Friday, February 27, 2009

• America’s Overnight Transformation

The centerpiece of the Administration’s rushed, colossal bailout and stimulus program is the taxpayer support of the nation’s 20 largest banks. Treasury Secretary Geithner, former Federal Reserve Bank of New York President, is Obama’s point man on the aggressive plan to bolster the financial system. As he leads the charge to inject hundreds of billions into banks, he cringes from applying the term, “nationalization,” to his strategy.

In the American lexicon and consciousness, nationalization of corporations steps across the threshold of socialism. Obama and his team are being careful not to overtly to be taking that gambit so early in the game.

By allowing this strategy to move forward, taxpayers are betting their futures that the collective mediocrity which mismanaged the financial institutions into an incomprehensible mess, will suddenly become masters of rational thought, and will transform into diligent financial management. Are there any taxpayers in America who would independently place their hard earned cash with any of these failed speculators? Not likely, so why is the greater collective mindset rushing into the abyss?

While he is not an economist, Geithner is supposedly an expert in monetary policy, yet he has no idea of the depth of the banking problem and cannot evaluate the viability of the financial institutions. He is also unable to establish their near term or long term solvency. Unfortunately, neither can anyone else, it seems. America is looking for guidance from a man who was one of those who not so long ago believed the banks were strong and their risks were distributed broadly enough to satisfy expectations for long term stability.

Bottom line, the government’s approach for instilling a return to “confidence in America,” means taking mountains of debt raised dollars, and placing them into giant unfathomable baskets of risk. Countries around the world are looking to America for a return to stability, but do they really care if the U.S. taxpayers drown in debt as the U.S. government rushes into territory it knows nothing about?

We are subjected to emphatic statements that the government must take these drastic measures of a scale never experienced, because the alternative will hold consequences of a far worse crisis. How can the Administration make such absolute and foreboding claims, when the government doesn’t fully comprehend the problem. It has also been unable to satisfactorily explain the specifics of its plan, or the expected outcome. Is the problem really insurmountable, or is this a massive cash grab and a government bloating exercise being quickly actualized while the historically unique opportunity presents itself?

It appears everyone in the MSM supporting the current plan uses Lehman Brothers in the argument, suggesting that its collapse almost destroyed the global financial system. That is a fabrication based on vacant assumptions, fuelled with panic. Are we expected to accept that the calamitous repercussions awaiting us are so overwhelming, they must be true? Surely Obama, Geithner and a list of well-educated experts along with NYT can’t be wrong, nor would they lie. When they tell Americans that Citigroup, Bank of America and Morgan Stanley hold the future of the world in their hands, surely they must know what they’re talking about.

On the surface, adding capital to an undercapitalized bank might seem to make sense. Unfortunately, the capital is coming from the taxpayer, and however the Administration camouflages it, this will be a nationalization of banks because the capital injections will exceed current market values of these financial institutions. In any case, this nationalization has already begun under the FDIC, and will accelerate as the largest banks get bailed. Equally disturbing is that the degree of undercapitalization enjoyed by all these banks is unknown. The taxpayer is being forced into guaranteeing the credit and balance sheets of these banks without any measure of as to the size of liabilities awaiting them. Such guarantee of unknown obligations isn’t even “throwing good money after bad,” it’s worse. And don’t believe them when they tell you taxpayers will get money back when the distressed assets are sold.

This panic driven overreaction will siphon an anticipated $3 trillion or $4 trillion from taxpayers over the coming three or four years. The strategy, being energized by Wall Street and its stockowners, reminds us of placer gold miners using overpowered firehoses that completely destroyed the landscape in the hope that it would render an occasional nugget and some gold dust. Somewhere on the side of that mountain, might be some gold. Somewhere out there, if trillions are immediately thrown at financial and other institutions, some jobs will be generated. The parallel isn’t quite appropriate of course, because miners of nineteenth century Northern California actually knew which hillsides sheltered the wellhead to their fortunes.

The administration suggests that once the economy recovers and these banks become viable once again, they will be returned to private status once again. Given the degree to which these banks are undercapitalized, such anticipation would appear to be an impossibility, and is therefore either disingenuous or lacks basic knowledge.

It would be more prudent for the Administration and Congress to reign in the panic, take control of The Fed and regain control of the U.S. dollar. The Fed did not do its job, and did not step in to restrain the out-of-control leveraging that allowed the crisis to bubble. Showing the world that the U.S. is changing the ways of its wayward financial community with specific plans, would bring back some confidence. It would also be more responsible to apply measured responses to specific pressure points in the financial industry, as the extreme demands surface, that are not efficiently answerable with bankruptcy protection. Taking the term “bankruptcy” out of the financial lexicon is a mistake regardless the size of the institution. Such attitude will only lead to further inappropriate consolidations such as the many we have already witnessed. There are many viable and well-capitalized banks remaining that will gladly lend, with minor inducement to take on risk from The Fed and the FDIC, but without bailout capital.

In its rush, the new administration does not appear to have come up with any creative or novel programs to address the financial industry’s decay. We appear to be coaxed into a dark alley, still drunk from two decades of profligate spending, and expecting magical overnight answers hoping the walls will keep us upright. Much more had been anticipated from this Presidency, or at least much more had been hoped for from a majority of the voting public. Much more, and certainly not the short-term uncreative thinking Taxpayers are being presented with. We are, however, witnessing a rapid transformation of America.

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Monday, February 23, 2009

• A Positive Trend Rising Out Of The Fear

A positive trend is imposing itself on the American landscape. The average savings rate, which had been 7.7% in 1992 and even reached lofty levels of around 12% in the ‘70s, dropped to almost zero four years ago and stayed there. In the last quarter of 2008 that trend made a dramatic turn.

The fourth quarter of 2008 found a 2.9% personal savings rate with 3.6% reached in December. The consumer has made a decision, forced though it may have been, that having some cash reserves for a rainy day is a prudent life style change. The other good news is that the consumer is ignoring those absurd pleadings sprinkled across the MSM attempting to instill more fear, that if you don’t spend and consume with abandon, the recession will get worse. Even the NYT laments that saved dollars don’t circulate through the economy.

The argument, obviously, runs that consumption now forms such a major portion (71%) of U.S. GDP, that only the consumer’s spending can bring this recession out of its tailspin. Ignore those experts and pundits, and disregard their threats and idiotic short-term thinking. While Obama helps failing companies and bails mortgage foreclosures, consumers should disregard the noise and remain on track. The economy is a long-term game with long-term effects in which patience should prevail as the governing strategy.

With this perspective, consumers armed with their increased savings will gain confidence as they live within reasonable and manageable levels of consumption. Wherever they choose to preserve their capital in a pillow, in gold, silver or any other medium, the state of mind will be positively impacted over a 3 or 4 year period. Such assurance in time will translate into long term, sustainable support of the economy.

It is hoped that consumers will ignore government and expert pleadings, and that current trends will prevail pushing savings rates to levels achieved 30 and 40 years ago. Perhaps we can say, "good riddance" to profligate spending for a generation or two into the future. It would, however, be too much to expect that such attitude could infect government through osmosis. With the return of consumer confidence there will also be an increase in the powerful sense of freedom, and a recession of the fear that government is trying so hard to instill in the American taxpayer.

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Tuesday, February 17, 2009

• Obama Mitigating Mortgage Foreclosures?

Obama announced that between $50 billion and $100 billion will be spent on making mortgage payments affordable, as part of the giant gamble he and Congress are making, under the title of “stimulus.” No help will be provided for those who made rational decisions on purchases, but ample support will be provided to those who couldn’t afford the homes they signed up for. Rationalizations for such a move are being promoted by the administration, Congress and the MSM. They are easy to dispense, but is such policy right?

Banks are temporarily suspending foreclosings on some home loans until they have had time to understand what the government really intends, and they’ve had a chance to negotiate their way into the handouts. Financial corporations such as Citigroup, Chase & Co., and Morgan Stanley will set a moratorium in place until early March, by which time it is expected that the mortgage modification details will be finalized.

The hard sell for this program uses supposedly sincere reasoning such as, “If the house next to yours is in foreclosure, your home drops in value as well.” That is the big one since instilled fear is an instrumental motivator. At first blush, it sure sounds convincing, but then it settles into your consciousness, and a discomfort begins to shade it’s seemingly benevolent intent. You begin to dissect the soundness of the argument and stand back to look objectively at the whole picture. Where is the common sense?

Who else is thrilled with the Obama and Congress decision to rush into a cash dispensation of such magnitude? Everyone in the bad mortgage food chain is in support of stemming the foreclosure rate. Banks, large and small, are clamoring for more bailout money to cover bad loans they were responsible for providing, and their executives don’t really want to give up the summer home in the Hampton’s. Mortgage brokers, real estate brokers, and homebuyers who are underwater on their house purchase decisions are cheering Obama and Congress. The only ones not in favor are those who made financial decisions diligently, having saved their money and minimized the outlay for shelter as much as they could. We don't need to explore how millions who are renting while saving and waiting for prices to become affordable for their first home, feel about taxpayer money being used to attenuate the drop in real estate values.

Aside from unknown hundreds of billions that will be required to implement such shocking endeavor, Rep. Barney Frank intends to introduce legislation to change bankruptcy law that will enable judges to adjust the principal on mortgages held by homeowners who cannot afford the payments. He plans to provide protection to lenders who reduce already set and contracted interest rates, or change the terms on troubled loans. This movement has enormous ramifications for the long-term viability of the financial services industry. It will certainly impact investors who invest in mortgages with set interest rates and steady returns on investments.

The plan is to reduce potential delinquent borrowers’ payments to as low as 31% or their pre-tax incomes. Evidently those facing foreclosure will get preference on the priority list. It is doubtful that anyone in government will be capable of differentiating fraudsters from intentionally bad decision makers. Who is not on the list? Those who purchased homes well within their financial means. These are also the people who will be paying for their wayward neighbors’ well being. Should renters be given a financial break for having made good decisions, NOT having been seduced by the “no money down” siren’s song, and NOT having lept into the froth of the real estate pool?

We are witnessing the government sliding the country into forced rewarding of bad behavior. This was bad behavior by borrowers, by lenders and by all the middlemen eating off the mortgage loan buffet. In such a program the opportunity for abuse will be significant, and probably uncontrollable. Why would people who purchased automobiles they couldn’t afford not also get bailed out? Didn’t many of these mortgages finance giant TVs and second cars?

The argument for “help” will originate from all corners of the economy. Across the U.S., businesses are preparing their theatrical presentations for requests of a piece of the bailout pie. With the trillions of dollars being loosened from the grasp of future generations by the government, it is understandable that the line-up extends invisibly over the horizon. There is no indication from any source, and certainly not from Obama, Congress or their economists friends, as to how any of these trillions will be repaid. They are probably afraid to face the real answer. Public reaction would be immediate.

Some of the answer for return to a healthy economy rests in individual responsibility for reasonable behavior, enhanced with large doses of education. The government should consider spending money on educating the whole population on the management of money, and on making sound financial decisions, particularly those pertaining to housing. The result would be much less self-destructive behavior. It wasn’t the fine print that burned borrowers, it was the big, bold print. This is one of those areas where even a little knowledge would go a long way.

This dramatic shift of government intervention into the economy from the backs of future generations with no plan or concept for recovery is a realm never before experienced, not even in the 1930s. The added measure of placing additional burden, even punishment, on those who have made the right financial decisions in their lives, is also beyond the pale of reason. The only ones in support of these measures are those with a stake in the game, or those panicked into thinking it is necessary, or possibly those who don’t pay taxes. It would be more reasonable to offer strong incentive such as long term zero interest loans to new home buyers who can come up with large down payments. There is also ample room for the government to positively influence the "renegotiation" of underwater mortgages, however, the government’s unreasonable and unbalanced current plans with this program are extremely difficult to comprehend.

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Thursday, February 12, 2009

• FBI’ Shifts – Counter-terrorism To Anti-Fraud

As the economy’s meltdown confuses politicians and economists, and stresses businesses and wage earners, the FBI has suddenly discovered a new path to career advancement. It has announced open season on the financial community with 530 corporate fraud investigations.

The FBI also claimed that 38 of these new investigations involve some of the biggest names on Wall Street, and that it has a record 1,800 investigations digging into mortgage fraud. Mortgage industry professionals, including the CEOs of companies, brokers, and lawyers are apparently being scrutinized for their roles in the evaporation of hundred of millions of dollars.

Some of the disappearance is related to the $700 billion Troubled Asset Relief Program’s cash distribution already dispensed. No-one was watching. What can really be expected for the stimulus money Obama and Congress will shortly be disposing of? Neil Barofsky, the special inspector general of the TARP program put it rather aptly, “History teaches us that an outlay of such money in such a short period of time will inevitably draw those seeking to profit criminally.” This is evidently a behavior newly discovered amongst these so-called pages of history. We can assume that anyone of the millions of taxpayers who are being asked to go into massive debt, could easily have lent a more watchful eye over the apportionment of cash than the amateurish efforts which the Administration and Congress have provided.

All of this, of course, is intended to allay, even anesthetize the public fears that its precious cash is, and will be, judiciously dispensed throughout the attempt to stimulate the economy. Taxpayers must be convinced that the trillions that will be borrowed on their behalf to bailout failing or troubled businesses, are in good hands. Every tactic, including fear and panic, is being applied to convince America that this unprecedented borrowing is justified, and execution of the cash distribution will be diligently overseen by government agencies. Taxpayers must also be persuaded that government intrusion in corporate America will, in time, have positive affect. How else can the emergence of future Madoffs be prevented? Shifting public consciousness is a slow multi-level, multi-dimensional process.

We can rest assured that the FBI investigation, along with an allegedly revived SEC, will not delve too deeply into any affairs of financially healthy friends of the Administration or Congress. Future results will be consistent with past inaction on abuses perpetrated by former executives of organizations such Fannie Mae and Freddie Mac. Where was the SEC’s oversight during the past few months or the past year? Where is it now?

America can look forward to being entertained by in-depth coverage of occasional culprits assembled into the coral constructed specifically for scapegoats. Sure, they will be guilty, and mountains of evidence will be collected then disgorged on their heads with flamboyance in the public square, but they will be bit players in the game. The new FBI initiative is another tool in the arsenal prescribed for taking the taxpayer’s eye off the ball. Fraudsters should be punished. All fraudsters, including the ones at the top of any fraudulent food-chain, even those whose cosy relationships provide insulation from prosecution. Delivering otherwise is repeating tired myths, and is a prolonging of past disrespect of taxpayers.

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Wednesday, February 11, 2009

• Iran & A Solution To The Middle East

Iran presents the United States with the most potent opportunity for a comprehensive breakthrough in foreign policy affecting the whole of the Middle East. Current dissatisfaction of Iranians with their current President’s mismanagement of the country’s economy, and the upcoming summer elections, present the United States an exceptional opportunity. A relationship can be forged with Iranians, first, and their leadership, second.

There is much common ground between the two countries that gets all but ignored or lost in the noise of rhetoric by leadership, and misrepresentation in the media. The U.S. should focus some attention on the people of Iran rather than strictly addressing itself to the governing Mullahs and President. Iranians have more in common with the West than is generally accepted or admitted, and they should not be confused with the Muslim fundamentalism that permeates countries such as Saudi Arabia or Syria. Iranians are well educated, and unlike their current leadership, have a distaste for ideological governance. They are generally suspicious of most rulers in the Middle East, and it appears they now are having second thoughts about their own leaders.

Beyond the prying eyes of their leadership, Iranians dress in the latest fashions, and are as anxious to conduct business and build companies with the kind of fervor and enthusiasm that most in North America would readily recognize and applaud. One only needs to look at companies that Iranian expatriates have built in Western nations for further evidence of Iranian entrepreneurialism. They enjoy a beautiful country with sometimes subtropical climate, bordering the Caspian Sea, the Persian Gulf and the Caspian Sea, and benefit from a wealth produced by such resources as oil, gas, coal, chromium, copper, lead, manganese, zinc and sulphur.

Although it is Muslim, Iran is not an Arabic country, which is a significant differentiation evidenced in its strained relationships with neighboring countries. Analysis of Iran’s fueling of Arabic insurgents in its Middle East neighborhood suggests that its participation in unsettling the Arab world is an inexpensive method of achieving self-security. Iran is really more concerned with its immediate neighbors than it is about the United States, or even Israel, nevertheless, under the current circumstances it’s leadership is taking actions that are in the nationalistic self-interest.

Afghanistan is a neighbor providing it with little other than a mountain of trouble, including heroin (Iranians have one of the highest rates of drug addiction), and a long history of hostile governments. On its Iraqi front, the West witnessed, even participated, in Iran’s war with a wayward and ruthless dictator. While Iran presently supports insurgencies in Iraq, those strategic gambits would come to an abrupt end if the U.S. were to build a broad based relationship with its population. The same goes for its arms sales to Hamas, and its support of Palestinian insurgents. Israel would have a much less aggressive neighbor, and a weakened capacity to launch terrorist attacks.

Some self proclaimed experts on Iran suggest that any overtures made to the Iranian government should include acknowledging the legitimacy of the Islamic Republic’s government, and make representations or commitments that the U.S. would not seek to change it. This would be a mistake. The U.S. should abstain from making such overtures, and leave that to Iran’s 66 million people to decide. The Iranian population in majority has little affection for its own leadership. Approach should be very public, and any “meeting” must be held under the glare of the media’s prying eyes. Any meeting should not be restricted to the “political” sphere. This would be a mistake. Rapprochement should include representatives from both U.S. and Iranian business communities even though much of economic activity in Iran is controlled by the state. As a comprehensive relationship becomes structured for the advantage of both Americans and Iranians, each stage should be shared through effective PR with the population.

The U.S. should also side-step the European Union in such meetings. Europe has little to gain by a normalization of relations between the U.S. and Iran. Iran presents a large market for European products. Its objective should be to lift sanctions, normalize bilateral relations including the opening of trade routes, and concluding some initial deals for goods and natural resources. This effort would be a forward step in the reversal of the ravaging effects that unemployment and inflation have administered on Iran’s economy, along with the heavy hand of a rigid and backward government.

If a threshold is built on such a basis, the people of Iran will quickly step into the fray, and the architecture of mutual respect will crystallize rapidly. From there it may well be a matter of months before the people of Iran replace the conservative clerics ruling them, with a secular government which is the preference of their vast majority. Once Iranians have developed the confidence that their security concerns are shared with a resilient partner, it can be expected that Iran will open its nuclear ambitions to more scrutiny. In time, it might even agree to the dismantling of the nuclear infrastructure. The tide that has created the “brain drain” of the past twenty years would reverse, and find many expatriates who now reside in places like Canada and Great Britain, returning in droves to enjoy their unique position as Persians in the Middle East, in from the cold of isolation.

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Sunday, February 8, 2009

• Obama’s Salary Cap Red Herring

In effort to appear attentive and accommodating to the crowd’s discontent, Obama has made a big deal of announcing an executive salary cap policy targeting financial institutions that receive exceptional government assistance. Then, the cap will spread.

Obama has every right to claim, “I will not tolerate it as president,” referring to abnormally high compensation during an economic crisis. This restriction will not affect past beggar recipients of taxpayer cash, but will impact future negotiated bailouts.

Why would I dare presume to call this, “a red herring,” when on the surface it seems to be a reasonable expectation?

Obama has been provided a perfect straw-man that presents him an opportunity for demonstration of righteous indignation, effectively used to inject government tentacles into corporate America, and to leverage the passing of an enormous and costly stimulus-bailout package. The stupidity of a few executives running failing companies has put executive pay into play. It has provided the fuel needed for a power-play by the White House and Congress to insinuate government into the Board Rooms of America. Obama could just as easily have made a statement, and required individual contracts to govern each bailout, affecting stipulations for each company. No such agreements will exist and the government is overstepping the bounds of reasonableness. This should be of concern to all, well, … other than to those dependent on government for income.

We all know Wall Street’s compensation is out of synch with common sense, but panicked reaction is absolutely not the right path to correcting the abuse. Exploitation of executive power has been the privy of the heads of Fortune 500 companies and has been exercised for years. It did not create the meltdown we are now enduring, but some corrective measures are needed to curb the excess in certain corners of the capitalist system’s underpinnings. Geithner, the Administration's favorite economist, is considering extension of salary caps to ALL U.S. companies. This, however, will not affect or control issuance of equity to compensate for lowered salaries. Obama has played to public outrage, but has ignored the rights of shareholders whose companies he is now sending the government to infringe on. There are specific actions he should have considered, or somebody in his crowd of experts should have thought of.

A year ago this post urged that consequential changes be made in Board Rooms and in CEO offices across the country. We also addressed a return to common sense on executive compensation and the elimination of stock options, … for good reason. A restructuring of the corporate body, and some of its processes, would be more advisable than government intervention such as Obama, Geithner, Pelosi and Barney Frank are demanding. They appear to lack basic understanding of corporate governance. They should be mandating a fix in the relationship between shareholders and management. There should be reconsideration of accountability – Management to the Board, and the Board to the Shareholders. There should also be an implementation of changes to Director elections. Shareholders should have very direct impact through affirmative votes on both Director election and compensation, as well as executive compensation. The current friends of the CEO, and pay-you-pay-me, style of Board compensation should be trashed, along with any determinations of government infringement.

There is a very uncomfortable incursion materializing into the foundation and fabric of the capitalist system by the White House and Congress. That intervention is misguided, and I suspect they are reading the electorate incorrectly. Red herrings get old quickly. The trend of this new Presidency, as short as it is, appears suddenly disturbing.

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Monday, February 2, 2009

• Obama, Watch Consumers And Learn

American consumers are being accused of closing their wallets. This is evidenced in three months of contracted spending into the end of 2008. The new year has brought more of the same, and consumers are being admonished for spreading “weakness.”

Politicians, economists, and the media, have strained to peculiar characterizations in describing the source of the current protraction in economic activity. Most renderings are not flattering to consumers, and are aimed at stimulating feelings of guilt or culpability. The use of imagery such as “weakness feeding on itself,” with the weakness being the consumers’ spending, borders on ridicule of the consumer. “Consumer confidence falls,” is another great headline we are subjected to. Why is there such negative perception attaching itself to what is in fact an extremely positive reversal of past detrimental behavior by consumers?

Consumers are not panicking the way their leadership appears to be doing. Taxpayers are being conscientious with their hard earned dollars. Consumers increased their rate of savings to 3.6% of disposable income in December, representing a significant month to month increase from a 2.8% rate in November, and overall a marked improvement from the only 0.8% of last August. Consumers are prioritizing their purchases, and cutting back on credit card use. This is a positive trend that will strengthen the likelihood of a return to economic health in the mid to long term. It also suggests that consumers are discounting endless prognostications, including Obama’s, of a restoration of the economy’s wealth and health within 6 months.

Consumers should ignore the mainstream media, the pundits, the economists and most of all should ignore implorations of “spending” from politicians. The economy will not be fixed in the short term, and believing otherwise is ignoring reality. The turn around can only be realized gradually through a diligent and patient ascent along a very gradual incline. Consumers are first taking care of absolute needs such as food and shelter, and they will then endeavor to save for an uncertain tomorrow. From those savings will emerge confidence that will very gradually ensue to gradual, rational, and conscientious increases in spending levels. Current signals strongly suggest that consumers have learned a lesson, and will in future spend within reasonable means of their disposable incomes. It is safe to expect that consumers will treat their homes very differently, and will no longer perceive them as rapidly appreciating sources of cash.

Government’s artificial injections of taxpayer borrowed stimulus billions, over and above normal and required spending, are unlikely to deliver reliable foundations for establishing solid and sustainable economic pillars. Does no-one sitting at the new Presidential round-table of experts understand that a $15 trillion dollar economy is a “long build?” Short term thinking is what brought us the current mess. Why agitate taxpayers through fright and terror? Is this an attempt to justify incomprehensible spending programs to placate special interests? Will this lead consumers to remain uninquisitive as to the structures of the bailout packages, and their lack of contractual arrangements? Is this an attempt to win over the almost 60% of the population strongly against the stimulus and bailout package Obama and Congress are implementing? Rebuilding of the economy will be a lengthy process, and other than providing consumers with incentives to continue their current trends, government should get out of the way of its materializing.

The political leadership should listen to American consumers. Listen and observe. Doing so would temper the rush to explode the National debt to 70% of GDP. You can help no-one else, if your house is not in order. Consumers are not rummaging for “boom times.” They are searching for shelter in stability.

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