Sunday, January 11, 2009

Brilliant analysis of financial meltdown, portent of future and partial solution

This was sent to me by my tax accountant, and though long, technical and detailed, I HIGHLY recommend you read it. I’m not qualified to fully defend everything in here, but the main thesis is brilliant – and I don’t use that term lightly.

If it motivates you to fully realize in concrete detail how the the insanity of the current government bailout policy is utterly backwards and destroying our economy and our way of government and life -- possibly permanently as he implies -- your voice in print or anywhere else you can speak in public could be one of those helping save the United States of America.


The author (whom I don’t know and there was no link provided) draws a parallel between U.S. policy in Iraq (before Gen. Petraeus), and it’s “solution” to the current financial meltdown. His analysis is very convincing, though I welcome comment.


He starts with an example of a large mall developer (GGP) and shows how the government easy money policy is creating a domino effect of business failures by increasing the “spread” between those who can get free money (the government-seized banks) and those who can’t (every productive business in America) get credit to keep their businesses going. This is wiping out equity holders everywhere.


His argument goes on that the market has been so traumatized by the arbitrary seizures of the banks that it is depressing values and accelerating failures because no one believes they will get a fair shake in bankruptcy court – ie, relief on debt payments till the crisis abates – because the Treasury will preempt the courts. As he says,

Call it the Hank "Halloween" Paulson serial murder flashback syndrome.... Lehman’s death and dismemberment was the proximate cause of the credit market seizure that followed. ...It is the very outlandishness and irrationality of the event that has impressed itself upon Mr. Market.

Here is the critical parallel as I’ve condensed it from many pages of the article (all emphasis added by me to bring out high-points to motivate skimmers to read):

As some of my colleagues pointed out, the best possible analogy to the administration’s policy so far is that same administration’s policy in Iraq from late 2003 up until 2007. Under that policy, symbolized by the infamous "Green Zone" in Baghdad, the government established a handful of areas nearly (though not quite) impenetrable to the insurgents, in which areas US government operations, and especially the armed forced themselves were based. Then when the insurgents struck outside the zone, US troops would massively deploy to punish them, and if possible destroy them, after which our troops would return to their bases.

In theory this kept the troops safe to sustain a strategy of wearing down and outlasting the enemy until order could be restored to the country. In actual practice, the strategy not only failed to restore order, it cost the lives of several thousand American soldiers killed on the raids or going back and forth.

The key problem of the strategy, which General Petraeus identified and reversed, was the implicit assumption that an orderly productive society can be established by dividing the country between small safe zones in which the government lives, safe zones created by massive and unsustainable expenditures of government resources, and large barbarized zones encompassing, among other things, the economy that must ultimately support the government inside its gated community.

...If government backed entities can finance an asset at 5 percent, and everyone else in the room is obliged to finance it at 15 percent, ...the government itself can massively confiscate assets. ...A lone trusted borrower in the midst of a financial terror can borrow and lend at an extraordinarily favorable spread, putting assets on its balance sheet at amazing bargain prices. This is exactly what the government is doing right now...

If such a condition could persist forever, only the state would own any assets... Everyone else, precisely because before the crisis they made money rather than lost it, acquired assets prudently, and did not recklessly imperil the financial system, remain out in the cold, borrowing at double digit rates... In the Green Zone money is cheap... Alas, ...the worst [people of the Green Zone, who] spent years making an easy living as grifters, frauds, and crony capitalists [are the ones who profit].

He makes a case that there are three ways out of the crisis, two of them not pretty at all (Great Depression II and massive inflation), and says the current “plan” is heading us towards a bailout that costs well over $3 Trillion dollars without providing any solution at all.

He then argues for a third alternative that could have ended the crisis in a few days had it been enacted. I’m not fully qualified to judge it, and you may read on your own, but he concludes by saying that one way to enact it would be a $10,000 tax rebate to 300M Americans, or

Even better, suspend all federal taxation, including both sides of the Social Security tax, for 2009.

Amen. That’s been part of my own prescription all along -- along with a call for a Constitutional amendment calling for a separation of State and Economics, cause nothing else will end the destruction of our way of life by the fools in Washington.

Robb


Sucked into the Green Zone

Andrew J. Redleaf, December 3, 2008

Consider General Growth Properties (GGP) for what it can teach us about what happens to more or less sound companies in a catastrophic credit contraction. GGP’s income easily covers its interest obligations by a factor of somewhat more than 1.5. It is, or was a few weeks ago, certainly solvent in the ordinary, muddle-through sort of way that any ongoing business that can pay its bills passes for solvent. There is a lot of debt, and the company’s disclosure is not as wonderful as it could be, so the situation is not entirely clear. Still I would guess that a consensus of analysts looking at the company’s assets 90 days ago would have concluded that, even if the business were to be unwound, its assets, sold in an orderly way, would fully cover its liabilities.

And yet GGP may well be pushed into bankruptcy by senior creditors—mortgage holders in this case—suddenly eager to pounce and seize assets. And that is the curious thing. Normally they would not pounce. In all the time I have been in this business I cannot remember one other instance of a company being forced into bankruptcy while current on its obligations and with 1.5x interest coverage.

So why are the creditors poised for the kill? Are they behaving irrationally? Not at all. Their actions are consistent with value of the dollar, a.k.a. the price of credit, having perhaps tripled in two months.

Here’s the 30,000 ft view of GGP, with all numbers rounded for maximum convenience. The company bought about $30 billion in mostly desirable shopping malls in the U.S. These generate about $2 billion a year in EBITDA. To finance the deal GGP borrowed $24 billion at an average rate of 5.2 percent, giving them an interest cost of about $1.25 billion and a net of about $750 million on equity of $6 billion.

The debt, which is roughly ¾ mortgages and ¼ corporate paper, matures at a variety of dates from next week to 10 years out. The mortgage holders are senior. The business model presumed GGP would be able to roll the near term maturities. Thanks to the events of the last two months, it can’t.

It can’t because, thanks to the government’s collapse of credit markets, today only a federally supported commercial bank (or one of the growing list of federally supported institutions) could finance even top-shelf shopping malls at 5.2 percent. Some real estate wannabe, trying to fill GGP’s shoes, or even GGP trying to fill its own shoes, would certainly have to pay double digit rates, making the malls a losing proposition.

That’s why the mortgage holders can push the situation to crisis.

The two remaining questions are, "why do they want to, rather than swiftly renegotiating an accommodation?", and "why does the market, which is currently pricing the bondholders claims at 10 cents on the dollar, think the mortgage holders can make off with nearly all the value of the assets?"

Let’s continue to simplify the numbers. Even better, let’s make them up. Say the money to finance GGP’s assets would cost 15 percent today, which is not far off. An equity holder would need a larger return to do the deal; let’s call that 20 percent. This makes the properties for which GGP paid $30 billion, and which continue to generate $2 billion in income, now worth $10 billion, distinctly shy of the total debt to mortgage holders.

Because at current market prices there are only $10 billion of assets left to split, the mortgage holders, at least in their fondest dreams, would get everything. "Everything" would mean all those assets that were worth $30 billion 90 days ago. And it would mean not a pro-rate share of the $1.2 billion in interest for which they contracted, through whatever maturity, but the whole $2 billion of annual EBITDA. Of course after getting hold of the assets they would, regardless of formal arrangements, be in the position of equity holders. If credit markets do not heal and we get the Great Depression Redux, much of their $2 billion in income would go away. But if the government reflates the currency and the spread between Treasuries and risk capital closes, the rents would not disappear and would probably grow over time, even in real terms.

At 10 cents on the dollar, the bonds are priced as if the fondest dreams of the mortgage holders will play out almost exactly. Mortgage holders get everything, or pretty darn close, leaving bond holders with little and equity holders with nothing. And this happens solely because the dollar denominated (i.e., interest-rate-adjusted) price of "everything" this week is a small fraction of its dollar-denominated price ten weeks ago.

This is almost as bizarre as the fact that an apparently solvent company is headed for bankruptcy.

Look at it this way. The mortgage holders are tempted to push an essentially solvent company into bankruptcy and seize nearly 100 percent of its assets, taking advantage of the fact that a company that normally would have routinely extended its near term maturities can’t because of the credit crisis.

The market is assuming the mortgage holders are right and will be able to seize nearly 100 percent of the assets. But the basis for this assumption is that the current market price of the assets is dispositive.

Here is one more way to put it. Equity holders, in this scenario, would be wiped out because they live in a world in which the value of a dollar is now so high that they cannot borrow to refinance properties acquired when the dollar was much cheaper. Bondholders mostly get wiped out with them, for essentially the same reason: dollar denominated recovery values on these bonds will be astonishingly low because the dollar has repriced so drastically that only the mortgage holders claims are still visible. Meanwhile the mortgage holders who can dream of seizing the property only because the dollar has tripled in price, are also no doubt dreaming of collecting rents amounting to $2 billion in income, rents set back when the dollar was much cheaper.

It seems to me the market, and for that matter the mortgage holders, are missing one crucial point, or at least one crucial player: the bankruptcy judge. Bankruptcy law has a strong equity tradition and a strong prejudice in favor of maintaining ongoing businesses and against liquidation. Bankruptcy judges dislike opportunism; they especially dislike their courtrooms being made into tools for creditor confiscation of essentially sound companies. Rather than do that it seems to me most judges are far more likely to look at GGP, see a sound company, impose an extension of current maturities on the creditors, impose an interest rate premium on the shareholders to compensate for said extension, and then tell the whole crowd to get out of his courtroom and stop wasting his time. Even more likely, the case never gets to a judge because all the lawyers will recognize the probabilities and work out something out along similar lines. If they do, and the company continues on, and the dollar reflates, then in due course of time the bonds will once again reflect the economic value of the assets, rather than what will have turned out to be their transitional deflationary valuation.

If I can see this, why can’t Mr. Market?

I’d suggest two reasons. The first is that Mr. Market has been so traumatized by the ‘bankruptcies’ of recent financial companies, that he is having a hard time remembering how real bankruptcies work. When regulated financial companies—especially of the ‘too big to fail’ sort— go bust, or come close enough to make the government nervous, they don’t go through bankruptcy in the ordinary sense. The goals of the ordinary bankruptcy process, though sometimes obscured by adversarial procedures, are to maximize the recovery value of the assets, including preserving the business if possible, and then distribute that value equitably. This takes time, as well as some patience for resolving claims not strictly dictated by contract, and for the extended negotiations that tend to result.

The government’s priority when a financial player fails is not fairness to claimholders, but avoiding domino effects. The banking system, though dominated by private companies, collectively executes a core government function: regulating the value of the currency. Because a domino-like tumbling of banks would cause a catastrophic credit contraction and deflation, the government quite rightly sees its role as accelerating a resolution. If bondholders are roughed up and assets dissolved in the process, so be it.

Now, as we have seen rather dramatically in the last couple months, this haste does not necessarily achieve the healing for which the government hopes. But that is not the relevant point here. The relevant point is that all of sudden Mr. Market is behaving as if there were no safety for any company, or any claimant’s capital, in the bankruptcy process. It is behaving as if the arguably necessary but certainly exceptional rules that apply to distressed financial companies are to be applied to companies in general.

This makes no economic sense. The general pattern of bankruptcies always has been quite the opposite. Far from assets being disposed of in fire sales, assets that should be sold are not, and management teams that should be tossed over the side are allowed to hang on, hoping for an exogenous event to improve their results.

When bankruptcies go wrong they tend to be more like Delphi, the auto parts maker that filed two years ago. As far as I can tell not a single asset has been sold. In those two years its bonds have traded from about 40, right after filing, up to 140 as it seemed that some of the bondholders were getting equity in a valuable ongoing business. Recently the bonds have fallen as low as 4, partly reflecting the troubles in the auto industry, but surely also reflecting Mr. Market’s new belief that bankruptcy is indistinguishable from cremation.

My best guess is that Mr. Market’s new view of bankruptcy is a financial version of post-traumatic stress syndrome. Call it the Hank "Halloween" Paulson serial murder flashback syndrome.

So traumatic was it for Mr. Market to witness the recent torture killings in the financial sector that he now seems to see this fate just around the corner for any firm experiencing some financial trauma.

Above all, "Paulson flashback syndrome" seems to be a generalization from the Lehman bankruptcy in which hundreds of billions of financial assets were liquidated in a matter of days with no regard whatsoever to the interests of claimholders. As it turns out there was no possible justification for the Lehman fire sale; it formed no part of a coherent plan to save the system. To the contrary, Lehman’s death and dismemberment was the proximate cause of the credit market seizure that followed. There is thus no rational reason for the government to repeat the performance.

Yet the freakishness of the government’s behavior in the Lehman case does not seem to reassure Mr. Market. On the contrary, the Lehman bankruptcy was an inflection point in the financial markets. It’s scale, suddenness, and unexpectedness in light of the government’s very different handling of Bear Sterns only months before, has made it the dominant image and metaphor of the moment, the sum and source of all fears. It is the very outlandishness and irrationality of the event that has impressed itself upon Mr. Market.

Serial murders are frightening not only in the ordinary rational sense that any violent crime is frightening. They are also spooky; they make no sense in the natural order and are thus beloved by novelists and screen-writers. Mr. Market has stayed up late watching scary movies—and no doubt snacking shamelessly before bedtime—and now he is hiding under the covers with the flashlight on.

Broadening the point, the Executive Branch has been so active, so dominating, both in precipitating the crisis, and in all the attempted resolutions so far, that Mr. Market, quite understandably, seems to have forgotten for the moment that there are two other branches of government and that neither of them has yet spoken in any significant way. Yes Congress passed a bill, but after that body’s initial protests its chief contribution so far has been to shout ‘how high?’ whenever Mr. Paulson says jump.

I don’t claim for a minute that when Congress weighs in that its own policy will be any wonder of wisdom compared to the Executive’s. But it will be different. It will be predictably more democratic, more egalitarian, more Main Street than Wall Street, to debtors, and above all more inflationary.

I should say, more effectively inflationary. The Executive is certainly trying to reflate, even inflate, but the market is resisting and so far the government is losing.

As some of my colleagues pointed out, the best possible analogy to the administration’s policy so far is that same administration’s policy in Iraq from late 2003 up until 2007. Under that policy, symbolized by the infamous "Green Zone" in Baghdad, the government established a handful of areas nearly (though not quite) impenetrable to the insurgents, in which areas US government operations, and especially the armed forced themselves were based. Then when the insurgents struck outside the zone, US troops would massively deploy to punish them, and if possible destroy them, after which our troops would return to their bases.

In theory this kept the troops safe to sustain a strategy of wearing down and outlasting the enemy until order could be restored to the country. In actual practice, the strategy not only failed to restore order, it cost the lives of several thousand American soldiers killed on the raids or going back and forth.

The key problem of the strategy, which General Petraeus identified and reversed, was the implicit assumption that an orderly productive society can be established by dividing the country between small safe zones in which the government lives, safe zones created by massive and unsustainable expenditures of government resources, and large barbarized zones encompassing, among other things, the economy that must ultimately support the government inside its gated community.

This cannot work. It is almost exactly what Secretary Paulson has been doing so far.

To see this, let’s go back to GGP.

Assume for a moment that the ambitions of the mortgage holders are realized, and all the assets of GGP end up in their hands. In essence, what will have happened is that the deflation, even if it lasts only a matter of months, will have effected a massive transfer of wealth from GGP to its mortgage holders. But will the mortgage holders be able to maintain control of the assets? Even at the bargain price at which they will have acquired those assets, this is not assured. In a credit-based economy (i.e., in any economy supported by a complex of intermediary relationships driven by the need to move capital from where it is idle to where it can be productive) assets that appear in themselves to be quite securely held, even free and clear, may not be.

When a massive and sudden deflationary credit collapse hits a modern economy, borrowing becomes extremely expensive for everyone—almost. The government, and certain government backed institutions, will still able to borrow at pre-deflation rates. With money plentiful and cheap on one side, the government’s side, but scarce and expensive on the other side of the room, assets will flow toward the government’s side of the room like water flowing downhill. Over time all ‘normal’, not government-backed, asset holders who can borrow only at high rates would lose everything they own to those who can borrow at the government rate. If government backed entities can finance an asset at 5 percent, and everyone else in the room is obliged to finance it at 15 percent, and if this condition could long endure, ultimately every asset in the economy would be owned by the government backed crowd.

Thus, just as in an inflation, by precipitating a sudden catastrophic deflation the government not only shifts wealth from one citizen to another, the government itself can massively confiscate assets.

At first this seems odd, since the government itself is massively a debtor, and deflation is generally held to be bad for debtors (as inflation is generally held to be good for them). Is it not for this very reason that governments are tempted to inflate the currency, so that their own debts can be wiped away, paid off with cheap currency of its own issuance?

All true. But our deflation—let us call it the deflation of the Red Zone—is the creature not of a long term shortage of currency, as for instance the US saw frequently in the 19th century, but a catastrophic credit collapse. A credit collapse, as the very word implies, is preeminently a crisis of trust. A lone trusted borrower in the midst of a financial terror can borrow and lend at an extraordinarily favorable spread, putting assets on its balance sheet at amazing bargain prices. This is exactly what the government is doing right now—even though it is trying to give the spread away by tossing money to its favored banks. Right now, the only US debtor with access to still functioning credit markets is the U.S. government. Because only the Treasury can borrow, only the Treasury, or those on whose behalf it consents to borrow, can lend, or buy.

A deflation arising from a catastrophic credit collapse can thus be described simply as a condition in which the spreads between risk free, or Treasury rates, and all other rates, or risk premiums, are radically out of proportion with real economic risks. (Or at least those real economic risks apparent before the collapse. The longer credit markets remain dysfunctional, the more the real economic risks will increase to match the increase in risk premiums.)

If such a condition could persist forever, only the state would own any assets, which is why the estimated price of the bailout keeps rising. The government is borrowing, lending, and buying in an attempt to keep the system afloat, but it is not closing the spread between risk free and risk premium paper. Perversely, by driving down risk-free rates it is actually widening the spread.

Normally of course lower government rates mean lower commercial rates; spreads not rates rule the world. But in a panic of the current sort, that link is broken. Lower government rates have no gravitational effect outside the Green Zone, because in a panic everyone focuses on the undoubted truth that poor is better than dead.

Thus for all the cheap money Treasury has been pumping out, all it has achieved is to extend the definition of the US Treasury to include banks (and banks-elect), Fannie and Freddie, AIG, soon the auto companies, etc. There is an ever expanding Green Zone of institutions, which, because they were imperiled and imperiled others, have been adopted by the Treasury. All these, using government money, can finance assets at reasonable rates. Everyone else, precisely because before the crisis they made money rather than lost it, acquired assets prudently, and did not recklessly imperil the financial system, remain out in the cold, borrowing at double digit rates, or not at all, which they will do until they drop, and are sucked into the Greater Treasury.

We must reflate the currency, the government says. But it has already done so—within the Green Zone. In the Green Zone money is cheap, and freely available for anyone who is up for a shopping spree down those mean streets where assets are priced in hard-to-get deflated dollars. Alas, the people of the Green Zone, the best of whom are careful to a fault, and the worst of whom spent years making an easy living as grifters, frauds, and crony capitalists, don’t like it very much on the mean streets. No matter how low the yields on Green Zone paper, they would rather not venture out.

If a catastrophic, credit-collapse-driven deflation can be described as a non-economic, and therefore unsustainable, spread between risk free rates and risk premiums - a massive inefficiency in credit markets - how does the spread close?

There are three basic paths, two of them very ugly. The most likely outcome is some combination of the three.

The first and perhaps ugliest is that the spread becomes economic, making the market inefficiencies disappear in the most painful way. This is the Great Depression scenario. The assets against which risky paper is held degenerate until their deterioration justifies, ex post facto, the risk currently implied by the spread. In the case of GGP, this would mean that the $10 billion valuation (down from $30 billion) implied by interest rates of 15 percent would become the ‘real’ valuation (the net present value of estimated future earnings), as a result of a catastrophic drop in rental income.

Nominal risk premiums would decline to reflect the fact that the risk had been realized, that economic uncertainty had been resolved—resolved alas by actual economic failure. One could once again borrow at some reasonable spread to acquire the formerly $30 billion worth of shopping malls, because the price of the property would have been adjusted to the rental income.

To look at it another way; right now there is an inefficiency between GGP’s healthy rental income of $2 billion and the impoverished market price of its assets. In the Great Depression scenario that inefficiency is resolved on the down side.

The second way the spread can close is that lenders to the US Treasury realize that the US government is on the way to acquiring and centrally managing all the assets of the United States, or that at a minimum we are cloning the Japanese banking system, and decide they don’t like this. They massively sell Treasuries pushing yields skyways and the spread closes from the bottom up. One might call this the "Chinese solution", on the grounds that the Chinese, of all people, would never lend money to a communist government. This scenario would be unpleasant in many predictable and probably many unpredictable ways. It’s chief virtue, if it were to happen quickly enough, would be that the massive loss of confidence in the Treasury would set off a general inflation.

(If, at the end of the previous sentence you were tempted to ask, ‘but wouldn’t a sell off of Treasuries raise Treasury rates, and doesn’t raising rates cause deflation?’ you could have an excellent opportunity working for Hank Paulson in his next job, if he ever gets one. The most important point Paulson is missing is that manipulating Treasury rates does not work in the ordinary way when the world has turned upside down and expectations have become perverse. Rising Treasury rates would not be ‘cause’ of anything; they would be a sign the dollar is reflating, (that the spread between risk-free rates and risk premiums is closing) just as falling risk-free rates now are a sign of the deflation outside the Green Zone. They are a sign, more precisely, that no one wants to accept risk.)

Then there is the sensible way to close the spread, which should have been pursued from the very beginning, and to which the Federal Reserve, though not Treasury has been inclined from the beginning. Forget saving institutions directly. Forget establishing a Green Zone. Forget working through the banks (which really just means taking them over.) If a non-economic spread of massive inefficiency has been created by a panic in credit markets, and the only buyer able to accept the liquidity risk of facing down the panic is the government, then attack the panic, and the spread, directly. Sell Treasuries and buy any corporate bond in sight that appears to be priced at some arbitrarily large spread to its economic value, starting with the cheapest.

Had the government done that on September 15 the crisis would have ended on September 16, and its end would have been apparent within a week. Instead of having to spend vastly more than originally predicted, while making the problem worse as the Green Zone sucked the life out of the rest of the economy, in all probability the government would have spent less than predicted. TARP was awkward even in its original form because it was focused on buying the bad paper off the balance sheets of particular institutions, rather than in the open market. It was awkward because it was focused on healing institutions, not the market panic that was wounding those institutions. It was awkward from the beginning because the government perceived the problem to be the collapsing price of non-performing loans held by money center banks, when the real problem was the collapsing price of performing loans held by everyone else.

Awkward, but it might have worked, almost inadvertently, because at least the government was going to buy some paper from someone, which may have contracted spreads and rallied other buyers into the market. But the next step, "fixing" TARP to make it look more like what the Europeans (those economic geniuses) were doing, investing directly in the banks, made it much worse.

That was the moment the government really established the Green Zone policy. Treasury then immediately ordered the banks it now controlled to raise margin requirements on investors so bold as to still own corporate paper. Thus the government launched into the Red Zone, except unlike the splendid US Army, the US Treasury only ever seems to shoot civilians. Treasury is on a mission in which all damage is collateral damage.

What was needed, instead of TARP, was a three sentence piece of legislation: (1) For the next 90 days the US Treasury is authorized to buy asset-backed securities whose price appears to be an extreme discount from economic value. (2) For the purposes of calculating the debt of the United States and complying with statutory limitations on such debt, securities purchased under this authorization shall be credited against that debt at purchase price. [This to eliminate the need for an appropriation, allowing Congress to stay under the radar.] (3) If any securities acquired under this authorization are not sold within 24 months, the Secretary of the Treasury must appear every day in front of a special investigating committee composed exclusively of the loudest and dumbest Members of Congress to explain why.

That didn’t happen and so far the Green Zone rules. But there are other, albeit less efficient ways to get out of this. The Executive, or this Executive, hasn’t been able to reflate dollars outside the Green Zone, which is what is needed. It naturally focuses on the official banking system, which it is accustomed to view as the mechanism through which monetary policy is executed. Congress, not routinely engaged in monetary policy, is not constrained by such habits of thought, or perhaps by the habit of thought at all. Gloriously, Congress is mostly inhabited by fundamentally unserious people, most of whom have not the slightest pretense of knowing what they are doing. This is just what we need.

There are 300 million people in the United States. Sending each of them a check for $10,000 would reflate the currency overnight and decimate Treasuries (since it would appear to be the work of insane populists unfit to manage a government) and at a cost of only $3 trillion, less than is now estimated for the cost of the Green Zone bail out. Even better, suspend all federal taxation, including both sides of the Social Security tax, for 2009. (Revenues will be down anyway.) Same approximate cost as sending everyone a $10,000 check, around $3 trillion, but with the better economic incentives. GDP growth for 2009 could easily hit six or seven percent.

I am not predicting Congress will do either of those. And I am not estimating GGP’s future bond price on the assumption it will do either. But there is a good side to having a bunch of crazy, liberal, vote-buying, demagogues in power. They are very likely to do some crazy, liberal, vote buying, demagogic sorts of things. And not a moment too soon.

Friday, January 2, 2009

The Big Rock Candy Mountain meets Life

As we usher in the New Year, so much to write about... I just wrote about finance professionals becoming comedians and filmmakers. Now let's watch a trailer for a comedy-action-thriller-farce about the Steel Industry (story at bottom). In a scene right out of Atlas Shrugged, they've boldly gone where no steel executive has ever gone before. Not even Orren Boyle. Proving that bankers must be the common unimaginative pikers of the movie cliche, the Steel exec's have upped the ante to prove who's got more taconite in their scrotum. They've asked the Federal bail bondsman for $1Trillion to rescue them.

That's with a "T". The auto companies must be kicking themselves right now.
For those of you who don't follow such things, the Fed is now renting Monopoly money for 0.25%. The Steel industry is just P.O.ed that the only ones getting a piece of that scrap metal are the banks. So they've decided to cut out the middle-man.

I say we all file the necessary paperwork and set ourselves up as banks to ask for bailout money. The interest on $1M is only $2500 per year! That's one month's payment on a $360k house! Probably on an upside-down loan for a place that won't appraise over $200k right now.

The Federal government has become the Big Rock Candy Mountain... and we're all going to be burly bums before long.
Robb

On a summers day in the month of May a burly bum come hiking
Down a shady lane through the sugar cane, he was looking for his liking
As he strolled along he sang a song of a land of milk and honey
Where a bum can stay for many a day, and he won't need any money

Ohhhh.... the buzzin' of the bees and the cigarette trees
the soda water fountain,
where the lemonade springs and the bluebird sings
in that Big Rock Candy Mountain

In the Big Rock Candy Mountain, the cops have wooden legs
the bulldogs all have rubber teeth, and the hens lay soft-boiled eggs
The farmer's trees are full of fruit, the barns are full of hay
I want to go where there ain't no snow
Where the sleet don't fall, and the wind don't blow
In that Big Rock Candy Mountain...

Ohhhh.... the buzzin' of the bees and the cigarette trees
the soda water fountain,
where the lemonade springs and the bluebird sings
in that Big Rock Candy Mountain

There's a lake of gin we can both jump in, and the handouts grow on bushes
In the new-mown hay we can sleep all day, and the bars all have free lunches
Where the mail train stops and there ain't no cops, and the folks are tender-hearted
Where you never change your socks and you throw no rocks,
And your hair is never parted...

Ohhhh.... the buzzin' of the bees and the cigarette trees
the soda water fountain,
where the lemonade springs and the bluebird sings
in that Big Rock Candy Mountain


In the Big Rock Candy Mountains, there's a land that's fair and bright,
The handouts grow on bushes and you sleep out every night
Where the boxcars all are empty and the sun shines every day
The birds and bees and the cigarette trees,
The lemonade springs where the bluebird sings
On the Big Rock Candy Mountain...

Steel industry hopes for big stimulus shot

The steel industry, having entered the recession in the best of health, is emerging as a leading indicator of what lies ahead. As steel production goes, and it is now in collapse, so will go the national economy.

The New York Times

The steel industry, having entered the recession in the best of health, is emerging as a leading indicator of what lies ahead. As steel production goes, and it is now in collapse, so will go the national economy.

That maxim once applied to the Big Three car companies. Now they are losing ground in good times and bad, and steel has replaced autos as the industry to watch for an early sign that a severe recession is beginning to lift.

The industry itself is turning to government for orders that, until the collapse, came from manufacturers and builders.

Its executives are waiting anxiously for details of President-elect Obama's stimulus plan and adding their voices to pleas for a huge public investment program — up to $1 trillion over two years — that will lift demand for steel to build highways, bridges, power grids, schools, hospitals, water-treatment plants and rapid transit.

"What we are asking," said Daniel R. DiMicco, chairman and CEO of Nucor, a giant steelmaker with a Seattle plant, "is that our government deal with the worst economic slowdown in our lifetime through a recovery program that has in every provision a 'buy America' clause."

Economists in the Obama camp said the proposals to Congress will include significant infrastructure spending that draws on heavy industry.

New spending should provide an immediate jolt to the steel business, which has already gone through the painful makeover now demanded of the Big Three.

Mills were closed, companies were consolidated, hundreds of thousands lost their jobs and the survivors agreed to concessions. As a result, productivity shot up and so did profits, to record levels in the first nine months of this year.

But then the recession hit in force.

Steel goes into nearly everything made in America, and as construction and manufacturing wound down, so did steel output, plunging 50 percent since September.

The steel industry's collapse closely tracks the alarming late-autumn swoon in the national economy, as the housing bust and the credit crisis converted a mild downturn into "a severe one that has much further to run," says Nigel Gault, chief domestic economist at IHS Global Insight.

Through August, steel production was actually up slightly for the year. The decline came slowly at first, then with a rush in November and December.

By late December, output was down to 1.02 million tons a week from 2.1 million tons Aug. 30, the American Iron and Steel Institute reported. The price of a ton of steel is also down by half since summer.

"We are making our steel at four mills instead of six," said John Armstrong, a spokesman for U.S. Steel, explaining that two mills were recently idled and the four still operating are at less than full capacity.

"The third quarter was one of the best in U.S. Steel's history," Armstrong added. "And it has been a very precipitous drop from there."

The cutback has been particularly hard on workers at the big integrated mills like those at U.S. Steel and Arcelor Mittal USA, with their blast furnaces and coke ovens converting coal and iron ore into steel.

Nucor "minimills"

Operated at less than full capacity, these mills are less efficient than the equally large "minimills," like Nucor, whose electric arc furnaces can be operated efficiently at lower speeds.

So the plant closings have been mostly at the integrated mills, whose 50,000 workers — roughly 40 percent of the nation's steelworkers — are represented by the United Steelworkers of America. The union says that by early this year it expects 20,000 workers to be laid off.

Ten thousand already are. Kathleen Loepker, a millwright and mechanic, is among the most recent to join their ranks. She was laid off Dec. 19 from the U.S. Steel plant in Granite City, Ill., which shut down, putting more than 2,000 people out of work.

With nearly 30 years seniority, Loepker, 48, has worked through bankruptcies, union concessions and consolidations that saw her mill acquired by U.S. Steel in 2003.

Her income is tied more to incentive bonuses than in the past. On layoff, she is collecting $20 an hour, which is 80 percent of her base pay of $25.12 an hour.

That base pay, rather than rising significantly, is fattened by incentive bonuses tied to amounts of steel produced and to profits. It had been averaging an additional $7 an hour — money now gone until the mill reopens.

"No one knows when that will happen," said Loepker. "The company tells us the end of March, but they don't know either. The uncertainty has everyone fearful."

Not since the 1980s has American steel production been as low as it is today. Those were the Rust Belt years when many steel companies were failing and imports of better-quality, lower-cost steel were rising.

Foreign producers no longer have an advantage over the refurbished American companies. Indeed, imports, which represent about 30 percent of all steel sales in the United States, also are hurting as customers disappear.

Lobbying Obama

The industry, in response, is lobbying the Obama transition team for infrastructure projects that would require big amounts of steel. Mass-transit systems are high on the list and so is bridge repair.

"We are sharing with the president-elect's transition team our thoughts in terms of the industry's policy priorities," said Nancy Gravatt, a spokeswoman for the American Iron and Steel Institute.

The Obama team has not revealed details of the president-elect's soon-to-be-announced recovery plan other than to indicate most of the package will probably go into infrastructure spending rather than tax breaks.

"If the president-elect really follows through, he'll fund a lot of mass-transit projects," said Wilbur L. Ross Jr., the Wall Street deal maker who put together the steel conglomerate known today as Arcelor Mittal USA.

"All the big cities have these projects ready to go."

Finance meets Flashdance

In the story below, some bankers are starting to use the Left side of their brain. Or is it the Right side? You know. The Creative side.
They are putting down their Wall Street Journals and picking up Variety as they try their hands at comedy, filmmaking and writing.
I'm just an engineer, but I'm finishing my latest screenplay.... does that count?
Harry B. Weiner, a partner at On-Ramps, a recruiting and consulting firm that works with financial professionals, says the economic downturn is creating a new psychology of career transition. “People feel there’s nothing to lose in terms of taking a risk and pursuing a new direction, especially when you have a résumé that says ‘banking’ and no banks are hiring,” Mr. Weiner said.

Certainly true that a lot of bankers didn't feel there was anything to lose before things went to hell in a money basket. Why should they be risk-averse now? And my new script is about risk-takers and high-tech flim-flam artists trying to bilk people. Perfect.

Richard Florida, author of “Who’s Your City?” and director of the Martin Prosperity Institute at the University of Toronto, sees the gravitational pull away from Wall Street and toward more creative industries as part of a necessary economic recalibration.

“The economy couldn’t survive on speculation and what really amounted to advanced financial alchemy,” he said. “We are now realizing it is our human creativity that is our real capital.

I dunno. Some of them were pretty creative before the good times went south.

WHILE most bankers and lawyers who pursue careers in comedy, writing and filmmaking say they are somewhat anomalous, the situation could change quickly.

“Things look so bad in finance that if you think the difference in salary multiple isn’t as big as it used to be between doing what you are viscerally interested in versus a job that’s just about money, it puts a whole different spin on it,” Mr. Terry said.

“Everyone seems to have something else they would rather be doing than their 9-to-5,” he said. “I think that people who are losing their jobs are being forced to pursue their dreams and, in a way, are being liberated from the golden handcuffs of Wall Street and venturing into something that might fulfill them.”

Remember the movie "Flashdance"? Beautiful young girl working as welder in a steel mill and a sleezy club dancer at night fulfills her life's ambition to audition for the ballet. Let's send them all the DVD. My feet are already tapping out the theme song.

http://www.nytimes.com/2008/12/28/jobs/28bankers.html?_r=1&8dpc

Former Bankers Turn to a Creative Plan B

Katie Orlinsky for The New York Times

Michael Terry, left, a former banker, and Patrick Dall’Occhio performing with Party Central USA at the Peoples Improv Theater in Manhattan.

Published: December 26, 2008

MICHAEL TERRY led a double life for many years.

“During the day I worked at Morgan Stanley as an executive director, overseeing a group that raised money for hedge funds,” he said, “and at night I performed in comedy shows.”

Then, last February, his company announced a round of layoffs. Mr. Terry, motivated to pursue his goal of becoming a “Daily Show” correspondent, raised his hand.

“At the time, I figured the severance package would give me a couple of years to try comedy, something that was getting increasingly hard to balance with my day job.”

Since leaving Morgan Stanley, Mr. Terry, 37, has shot two pieces as an on-the-scene reporter for the Onion News Network, and his sketch comedy group, Party Central USA, has been given a prime spot at the coming Chicago Sketch Comedy Festival.

With Wall Street hemorrhaging jobs, bonuses disappearing and the financial sector going through a seismic shift, some bankers and lawyers are switching lanes to more creative career paths. They are putting down their Wall Street Journals and picking up Variety as they try their hands at comedy, filmmaking and writing.

Harry B. Weiner, a partner at On-Ramps, a recruiting and consulting firm that works with financial professionals, says the economic downturn is creating a new psychology of career transition.

“People feel there’s nothing to lose in terms of taking a risk and pursuing a new direction, especially when you have a résumé that says ‘banking’ and no banks are hiring,” Mr. Weiner said.

That was certainly the calculus for Benjamin Cox, 33. After leaving his job as a vice president at Goldman Sachs in August, he immediately began incubating his plans to work on his screenplay — he calls it a cross between “Swingers” and “Annie Hall” — and start a production company.

Mr. Cox said that with the upheaval on Wall Street, he feels relieved to have a backup plan. “I’m seeing a lot of people who never thought of an alternative to banking.”

Shaun Gatter, 38, left his position as a vice president and counsel at a large investment bank last year to work on his novel about a Jewish South African family, a story set against the backdrop of apartheid.

Mr. Gatter says that the decision has meant a huge financial adjustment, but that the payback — having more mental energy for his book — has been worth it.

“It’s been euphoric to be able to think mainly about the book and less about equity derivatives and client risk.”

Greg Collett, 37, left his job as a director in the commodity exchange-traded fund business at Deutsche Bank in June to explore a career in stand-up comedy.

“I had this gnawing feeling that things were only going to get worse and that Wall Street was not the place to be,” Mr. Collett said, adding that it was easier to leave knowing that compensation packages were going to be a fraction of what they were a few years ago.

Richard Florida, author of “Who’s Your City?” and director of the Martin Prosperity Institute at the University of Toronto, sees the gravitational pull away from Wall Street and toward more creative industries as part of a necessary economic recalibration.

“The economy couldn’t survive on speculation and what really amounted to advanced financial alchemy,” he said. “We are now realizing it is our human creativity that is our real capital.

“The economic downturn is going to free up top talent to do other things that are going to change the metabolism of cities like New York in a very good way.”

According to a 2005 report by the Center for an Urban Future, the creative work force of New York City comprised 8.1 percent of all those employed in the five boroughs, and has been on one of the strongest areas of economic growth for the city. Between 1998 and 2002, employment in New York’s creative core grew by 13.1 percent, adding 32,000 jobs, while the city’s overall job totals increased by 6.5 percent.

Carmen Scheidel, director of education, events and multimedia at MediaBistro.com, a Web site for artists and media professionals, says that while most industries are contracting, MediaBistro added 93 online courses in the last year to meet the demands of people who want to take courses in writing, multimedia and design.

Still, Jonathan Bowles, director of the Center for an Urban Future, says that while there is no question that creative fields are not faring as badly as Wall Street right now, they are hardly immune to the economic downturn. The advertising, publishing and newspaper industries are all cutting jobs, he noted.

The bright spot that Mr. Bowles sees is for the free agent. “There’s a good chance,” he said, “that there will be more work for independent contractors and freelancers.”

WHILE most bankers and lawyers who pursue careers in comedy, writing and filmmaking say they are somewhat anomalous, the situation could change quickly.

“Things look so bad in finance that if you think the difference in salary multiple isn’t as big as it used to be between doing what you are viscerally interested in versus a job that’s just about money, it puts a whole different spin on it,” Mr. Terry said.

Mr. Gatter said that many of his colleagues at the bank commended his choice to leave, telling him that they also nursed ambitions to be chefs, photographers, writers and artists.

“Everyone seems to have something else they would rather be doing than their 9-to-5,” he said. “I think that people who are losing their jobs are being forced to pursue their dreams and, in a way, are being liberated from the golden handcuffs of Wall Street and venturing into something that might fulfill them.”

Thursday, January 1, 2009

The Miracle of Cuba, Part 3

Copied below, two more sympathetic articles on Cuba in AP and NYTimes over the last three weeks. (A third is "Viva La Revolution!", a post further down from December 7.) The second includes a letter sent to the Denver Post a few days ago (as well as various other venues), to point out that *someone* is noticing what they are doing.

You'll note this most recent article ("Cuba celebrates Revolution's 50th Anniversary"), which just appeared tonight, is the most positive of the three towards Cuba:
Over a half-century, the rebels erased illiteracy and crafted a universal health care system. ...The Havana-based non-governmental Cuban Commission for Human Rights and Reconciliation last counted 219 political prisoners on the island, down from as many as 15,000 in 1964.
"Crafted". Ah, yes. The old-world skill that went into it. Wait till the few days before Obama takes the oath -- I bet the papers are fairly swooning with the wonder that is Kooba.
...''I hope he gets rid of the blockade,'' 42-year-old Ana Luisa Mas ''...We are very hopeful that with Obama our relatives will be able to visit us more, and send us more money.''
Proving my point raised previously, though I wasn't so explicit before that a P.R. campaign has been orchestrated for normalizing relations with Cuba after Obama is sworn in. As this last story shows, the band is still playing some kind of Soviet Polka.

It's remarkable how well organized they are. The Communists, I mean. It gets you amused scorn from almost anyone to refer to the threat of them in Cold War terms these days, but they really are out there, they really are quite well infiltrated into positions of influence and power, they really are quite commited to their agenda, and they really are quite effective at what they do. One has to admire effectiveness, if nothing else.
Robb

Cuba Celebrates Revolution's 50th Anniversary

Published: January 1, 2009

Filed at 10:23 p.m. ET

SANTIAGO, Cuba (AP) -- Fifty years after triumphant armed rebels descended from the mountains, communist Cuba celebrated the revolution's anniversary Thursday with toned-down festivities following a trio of devastating hurricanes and under the enduring public absence of Fidel Castro.

Although the ailing Castro continued convalescing in private, the festivities were filled with praise of the bearded rebel known as the ''Leader of the Revolution.''

''We know that a man alone doesn't make history. But some men are indispensable, as they can have a decisive influence in the course of events. Fidel is one,'' President Raul Castro said of his older brother in a speech given beneath the balcony where Fidel declared victory over dictator Fulgencio Batista's government on Jan. 1, 1959.

The austere celebrations, including concerts across the island, belied the start of a year infused with possibilities for reforms that might ease Cubans' daily hardships. Many here hope for improved relations with the United States when President-elect Barack Obama takes office Jan. 20 following declarations he would talk directly with Raul Castro and lift severe restrictions on family travel and remittances to the island.

''I hope he gets rid of the blockade,'' 42-year-old Ana Luisa Mas said earlier at a Havana farmers market as she bought a pork leg for her family's New Year's celebration, referring to decades-old U.S. trade sanctions. ''We are very hopeful that with Obama our relatives will be able to visit us more, and send us more money.''

Raul Castro, who succeeded his older brother in February, quoted extensively from Fidel as he spoke for less than 40 minutes on a small, leafy plaza to 3,000 Communist Party faithful.

He cited from his brother's 2005 speech at Havana University, warning ''this revolution can destroy itself'' and that if it occurred, ''it would only be our own fault.''

The rebels' victory a half-century ago was doubly important ''for it has been attained despite the unhealthy and vindictive hatred of the powerful neighbor,'' Castro said, referring to the United States.

He cited the Bay of Pigs invasion by U.S.-trained exiles, the U.S. embargo, the Cuban missile crisis and assassination attempts against his brother.

''One way or another, with more or less aggressiveness, every U.S. administration has tried to impose a regime change in Cuba,'' he said.

No foreign leaders attended. Bolivian President Evo Morales, who originally was to attend, saluted the Cuban revolution and the older Castro from La Paz, declaring ''my respect, my admiration for Fidel.''

Venezuelan President Hugo Chavez announced in Caracas that in honor of the 50th anniversary, the Cuban flag would fly permanently outside the Venezuelan tomb of South American independence leader Simon Bolivar.

For Raul Castro's speech, a huge red banner was hung from a colonial hotel on the plaza featuring a photograph of a 32-year-old Fidel Castro in guerrilla uniform and backpack. The celebration began with a short documentary featuring historic and more recent video clips of the revolutionary leader.

Fidel Castro's health is a state secret, and he remains out of sight after major intestinal surgery almost 2 1/2 years ago. But the 82-year-old still writes essays suggesting he maintains some say in government affairs.

On the anniversary's eve, he released a brief statement congratulating ''our heroic people.''

The 77-year-old Raul Castro, meanwhile, has yet to introduce any major reforms.

Officials initially planned a bigger celebration but scaled back after three hurricanes this year caused $10 billion in damages.

Over a half-century, the rebels erased illiteracy and crafted a universal health care system. But after Fidel Castro embraced communism in 1961, opponents were jailed.

The Havana-based non-governmental Cuban Commission for Human Rights and Reconciliation last counted 219 political prisoners on the island, down from as many as 15,000 in 1964.

Cuba's revolution was nevertheless admired by many in the developing world as Castro stood up to the ''Yankee imperialists.'' And the communist system persevered after the Iron Curtain collapsed, and communist China and Vietnam embraced free markets while still maintaining their political systems.

When President George W. Bush leaves office, the revolution will have outlasted 10 American presidents who maintained strict U.S. sanctions aimed at overthrowing the Cuban leadership.

While Castro's foes argue to maintain sanctions, others think rapprochement would be better.

''Engagement may show how weak (Cuba's) hand really is,'' Marifeli Perez-Stable of the Inter-American Dialogue think tank in Washington wrote in December. ''Which one is the real hard line?''

--------------------

From: Robb
Sent: Wednesday, December 31, 2008 2:49 PM
To: 'openforum@denverpost.com'
Subject: Cuba No Big Rock Candy Mountain

It's rather odd that I'm seeing articles in the last few weeks pumping up the warm, friendly vacation spot of Cuba. I'm guessing this is a trial balloon for all those who want normalized relations as soon as Obama takes over. But even in this story from AP, some reality seeps through:

Juan Gonzalez loves Fidel Castro. But he is also a realist. ''The people do what they can. They don't just sit around and wait for the government to give them everything,'' the 59-year-old said, standing on his dusty front porch. ''If they waited for the government to keep all its promises, they would have to wait a long time. Fifty more years, maybe.'' ...as the revolution turns 50... electricity, running water and phone service are relatively new here.

There's a glimpse of our own future if we finish socializing medicine and banking and automobile manufacturing and insurance and... well, you get the idea. But people can read in this tropical paradise,

...said the 73-year-old, who fought in Castro's rebel army, ''Education is a gigantic weapon. Most people don't understand that, but Fidel does.''

Me, too. And the teacher's unions and politicians and lobbyists and activists and anyone who wants government control of education and everything else on which my life depends.

Shades of Atlas Shrugged.

Robb

In Communist Cuba, a Whiff of Rugged Individualism

Published: December 31, 2008

Filed at 12:11 p.m. ET

SIERRA MAESTRA, Cuba (AP) -- Juan Gonzalez loves Fidel Castro. But he is also a realist.

''The people do what they can. They don't just sit around and wait for the government to give them everything,'' the 59-year-old said, standing on his dusty front porch. ''If they waited for the government to keep all its promises, they would have to wait a long time. Fifty more years, maybe.''

It sounds like the kind of rugged individualism that would resonate with Americans, but this is the mountainous Sierra Maestra of eastern Cuba, the cradle of the revolution that brought Castro to power 50 years ago New Year's Day, ushering in a communist era of promised egalitarianism under big, all-controlling government.

Here, more than 500 miles from Havana, people tend to speak their minds more freely, even grumble openly about their privations.

They also see a growing generation gap -- between elder Cubans who wholeheartedly support the communist system, and youngsters yearning for change, at a time when the ailing, 82-year-old Castro has been replaced by his younger brother, Raul, and Barack Obama is about to move into the White House.

The Sierra Maestra is where Castro and his guerrillas prevailed over 10,000 soldiers sent in by dictator Fulgencio Batista in May 1958 and eventually forced Batista to flee Cuba on Jan. 1 of the following year.

Gonzalez, from the village of Santo Domingo, was 9 when the rebellion Cubans universally call ''la revolucion'' triumphed.

Now, as the revolution turns 50, how does he feel about it? ''The people here feel good, but not everyone has the same amount of pride,'' he said.

That's because the promises of a shining future have not come as fast as they may have hoped. Electricity, running water and phone service are relatively new here. Some families still live in dirt-floored shacks and wash their clothes in rivers. Carts pulled by oxen, donkeys or horses outnumber cars and trucks.

Gonzalez is charged with the upkeep of his grandfather's homestead, now a historical site. The biggest problem, he says, is a lack of public transport. The area had a single ambulance but a few years ago ''it broke and some people died because of that.''

Soviet engineers only brought electricity to the area in 1986.

South of Santo Domingo lies Comandancia de la Plata, the hideout where Fidel Castro directed the final rebel push. He lived in a wooden hut with a roof of palm leaves. Outside, still encrusted with bullet fragments, is the tree on which he practiced his marksmanship.

Luis Angel Segura, 55, is a guide who leads tourists up a muddy mule trail to the hut. Spend a few hours with him, and long-held complaints begin to bubble to the surface. What makes him angry is not too little government but too much -- farmers can only grow what the state tells them to, and only sell their produce back to the government.

''There should be more autonomy,'' he said. ''But, as they tell us, 'we're all Cuba.'''

Still, no one here misses Batista. Like many Cubans in these parts, Segura calls the pre-Castro era ''the tyranny.''

About 600 people live in the isolated mountains around Comandancia de la Plata. Solar panels power tiny schoolhouses and health clinics. In the farthest regions, teachers live with pupils' families and doctors make house calls. Like nearly all Cubans, people here live rent-free and get monthly rations of basic food.

The government expanded a two-lane mountain highway through the area, but there's so little traffic that farmers dry their coffee beans on the asphalt. Goats, pigs, donkeys and dogs sleep on it undisturbed.

Many families have TVs bought with government credit, but few channels reach deep into the mountains. To fill the void there are ''video clubs,'' shacks that show pirated movies. Internet access is tightly controlled.

As in the cities, rural areas have ''Committees for the Defense of the Revolution'' which meet to discuss community problems. Public attendance is mandatory.

''Everything here is well organized,'' said Julia Castillo, a housewife in the Sierra Cristal, another eastern mountain range that was a rebel stronghold. ''But people complain and nothing happens.''

Ask Cubans to rate their education and medical care systems, and many will talk instead about Batista's day -- though few are old enough to have experienced it. An exception is Ruben La O.

''Before the revolution, I couldn't read,'' said the 73-year-old, who fought in Castro's rebel army. ''Education is a gigantic weapon. Most people don't understand that, but Fidel does.''

La O was 23 and from a reasonably well-to-do family of coffee farmers when the rebels recruited him as lead singer for a quintet that performed on Radio Rebelde, a propaganda station that Ernesto ''Che'' Guevara founded in the Sierra Maestra in 1958.

The musicians still don olive-green rebel uniforms and play songs denouncing Batista for tourists. They live in a row of concrete houses Castro ordered built for them in 1981, and, to honor the 50th anniversary of the revolution, each has been given a new mo-ped.

''In capitalism there are no schools. Socialism has solidarity, education, health and societal development that capitalism can't fathom,'' said Alejandro Molina, the quintet's 69-year-old founder and guitarist.

But La O's brother Alcides, a fellow quintet member, said the lesson is lost on many younger Cubans.

''There are lots of schools and lots of people who don't want to study,'' he said. ''They don't take advantage of all they have.''

Alejandro, a farm worker who lives nearby, says the problem is not apathy but a lack of freedom.

''Solidarity? Fine. But it is no substitute for political change,'' said the 26-year-old, who lives with his parents and didn't want to cause them problems by giving his surname. ''People are ready for new things. There's a lot of frustration.''