IN SEARCH OF CHERRY SOCIALISM
The foot pounding to avoid lemon socialism, in which citizen-taxpayers "agree" to socialize the risks and privatize the returns can be heard across the plains. Openly agree, one should say, to contrast with the regular way, which is to have lemon socialism hidden in laws and regulations (from both political parties) that enable misalignment of risks and rewards.
But, these days, we have to eat the lemon. At least on the banking side.
Obama's team will never socialize the big banks, fully, despite that the best case for it might be purging a generation of dead-head management and elevating some people who really do know the risks of modern financial products and markets. (Cleaning out corporate boards is another good idea, as should have been done wholesale at Merrill and Lehman, right?)
So, what other choice is there?
PICK THE SIZE OF YOUR LEMON, PEEL, THEN EAT
The best combination is for the Treasury and Fed to work together. The Treasury provides the risk capital and the Fed has available infinite leverage (at least for a time).
The private sector, particularly the distressed assets crew, knows how to value assets no one wants, much. The best of all worlds is to share risk-capital with the private sector, to scare-up a public-private partnership, and leverage it with the Fed-Treasury combo. That's one way to get past the problem of government getting duped in setting/taking a price on things its bureaucrats don't understand.
Another risk-sharing is to pre-package large-bank bankruptcies, allowing banks (and some non-banks) to trade out of their debt-obligations at or near market prices or at zero, if necessary. A restructuring of their liabilities will allow further risk-sharing with public funds. How? Well, the Treasury can 'substitute' the erased liabilities with recourse provisions. The banks sell assets at a price to the Treasury, who picks up an amount of risk consistent with the Treasury's economic forecasts, but the banks share or assume risk that the asset values come in below that.
Exchanging debt obligations for recourse guarantees is another public-private risk sharing that might work, if it is enough in the mid-term to avoid a terrible, terrible long-term.
The truth takes only a few words (to borrow a famous phrase from Chief Joseph). This might be the American solution, one that contrasts with the way that Europe have done so far and that Japan did a long while ago.
I wrote this in 20 mintues this morning. I have no idea what is taking weeks and weeks to conceptualize, inside the Obama team, unless it is the gory detail of regulatory structure redesign or a forward-looking, step-by-step to step around too-big-to-fail.
Maybe they are trying to decide what to do with housing market intervention, first? That would make sense. Soon, they should have had enough time for a masterpiece, though, so my expectations are high.
Thursday, February 5, 2009
"Lemon Tree, Very Pretty"
Thursday, January 29, 2009
Pictures - Regional Economics
REGIONAL ECONOMICS
We do not have a national housing market - Alan Greenspan (and others)
...which is true, until there is a national credit crunch?
Here is a map from the WSJ that puts up some data on where the spending and relief may be going, throughout the country. On a per-capita basis, it's spread pretty evenly:
Here is the latest foreclosure map from the NY Fed. Sorta makes the approach look less than perfectly targeted, although maybe foreclosures are not the best metric. Still ...:
Here are the persistent poverty areas, a designation defined in the house bill, HR-1, as of 1990 (yeah, quite old, but...). Notice that almost all the non-metro areas are all ... in red-state, South.
Here is the change in economic activity, as measured by the Philly Fed - direction is most important here (notice the states that have been spared, so far);
Invincible Wall Street
Another for our series, "Invincible Wall Street":
Jan. 27 (Bloomberg) -- American International Group Inc., the insurer saved from collapse by government money after losses on credit-default swaps, offered about $450 million in retention pay to employees of the unit that sold the derivatives, according to two people familiar with the situation.
About 400 workers at the financial products unit may get the money in two installments
It costs that much to manage an existing book of business? Really?
Friday, January 23, 2009
I love the internet
We should find out the size of Thain's severance sometime today or in the next few days, I suspect:
'I'm not sure that McCann and Fleming left just because they may have fallen out with John Thain. The reality is that both these executives would have bagged huge severance packages (triggered by change-of-ownership clauses in their contracts). If they stayed, all they would have had to look forward to compensation-wise was US government restrictions, which would have resulted in $400,000 base salaries and no bonuses for the foreseeable future.
my uneducated, basic view, shared:
I have worked for Citi for 35 years now, joining when it was still called First National City Bank of New York. The rot, in my view, set in after the Travellers deal. We all thought that we'd end up going to Hell in a handcart, and it's now coming to pass.
No Money for BOA?
Disgorge and bankrupt Merrill. Then, try again. That is, wash, rinse, repeat. [I know, it probably can't be done.]
Superbly compiled by Rob Cox: A History Lesson With Merrill Deal (No doubt, this didn't get sent around to BOA's shareholders, as they voted "yes").
Thursday, January 15, 2009
The Beauty Contest Keynes Didn't Write About
Everyone knows Keynes' famous beauty contest analogy, in which the marginal price/prize is what the next person bidding in the beauty contest for an item will pay.
What he seems to have left out (to my memory) is the beauty contest that went on to get Bernie Madoff to manage your money.
Since nothing ever changes, how could the great man have missed this layer of the onion?
Maybe a Keynes maven can enlighten us.
Even if not, you cannot miss the irony of people scrambling for the privilege of loosely regulated money-management, given this headline:
Madoff might not have made any trades
Wednesday, January 14, 2009
Citibank Shrinks
THE GM OF THE EAST
It's the thing to do (for a bank), since they cannot expand in the current environment, much, given their balance sheet.
Meanwhile, people are somehow surprised that Sandy Weill's ... er, vision exceeded his grasp? Naw, really?
"The problem with Citi is the model, the execution, the management," Smith said. "How do you go a decade without integrating?"
Could it be that non-integration suits some people's management style? Who knows, but the idea that there is a high growth or highly profitable, easily managed "sub-business" for Citibank is ... chimera.
Friday, December 19, 2008
It Was Not an 'Act of God', Part II
Part One
WE ALREADY HAD A 'SUBPRIME' MORTGAGE CRISIS, THIS IS THE SECOND IN A ROW
In his recent op-ed, Paul Krugman wonders aloud about our "Ponzi era", about how we all could have not noticed, basically, about financial services in general. He concludes, in essence, that we lived an era of post hoc, ergo propter hoc, regarding those looking the part in money management. {But read the comments section for the good stuff}
Many others, including the ever-readable Martin Wolf, have looked in detail at how "we" missed it, how the latest junk-credits from Wall Street went undetected until it was too late.
Greenspan himself has indicated that he relied on the collective wisdom of market participants, ending up shocked that they failed to secure the (long-term?) interests of shareholders.
For my own part, I initially underestimated what would become the full scope of the problem. I think it is because I didn't imagine that Green Tree Financial had left the collective conscience.
REMEMBER GREEN TREE FINANCIAL?
Well apparently, not too many people do. I remember it vividly, however.
Did the quantitative people in the departments at the ratings agencies (Moody's, S&P) have more than a degree? Did someone from the "real" credit area take an elevator down to look over the shoulder of their proverbial CDO Queen? Was there a risk-policy committee? God knows, the implication of Green Tree made it to the radar screen of leading economists (and, as best I recall, Greenspan's purview. Update: yes, see here).
There should be more hearings, right?
Anyway, here is the story of Green Tree Financial and the manufactured housing bust.
I've pulled some quotes, that make it rather plain just how much it looks like the very same sub-prime crisis that eventually grew to $700-1,800 billion.
The question becomes, how did we have two sub-prime crises in a row, in rapid succession, even?
A Boom Built Upon Sand, Gone BustFrom 1991 to 1998, annual sales of manufactured homes more than doubled, to 374,000 from 174,000.
One company, one man and one accounting rule drove that growth.
The rule, a rarely used accounting convention called ''gain on sale,'' encouraged Green Tree to make as many loans as possible and allowed it to report more than $2 billion in profits that never existed.In their rush to lend, Green Tree and its rivals made loans to borrowers who had little chance of paying them back. Tens of thousands of those people have already defaulted and have been evicted. Conseco alone has repossessed 25,000 homes so far this year, after a record 28,466 in 2000. By the time the industry's hangover ends later this decade, hundreds of thousands more low-income borrowers will lose their homes. They will wind up with huge debts and ruined credit because their homes are worth far less than what they owe.
Securitization provided Green Tree with ready access to capital from the bond buyers, and that enabled it to finance as many loans as it wanted. At the same time, gain-on-sale accounting allowed Green Tree to record income from every loan that it made.
On April 28, 2000, with the company's shares at $5.63, Mr. Hilbert quit. He received a $72 million severance package, including the right to use Conseco's private jet up to 20 times a year. All told, Mr. Hilbert's pay from 1993 to 2000 was $530 million.
Mr. Coss did not do quite as well. His pay, tied to Green Tree's reported profits, totaled about $200 million from 1993 to 1998, including a $30 million severance package.
More references:
April, 19998:
April, 2000:
[This one reads like a bad omen for the Bank America and Merrill "merger", yes?]
December, 2002:
The Panic In Pictures - Merrill Uplift Edition
It was a good time to be in "fixed" income in mortgages at Merrill:
A peek at what may show up on the 'expenses deed' of a CDO:
Merrill Lynch collected about $5 million in fees for concocting Costa Bella, which included mortgages originated by First Franklin.
Thursday, December 18, 2008
For the record ...
John Steel Gordon with the long view on Ponzi schemes.
Still, no one has the data on the longest running - biggest means nothing. (In fact, no one knows how long Madoff was running his, exactly. It may have been a regular fund for a while.)
Wednesday, December 17, 2008
A mysterious demand for housing
By postulating that there is a demand for housing, in an economy rapidly shedding jobs, tightening credit requirements, and casting a huge number of citizens into the 'no-credit-at-all' category (bankruptcy/foreclosure), Hubbard and Mayer conclude:
A reduction of mortgage interest rates to 4.5% (or, given yesterday's Fed action, to a lower level) is superior to other proposals that focus only on stopping foreclosures, or on reforming the bankruptcy code to keep people in their homes. Stopping foreclosures, however meritorious, may not limit the dangerous decline in house prices as much as proponents claim. It could work the other way. Stripping down mortgage balances in bankruptcy would likely raise future mortgage interest rates and lower the availability of mortgages, reducing house prices.
Loan modifications are a reduction in interest paid, right? They also directly and quickly affect the structural challenges. An interest-rate only mechanism could extend the 'debt-depression' for years.
There is a
Given the problem is so serious, why 'bet the farm' that an artificially reduced rate will bring the desired equilibrium? Given all the hope-for-the-best approaches that have already failed, across a range of problems, wouldn't the direct approach, modifying some loans, actually be more robust?
The Businessweek study:
That's especially true in California. In the second quarter of 2008, seven in 10 existing-home sales in San Joaquin and Merced counties were of properties that had gone through foreclosure in the previous 12 months, according to DataQuick, a La Jolla (Calif.) real estate information company. In Sacramento County, six in 10 sales involved foreclosures.
It's no wonder that prices in these markets are tumbling: Distressed sales have a way of dragging prices down for entire communities. Aaron Smith, senior economist at Moody's Economy.com, says markets in which foreclosed homes dominate listings suffer from a kind of "negative feedback loop."
More Ratings Agency Voodoo?
So, Moody's has a double barrel this week, downgrading both Goldman and Morgan Stanley to A2 from A1.
Goldman has $110 billion in excess liquidity on a balance sheet of $885 billion. They've cut compensation by $10 billion (in half).
Goldman's competitive position has never seemed stronger, with the competition boxed-in, and the idea that "investment banking" (or even trading) is finished for good is pretty radical.
Accordingly, it looks like the ratings agencies are practicing a bad voodoo.
Tuesday, December 16, 2008
'Everything I had, I gave to Madoff'
Well, the stories are coming out.
Q: If someone with high liquid net worth comes to you and says, "here is all the money I have in the world", what do you do? Do you turn them away, in whole or in part?
Unless I intended to provide them with a significant diversification, I would, right? You?
Fed hits rock bottom
POLICY AT POINT OF MAXIMUM DEPARTURE - FLAPS AT FULL
0.0% to 0.25% as a target for funds, discount rate down to 0.5% and "excess" reserves at 0.25%
There is a case that zero is not a good rate of interest.
Dividend and credit rates are overwhelmingly attractive now.
[Remember the summertime and the ideologues who were issuing statements that the Fed needed to fight inflation? How ridiculous was that, in hindsight...]
THE RETURN OF THE CARRY TRADE - WE'RE ALL ON THE DOLLAR NOW?
The cost of hedging yen is nearly zero. The Euro is probably not far behind.
That means there is a huge reservoir of liquidity available for sensible risk, credit or otherwise.
