Uh, oh:
CNNMoney reports:
"Under these circumstances, to start off the season in this fashion is truly amazing and is a testament to the resiliency of the American consumer, and undeniably proves a willingness to spend," Martin said in a statement.
Sunday, November 30, 2008
Nouriel has a Black Friday
Wednesday, November 26, 2008
The Bears Have Come Home
"Where are we in the cycle?"
"Goldilocks has eaten and slept and the bears have just come home."
Meanwhile, real disposable income was up on this morning's dipstick, so ...
Tuesday, November 25, 2008
No Federal Money for Lender Education ...
NO SUCH THING AS A STUPID LOAN OR A SILLY LENDER
If you missed it, they are all excited over at HUD about a new form, that has no enforcement mechanism and won't be required until 2010. (It's still a big deal, maybe a break in a multi-decade log-jam, even).
Meanwhile, everyone, Left and Right, is agreed that some form of debt-counseling helps improve mortgage loan performance. We voted federal money for it, in the past year, maybe twice.
Still, no one appears to study the affect of education (or jail?) on ... those doing the lending. It's an abstract we prefer to call 'structural market failure', I guess, related to 'mis-aligned' incentives. No culpability there.
The knee-jerk free-marketeers seem to believe that the appropriate penalty for lender silliness is their own bankruptcy, not discharge of their poorly conceived loans.
Financial Statement Variety
Sampler from some of the recent financial reports for financial institutions. Sometimes, things just jump off the page at you:
(1) The Sub-Prime Group (SPG) exposures became fully integrated into VAR during the first quarter of 2008. As a result, September 30, 2008 and third quarter 2008 average VAR increased by approximately $60 million and $73 million, respectively. June 30, 2008 and second quarter 2008 VAR increased by approximately $95 million and $135 million, respectively.
(1) The FRB granted interim capital relief for the impact of adopting SFAS 158, “Employer’s Accounting for Defined Benefit Pensions and Other Postretirement Benefits” (SFAS 158), at December 31, 2006.
The claims are for breaches of the duty of care, breach of fiduciary duty, waste, insider trading, fraud, gross mismanagement, violations of the Sarbanes-Oxley Act of 2002, and unjust enrichment.
Derivative contracts with a financing element, net | YTD 2008 73 | YTD 2007 3,887 |
TALF
This new ABS lending program from the Treasury/Fed is quite a powerful construct, providing 'levered financing' to the market. Woo-hoo!
This term-financing for up to a year for a variety of initial asset types, subject to a (one-year?) price-volatility haircut. The collateral must be "AAA", highest quality. In addition to the price/market-risk haircut, the Treasury then backstops the Fed with an equity pool, for the credit risk.
Two things I don't like, based on a quick first-read.
- 'AAA' may not be the part of the market that needs the most help. I'd like to see a broader range of collateral. All qualities may need help, to the extent the market is shut down, but still.
- The Treasury ought not to be the one managing the collateral, unless it intends to immediately enter into a forward purchase agreement with someone in the marketplace (and take a residual risk to lubricate the deal, maybe).
The Fed using it's balance sheet during crisis is just fine. However, with this latest construct, the Government looks like it is too much both the supply and the demand for funds. Of course, it's just $200 billion, so no need to wring hands over it, either.
"Dual-action" may be fine to address a blip in a market or smooth things over, in a market that isn't huge. It may even be a powerful "can-do" in a near deflationary environment.
But, on face, it doesn't seem a sound recipe for the long-term or for much larger asset classes, like commercial real-estate or private-label RMBS (nor does 1-yr term financing, given the duration of the underlying collateral of those instruments)
Fannie/Freddie Bashing To Continue
...until agency spreads blow out, no doubt. Just another lame attempt by the outgoing administration to hand-tie the nation and the new administration.
There are days that I think the GOP no longer care about the finances of the Republic - even its homeowners - and would just assume see it go through "bankruptcy", just like they want for GM and every other homeowner who gets a foreclosure notice.
It bears reminding, I guess, that we are a nation of people, not merely cash flows and assets:
So, now that the McCain camp which tried to use this same “Fannie/Freddie did it” fairy tale in its anti-Obama campaign—is history, as is most of Fannie and Freddie--what are the Republicans going to dredge up to in an effort to sanitize their regulatory shortcomings and, once again, blame Fannie Mae and Freddie Mac?
Most observers point to the seminal actions by Mudd and Syron, respectively, to purchase large amounts of toxic Alt A and private label subprime securities (PLS) in 2006 and 2007, as the major red ink causes.
But, almost as important, is the fact that virtually every aspect of the two mortgage companies business was presided over and blessed by their former regulator the Office of Housing Enterprise Oversight (OFHEO), following the May, 2006 consent agreements both companies signed with OFHEO. From that point on, the regulatory agency had their own employees in both companies every business day of the week reviewing all transactions and decisions.
If the former GSE managements made bad business calls, what’s that say about the OFHEO staff who shared in their meetings and machinations?
This next Waxman hearing should be fun to watch as the Committee GOP has to perforce blame other Republicans for mortgage misfeasance or malfeasance!
Monday, November 24, 2008
Read Your Mankiw
THE PRICE OF INFLATION/DISINFLATION/DEFLATION UNCERTAINTY
Robert Barro points out that there may be a current, sizable deflation risk premium, just as there was once an inflation-risk premium incorporated in the observed yields (although some thought that had since passed, with the ability to use products to manage inflation risks...).
Uncertainty about how best to use these expectational variables has kept me from updating the rates chart, for now. They are projecting maybe five years of deflation. [!]. It's possible that the structure of the TIPS offering has some technical impact, not just the liquidity.
Separately, perhaps one of the NIPA pros can explain why the price indexes for Q3 GDP were rising for line items like "Gasoline, fuel oil, and other energy goods" and how the consumption deflator seems... so large.
Citi By The Numbers ...
TARP INFUSIONS ONLY INDIRECTLY RAISE COMMON STOCK PRICES
There is this post over at Brad DeLongs, with a high level view of what happened to Citi.
Here is another stylized view, Citi by the numbers:
At the end of 2006, Citibank had just under $90 billion in tangible, common shareholder equity. That would be about $18/share. The market liked Citi enough to pay up almost 2.7 times tangible book for a common share.
Twenty-one months later, by the end of the third quarter of 2008, Citibank had recognized $32.2 billion in credit losses and provisions for losses, earning 3.6 billion in 2007 and losing about $10 billion in 2008 (so far).
Tangible book value of common was $68.8 billion or about $12.60/shr and the market was paying up as little as $4-$6/shr, implying significant further loses. If those loses were in the range of $33 billion, it would imply a valuation of just 1.0 times tangible book (based on my guesstimates for earnings over the next 18 months).
Yes, that's a big drop in the premium paid. The stock is "washing out", as the pros say.
n.b. TARP "infusions" do not make the stock price go up or boost the capital stake for common holders, just for the firm as a whole. I'm guessing this may be creating a great deal of confusion in the punditocracy, because it looks like the TARP isn't "doing anything", because people are looking at the common stock price and asking, "why is it going down, not up, after TARP?"
See also, The Bankless Rally
WHAT'S THE BREAKDOWN FOR HOW CITI 'LOST' ITS MONEY SO FAR?
I don't have these figures in detail. The company did offer up this high-level summary, during it's "Townhall Meeting". "LLR" are loan-loss reserves. "S&B" is 'Securities and Banking', which, for them, includes structured products, trading, private equity, investment banking, hedge funds, and a lot more.
In Finance There Is No East or West
FIND YOUR INNER VULTURE - THE TIME IS RIPE
The service companies arise:
Colliers Abood Wood-Fay Launches Distressed Property Services Group
Published: November 20, 2008
Miami--Colliers Abood Wood-Fay recently launched its Distressed Property Services Group. The group brings together an integrated team of resources, disciplines and professionals with over 75 years combined experience in managing distressed assets in inflationary or recessionary markets.
I mean, people are asking, "How do I get a piece of TARP?" Well, now you know...
Is CNBC hopeless?
They are focused on some stupid meme about taxes on the wealthy?
We're bailing out the entire financial system, and this is what is topic number one?
The market is selling off? As if they have never heard about sell the news? (*eyes roll*)
Obama - First Press Conference
Very impressive.
- -Clean grasp of the multi-faceted problem (even talked about doing more than one thing at a time).
- -Handled long-term and short-term aspects of economic stimulus with alacrity
- -Daily briefings - perhaps indicates a markets orientation right at the top
- -"In charge" - no wandering or pushing off to advisers on basic structure, goals or intent of policy
- -Stimulus will be almost first act as President and will include changes to various processes of government
- -Bailouts for Detroit will be as "sound" as practicable
In fact, the only detraction perhaps was the characterization that Americans have pride in their auto industry. I think we are finding out, from the polls, that is about 50/50.
Christina Romer is an impressive grab. Can you imagine an afternoon with Summers, Romer, and, say, Doris Kearns Goodwin in the Oval office? It seems like we can sleep a little easier than during the Bush Administration, at a minimum.
Bailout Sundays
SAVING PRIVATE RYAN, ...ER, CITIBANK
Our Nation's quick-draw team has ... had another bailout weekend. Citigroup is the patient on the table, five-days after they started a free-fall.
The deal is the deal, improvised or not. I don't think you need to take-up 90% of the residual to make a good re-insurance market, but other (more informed) opinions could be had on that. It's a noteworthy point, especially because one may want to repeat this guarantee immediately at the next target (and there will be one, right?). I also think that the government should have left some of the tail probability on the table, taking just a "slice" not the whole enchilada. Last, a back-of-the-envelop, 10% haircut seems ... so yesterday, compared to the valuation technologies available, presently. Also, I guess Wilbur Ross, a lighthouse of the free-marketeers, wasn't available...
The markets will likely cheer the result, in a modest way, but will wonder if we still have moved from weekend-solutions to a comprehensive solution that was sought by "enacting TARP".
MEANWHILE, IN THE REAL ECONOMY
Meanwhile, the worst number from last week was the yield on long-term Treasuries.
That was no panic buying (I don't think). The market has clearly started to lose confidence in the direction of the real U.S. economy. Chief culprits are the Bush-Paulson abdicating their leadership and a lack of a plan to address the bad-asset problem, right at the source - foreclosures, real-estate price declines, and, now, weak economic activity.
WHEN ALL THE SHOES HAVE DROPPED ...
The diagrams of a "bad-asset cycle" suggest, conventionally, that economic stimulus will "break the cycle", even if I thought that addressing the bad-asset problem (the value of home collateral) directly would have been a good first "stimulus" step.
So far, our reactive policy seems unable to get ahead of the curve. We haven't stopped any market from "breaking", that I can think of. To paraphrase Galbraith, "the key feature of the panic was that it kept getting under-estimated [until the system was so weak that antibiotics wouldn't work]."
Snarking aside, we can (and must) track the shoes in the cycle:
- Subprime has gone first, along with the bond-insurance markets.
- Weak corporate credit may have gone second (not just the non-financials, but the financial CP market, including non-bank financials).
- Regular corporate credit has worsened, arguably, but not yet broken (not sure where the super-senior synthetic CDO risk on corporates is trading, now).
- Last week, commerical-MBS broke.
- Last month, the ABS market may have had a seizure.
- The commodity markets have largely imploded
- We've had the first round of a currency crisis in the developed economies that has spilled over to the emerging economies.
On deck:
- The massive insurance market looks like it is ... dire.
- The municipal bond market is holding on, so far, given the failure of the bond insurers and the interregnum uncertainty in the U.S.
- The global sovereign market is okay, but cracking at the fringes. A second-round of currency crisis ... waits for a 'trigger'.
- We are waiting to hear what is going to happen with alt-A "prime" and regular-way prime RMBS.
- The agency market is under attack by the Treasury Secretary and his rightwing ideological travelers.
Sunday, November 23, 2008
Cycling on Empty
For those who keep asking about a market bottom, Paul Kedrosky wonders aloud about whether the worst is past.
The lack of systematic, government-mandated and collected statistics on the structure of the mortgage loan market appears to be a running theme in how the uncertainty keeps going, and going, and going. (There may be some that I just do not know about).
Among the things I haven't seen systematically outlined:
- How many sub-primes have been re-financed into primes, and who were the companies that originated those loans
- How many loans, of all types, have pre-payment penalties, and who were the companies that originated those loans
- How many ARMs, by class/type, are pay-option arms, and who were the companies that originated those loans
- How many loans had mortgage insurance paid for by financing and who were the companies that originated those loans
- How many IO's have terms greater than 30 years, and who were the companies that originated those loans
- For a variety of cross-sections, what are the summary statistics for the "margin" required? How many have a margin so high, on re-set or otherwise, that the "normal economics" of the loan are "gotcha", i.e. as time passes, the chances are great that indebtedness (total due) will increase, perhaps even if rates fall?
For those reading comments to PK's post, without knowing the array of mortgage market products (I certainly do not), here are some jargon qualifiers:
On the other hand, the 1-yr ARMs rates for new mortgages are surveyed at over 5% and 5/1 ARMs higher still. It looks like 1-yrs bottomed out at 4% when Greenspan took policy rates as low as they are today.
Friday, November 21, 2008
Chart of the Day
So, Tim, how are you at insurance? (Do we dare to ask Paulson & Co.?)
I mean, you can "TARP" Citi if you need to, but, in the words of MetLife, "Who's gonna pay for this mess?" (and it *must* be attended to, maybe even this weekend):
The Hartford Group and Lincoln Life, 5-days of gruesome giddy-up
Chart of yester-jour was AMBAC, up 86%:
Ambac Assurance Corp, Ambac's main unit, paid $1 billion to get out of four contracts it had written to guarantee collateralized debt obligations, reducing the bond insurer's liabilities. It said the terminations would allow it to reduce reserves set aside for market losses on these guarantees. - Reuters
...but today, the "ratings agencies", where everyday is a new day, slammed 'em:
S&P downgraded the senior debt of Ambac Financial (ABK) to BBB from A. It also cut Ambac Assurance Corp., the bond insurance subsidiary, to A from AA. The outlook is negative.-SmartMoney
Real Rates and Future Growth
Using the Fed series for corporate rates, less y/y CPI (not necessarily the best, but the easiest), I have a somewhat different picture than PK has for real rates.
In fact, it is sufficiently different that one can question the read that these levels are due to a factoring in of a collapse of the system. Rather, they look a lot more like the "Greenspan conundrum" has been canceled, and the US is ...er, back to where it used to be, in terms of having to price up for capital? On the other hand, the spread has never been wider, from BAA to AAA, which suggests a high degree of risk aversion and that the rates we are seeing are a consistent with a view of who will survive a collapse or a gross estimate / mis-estimate of what the price of credit should look like in advance of the sharpest downturn, possibly, since the data series was collected.
Chart1. Estimated real rates thru 11/19/08., US Corporate Sector (spread shown on RHS axis)
THIS YEAR
Here is a look at what has happened this year, so one can judge the timing of the rate rise and how much might be attributable to changes in measured inflation not reflected in a fall in nominal rates...
Citibank Redux - A Speculative Attack?
Is Citigroup under "speculative attack"?
"Discuss amongst yourselves."
There is a fairly strong prima facie case.
- -I don't have an in-depth balance sheet comparison, but their own b/s doesn't seem much worse than others, including JPM.
- -Plugging another "market-driven" 20% haircut to their portfolio, or parts of their portfolio, seems pretty radical.
- -An "instantaneous" haircut seems panicy, a little ahead of the facts. Defaults on CRE are running in the low single digits (last a looked, which was a while now). Do we believe that operators are so weak financially that two quarters of negative growth are going to drive a fifth of them to bankruptcy, or will that stress build up over a longer time, maybe a year or more.
Thursday, November 20, 2008
Tranche 'em!
It looks like Citibank is ready for its next TARP infusion.
Meanwhile, Hank "Menace to the Markets" Paulson is hop-scotching in Simi Valley, giving a lecture that, in places, seems to border on a psychotic episode (I have to agree with Cramer about that).
He said, once, he was looking to invest alongside private capital.
Well, he could have seized the day to suggest that Prince Al-Waleed bin Talal's investment was "encouraging" and
"might suggest a way that TARP money can be allocated in the future". The mere suggestion could boost the immediate impact of that investment.
Instead, he misses the opportunity of the day, so that he can what? Lecture to the Reagan faithful about regulation?
Hold to Maturity - Okay for CMBS
It's hard to see why a CMBS portfolio, held for maturity, couldn't be off of mark-to-market.
I'm not sure it will matter, much, for the stock prices, but it will take pressure off the urgency/immediacy surrounding "bank failure", by redefining that term to include an, er... longer-term perspective, right?
Markets flirt with worst-case probabilities
Credit spreads currently present a new "conundrum", the word Greenspan once used for an interest rate poser in another context.
Paul Krugman illustrates the latest market conundrumWhat may be driving rates, rather than volumes, is the ongoing assessment of the worst-case economic probabilities.
To me, these markets look like they are pricing in what we might call "event risk". Credit risk doesn't seem to be trading off fundamentals, like historical default probabilities for highly rated debt, even peak probabilities for an economic downturn. Instead, these prices appear to be discounting the likelihood of financial system collapse leading to an economic collapse OR a business failure in the real economy (like GM?) that may induce cascades or feedback into the financial system in ways not easily observed ex ante.
The additional premium for that risk may be wrongly interpreted as a "credit crunch" - even if a persistent and prevailing uncertainty may end up causing a genuine one, paradoxically.
It may seem like a trivial point, but it helps in getting a tight analytical framework. We aren't fighting an "ordinary" credit crunch. It looks like we are still principally fighting the risks of the bottom falling out, right? Of course, the truth is some complex combination of the two.
From FT Alphaville, pricing "Armageddon":
European credit spreads were lurching back towards “Armageddon levels” on Wednesday, flirting with their all time highs as speculation mounted over a bail-out for US carmakers. The Markit iTraxx Europe index of investment grade corporate debt widened 12.9 basis points to 175bp, up from a Tuesday closing price of 162bp. The iTraxx Crossover widened by 27.8bp to 899.46, teetering on the brink of the symbolically important 900bp mark last crossed in the fallout after Lehman Brothers collapsed.
Jobs Slipping
THE GRINCH THAT STOLE CHRISTMAS
Labor shedding, widespread. The South is participating, noticeably.
CA's large number looks (to me) like a fluke in this week's read (these big numbers often get reversed in subsequent release).
Wednesday, November 19, 2008
Quote for the Day
From the WSJ MarketBeaters blog, on the strangeness of just what 75% VIXy means/implies(!):
...some people have been taking positions in the likes of put options on the S&P at 750. These are expiring at the end of the week and they’re trading at about $3, says William Lefkowitz, chief options strategist at vFinance Investments. A goofy bet like this would normally cost the buyer a nickel, because it’s so preposterous. Not anymore.
Among the culprits in today's selloff:
- -Paulson's walk-away
- -A couple of defaults (waiting for confirmation) inside CMBS, spreading a new round of panic over of asset quality among the banks
- -A political uncertainty-tsunami coming from Washington, who are heckling over ... the kinds of details that will be rounding errors if the big picture is ... "lost".
- -A weak CPI
Diagnosing Freddie and Fannie
FIX THE FORMULA, SAVE THE WORLD
We know that Freddie and Fannie dropped their market share (h/t Krugman) at the time when the worst vintage loans were being originated. Because of Fannie's fancy-accounting penalties and because they did not participate in a lot of the "affordability products" dreamt up, they were not the drivers of the worst excesses of the markets.
Well, despite consistently applied loan standards, it looks like their economic model for underwriting was not designed with the notion that a housing price bubble could develop. Their formula appears to have been tied to house prices, rather than to "economic fundamentals".
If they certainly didn't create "the bubble", they did get pushed around by it, based on my first look at the figures.Why did they, if it wasn't some exceptionally bad credit underwriting standards (the bulk of their credit losses appear to be in one part of the portfolio)? Well, despite consistently applied loan standards, it looks like their economic model for underwriting was not designed with the notion that a housing price bubble could develop and that could be a factor. Their formula appears to have been tied to house prices, rather than to "economic fundamentals".
BUBBLE PROOFING FANNIE MAE
FHFA/OFHEO, their regulator, sets a "conforming loan limit", among a number of other conforming characteristics. This is key to segmenting the market, for policy purposes, I'd suppose. Now, this limit periodically gets adjusted. How? It looks like it is roughly tied to the OFHEO house price index, with various degrees of lags and discretion.
Of course, all lending does not take place at the limit, so to speak. However, the average loan amount, the new business for a given year, tracks that year's loan limit pretty closely. The two are in a ratio of near 2, for the priod over which I can get data.
Chart 1. The progression of Fannie's conforming loan limit and the average loan size, shown as a ratio (green line). In 2006, the limit was raised to $417,000.
Fanning the Flames - GOP's Scorched Earth Ideology
BUSH, PAULSON, DOLE
They are all out in the past week, bashing the implied government guarantee on trillions of dollars of outstanding agency debt.
George "Little Hoover" Bush at Federal Hall. Paulson yesterday at CEO summit. Elizabeth Dole, lame duck, at today's hearing.
I ... it's so ... astoundingly irresponsible, in the current environment.
They must hate America.
Brad Setser spells out just one of many risk layouts. At a minimum, they hate America's homeowners.
Tuesday, November 18, 2008
Paulson's Failures, Vol I, Chapter 11
He had time to direct his people to run around and hire money managers and so forth, but according to today's testimony, he's still studying the issue of preventing foreclosures, more than a year after it became consensus that maybe 2 million families were at risk this year alone...
It's not just families at risk. Check it out:
The performance of private label mortgage backed securities that were sliced and diced and sold to investors is just the opposite of Fannie Mae’s and Freddie Mac’s. Private label securities represent less than 20% of the mortgages but 60% of the serious delinquencies. As the regulator of the housing GSEs that own over a quarter of a trillion dollars of private label securities, I ask the private label MBS servicers and investors to rapidly adopt this program as the industry standard. Not only will this streamlined program assist borrowers, but broad acceptance and effective implementation could stabilize communities and property values.
James B. Lockhart, III, Bush Appointee, OFEHO, introducing a new "voluntary program", November 11th
Facing Congressional Flame Throwing, Bernanke a Little Too Quiet?
BUYING TIME FOR MONETARY POLICY TO WORK
He has yet to say that a bail-in or bail-out or a "bridge" for GM (or "autos") may be a step in buying time for his monetary policy to work, to 'work through the system'.
To the extent that real economic activity and credit creation (default on a credit report) is being affected by foreclosures, some of which may be "prevented" at the margin (maybe up to 75%, based on IndyMac figures), he hasn't offered an opinion of how that relates to his view of monetary policy, in the short term. (He could use the words "urgent" and "necessary", without stepping outside his lane, right? Greenspan used to cajole and remind legislators of their responsibilities, using all kinds of suasion.)
The conscious step to give the Treasury key responsibility for tough decisions, like who fails and who succeeds, is obvious and understandable. But ... there is more to the big picture than just the necessary liquidity programs, yes?
No Deflation at Producer Level
PPIxF&E - UP, UP, UP
It's an amazing economy, right?
Be careful betting against the U.S. economy, eh?
OMG, WHERE WILL THE BAILOUTS END
Maybe we'll see the end of this meme, today, too. Hewlett Packard appears to have done a good job balancing things ...
FOR NOW, THE LIQUIDITY TRAP IS CANCELED
There will be no 'liquidity trap' with a whopping yield curve like this, perhaps even steeper by today's end:
[yc via bloomberg]
Monday, November 17, 2008
See a Penny, Pick it Up and Other Fallacies
SEE A PENNY, PICK IT UP AND OTHER FALLACIES
If you see a free dollar in a competitive market, do you pick it up or do you say to yourself, "This is too good to be true, there must be a catch"?
Have a look at Mankiw's chart-grab du jour.
According to this chart, unexplained as it is, you'd expect that the UAW would have no trouble organizing workers in foreign manufacturer's plants (God knows, they've tried). What employee wouldn't want very nearly to double their income, their hourly wage?
Since we know that unionization is not spreading quite like that, do you swallow this chart, or ask, "Hey, this can't be true" or "there must be more to the story"?
If you dig into the data, you find out that the author of this chart is intentionally comparing a fully loaded cost with one that isn't (and based on an estimate by Daimler). The comparable wage rate appears to be $47.50 for 2006...
Can I pick on Greg Mankiw for this? He is a well established and deservedly respected economist, who is known for his acumen and thoroughness (that I admire), both of which will endure a pundit on this mini-blog, right?
So here is a query, that I've had in the back of my mind:
When he wrote his letter to POTUS, he advised the new President to keep his economic advisers close, that no one party has "a monopoly" on the truth.
What does that mean, more precisely? Does that mean that Dr. Mankiw believes that he is wrong, 'doesn't have the truth', half the time? I doubt it.
Does it mean that economists use statistics to make "lies of omission", like this chart above, sans explanation? I don't know.
I hope he just means that economists are sometimes prone to offering one side of the story, for the best of motives, so that there is a positive value to having economists with alternative viewpoints "work a problem". But, then, there is this chart above ... hummm.
Town Haul With Citibank
How did their loan loss reserves get so low? This chart looks like the definition of "FICO madness". Was it all current loss experience, or did somebody decide that the appropriate level of reserves was not much more than what was allowed to count toward Tier 2 capital?
Note to self: credit cards, even at 15% average rate, are not sunflowers that grow to the sky.
Just-in-time loss reservering:
What ever is inside "other loans" and "investments"? Leveraged private equity stuff", commercial real-estate? Synthetic CDOs? (Most of the "Goodwill" is disallowed when calculating capital adequacy).
They have about $100Billion in Tier1 capital and $25 billion in loan reserves, against these assets and all their off balance-sheet exposures. Is it enough? Off hand, it looks too hard to say. It does look unlikely that, on their own, credit cards and RMBS, marked down, would be sufficient to 'break the bank', right?
Something about their jobs cuts and the amount of targeted savings doesn't seem to square, but others know the company better than I do...
I'm so glad that, during a downturn, they can achieve 8% core capital, on the backs of job cuts, with a full guarantee of their debt, and a giant spinnaker-like TARP-sail running with the winds. What is wrong with this picture? More:
We distributed $2.1 billion in dividends to shareholders during the quarter. On October 20, 2008, as previously announced, the Company [the Board of Directors] decreased the quarterly dividend on its common stock to $0.16 per share [about $3.4 billion at an annual rate...]
For the die-hards who are targeting certain people on Citi's board, it's not clear which business lines actually "deserve" job cuts. Are they going to close retail branch offices? Cut dealmakers? The knee-jerk demand to make cuts seems ... reckless. You need some kind of model of what the core business requires. Without it, one would look on knee-jerk job cuts unfavorably, as a costly prescription without a diagnosis...
Thursday, November 13, 2008
Soros: Commerial Paper was proximate cause / transition mechanism
... of inter-bank freeze. In his testimony, he doesn't address other linkages (derivatives, etc.), sweeping them into 'uncertainty' and parts not central to his basic thesis or description of the contagion.
A large money market fund that had invested in commercial paper issued by Lehman Brothers "broke the buck," i.e., its asset value fell below the dollar amount deposited, breaking an implicit promise that deposits in such funds are totally safe and liquid. This started a run on money market funds and the funds stopped buying commercial paper. Since they were the largest buyers, the commercial paper market ceased to function. The issuers of commercial paper were forced to draw down their credit lines, bringing interbank lending to a standstill. Credit spreads-i.e., the risk premium over and above the riskless rate of interest-widened to unprecedented levels and eventually the stock market was also overwhelmed by panic. All this happened in the space of a week.
Lo pegs 'uncertainty' to transparency, indicating that lack of understanding of why Lehman (and others) failed may have contributed to paralyzing uncertainty.
...it's a lot of reading to do. More later.
Bashing Fannie As a Diversion
Everyone is guilty of it, Left and Right, but when you hear the cause of a problem long before you hear the data, you can bet that something is being shoveled your way.
This happened when we heard how much the Community Reinvestment Act (CRA) was 'the cause', right? Turned out that data was crap. Same for how dangerous it would be if the FDIC limit were not raised to $250,000. Turned out that was crap, too.
Now we hear how bad Freddie and Fannie were, even from the mouth of the President. *sigh*
These two did not participate in the "affordability" products that were dreamt up by the private sector in the first half of the 2000s:
Washington Post Staff Writer
Thursday, May 12, 2005; Page E04
Mortgage financing giant Fannie Mae said yesterday that its share of the mortgage-related securities market dropped from 45 percent in 2003 to 29 percent in 2004 because of the growing popularity of adjustable-rate mortgages, according to a filing with the Securities and Exchange Commission.
Although business at Fannie appears to have been robust, it would be a stretch characterize their numbers as "go-go growth" or "unfettered". In fact, before Greenspan couldn't have been bothered to regulate using federal authority, Fannie had laid down underwriting guidelines that just said "no" to a lot of the most ridiculous provisions that brokers were dreaming up to help them sell, sell, sell.
Today, the two could be 80% of the market. Yes, the truth is, if it weren't for them keeping lending, we'd have a far, far worse problem on our hands.
Academics "shine": The Lessons of LTCM, revisited
An "act of God"?
Financial crises may be an unavoidable aspect of modern capitalism, a consequence of the interactions between hardwired human behavior and the unfettered ability to innovate, compete, and evolve.The quote is a little unfair, he went on to talk about limiting those risks in important ways. Still there are other gems, like government should subsidize geekiness/greekiness (we need to subsidize people who rush out to make, maybe, $220K on Wall Street in their first year?):
-MIT Professor, Andrew Lo. (rest is worth the read)
"In the same way that government grants currently support the majority of Ph.D. programs in science and engineering, new funding should be allocated to major universities to greatly expand degree programs in financial technology."The good guys in the zero-sum game of trading:
Based upon my research on the activities of hedge funds, there are three important findings I would like to share with the Committee. First, hedge funds did not cause the financial crisis and are in fact helping to mitigate its damage and save taxpayers money. This may seem surprising, but in fact hedge funds have historically made markets more stable [!!!] and helped their investors conserve wealth in times of economic stress. Second, hedge funds’ short-selling activities have helped draw attention to the poor management and investment decisions of financial companies in recent years. Indeed, when hedge funds short-sell the stocks of unhealthy companies, they help to divert capital from companies that are fundamentally unstable. This not only prevents stock market bubbles from becoming much worse, but it helps to ensure that companies that make sound decisions are rewarded and are able to provide stable jobs for their employees. Finally, existing laws and regulations should be strictly enforced against hedge funds and their managers, but changing how hedge funds are regulated could actually undermine the interests of investors and increase economic instability.
-Houman Shadab, Senior Research Fellow, Mercatus Center, George Mason University
Of course there were those reported strategies of gaming the (partly) market-driven models that the ratings agencies had adopted...
Synthetic CDOs ... Again
Moody’s raising its expectations (again) that corporate default rates will rise, i.e. higher corporate defaults and even further pressures on CDSs and synthetic CDOs - FT Alphaville
Why, oh, why, oh, why-o, doesn't someone - anyone - get out, stand-up, and force an unwind of the synthetic CDOs? Is it really impossible? Can it not be done, for some reason?
Otherwise, how can we just sit around and ... and wait? For a sword to fall.
Seriously. Can you think of anything more ... intentionally self-destructive?
Joblessness In America
The weekly claims are out.
Scanning the reports for the past four or five weeks, there are signs that California and Florida may be bottoming a tad, just as the "rust belt" is ramping up big time. Michigan and Ohio (and Pennsylvania) have been hit hard, at the margin, in the past weeks. Autos and manufacturing.
A Taxpayer Friendly GM "Solution"
This is rather mercenary, but ...
Notice that the non-pension post-retirement benefits of $33 billion equate to $55/share?
If the UAW and "The Government" can come to an understanding, that's a whole LOT of bargaining power.
So much that you could buy out the existing stock holders (just $2 billion), pay off the debholders at market prices, whip this puppy through bankruptcy, maybe, to get out from dealer contracts and the onerous aspects of Cerberus agreement, and still turn a very significant cash profit, in the short-term.
GM, In Their Own Words
So many have stopped listening, long ago, perhaps, but that doesn't mean it isn't still important.
I've pulled some stuff from their 2007 Annual Report, to outline what the company thinks is going on. The details on the VEBA cash funding ... well, it appears that is down the road, truly (as of this writing). At least, it's doesn't look as though it was pre-funded in 2007 or that they are doing more than accrual for it, presently. At least in the current period, the UAW has agreed to them deferring $1.7B of interim cash payments to the VEBA.
Still, you get the general direction, and maybe some inklings on how to assess their own assessment.
Among noteworthy items:
- They are formally committed, via settlement with the UAW, to helping with health care reform ideas.
- At the end of the year (2007), the pension obligation was over-funded. Not sure how that stands, currently.
- They finally suspended dividends to common in July, 2008...[no comment]
The Bush Administration was ... AWOL in 2005 on issues of national health care.
Long - very long - snippet after the jump.
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