S. compared to those in France, Germany and Switzerland, the world's riskiest banks are right here in the good old USA. The safest banks? French ones.

How so? Here is the rough (due to different capital structures) after-tax cost of capital for the banks in different countries:

• U.S.: Morgan Stanley (NYSE: MS) is paying a 17% interest rate and Goldman Sachs Group (NYSE: GS) pays almost 17%
• UK: Barclays pays 16%; HBOS, Lloyds TSB; and Royal Bank of Scotland pay about 12%
• Germany: Commerzbank pays 10%
• Switzerland: UBS's interest rate is relative bargain of 9.9%
• France: BNP Paribas, Societe Generale, and four others pay the lowest rate -- 5% -- for their capital

Maybe there's some sort of trading opportunity to short U.S banks and go long French ones. C'est la vie!

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book, You Can't Order Change: Lessons From Jim McNerney's Turnaround at Boeing, will be published by Portfolio on December 26, 2008. He has no financial interest in Goldman or Morgan Stanley securities.

Harvard is an easy target for the woes of our economy. Its business school produced George W. Bush, the fellow who's presided over the current economic catastrophe, and Rick Wagoner, the CEO of the largest automobile maker who's led its stock down 95% in the last eight years and now wants $25 billion worth of taxpayer money to keep the millions rolling into his bank account. But Harvard had these folks for just two years, so it's tough to blame the school for the current predicament.

However, with $36.9 billion in assets (as of June 30), Harvard also has the largest endowment of any university. And thanks to its big exposure to very illiquid interests in venture capital (VC) and private equity (PE) firms, Harvard leads a growing list of limited partners (LPs) which are selling stocks and those very illiquid interests in order to come up with the cash needed to fulfill their capital calls to these partnerships.

This requires some explaining. VC firms raise money from limited partners such as wealthy individuals, foundations, pension funds, and endowments. But the LPs don't write checks up front -- instead they hold onto their cash and must write a check when the VC calls and asks for the money when the VC is on the verge of making an investment. The problem for many LPs like Harvard is that much of their stock portfolio is locked up in hedge funds and these illiquid VC and PE interests.

I sure am tired of writing about bad news. That's why I was happy to read this morning that the consumer price index (CPI) tumbled by a record 1% in October. In the last 61 years, there has never been a bigger monthly decline in the CPI. The cause? You guessed it -- a huge drop in gasoline prices.

But wait, there's more. Core inflation -- the Fed's favorite measure, which excludes "volatile food and energy" prices -- also declined for the first time in 25 years. The core consumer inflation decline was 0.1%. The numbers are not a big surprise after yesterday's wholesale inflation report.

The drop in prices across the board is great news for people with money. After all, it means they can spend less of that money to buy what they need. But the reason for the drop in prices is very ominous for the future of the economy. That's because companies have overproduced and they now have excess supply gathering dust on their shelves and showrooms.

Thanks to what former Enron CEO, Jeff Skilling, called bad "optics", some top Wall Street executives announced that they're foregoing their normal seven figure bonuses. But I think I am being generous in estimating that those potentially symbolic gestures will only shave a few billion off the Wall Street bonus pool for 2008. We could still be paying $20 billion in bonuses this year.

How so? After buying $159 billion worth of preferred stock in 24 banks, I have not seen any evidence that the Treasury required the banks to lend it out. There is nothing stopping the banks from using the money for paying bonuses. And while the original estimate of 2008 bonuses was down 20% from 2007 -- to $26.6 billion -- I am thinking that eliminating executive bonuses could lead to at least a $6 billion lower figure -- particularly if this cut provides bank CEOs leverage to reduce the amount of bonuses paid to lower level people.

So far, top executives from Goldman Sachs (NYSE: GS), UBS AG (NYSE: UBS), Deutsche Bank, and Barclays have said they will skip their bonuses for 2008. Ironically, the ethically challenged UBS has the most interesting idea -- starting in 2009, it will be able to claw back bonuses in the years after their award with a third paid immediately, while the remainder will be put into a participant's account and can be reduced if there is a loss at the division or the whole bank. I started proposing an escrow account along these lines in October 2007.

Prudential Financial (NYSE: PRU) used to have an advertisement offering consumers a piece of the rock (Gibraltar). Now Hank Paulson's $810 billion Troubled Asset Recovery Plan (TARP) has replaced Pru's rock. Insurance companies around the world are angling to buy a Savings & Loan (S&L) so they can apply for some of that money. So I think it's time to create a mutual fund that will be used to buy an S&L so that the average citizen can get some of that money as well.

Not only are U.S. insurance companies on the hunt for an S&L, there's a European insurer seeking some of our tax dollars as well. The U.S. insurers seeking an S&L include Hartford Financial Services Group (NYSE: HIG), a life and property insurer that has been hit by investment losses, Genworth Financial (NYSE: GNW) and Lincoln National (NYSE: LNC). And the European insurer in question is Amsterdam's Aegon AG, which wants to buy Suburban Federal Savings Bank.

I've been too patient waiting for my share of the TARP. Here's an idea that will make it affordable for the average taxpayer to buy an S&L so we can apply for some of that money -- which is really our money -- as well. We should start a mutual fund and once it has collected enough cash, the fund could purchase a little S&L and then apply for some of that TARP money. With banks, insurance companies and automobile manufacturers getting their piece of the TARP, it's our turn now.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.