GMAC - They'll Make up for it in VOLUME!

Even if you lived in a cave, you probably heard that GMAC will be receiving some (and by "some" I mean "six billion dollars") money from the government. Of course, this is on top of the $13+ billion that GM was promised already, but I want to talk about the math behind GMAC.

GMAC has to pay the government an 8% dividend on this injection of capital (in the form of preferred equity shares) it received. GMAC is turning around and lending this money to would be car buyers at 0% . Now, you may have heard the old maxim regarding the rule of thumb for bankers: 3-6-3: they borrow money at 3% (ie, take in deposits, and pay 3% interest), they lend money at 6% (ie, a mortgage) and they're on the golf course by 3 o'clock. I'm not a math major - no wait - in fact, I AM a math major, and I can tell you that GMAC's 8-0-6 plan won't work... what it will translate to is: borrow money at 8%, lend it out at 0%, and be bankrupt in 6 months. Anyone want to set an over/under on the total amount of money we (the taxpayers) will dump on GM and GMAC before all is said and done? I'd say it's a toss-up between the GM/GMAC total, and the Miami Dolphins vs Baltimore Ravens total for the AFC wildcard playoff game this weekend, which is 37 1/2 points. In GMAC's case, that's 37.5 Billion.

GMAC's most recent move should put to rest any question as to if this is an "investment" or not: I know of no business that makes money borrowing at 8% and lending at zero percent... I guess they'll make up for it in VOLUME! Perhaps the model would stand a chance if they made money on the cars they sold, which they don't.

Reading the Bloomberg article on the subject today left me with another head-scratcher:

"GMAC will now lend to vehicle buyers with credit scores of 621 or higher, compared with a previous standard of at least 700, according to a company statement. The higher threshold had excluded about 42 percent of U.S. consumers."

The company said it won’t finance “higher-risk transactions,” instead concentrating on prime customers who are more likely to repay using “responsible credit standards.”

Wow. Go back and read that again. The standards GMAC were using before this latest bailout meant they were ONLY (note: SARCASM!) lending to 58% of all U.S. consumers! Holy fuck! That doesn't exactly sound like they were only lending to the Rockefellers and Buffets of the world! You're telling me that 58% of U.S. consumers was too narrow a market? As I've said before, the problem isn't a lack of available money to lend, the problem is a lack of qualified borrowers, given that lenders have re-adopted NORMAL, REASONABLE lending standards. GMAC proved this today, by immediately lowering their lending standards so that they could lend more money.

update: I just read Karl Denninger's post from today, where he basically has the exact same line of thought I enunciated above. Denninger also points out that the median FICO credit score in the U.S. is 723. That means that 1/2 of all Americans have a credit score above 723. Thus, 621 cannot possibly considered "prime" as GMAC claims.

happy f'n new year.

-KD

Merry X-mas

For Oscar's Hanukkah picture, see this post.

-KD

Read Up!

Some good stories around today:

CSFB designed an interesting solution to the problem of executive compensation in tough times on Wall Street: they took their "troubled assets" and put them into a fund. Senior employees (directors and managing directors) will be given stakes in the fund as part of their compensation! Thus, if the assets are really worth what people say they are, the execs will make out nicely If they're full of it, they'll eat their worthless paper. I especially like the comment on Barry's blog in the link above suggesting that Congress be compensated the same way: with the gains from the "investments" of the TARP loans!

Paul Kedrosky has a link to some must read stuff on Bernie Madoff. If you read the warning letter that Harry Markopolos sent to the SEC years ago it probably won't make you think any higher of the SEC.

Speaking of the SEC, NakedShorts weighs in on Obama's new SEC head: Mary Schapiro:

Schapiro has troubled these pixels but once, when we reported that in 2003, during a period when she was opining vociferously on hedge fund-related broker-dealer disclosures and the adequacy thereof, her valiant sleuths swept through the offices of Bayou Securities LLC in Scamford, Conn.

There, they found $8500 worth of allowing “two individuals to execute transactions...without first obtaining registration as equity traders…” and failing “to update written supervisory procedures reasonably designed to achieve compliance with said regulations…” The missing however many hundreds of millions it was by then quite escaped their attention as, boxes all checked and wrist-taps to come, the sleuths boarded the train back to Boston.

For the uninitiated, Bayou was the original hedge fund ponzi scheme - back before Madoff was discovered. Schapiro apparently had her chance to take a look at their books, but came back with doody.

Clusterstock notes the despicable manipulation of the oil market by short sellers. And, in case you're retarded, they are being sarcastic.

I liked the point of this Bloomberg article, which points out that the Fed is making hundreds of billions of dollars of loans based on the AAA ratings of securities which were rated by the same people who've already proven their ratings cannot be relied on.

Finally, via CNNsi HotClicks, I had no idea there was such a thing as trick bowling:



-KD

Innate Behavior?

Oscar after playing in the Mulch Pile

My dog Oscar did something funny this weekend. We stopped at the store and bought him a beef chewy - this tendon thing that he can go to town on. He's had treats similar to it, but never this exact treat before. So, my wife and I are in the backyard cleaning up our patio, and there is a hole in the flower bed that Oscar had dug many weeks before - if he wants to rumble with us, he digs a hole because he thinks it'll antagonize us into chasing him around the yard.

Anyway, he's trying to get us to chase him, but we're only half-heartedly playing with him, cause we're trying to clean up. Oscar ditches us, goes inside and gets his new chew treat, and brings it outside. He places it in the hole, and then I see him moving his face back and forth across the dirt.

I got my wife's attention, and mouthed "what's he doing?" He was burying the bone, using his nose as a shovel! Oscar is a talented digger with his paws, but he elected to replace the dirt with his nose. It was incredible, because 1) I'm certain he hasn't seen another dog do this, and 2) he's not a hound/hunting/digging dog - he's a Brussels Griffon, which is a toy breed, and thus I wouldn't expect him to have any innate "bone burying" tendencies.

For some reason, we were very proud of the guy for showing the desire and ingenuity to bury his bone, and he was obviously insanely cute when he was done, face covered with mud. We were trying to figure out if a) he really liked the treat and wanted to save it or b) hated it and wanted to get rid of it so we would get him something else! I'm leaning toward a).

-KD

Back to Madoff

I want to re-address the Bernie Madoff story for a second here, because something is bothering me. Now, on the one hand, I want to chide the investors in the fund for being greedy and blind: refusing to ask questions about how the fund was making money as long as the money was coming in. HOWEVER, Dealbook, today, published some trading statements that Madoff customers received. Looking at these statements, I can't think of any way that a customer could look at them and have any reason to conclude that the business was anything other than legit.

Said differently, I had a 401k account at Scudder in which I owned a variety of mutual funds. Every quarter, they sent me an accounting statement which shows the change in value of the funds. Obviously, I assumed that my money was actually being invested in these funds. I also assumed that the funds were honestly reporting their positions and trading. I have no reason to assume fraud anywhere in the chain - but Scudder could be completely fabricating my statements, just like Madoff did... I think this is highly unlikely, and thus I'm back to sympathizing with Madoff's investors instead of blaming them for being blind and greedy.

So that takes care of the individual investors, but there was also a massive class of institutional investors (managing money for individuals) in Madoff's fund. Do they have a higher fiduciary responsibility than individuals, and the obligation to know exactly what they are investing their clients' money in? Yeah - I think they do, and I think they are to blame big time. Does the argument "hey, how could Nomura know there was fraud - they were receiving the same phony statements" hold water? I don't know... I want to say "no," but I'm not sure I'm being consistent here...

Anyone have a thought on this?

-KD

Champ

After taking down the third qualifying match last week to force a playoff for the final seat in the Pokerlistings Run Good Challenge 2 Finals, I ran good again this week to bring home the bacon and capture the title, the money, the glory, the trophy, the championship bracelet, and the commemorative watch (note: only the money actually happened...)

Spaceman, Pauly and I had to have a playoff for the final two seats, which we did on Tuesday at midnight. After dispatching Pauly, Spaceman and I both had our finals seats.

In the finals I won the first hand against the PokerShrink, who thinks I'm a maniac, when I three bet him from the button with AhKh and extracted some more value vs his AJ when an ace flopped. I played pretty aggressively, picked up a few hands, avoided some trouble spots, and stuck a fork in Benjo when he trapped me in a pot but left me with plenty of outs. I'd been raising frequently, and with 25-50 blinds I made it 150 to go from middle position with 33, and Michele Lewis called. Benjo on the button made it 550 to go, and I elected to call and see what happened. Michele called as well, and we saw a flop of A-9-4 with two clubs. I checked, as did Michele, and Benjo offered us a free card. The turn was the 5c, giving me a gutshot wheel draw and a three high flush draw, which was obviously the nuts. I bet out half the pot, Michele thought before folding, and Benjo shoved, which was less than a min-raise. I called getting over 5-1, and Benjo's A-J was punked on the river when an offsuit deuce fell.

When will these kids learn to stop taking AJ up against the Kid! DYKWTFIA?!?!?! Anyway, I owed Benjo that for the beat he put on me in the second tourney of this series, when his QQ spiked a river Q against my AA after I'd trapped him. I pointed out that my suckout was about 5% as sick as his suckout, but Spaceman claimed it's more like 8% as sick.

The field was eventually whittled down to myself, Luckbox, Amy Calistri, Pokerlistings host Matt Showell, and Defending Run Good Challenge Champion, Change 100. Amy wielded her short stack with Juanda-esque efficiency: fearlessly blinding herself down almost to the felt before doubling up - a strategy she repeated at least three times before we were finally able to send her to the rail. "Lucky" Matt Showell was on the ropes when I got him to call off his chips with A-2 vs my A-9 on an ace high board, but he was saved when the board paired on the river to earn him a chop. Soon Matt's luck ran out, leaving Luckbox, Change100 and me to fight it out for the glory.

Change100 was unable to pull off the greatest poker back to back since Chan won his second WSOP bracelet, and instead settled for second place against me, after eliminating Luckbox in third place.

Thanks again to Pokerlistings.com for sponsoring this generous freeroll series.

-KD

Art Imitates Life

(hat tip Barry)

Dilbert once again nails it in three simple frames: if you're missing the reference, the cartoon is mocking the mortgage backed securities market, where slices of subprime loans were repackaged into new securities which somehow attained a AAA top tier rating.

More on Madoff: The Bernie Madoff Ponzi Scheme story is really remarkable and tragic. Naked Shorts has a link to a story from 2001 questioning how Madoff achieved his incredible numbers. That piece seemed to spark an inquiry from Barrons, which Paul Kedrosky summarized nicely. Clusterstock also has a summary of how Madoff pulled off the biggest Ponzi scheme in history. Aksia Advisors wrote a letter yesterday explaining how they managed to detect the fraud in advance and avoid placing their clients' money with Madoff. One group that has no excuse, again, is the SEC, who was warned as far back as 1999 that Madoff, who was registered with the SEC, was up to something nefarious.

The SEC boggles my mind. I wrote months ago about how they had to close their broker-dealer oversight division because, well, they failed in their oversight and all the broker-dealers (BSC, LEH, MER, MS, GS) blew themselves up and ceased to exist! In the Madoff case, someone gave it to them on a silver platter almost ten years ago yet they STILL failed to detect any foul play. Incredible. The simple maxim: "if it looks too good to be true, it probably is," is something well within the SEC's powers to deconstruct, even mathematically.

When someone achieves returns that seem remarkable and unexplainable, some people ask questions (as highlighted above) and some people skip the questions and look for ways to make more money. In the case of Madoff, how do you take exceptional returns and make them better? Simple: Leverage! Nomura sold a 3xLevered version of Madoff's fund to investors. This is the best part of the whole story. Figure out how he's making the money? Nah... just LEVER IT UP BABY! As Clusterstock points out, incredibly, the leveraged fund in this case ended up doing no worse than the regular fund: they are both worth zero now.

I've written previously about our treatment of this debt crisis being a Ponzi scheme. Sure, maybe the intent of the government isn't to steal and defraud, but in any case, the music will stop at some point - Bernanke will stop throwing money at the problems, and our day of reality (I was going to say "reckoning" but it's really just reality: home prices must fall, we must lower our debt load, we can't spend our way out of this problem) will come.

Maybe then Madoff will slip to number 2 on the list of greatest Ponzi schemes in history.

-KD

Why Bother?

Last night the Senate failed to pass the bill to bailout the U.S. Automakers. This morning, the Treasury piped in and said: ""Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry,'' (Treasury spokeswoman Brookly McLaughlin).

My question is this: why did we bother to waste Congress's time debating this issue if the Treasury was going to step in and give them the money anyway? Just to have the illusion that the American people have any say in anything anymore?

"The current weakened state of the economy is such that it could not withstand a body blow like a disorderly bankruptcy in the auto industry," White House press secretary Dana Perino said. Really Dana? Why didn't you just slam the table with your Thor's Hammer Gavel last week then - and America could have avoided wasting billions of dollars covering the up to the minute developments in the bailout debates, which, it turns out, may not matter anyway!

This reminds me of a kid who quickly learns that if he asks dad for something, and the answer is no, he should just go ask mom. If that fails, there's always grandma and grandpa. SOMEONE will say yes eventually.

You may notice that my argument is independent of the fact that I believe we should NOT bailout the automakers: the point is, we have a process, we followed the process, and it seems the whole thing was a sham - our elected officials have spoken, but someone somewhere doesn't like what they said. What a joke. I mean, we could at least do what we did with the TARP hearings: after the auto bailout was rejected, let's wait until Congress panics when the stock market tanks, and makes the mistake of confusing the stock market with the good of the American people, changes their mind, and passes new legislation. That process sucks, but it's better than Congress's will being ignored or overruled.

And in other news, just in case you missed the Bernie Madoff story: it turns out his entire asset management business was a ponzi scheme (and possibly the biggest ponzi scheme in history!). The great thing, though, is that as long as he turned out positive returns, no one cared! (Sounds like the same symptoms of our massive credit bubble doesn't it? Take on massive risk, but no one cares as long as the returns are positive!) As Clusterstock points out, Barron's actually questioned his returns back in 2001, as he seemed to have made the same mistake as the guys who cheated at online poker: he never lost money! Another brick in the wall.

Still building my bunker,

-KD

New Benchmark

SnL set a new benchmark this week with "I Jizzed In My Pants."

Video Recaps | Full Episodes | Webisodes

Run Good!

I finally ran good, and took down the third episode in the Pokerlistings Run Good Challenge 2 series. After getting all in early vs Luckbox with KsJs on a QsQc9s board against his pocket 4's, I had too many outs to count - spiked a king on the turn to double up, and was never all in again for the duration of the tourney. I dispatched Chops with my QTo vs his TT after I raised preflop and was getting 2-1 to call his shove. This prompted a series of incredulous text messages from Chops after I sucked out on him: "QT?!?!?!" " ??????" "?!?!?"

Shortly thereafter, Michele Lewis smooth called my preflop raise (she had QQ) and then called when I put her all in on the 8 high flop. My 44 was way ahead after a 4 fell on the rio, and I turned my attention to the PokerShrink, who I again dispatched with 44 when I flopped a set on an ace high board after raising preflop, and there was no getting away from it with his AJ. Interestingly, Shrink has me classified on his blog as "LAG maniac."

Pokerlisting's own Dan "the boy" Skolovy put on a very impressive display of call and response B.I.G. lyrics with me, which was necessary to get Chops to stop talking about Candlebox and other lost in the 80's bands. Since rap music is illegal in Canada, Skolovy had to study his rhyme craft deep in an igloo by candellight while sitting on a beaver pelt, but learned well.

I avoided getting stuck in a team play sandwich between Dr. Pauly and Change100, who were playing while running from the Federales in Mexico, and Pauly was eliminated by Pokerlistings host Matt Showell. We ground down Change100 to set up the heads up bloodbath between me and Matt. I needed a first place finish just to set up a 3 way tiebreaker for the last spot in the grand finale between myself, the Spaceman, and Dr. Pauly, and I achieved just that after a back and forth battle with Showell, which ended with me raising on the button with 77, and 4-betting a pot-sized re-raise after he 3-bet me. Showell tanked and called with A8, and my hand held up, shipping me the generous freeroll prizepool and setting up a tiebreaker for the final spot.

Thanks again to the folks at Pokerlistings for giving me a chance to play with the A-list poker blogging elite in this freeroll series.

-KD

Reading for the Weekend

Clusterstock eloquently and simply explained why the government's idea to manipulate mortgage rates down to 4.5% is an asinine idea.

Vanity Fair has a nice piece about the effects of the financial collapse on the super rich.

British Humour: How banks make money

I can't believe Sean Avery got suspended for 6 games for his comments.

The Sports Guy's weekly column is very good this week.

-KD

Sloppy Seconds

Plaxico Burress was suspended by the NY Giants for the remainder of the season, because he broke the law by firing an illegal handgun, and he faces two prison terms of 3 1/2 years each.

Sean Avery, on the other hand, was suspended by the NHL for making a comment about his ex-girlfriend Elisha Cuthbert's tendency to date other NHL players:

"I'm really happy to be back in Calgary; I love Canada," the Ontario native said. "I just want to comment on how it's become like a common thing in the NHL for guys to fall in love with my sloppy seconds. I don't know what that's about, but enjoy the game tonight."

I'm no Sean Avery fan, but seriously - that warrants a suspension in the NHL these days? Talk about signs of the apocalypse. It's not like he yelled something rude at Elisha in front of the camera, like:

-KD

STFU Hank Greenberg!

Clusterstock got me all fired up this morning by pointing out an op-ed in today's WSJ from former AIG CEO Hank Greenberg. Now, more than three weeks ago I addressed the atrocity that was out RE-negotiated bailout terms for AIG - since the terms of the initial bailout were just too reasonable for the US Taxpayers. Hank Greenberg, however, says it's still not fair! Really? Really Hank? AIG took risks they couldn't possibly mitigate, printing profits by doing so for many years, and then when the bill comes due you think it's not fair? Hank writes:

"The role of government should not be to force a company out of business, but rather to help it stay in business so that it can continue to be a taxpayer and an employer."

Huh? Hey Hank - if the government hadn't stepped in, your company WAS going out of business! Also, due to gross ignorance of the risks, they were going to take a lot of other people down with them! As for the bullshit about it being in the government's best interest if AIG remains a taxpayer, a quote from Rounders comes to mind:

"It's a fucking joke anyway. After all, I'm paying you with your money," - Teddy KGB (click the link for the actual audio!)

We're supposed to want AIG to remain a tax-paying entity so they can pay us back with our own money? No thanks Hank.

I read a hedge fund quarterly letter at the end of September from Oaktree's Howard Marks, where he explained that although he's generally bearish, he doesn't bet on the end of the world because if he's right, he won't be able to collect on his bet. AIG's business model was pretty much to take the other side of people who wanted to bet against the end of the world (or lesser transgressions) - AIG provided insurance against such events. Of course, when these "unlikely" events happened, AIG couldn't pay off the bets anyway.

Along these lines, I'm somewhat surprised that there isn't more discussion about the US Government credit default swaps which have widened, last I heard, to around 55bps (from under 10 bps). Why not sell this CDS? If the US Government defaults, we'll all be so fucked anyway that no one will be able to settle these CDS trades... There you go AIG - I just gave you a new line item for your 2009 business plan.

-KD

Who Does This?

Why I Don't Use the Hair Dryer In the Gym - A Short Story by Kid Dynamite

Saturday afternoon I hit the gym to pound out some miles on the treadmill. I live about a half mile from the gym, so after I run, I pop into the locker room to remove my sweaty t-shirt, put my sweatshirt back on, and head home dry.

So I finish my 4 miles and walk into the locker room. There's a triple sink and counter there where I can put down my Ipod and throw on my sweatshirt, while busting out a most muscular pose in the mirror. Today, however, there's a very naked dude monopolizing the first sink. Now, I've never understood the phenomenon of people waggling their nekkid goods all over the locker room - especially at the sink. I mean, what do you do at the sink - brush your teeth, comb your hair, shave - basically, things that are very easily done with a towel wrapped around your waist. But no - this donkey was deliberately toweling off his head, shaking his junk all around, in my general direction.

I turned at a slight angle away from him, being careful to avoid the reflection trap of the side-mirror that I was now almost facing, and being even more careful not to stare into the sun (aka, his junk). Apparently not content that I refused to check out his package, this guy then proceeded to bang out a hip flexor stretch with his foot up on the sink. Naked. Way out of line.

As I grabbed my t-shirt and turned to exit, he executed the coup de grace - he grabbed the hair dryer and after giving his head a compulsory 5 second once over, he proceeded to blow dry his junk.

And THAT is why I don't use the hair dryer at the gym.

-KD

Run Bad

So I played the second part of the second installment of the PokerListings Run Good Challenge today. The bad news is that I finished last again. The good news is it only took one orbit for me to get bounced. Last week, my AcQc ran into Luckbox's 7-2 on a A-2-2 board where he'd 3-bet me preflop. This week I trapped Benjo with my AA vs his QQ - I raised preflop and smooth called his 3-bet. I check-called the 9-2-2 flop, and we got it all in when a jack peeled off on the turn. He spiked his 2 outer on the rio to send me to the rail. Effin' French.

Actually, maybe I shouldn't condemn Benjo and the French - what's really got me pissed off these days is Americans. Ignorant Americans lining up overnight to spend money they don't have - and killing people in the process. I'm assuming you've read that story about the Wal-Mart employee who was trampled by a mob of doucheballs rushing to scoop up dancing Elmo's for 30% off and dogshit Olevia LCD tv's for a few hundred bucks. Was it worth it so you could get those 300 thread count sheets for $19.99? Did that $39.99 electric razor assuage your guilt? People can't be bothered to be responsible for their own finances or to pay their own mortgage, but they'll camp out overnight at a fucking Wal-Mart to save $10 on a laser pointer pen they'll never use.

The mob actually ripped the doors off the hinges minutes before the store opened. Of course, this being America, people blame the store. Meanwhile, the store had called the cops several hours earlier, but the cops had to respond to more mobs of doucheballs at neighboring stores.

I'm still trying to figure out if this story is bullish or bearish for the retail season: is it a sign that Americans still want to spend money? Or a sign of pure desperation - that they have no money to spend, and will fight to the death to save twenty bucks? Seems like the latter to me...

-KD

More Credit!

As if to mock my claim yesterday that you can't solve a problem of excessive credit with MORE credit, the Federal Reserve today announced some new programs which aim to free up more credit!

The Fed said they'd buy up to $500B (that's BILLION) in mortgage backed securities, and $100B in direct debt from Fannie and Freddie. They also said they'd spend $200B on asset backed securities to ease credit to small businesses, student loans, auto loans and credit card loans.

As I've said many times, the housing bubble was caused by an over-availability of cheap credit, yet the Fed's solution to the problem is more of the same. In their own words:

“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.”

Good luck with that. Hey, mortgage rates had their biggest drop ever today - I guess that means the Fed is brilliant (sarcasm). In the words of a commenter on the NY Times' article on the Fed program: "I guess I'm having a little bit of a problem understanding how more credit is going to help people who don't have jobs and owe $250,000 on a house that isn't even worth $150,000. Can someone kick me down some knowledge?"

I sent Bones this video today, with the subject line "insta-fav"

But he replied with this video, which is a tremendous take on the classic iconic 1980's A-Ha video: Take On Me. This is great stuff: The Take On Me Literal Video Version

-KD

Ponzi

Oh man. What to say... Today I'm not focused on the Citi bailout - let's talk about the FDIC "Temporary Liquidity Guarantee" program, and I welcome any insights from readers who trade the corporate bond markets.

Let's go over the quick facts of the program, which was announced Oct 14th, and which caught my attention because I read today that Goldman Sachs will be raising $2Billion under the program on Tuesday.

"Under the plan, certain newly issued senior unsecured debt issued on or before June 30, 2009, would be fully protected in the event the issuing institution subsequently fails, or its holding company files for bankruptcy. This includes promissory notes, commercial paper, inter-bank funding, and any unsecured portion of secured debt. Coverage would be limited to June 30, 2012, even if the maturity exceeds that date. Participants will be charged a 75-basis point fee to protect their new debt issues."

Obviously, if Goldman is issuing debt backed by the FDIC, it should have yields that are very close to corresponding treasury yields, which is a mere fraction of what Goldman would pay in the open market. In essence, the FDIC is attaching CDS protection to every bond issued by qualifying firms, and the firms themselves pay for this protection which is given to the buyer: 75 bps.

Now, this plan brings up a lot of thoughts smashing through my head: 1) This is basically what AIG did - they tried to guarantee everything that everyone brought them, which worked fine until it started to NOT work, then it unraveled quickly. 2) On the other hand, the US Government is clearly not AIG, and what they're really doing here is allowing companies to get cheap funding without (the government) having to pick up the tab for it - all they (the government) do is put their seal of approval on it, and buyers have no dis-incentive that I can think of - the debt is essentially risk free. Brilliant right? 3) But we never found out which banks are the "good banks" and which banks are the "bad banks" because we never marked all the crappy assets to market - so the government can very well end up guaranteeing the debt of companies that chug cock and will not be able to pay it back.

But anyway, let's move on to a specific example - because Eric emailed me and said "As a holder of CIT debt yielding 28%, this program makes me happy!" Eric owns CIT debt maturing in 2011, which yields in excess of 25%. Now, this debt was already outstanding, so it's not guaranteed by the FDIC. But why would CIT ever default on this debt? Even though they have billions of dollars of debt outstanding and maturing in the next few years, why would they default on any of it if they can issue new guaranteed debt? Well duh, they need to be able to sell the new debt to refinance the old debt - but why wouldn't they be able to sell new debt - IT'S GUARANTEED! What would discourage a buyer of the debt from owning it?

All I can think of is one thing, but it's a big thing - and it comes back to the central point of this whole calamitous cycle: deleveraging. There simply isn't enough capital available to be invest to continue to fund all the excess debt we've accumulated over the last ten years or so. If anyone doesn't know what "leverage" means, it's basically the principle where you can take $1 and buy more than $1 worth of stuff for it. For some companies, that means they can buy $5 worth of stuff, for some it means $10. For the Wall Street brokers, it was roughly $30. For Long Term Capital Management, it was $100.

But here's another question, and it's related to the crappy ass CIT debt: at SOME price, buyers will come in and buy short term debt backed from CIT that's backed by the FDIC right? I mean, if it yielded 20 bps over treasuries, maybe it doesn't sell... But if it yields 2% over treasuries, it does, right? Or if the number that it takes it 4%... at some price, buyers come in. Meanwhile, CIT avoids defaulting on their other debt - refinancing it with this new gift from the FDIC. Sure, they may default later, when this new debt comes due, but isn't that better for them than defaulting now? Don't they want to participate in the debt ponzi scheme and take the free roll that something turns around for them, they catch a miracle, and are able to pay off this new debt too? This is something I'd love to hear reader thoughts on. In short, why would CIT(or anyone else) ever default on debt that comes due before the end of the FDIC program's guarantee?

I called my account manager at Solomon Smith Barney (owned by Citigroup, of course) in the beginning of August. I told him, "I want my liquid assets invested such that when Citi goes bankrupt, I don't lose a dime." This meant I had to have them out of a Citi money market, out of the muni-money market they were in, and out of any sort of account that basically had any risk. So I'm in a Treasury money market fund, which yields somewhere around 50 bps probably. Is there any reason at all (apart from liquidity) why I shouldn't buy this new Goldman Sachs debt they'll issue tomorrow, which will probably yield around 3%? Apart from the fact that I can't sell the GS debt in two weeks if I so desire, I think the answer is "no."

The fact of the matter is that we, as a country, are broke. It's not just housing - it's credit cards, auto loans, corporate debt - we're all over levered, and that leverage has to come down. We can't just continue to roll over all of our old debt, because the amount of capital available in the system has shrunk and will continue to shrink as we continue to reduce our borrowing and leverage. We can't solve the problem of house prices being unaffordable by trying to prevent home prices from falling. We can't solve the problem of companies having too much debt by guaranteeing their new debt!

I'm thinking of a few different childhood game cliches as closing lines: don't get caught holding the hot potato, and don't be the one without a chair when the music stops... Someone will be left holding the bag when the ponzi scheme ends - and as usual, it looks like it will be we the taxpayers.

UPDATE: holy crap, speaking of my cliches - check out this quote I just found from July 2007 from former Citi CEO Chuck Prince:

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Party on.

-KD

Not Feeling It

Seriously - I'm really not feeling the anger. Maybe this will hit the spot:

Nov. 17 (Bloomberg)
Four of the world's biggest life insurers may acquire small banks that regulators have cited for improper practices to improve their own chances of getting cash from the $700 billion U.S. government bailout fund. Lincoln National Corp. and Aegon NV, owner of Transamerica Corp., may buy savings and loan companies in Indiana and Maryland whose methods were found to be ``unsafe and unsound'' by the Office of Thrift Supervision. Hartford Financial Services Group Inc. is acquiring a Florida lender that was told by the OTS in May to curb lending. Genworth Financial Inc.'s target got a ``cease-and-desist'' order tied to potentially fraudulent loans....Lincoln National plans to buy Goodland, Indiana-based Newton County Loan & Savings, which has $3.83 million of deposits, according to regulatory data, and no branches. The lender posted a $404,000 loss for the quarter ended June 30, according to FDIC data. Newton was ordered to halt certain types of mortgages without written approval from the OTS. Lincoln may qualify for as much as $3 billion from the Treasury, company spokeswoman Laurel O'brien said today

Wow - That's even worse than the scam HIG pulled! Lincoln is buying a firm with NO branch offices, THREE full time employees, and under $4MM in deposits... and they'll be eligible for up to $3Billion of taxpayer money from the Treasury! Aiyahhh! I mean, I actually have to CALM MYSELF DOWN by watching POPOZAO!

In "more enjoyable reading" news, Doctor Pauly has a few good posts about the far reaching effects of the economic downtown; even hookers in Vegas are feeling the heat. ""It sucks," she said. "Business is bad. No one has money. Shit, I might have to actually get a real job." Pauly's inimitable observations and masterful dealings with the pro's are a must read. In another post, Emissaries From the Land of Indulgence, he echos a sentiment that the Big Show and I commented on out loud on our last two trips: the Vegas game is over. The bubble has burst, and there will be a lot of pain to come. Especially if Michaelski is standing near you when you're gambling.

And speaking of good news, Pauly and Michaelski, Pokerlistings will once again be hosting both of them, along with yours truly, in the second coming of the Run Good Challenge series, starting this Sunday.

KD

This Should Make You Very Mad

NEW YORK (Reuters) - Hartford Financial Services Group Inc, a property and casualty insurer beset by worries about capital levels, said on Friday it agreed to buy a small savings and loan, making it eligible to raise up to $3.4 billion from the U.S. government's bank bailout plan. An infusion may alleviate investor concerns about capital at Hartford, which suffered a $2.63 billion third-quarter loss, and last month raised $2.5 billion from German insurer Allianz SE. Shares of Hartford soared 20.9 percent on Friday, closing up $2.19 at $12.65 on the New York Stock Exchange.

Hartford said it agreed to buy Sanford, Florida-based Federal Trust Corp, which operates the 11-branch thrift Federal Trust Bank, for $10 million. The insurer said it plans to recapitalize Federal Trust, and has applied to the federal Office of Thrift Supervision to become a savings and loan holding company.

Hartford said the developments should allow it to sell $1.1 billion to $3.4 billion of preferred shares to the government under the Treasury Department's $700 billion Troubled Asset Relief Program.

"We are taking these actions as a strong and well-capitalized financial institution looking for maximum flexibility and stability," Chief Executive Ramani Ayer said in a statement.

To simplify what's happening here: Hartford Insurance, an insurance company that made a lot of bad bets, needs money. They aren't currently eligible for funds under the government's program, so they are spending $10 Million to buy a little savings and loan bank in Florida. They will then take advantage of the system, reclassify themselves as a Savings and Loan, and be eligible for up to THREE BILLION DOLLARS from the treasury's fund. Spend $10MM, file some papers, get $3B in government handouts.

Oh - by the way - Hartford isn't the only company that's trying this scam. Aegon, Genworth and Lincoln Financial also did the same thing, and last week American Express morphed into a "bank holding company," as did GE Capital and CIT group - all just to try to get their hands on the money the government is parcelling out.

This should make every American taxpayer FIGHTING mad.

-KD

"If You Love America, You Throw Money In Its Hole!"

Via WallStreetFighter: President Bush Gives Nation "The Shocker"

I love this video from the Onion - you really have to appreciate how accurate a parody it is of these multi-panelist news debate shows:

In The Know: Should The Government Stop Dumping Money Into A Giant Hole?

My favorite is definitely the black lady: "My father worked two jobs so he'd have money to put in the money hole, and HE never complained!" and "If you love America, you throw money in its hole."

If you believe that people who took out mortgages they couldn't afford should have their outstanding loan balances reduced, well, then, you like Hitler:

Finally, I actually wasted about 90 minutes with Yahoo Chat support last night while I was watching the Jets-Pats game. All I could think of the whole time was the classic "I accidentally the whole fleshlight" prank... But I really had a problem with my email attachments.

Please wait for a Yahoo! agent to respond.

You are now chatting with Julie

KidDynamite: hi julie

Julie: Hi! Welcome to our Yahoo! Mail Live Chat service. I'm glad you'vejoined us.

Julie: Thank you for providing us the details of your issue.

Julie: In my understanding, you are unable to open your attachments.

KidDynamite: yes

Julie: Is that correct?

KidDynamite: yes

Julie: I apologize for the inconvenience this might have caused you.Please be assured that I'm more than willing to assist you with your concern.

Julie: Are you getting any error message?

KidDynamite: i get an "internet explorer cannot display the webpage"

KidDynamite: if someone sends me a file (.doc, .pdf) i can't even save it to my desktop... for some reason Yahoo Mail treats it like an HTML document

Julie: Thanks for the details.

Julie: Is "KidDynamite1" the Yahoo! ID you are having issues with?

KidDynamite: yes

Julie: Thanks for the details.

Julie: Please hold while I check on your issue.

Julie: Sorry for the delay, KidDynamite.

Julie: Let us clear your browser's cache and cookies first to see if theissue will go away.Julie: I'll be glad to walk you through the steps.

KidDynamite: ok

Julie: Before we proceed, close all your windows except this chatwindow. Make sure you're signed out of your Yahoo! Mail account.

KidDynamite: ok done

Julie: Thanks. Please open a new Internet Explorer window.

KidDynamite: done

Julie: 1. Click on "Tools" at the upper right of any Internet Explorer window.

Julie: 2. Choose Internet Options from the drop down menu.

KidDynamite: yep

Julie: 3. Click on "Delete" under "Browsing History".

Julie: 4. Click on "Delete All" at the bottom, and choose "OK" ifprompted.

Julie: 5. Click the OK button at the bottom of the Internet Optionswindow.

KidDynamite: ok

KidDynamite: done

Julie: Click here to access your account.

Julie: Let me know of the results, KidDynamite.

KidDynamite: 1 sec

Julie: No worries.

KidDynamite: still have the same problem

KidDynamite: it didn't fix it

Julie: Thanks for checking.

Julie: Let us try another troubleshooting step on your account to see ifthis will work.

Julie: Let us try enabling your Java Script.

KidDynamite: ok

Julie: Are you ready with the steps now?

KidDynamite: y

Julie: 1. From the "Tools" menu, click "Internet Options."

Julie: 2. Click on the "Advanced" tab and then in the "Settings" list,scroll down to the "Security" section.

Julie: Let me know if you're done.

KidDynamite: done

Julie: 3. Select the "Allow active content to run in files on MyComputer" check box.

Julie: 4. Click "OK."

KidDynamite: ok

Julie: 5. Click "Apply."

Julie: 6. Click "OK."

KidDynamite: done

Julie: 7. Close and relaunch your Internet browser.

Julie: Click here to logged back into your account.

Julie: Let me know if you are still having the same issue.

KidDynamite: yes,. still same problem

KidDynamite: as i said, it works from my GMAIL account. so i don't think it's aproblem with my PC settings

Julie: Okay.

Julie: Please temporarily disable your anti virus and fire wall client.

Julie: For most security software products, you can right-click on the security software icon in the bottom right-hand corner of your screen,by the system clock.

Julie: This will usually pop up a menu with "Preferences" or "disable"as an option. Julie: Try to change one of those options to see if the issue goes away.

KidDynamite: i have no interest in disabling my antivirus and firewall

KidDynamite: as i've said, it works in ANOTHER email client

KidDynamite: it's a YAHOO problem

Julie: Please understand that we need to check first all your settings.

KidDynamite: i looked on Yahoo answers and it seems i'm not the only person with this problem... this can't be the first Yahoo has heard of it...

KidDynamite: julie - let's just pretend i disabled my firewall and antivirus,and it still didn't work.

KidDynamite: then what?

Julie: My apologies for that, KidDynamite.

Julie: You should check it first before we proceed with the next step.

KidDynamite: ok 1 sec

KidDynamite: turn them off and retry it?

Julie: Please try to turn off your anti virus so we could check if this caused the issue.

Julie: Yes, after turning it off, you may close and restart yourbrowser.

KidDynamite: done. (note: I didn't turn off my anti-virus - I was bluffing Julie here)

KidDynamite: checking...

Julie: Then, try accessing again your account.

KidDynamite: still doesn't work!

Julie: Hi, I'll be right with you.

Julie: Sorry to keep you waiting.

Julie: Let us proceed with the next troubleshooting step on youraccount.

KidDynamite: ok

Julie: Let us disable your Internet Add Ons and Plug Ins.

Julie: 1. Close out of all instances of the Internet Explorer internetbrowser.Julie: 2. Select "Start", "Settings", then click "Control Panel".

KidDynamite: julie - are you a real person or an automated system?

Julie: Let me know if you're finish.

Julie: I am a real person, KidDynamite.

KidDynamite: :-)

Julie: :-)

Julie: Are you done with the first two steps?

KidDynamite: yes

Julie: 3. Double-click on "Internet Options".

Julie: 4. Select the "Advanced" tab.

KidDynamite: ok

Julie: 5. Under "Browsing", remove the "Enable third-party internetbrowser extensions" check box.

Julie: 6. Relaunch the Internet Explorer internet browser.

Julie: Please access your account here.

Julie: Let me know if the issue still persists.

KidDynamite: 1 sec

Julie: No worries.

KidDynamite: yep. still have the same problem

Julie: Alright.

Julie: Thanks for checking.

Julie: To check on your issue further, I need ermission to access your account and duplicate your issue at our end.

Julie: *permission

KidDynamite: ok

Julie: Thank you, before proceeding I'd like to verify your account information so I can confirm your account ownership. We take this precaution to ensure the security of your account.

Julie: Just to verify the Yahoo! ID that you are having problem with is"KidDynamite1". Am I correct?

KidDynamite: yes

Julie: What is your Date of Birth? (mm/dd/yyyy)

KidDynamite: 01/11/1976

Julie: What is the answer to your secret question: "what kind of pet doi have?"

KidDynamite: dog

Julie: Can I have your Alternate Email Address?

KidDynamite: for what purpose?

KidDynamite: it's the only email address i have that gets no spam... so i'm reluctant to give it out

Julie: Please understand that these requirements exist only to protectthe privacy and security of your account.

KidDynamite: sorry julie, but that has nothing to do with the privacy and security of my account

Julie: Let me provide you a link where you can add an alternate email address on your account.

KidDynamite: i do'nt want to add an alternate email address

KidDynamite: lets just pretend i don't have one

Julie: Please understand that I cannot access your account and duplicateyour issue without proper verification process.

KidDynamite: i dont understand.. do you want to send me an email? or do i have an alternate address already listed on my account?

KidDynamite: if i have an alternate address on my account its:KidDynamite@alum.edu

Julie: Let me provide you the link on how you can update your account information page, KidDynamite.

Julie: Click here to update your account information.

Julie: You may access the link and add the alternate email address thatyou have provided.

KidDynamite: ok. i do not have an alternate email address to add

Julie: You may add any alternate email address.

KidDynamite: i understand

KidDynamite: no thanks

Julie: I am sorry but I cannot access your account. This is ourstandard procedure in accessing one's account and we are all required to follow this procedure.

KidDynamite: so if someone only has a yahoo email address you cannot accesstheir account!??!?!KidDynamite: i have no idea what you are talking about

KidDynamite: how will ANOTHER email address help you access my account?

Julie: In depends on the verification process, KidDynamite. I need youralternate email address because the first data that you have provideddoes not match on our record.

KidDynamite: KidDynamite@alum.edu

Julie: Please access the link and add the alternate email address onyour account information page.

Julie: Let me know if you're still there.

KidDynamite: yes i am

KidDynamite: i did not get an email

Julie: Thanks.

KidDynamite: what information that i gave you was wrong?

KidDynamite: wait.. got the email

Julie: Let me check again your account.

KidDynamite: 1 sec

KidDynamite: ok

KidDynamite: i added the email adddresss

KidDynamite: now what

KidDynamite: and please tell me how to update my security quesitons - cause i created this account a long time ago when i didn't even have a pet - so i have no idea what the answer to that question is. i have a dog now.

Julie: Let me address your issue one at a time.

KidDynamite: go for it

KidDynamite: i'm still here

Julie: Thanks.

Julie: To answer your question regarding the information you have given,our system automatically identify the answers that you have provided andto update your "security questions" let me provide you a link on how you can update it.

KidDynamite: please do

Julie: Please click here to update your "Secret Question".

Julie: For the meantime, please log out from your Yahoo! Mail before I can access it.

KidDynamite: i am out

Julie: Thank you, please give me 2-3 minutes while I access youraccount.

KidDynamite: ok. by the way, there is no way i can change my secret question if i don't even know what my current secret answer is

KidDynamite: so that's useless

KidDynamite: but anyway....

KidDynamite: you've confused me into submission...

Julie: Alright. In that case, you will have to contact our AccountVerification Team.

Julie: Let me provide you their contact details now.

KidDynamite: forget it

Julie: Please call 1-866-562-7219 for AV Department.

KidDynamite: lets just see if you can fix the email problem

Julie: Please hold while I check your issue.Julie: Could you tell me what subject of the attachments are you trying to open?

KidDynamite: can i log back in to check?

KidDynamite: re: FAMILY CHANUKAH PARTY

KidDynamite: third one down in my account

KidDynamite: from Mom Dynamite

Julie: Alright.

Julie: Let me log out first from your account.

Julie: You may check now your account.KidDynamite: i did already

KidDynamite: i told you already

KidDynamite: re: FAMILY CHANUKAH PARTY

Julie: Alright.

Julie: Thanks for the details.

KidDynamite: did you find it?

KidDynamite: can you open it?

Julie: Yes, KidDynamite.

Julie: One moment please as I further check on it.

Julie: I was able to download the attachment, KidDynamite.

KidDynamite: are you on Windows Vista?

KidDynamite: actually - i'm on a laptop now that's not running Vista - so that's not the problem

Julie: Let me try that again.

Julie: I was able to download again the attachments. Have you try downloading the attachments in another browser?

KidDynamite: nope

KidDynamite: what browser are you using?

Julie: I am using Mozilla Firefox. Let me provide you a link where you can download another browser.

KidDynamite: no thanks

KidDynamite: hold on.

KidDynamite: i have Safari

KidDynamite: trying it...

Julie: Okay.

KidDynamite: doesn't work in Safari either (i was using IE before)

KidDynamite: here is the error from Safari:KidDynamite: Safari can't open the page"http://68.142.200.12/us.f342.mail.yahoo.com/ya/securedownload?clean=0&fid=Inbox&mid=1_534017_AHqyo0IAANW%: "unknown error"(CFURLErrorDomain:302)

Julie: Thanks for trying.

Julie: But I could open your attachments here on my end.

KidDynamite: ok. i guess i'll just have to stop using yahoo

KidDynamite: are you coming to the Chanukah party?

Julie: If you will invite me, KidDynamite.

Julie: My apologies for the inconvenience.

KidDynamite: there are clearly problems julie - why don't you download IE and see if it works?

Julie: I would suggest that try accessing your Yahoo! Mail account from another computer at a different location. You should also try adifferent ISP to eliminate that as a possible factor.

Julie: I will try to open the attachments on IE browser.

Julie: Please hold for a while.

KidDynamite: ok

Julie: Thanks.

Julie: I was able to open the attachment using the IE browser.

KidDynamite: come on

KidDynamite: you're kidding

KidDynamite: what's it say?

Julie: Thank you for waiting. I'll be with you in just a moment.

Julie: I'm sorry for the delay. I'll be with you as soon as I can.

KidDynamite: i thought we were in the middle of a conversation...

Julie: Sorry to keep you waiting.

Julie: Please let me check again your issue.

KidDynamite: julie... i'm starting to think you're really a computer

Julie: I am still here.

Julie: I am still investigating your issue.

Julie: Just to verify, the attachment is a word document, right?

KidDynamite: yes

KidDynamite: what version of IE did you use?

Julie: Alright.

Julie: It says that "It's time for latkes, dreidel games, Yankee swap,time together, and more".

KidDynamite: i have IE 7.0.5730.11

KidDynamite: correct... you passed the test!

KidDynamite: i believe you are a human now...

KidDynamite: and i can't believe you were able to open the attachment

KidDynamite: jeez...

KidDynamite: so what IE version?

KidDynamite: and also, about that party - do you think it sounds like fun?

Julie: Yes, KidDynamite.

Julie: The version I am using as of now is IE 6.

KidDynamite: ok. i give up.

Julie: Yes, I think that was fun.

Julie: I am sorry for the inconvenience, KidDynamite.

KidDynamite: yeah yeah

Julie: Anything else of the moment?

KidDynamite: can you please remove the other email from my account?

KidDynamite: it will not let me delete it now

KidDynamite: it says i must have another email...

KidDynamite: which is ridiculous, because i didn't before

Julie: You will have to contact our Account Verification Team regarding that issue.

KidDynamite: oh man. you duped me

KidDynamite: you got me to add another email for no good reason!

KidDynamite: all that account does is forward to yahoo anyway

Julie: Let me provide you their contact details now.

KidDynamite: i have no interest in calling them

KidDynamite: or wasting any more time with Yahoo

Julie: Please call 1-866-562-7219 for AV Department.

KidDynamite: julie - i appreciate your help, but it's clear there are problems with yahoo email you can see it in the Yahoo questions and answers forums

Julie: My apologies for any inconvenience.

KidDynamite: it's not just me... your teams should be looking into the solution

KidDynamite: i know you guys change the versions all the time... well, my current version sucks - it doesn't work.

Julie: You may visit our Yahoo! Mail Blog site about the updates onYahoo! Mail, KidDynamite.

KidDynamite: plese forward my complaints up the yahoo technology food chain

KidDynamite: where is the yahoo mail blog?

Julie: Click here for Yahoo! Mail Blog site.

KidDynamite: do you see what it says there?

KidDynamite: the post from November 11th?

Julie: Yes, rest assured that I will take note of your issue and we willtry to investigate all the possible causes.

KidDynamite: they are already aware of the problem!!!!

KidDynamite: please make sure they know it's not fixed

Julie: I will take note of that.

Julie: Is there anything else I can help you with?

KidDynamite: nope

KidDynamite: thanks

this is my life...

-KD