Saturday, February 28, 2009

The Oracle of Omaha

Warren Buffett's 2008 letter to Berkshire Hathaway shareholders is out. I'm going to pull what I found to be the most interesting quotes for you here:

"We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall." - page 4

"When investing, pessimism is your friend, euphoria the enemy." - page 5

"Additionally, the market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie and me. Indeed, we enjoy such price declines if we have funds available to increase our positions. Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down." - page 5

"Our long-avowed goal is to be the “buyer of choice” for businesses – particularly those built and owned by families. The way to achieve this goal is to deserve it. That means we must keep our promises; avoid leveraging up acquired businesses; grant unusual autonomy to our managers; and hold the purchased companies through thick and thin (though we prefer thick and thicker)" - page 7

"As we view GEICO’s current opportunities, Tony and I feel like two hungry mosquitoes in a nudist camp. Juicy targets are everywhere" - page 8

"Reinsurance is a business of long-term promises, sometimes extending for fifty years or more. This past year has retaught clients a crucial principle: A promise is no better than the person or institution making it. That’s where General Re excels: It is the only reinsurer that is backed by an AAA corporation. Ben Franklin once said, “It’s difficult for an empty sack to stand upright.” That’s no worry for General Re clients." - Page 9

"Why are our borrowers – characteristically people with modest incomes and far-from-great credit scores – performing so well? The answer is elementary, going right back to Lending 101. Our borrowers simply looked at how full-bore mortgage payments would compare with their actual – not hoped-for – income and then decided whether they could live with that commitment. Simply put, they took out a mortgage with the intention of paying it off, whatever the course of home prices. Just as important is what our borrowers did not do. They did not count on making their loan payments by means of refinancing. They did not sign up for “teaser” rates that upon reset were outsized relative to their income. And they did not assume that they could always sell their home at a profit if their mortgage payments became onerous. Jimmy Stewart would have loved these folks." - page 11

"Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called “upside-down” loans). Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay. Homeowners who have made a meaningful down-payment – derived from savings and not from other borrowing – seldom walk away from a primary residence simply because its value today is less than the mortgage. Instead, they walk when they can’t make the monthly payments." - page 12

"Home ownership is a wonderful thing. My family and I have enjoyed my present home for 50 years, with more to come. But enjoyment and utility should be the primary motives for purchase, not profit or refi possibilities. And the home purchased ought to fit the income of the purchaser. The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income should be carefully verified.
Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective.
Keeping them in their homes should be the ambition." - page 12

"Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas." - page 15

"I have pledged – to you, the rating agencies and myself – to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet
tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits." - page 16

"Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns" - page 16

"Improved “transparency” – a favorite remedy of politicians, commentators and financial regulators for averting future train wrecks – won’t cure the problems that derivatives pose. I know of no reporting mechanism that would come close to describing and measuring the risks in a huge and complex portfolio of derivatives. Auditors can’t audit these contracts, and regulators can’t regulate them. When I read the pages of “disclosure” in 10-Ks of companies that are entangled with these instruments, all I end up knowing is that I don’t know what is going on in their portfolios (and then I reach for some aspirin)." - page 17

"Derivatives contracts, in contrast, often go unsettled for years, or even decades, with counterparties building up huge claims against each other. “Paper” assets and liabilities – often hard to quantify – become important parts of financial statements though these items will not be validated for many years. Additionally, a frightening web of mutual dependence develops among huge financial institutions. Receivables and payables by the billions become concentrated in the hands of a few large dealers who are apt to be highly-leveraged in other ways as well. Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with.

Sleeping around, to continue our metaphor, can actually be useful for large derivatives dealers because it assures them government aid if trouble hits. In other words, only companies having problems that can infect the entire neighborhood – I won’t mention names – are certain to become a concern of the state (an outcome, I’m sad to say, that is proper). From this irritating reality comes The First Law of Corporate Survival for ambitious CEOs who pile on leverage and run large and unfathomable derivatives books: Modest incompetence simply won’t do; it’s mindboggling screw-ups that are required." - page 17 & 18

Warren also has an interesting analysis of how he thinks the Black-Scholes options pricing model overstates the risks in the put options he has sold when looking at long term options, on page 20 of the letter.


Tuesday, February 24, 2009

The Wall Street Journal is Wrong

In poker, there's a saying, "don't tap on the glass." When someone is being an idiot - a fish, you don't educate them - you let them be an idiot and you take their money.

However, when I read something that I know is blatantly false in a paper with as much clout as the Wall Street Journal, it bugs me. WSJ reporter John Jannarone wrote an article on the GLD trust on Sunday that fundamentally misunderstands how the trust works, and since he's not the only one (I read some "GLD IS A SCAM!" articles which posed similar questions), I felt the need to explain it here.

First, let's review his claims:

"ETFs such as SPDR Gold Shares -- ticker GLD -- are a direct bet on bullion prices. The trusts have to buy physical gold to match investment levels. Having doubled the gold in their vaults in a year, the stash is worth $45 billion.That's tiny in the context of big asset classes like stocks. But gold's scarcity keeps the market small. If ETFs continue to grow fast, they could start to create a real squeeze in gold, with its limited supply."

and then in his conclusion:

"If, and when, investors decide the game is up, ETFs will have to liquidate holdings as people sell. Just as they are squeezing the market now, they could flood it when the frenzy ends."

OK - Mr. Jannarone has one thing right that a lot of people fail to understand - GLD is indeed a direct bet on bullion prices - they own gold bullion, not futures or options. You can read all about the details of the GLD Trust here.

However, when an investor goes out and buys GLD, there is no resulting effect causing the trust to "buy physical gold to match investment levels." That's simply not how it works. When you buy shares of GE, the money doesn't go to GE - it goes to whomever sold the shares to you. When you buy shares of SPY, the money doesn't go to the SPY trust in order to buy a basket of S&P 500 stocks. Similarly, when you buy GLD, the money doesn't go to the GLD trust - it goes to the seller of the GLD on the exchange. The trust has nothing to do with it.

Now, you are able to create shares of GLD (in 100,000 share increments) if you go out and buy the corresponding amount of gold bullion. You can take your bullion, deliver it to the trust, and get shares - but the trust doesn't have to go out and buy any bullion. Similarly, if you have 100k shares of GLD, you can give them back to the trust (aka, "Redeem") and they will give you gold bullion in return.

The reason the shares outstanding of the GLD are increasing is because someone is creating GLD shares. Even though GLD frequently trades very close to its net asset value, (you can get the data here) I'd guess that someone has been shorting GLD when it trades rich (above NAV), and buying bullion. This arbitrageur then takes his bullion and delivers it to the trust, and received GLD shares to cover his short.

There has been a lot of talk lately about the USO Oil ETF, and its impact on the oil market. The USO is structured differently from the GLD in that it owns oil FUTURES, which must be rolled each month. The assets of the USO are a huge percentage of the outstanding open interest in oil futures, and thus it ends up costing the trust a great deal each month when they roll their futures position, because everyone in the market knows they are coming and rips their eyes out. GLD, on the other hand, doesn't have to roll anything - they just hold their gold bullion in their vault.

This is neither a recommendation to buy or sell GLD - just an attempt to correct a common misunderstanding out there in the market.

Thus concludes today's lesson.


Sunday, February 22, 2009

Ridiculuous Snippets of the Week

Ok, it's time for another installment of "Is it Real? Or Is it From The Onion?"

1) Senator Skeptical About Loaning $30Billion to GM:
"Borrowing $30 billion from taxpayers to finance its restructuring could weigh General Motors down too much for the company to be viable, an outspoken senator who voted against aid for automakers said Wednesday...Senator Bob Corker, a Tennessee Republican, said that he did not know whether he would support the larger loan requests that G.M. and Chrysler made Tuesday, but that he had reservations about G.M. owing taxpayers $30 billion, nearly 24 times the amount that the company is worth based on its outstanding stock. Mr. Corker said he was also concerned that G.M., which was negotiating with bondholders to cut much of its debt to them, would continue to ask for more money.

2) Employee Who Likens Self to TV's "House" Fired:
ALPINE, NJ—Walter Salinger, 38, a U.S postal employee who often compared himself to the cantankerous yet brilliant titular character from the Fox medical drama House, was recently fired for insubordinate behavior, coworkers reported Tuesday. "He was either outright rude to customers or avoided them completely," said letter carrier Lyle Davis, whom Salinger often referred to as one of his "team," even though both men hold the same title.

3) Obama Warns Mayors Not to Waste Stimulus Money:
"Invoking his own name-and-shame policy, President Barack Obamawarned the nation's mayors on Friday that he will "call them out" if they waste the money from his massive economic stimulus plan."

So, did you figure it out yet? Sadly, only story 2 is from The Onion. When I read story 1, "Senator Skeptical About Loaning $30Billion to GM" on the NY Times site I thought their site must have been hacked. I read the article, looking for the joke, or the sarcasm, but there was nary a trace of acknowledgement! I mean, come on - Bob Corker is the only senator skeptical about this? That's impossible. I refuse to believe that. To me, this headline was the clear winner in the "Stating the Obvious" category of reporting.

Story 3, "Obama Warns Mayors Not To Waste Stimulus Money," also should have been a joke, but wasn't. If the chief tool the President is employing to make sure that our nation's governors don't waste the hundreds and hundreds of billions of dollars he just appropriated is "name and shame," well then, in the words of my most loyal reader, Bones, "We're doomed. FMyLife."

Supporters of Senator Daniel Inouye's (Hawaii) stimulus item of $198 million for Filipino veterans of WWII have already acknowledged that "they did not expect the payments to do much to stimulate the economy, but that it was a way to bypass opponents who had blocked payments in the past". So is President Obama going to SHAME them? Ridiculing them while Rahm Emanuel, Nancy Pelosi and Barney Frank dance behind him chanting "Oh SNAP! you got SERVED!" ???

I guess we'll have to wait and see.

EDIT: I almost forgot this most absurd story of the week:
"Nigerian Accused in Scheme to Swindle Citibank."

To carry out the elaborate scheme, prosecutors in New York said on Friday, the man, identified as Paul Gabriel Amos, 37, a Nigerian citizen who lived in Singapore, worked with others to create official-looking documents that instructed Citibank to wire the money in two dozen transactions to accounts that Mr. Amos and the others controlled around the world.

I mean - wow. Yes, it's real, and no - I have no idea what can even be said about that. This story is like the ULTIMATE satire, and has to prove that Citibank has not yet hit bottom - they clearly still don't understand risk!


Thursday, February 19, 2009

The Homeowner Affordability and Stability Plan

Ok, so the Obama Administration released their housing bailout. Check out the details here. The White House also published a good list of FAQ's here. I'll ignore the fact that the title of the plan (which is the title of this post) is pretty bizarre, in that any plan which aims to keep home prices from falling by definition makes them less affordable for those looking to buy homes.

So the plan has a few parts. The first part deals with people who want to refinance into a lower interest rate, but are unable to do so because it's almost impossible to refinance if you owe more than 80% of your home's value. The Plan ups this ratio to 105% - those who owe up to 105% of their homes value will be eligible to refinance into new, lower rate fixed rate mortgages. There are some examples illustrated here.

This is good - allowing people to refinance into a more reasonable interest rate is a fine goal.

The second part of the plan is basically aimed at incentivizing "at risk" borrowers and lenders to avoid foreclosure. In other words, if there are borrowers who are borderline foreclosure candidates, the government is offering to share part of the burden with the lender if the lender aims to restructure the loan so that the borrower has a less burdensome monthly payment. The government set 31% of monthly income as the goal for maximum mortgage payments. Although, according to the example worksheet I linked above, the outstanding principal balance of the loan will not change, the government will subsidize the interest rate to a below market rate to achieve the lower monthly payment.

In addition, the government offers incentives to both the borrower and the lender to remain current on the mortgage - $1k reduction in principal for the borrower for every year (up to 5 years) they remain current, and $1k per year (for 3 years) to the lender for enabling borrowers to remain current! Finally, they offer $500 incentives to mortgage servicers and $1500 incentive to mortgage holders who modify mortgages before they become delinquent. Again, they are disualifying those borrowers who own more than 105% of the value of their home.

Now, this part of the plan is a little dicier. Instead of looking at it as the absolutely absurd idea of both subsidizing and paying people to pay their mortgages, which goes against every value I have, I believe the goal is to reach a better outcome for all parties involved (lender, borrower, other homeowners in the neighborhood) who would do worse if the lender went through with foreclosure (which is expensive for the lender, obviously not good for the borrower, and lowers surrounding home values.)

The final part of the plan is more money dumped into Fannie Mae and Freddie Mac to continue to buy mortgages, as well as an increase in the maximum allowable size of their portfolios. I'll just ignore this part of the plan, since there's no use complaining about how we were supposed to be winding down FNM and FRE's heft, not increasing it - as was stated when the government bailed THEM out.

Now, one reason I'm not outraged as a fiscally conservative free markets American is that I don't think this plan is egregious. Unfortunately, because it's not egregious I don't believe it will be transformational. At best, the plan will allow borderline foreclosure cases to restructure into mortgages they will be able to pay off. At worst, it will delay their foreclosures for a few years. What it won't do, I PRAY, is bail out the morons who have no hope of paying back their debts.

Obama is not an idiot. He knows he cannot and should not bail out everyone. Unfortunately, I think there are a lot more people in the "shouldn't and cannot be bailed out" category than the President estimates, and that this housing plan will be like a finger in the dike (the retaining wall kind, not the lesbian kind).

I have thoroughly enjoyed reading the comments from NY Times readers on the Housing Plan. When there is so much outrage from an audience as supremely liberal as the Times', you know The People are getting mad. The link to the comments is sorted by ones which NY Times readers most approved of. I strongly agree with the sentiment of many of the comments, which basically revolves around the common theme of "Why are we rewarding fiscal irresponsibility?" My two most liberal colleagues continue to argue with me that we need to bail out these at risk homeowners because we cannot allow the housing market to just collapse and face armageddon in our society. I strongly disagree with this notion of homeowners being essentially "too big to fail." Millions of Americans were given a taste of a life they could never afford as a result of a bubble of massive proportions. Now they will need to go back to the life they had before they were given $700k houses on $50k incomes. It can be undone, and there are millions of other families waiting to buy these houses when they are allowed to be priced at normal market prices.

Part of the problem is that my friends don't sympathize with me because they know I'm still well off, even if I'm getting raped on my massive rent each month because I was responsible and didn't buy an apartment at the top of the market. Even though it's unfortunate that my wife and I will probably leave NYC shortly because this cost of living is ridiculous, I still have options.

I explained to these liberal friends that they shouldn't think about me - they should think about my sister and her husband, who are both teachers living (renting) in suburban Boston. How will my sister be able to afford a home if the government acts to inflate home prices artificially (and I dare anyone to explain to me how any sort of government subsidy can be viewed as anything other than artificially keeping home prices higher.) My step-sister also lives (rents) outside of Boston. Her husband drives to Providence before dawn every morning to work a temp job to earn money for the business he is working on developing. How can they ever hope to afford a house if the government is attempting to keep home prices higher - rewarding those who took on mortgages they couldn't afford?

I tried to explain to my bleeding heart liberal friends that by helping one (imprudent) family, the irresponsible borrower family, the government is hurting another (prudent) family - the "saving and waiting for AFFORDABLE housing" family. It's quite clear to me which way that scale should tip.

I leave you first with a NY Times comment from "Jessica in Brooklyn," which I think illustrates my point:
In other news, I am barely making enough to pay my student loans, rent, food, insurance and save for a down payment. To me, mortgage is a privilege. Nobody is helping folks pay their rent, so why should we spend so much money to help those who purchased too much house. I don't want to see families become homeless, but this all very frustrating for someone who is trying to purchase a home the right way. Hey Obama, I didn't get a good return on my law school education. Can you help me out with my bills?
and then with today's outburst from CNBC's Rick Santelli, who is one of the most reasonable and well informed reporters they have. This was immediately dubbed "The Chicago Tea Party."


Tuesday, February 17, 2009

Remember Back When This Was a Lot of Money?

"GM told the federal government Tuesday that it needed to increase its loan request to $30 billion, $12 billion more than it had initially sought in order to avoid bankruptcy."

And if we're lucky, that will tide them over for a few more months.

I really don't know what else to say about this disaster, except that it makes the extra $2B Chrysler requested look like a bargain. Just to be clear, that's an EXTRA $2B, totaling $9B for Chrysler.

Fortunately, I doubt I'll have to stew over the auto disaster for long, as Obama will unveil his homeowner bailout plan tomorrow afternoon.

I recommend CNBC's special "House of Cards" - about the entire housing and MBS/CDO boom and bust. It highlights the complete lack of responsibility at every step in the mortgage food chain. As I wrote in my Blowjobs and Mortgages post almost a year ago, I take issue with people blaming "Wall Street." Wall Street was guilty of making bad loans - and you can never blame the lender in that situation, as lending money to people who cannot repay it is never a profitable business model. CNBC did a good job reminding the viewer that each of the troubled homeowners they focused on took out mortgages they could not afford, while not absolving mortgage brokers and Wall Street securitizers from their role in picking up a piece of the pie. As one mortgage originator explained it, "What could I do? If I wouldn't lend them the money my share would go to zero and 20 others would lend it to them." (not an exact quote)

I would have liked to see more hard questions asked to the bond rater from Moodys who they focused on. I still think that if anyone other than the borrowers are to blame, it's the ratings agencies. I also didn't realize that Alan Greenspan himself had, back in 2004 I believe, encouraged mortgage issuers to come up with alternatives to the traditional fixed rate mortgages.

As I watched this special with my wife, she was shocked when they started describing negative amortization loans. This is a mortgage where you actually pay LESS than the interest due each month, so that your outstanding balance goes UP over time. "Who is that good for?" She asked me. I had no answer. (In truth, I think the only people NegAm loans are good for are those who can afford to speculate on future home prices and want additional leverage. Unfortunately, they were used almost exclusively for those who could NOT afford the loans if the home prices failed to continue their steep upward trajectory). "These people aren't even renters," she continued, "they're paying LESS than rent essentially," and she was right. That's a key point that I hope won't be glossed over when we structure any homeowner bailout plan - just because you took out a mortgage doesn't mean you were a homeowner and certainly doesn't mean you deserve help.

My big issue is that I have yet to find a borrower I sympathize with. It's not that I hate humanity - I'm a compassionate conservative - a Libertarian - socially liberal, fiscally conservative - call it what you want. But I believe people should be held accountable for their decisions. My father has driven the same car and lived in the same non-renovated house since the early 90's. He didn't cash out his mortgage equity to get a shiny new kitchen and a mortgage he couldn't afford - and he shouldn't have to pay the price for those who did. Similarly, my wife and I twice failed to buy homes, once during a vicious bidding war in 2000 that made no sense to me, and once in 2005 when we couldn't make numbers work because the condo fees were too high. "But you'd be building equity," people would say. "Sure - if home prices go up, which is not something I'm willing to bet on," I'd reply. So now I'm stuck paying rent still as I wait for house prices to come back to normal levels. I read a comment on a Clusterstock article last week that said it perfectly:

"This is amazing...I did not buy a house for years because I didn't think the pricing made any sense. Now the government is going to use my tax dollars against me be trying to re-inflate the market."

Prudent people should not be held liable for the greed and poor decision making of the masses. There is an old saying, "If you owe the bank $10,000 you have a problem. If you owe the bank $1mm, the bank has a problem." I'm all for people trying to renegotiate their mortgages with their banks - that is a BUSINESS decision for the banks - but I'm adamant that the government should not be involved.

anyway... we'll see what the administration comes up with. Then I'll rant some more.


Wednesday, February 11, 2009

We Want Jobs!!!

I can't escape parallels to the Onion every where I look. That's probably another sign we're still on the precipice of some sort of major fallout.

Today's moment occurred when I went to the gym. As I waited for the elevator, the television in the lobby was showing a CNN story about a steel plant - I think it was in Missouri - which had to shut down because business sucks.

I stood there and watched this story, which focused on the former workers at the steel plant, who were marching around in the street in protest - one guy had a megaphone of course, and was leading the chants:

"What do we want?"
"When do we want them?"
"What kind of jobs?"

I stood there, mouth agape, unable to shake the feeling that this was completely preposterous. Look - EVERYONE is in favor of higher employment. It's not like the steel company fired all the employees and replaced them with robots - THAT may have been something to march about, even though it's inevitable at some point with technological progress and increased efficiency.

But that's not what happened. The steel plant, as a result of the crappy economy, had to shut its doors because they cannot operate profitably. Was the head of the steel plant marching in the street shouting

"What do we want?"
"When do we want it?"

No. He wasn't, because that would be senseless. I just feel like marching in the street in order to protest something that is uncontrollable and is not a violation of anyone's rights is so... how do I say... French.

In funnier news, I give you this video from The Onion:

I also had another epiphany today, as I watched the House Financial Services Committee hearings on the use of TARP funds with the heads of the big Wall Street banks.

Maxine Waters from California is completely ignorant (she's not alone in Congress in that regard) and batshit crazy, but more importantly, she is the black lady in the classic "money hole" video! You don't believe me? Come on - go watch the Money Hole video, and then watch Ms. Waters' questioning (embedded below).

It's really worth watching all 7 minutes:

Compare that to the lady who says "My father worked two jobs so he'd have money to throw in the money hole" from this vid:

oy vey.


Tuesday, February 10, 2009

In THIS Country

I was surprised that none of the financial blogs I read daily had a comment on this story I found on tonight: "China Needs U.S. Guarantees for Treasury Bond Holdings."

See, for the unaware, China owns a metric assload of U.S. Treasury bonds - $682 billion according to the article. Basically, China has lent us money to fuel our consumption binge. In exchange, we buy their LCD TV's and everything else they manufacture.

Strangely, shortly after taking control as the secretary of the Treasury, Tim Geithner decided to lob a financial cold war scud missile right at China, when he accused them of manipulating their currency - keeping it artificially weak to give China an advantage in global trade.

The thing with China is this: they own a ton of our debt - this puts both countries in a bind. We need China to continue to fund our debt and consumption based economy. China probably wants to scale back its purchases of U.S. debt, but they have a tough time doing so, because they're already in up to their eyeballs: they can't just walk away now, or they'll screw us AND themselves. Talk about a game of chicken.

This Bloomberg story though, again, reeks of The Onion. After all - our debt is already guaranteed by the U.S. Treasury. Now they want us to REALLY guarantee it? They want HILLARY to guarantee it?

“In talks with Clinton, China will ask for a guarantee that the U.S. will support the dollar’s exchange rate and make sure China’s dollar-denominated assets are safe,” said He in Beijing. “That would be one of the prerequisites for more purchases.”

All I can think of is the quote from Tommy Boy: "Hey, if you want me to take a shit in a box and mark it guaranteed, I will - I've got the time."

The parallels between what we in the U.S. are going through with our "too big to fail " institutions, and the dilemma China has with it's U.S. debt are startling. China can't just walk away, just like we can't just let Citi and BofA blow up. Still, at some point, they may find that they'll have to reach some sort of compromise and cut their exposure to the U.S.

I'm not a poli-sci expert, and I'm not a global trade expert - but this will be a key talking point for the next several years.

Of course, this post wouldn't be complete without a viewing of another classic Chinese-USA conflict - Costello's microprocessors deal with the Chinese from the Departed. Skip ahead to 3:10 in the video.

"I'm concerned about a Chinaman who thinks it's wise to come to a business transaction with automatic weapons. For his own good tell Bruce Lee and the Karate Kids none of us are carrying automatic weapons, because HERE, in THIS COUNTRY, it don't add inches to your dick."

and then, of course, the capper:

"What we generally do, IN THIS COUNTRY, is: one guy brings the items, and the other guy PAYS him. No ticky - no laundry."

Hey - if all it takes to make China happy is to have Hillary take a shit in a box and put a guarantee on it - so be it. Ship it!


Real? or from The Onion?

Feb 10th: New York: The New York Lottery is proposing a gamble where the odds aren’t always in its favor -- moving its $1.3 billion prize fund into investments such as stocks, corporate bonds, real estate and hedge funds and out of the safety of U.S. Treasuries. If the agency were to double its annual return to 8 percent as it projects, the prize would be $37 million more for state coffers as New York grapples with a record $13 billion budget deficit next year.

I mean come on... that cannot really be from Bloomberg can it? the NY Lottery, after watching the biggest multi-asset-class blowup in multiple generations has decided it wants to take MORE risk? This has to be from The Onion right?

Nope. It's a real story, and yet another sign we haven't seen the bottom yet.


Thursday, February 05, 2009

What Can You Say?

Thanks to Dealbreaker for bringing me this gem:

Bloomberg: Fannie Mae, the mortgage-finance company under U.S. government control, will loosen rules for homeowners seeking to lower their loan payments by refinancing.

Fannie Mae will drop some credit-score requirements, reduce income-documentation standards and waive the need for appraisals in some cases, according to a notice yesterday to lenders posted on the Washington-based company’s Web site. The changes apply to loans that the company owns or guarantees.

I mean - wow. Deja vu? I already touched on this when GMAC lowered credit standards: it seems the problem may not be so much a lack of capital to be lent by banks, but a lack of qualified borrowers. This FNM statement is especially shocking since it's basically EXACTLY what caused the mortgage bubble in the first place.

Dealbreaker also had another nice analysis of a WSJ article noting that the central bank cannot prop up prices forever.

At some point someone is going to have to break it to the American people and the world that there is no magic pill. It seems apparent that not even the likes of Helicopter Alan or Helicopter Ben possess the needed capital- even with the printing presses running wide open. Rewriting accounting rules to create the appearance of wealth, buying up nuclear waste at above fair value and trying to re-pump the beach ball of mortgage lending is wishful thinking. The sooner the current administration comes to grips with that, and starts resetting the impossibly high expectations they won the election with, the better. Painful? Yes. But less painful than the fall from grace that will accompany any other path.

As I've said many times: it's a matter of time. You cannot grow or wait your way out of a debt bubble.


Monday, February 02, 2009

A Truth, What We Should Do, and What We Will Do

I haven't ranted much lately about the government's plans to work out the problem the TARP was supposed to resolve: that banks still hold crappy assets which is resulting in them lending less than people would like. We've now come almost full cycle back to the original TARP plan, which was, to buy Troubled Assets (remember, TARP stands for Troubled Asset Relief Program). Of course, the problem is that if/when the government buys these troubled assets, they will, by definition, be overpaying for them.

John Carney over at Clusterstock had a good piece today, attacking the fallacy that many congressmen and senators have been spouting because they don't know better: that "We need to get bad assets off the books of the banks."

The problem is not that balance sheets are somehow "clogged" with bad assets. If that were really the problem, everyone would immediately agree to this deal: Clusterstock will take all the bad assets. Every single one. Give us your subprime mortgages, your second liens, your bundles of autoloans and student loans and credit card debt. If the problem is that you need these off your balance sheets, we're here to help.

We'll even sweeten the deal by offering to pay you one penny for the assets. Not a "penny on the dollar." We're bidding one penny in total for every asset at the market prices below the value you are carrying them on your books.

Any takers?

We didn't think so.

As our little offer shows, the problem is not that there are no buyers for these assets or that the assets are clogging balance sheets. The banks don't just want to get rid of the bad assets--they want to get rid of them by exchanging them for far more money than anyone is willing to pay. And there's only one entity around that can force people to pay more than they are willing for something--that's the government.

We've made this point before but it bears repeating. Any proposal to buy bad assets from banks means that the government will give the banks cash for trash. The "bad bank" will have to overpay otherwise the banks won't take the deal.

Part of the solution that's been discussed is the good bank/bad bank plan, which basically results in the government buying up all the crappy assets. The problem with this is that, as Carney alluded to, the government will be overpaying for the assets, because the banks don't want to sell them at the true market value (and don't be deceived - the true market value is low for a reason - not because they are "fire sale prices" as a result of frozen credit markets, which was the party line spewed back in October and November. For one example, see Carney's own comment under his post.)

The Kid Dynamite solution is simpler: take the money we'd use to purchase the bad assets, and instead fund a new bank - or several new banks that can resume normal, unfettered lending. This would have multiple effects: primarily that the velocity of money would be higher - these new, pristine banks would be able to lend more to qualified borrowers, because they wouldn't have any questionable assets to hinder them - and we wouldn't have to overpay for crappy assets to get into this situation. Also, the government could directly set mortgage rates and other consumer loan rates at whatever level they wanted through these new, government sponsored banks. The Fed wouldn't need to continue to try to bluff the market that it's going to buy treasury bonds to keep rates low - they could set the rates directly - almost like a new, clean, Fannie and Freddie. All deposits with the current "bad banks" should be guaranteed - and they should then be allowed to fail and unwound in a controlled manner. Maybe this is more difficult than it sounds, but I am convinced that as long as we protect depositors money (instead of SHAREHOLDER money), the bad banks can be allowed to fail and we can re-develop a healthy, unfettered banking system.

This idea is not groundbreaking - tons of other people suggested it back when the original TARP plan was announced. It should now be clear that we can't keep dumping money into insolvent banks and yelling at them "LEND DAMNIT!! WHY WON'T YOU LEND!" If you want to know why they can't lend, read Mish's piece on how fucked Wells Fargo is...

Now, this won't happen. What will likely happen is that the government will announce some sort of massive guarantee program, like what they've already done with Citi, AIG, and BAC. They will tell us that these guarantees will only apply if the crappy assets default, and that the crappy assets will be fine with time. The truth is that this will simply delay our day of reckoning for a little while - because the crappy assets will NOT be fine. As I've said before, you can't grow or wait your wait out of a leverage bubble. It's a matter of time.


Best Super Bowl Ad

What a game...

This was my favorite ad: