Sunday, May 31, 2009

An Evening With Barney Fran - Part 2: Q & A

If you missed Part One, go read it now.

After Barney Frank finished explaining what he felt were the root causes of the financial crisis, and detailing his plan to prevent a recurrence of said crisis, he opened the floor up to questions. I quickly vaulted over my father and the two senior citizens blocking my way to the aisle, and was 5th in line.

The first question was a good one - the guy asked how banks could be allowed to have 33-1 leverage - and "Wasn't that the crux of the problem?" Frank repeated the argument he had made earlier, claiming that the problem was all of the non-banks who were now lending money. Again, this argument doesn't hold water for me - it's like saying we need to regulate hedge funds instead of regulating banks. If a hedge fund manages to attract $50B of investor money which they then put into lousy investments and lose, that's ok - that happens - so what - someone made a bad investment and lost money. The problem is when the hedge fund manages to take that $50B and buy $500B worth of assets with it by borrowing from a bank. Then, when the $500B in assets decreases in value to $300B, the bank takes the loss and there are real problems.

The problem isn't the non-bank lenders - it's that the banks are massively levered themselves, and also that they are extending massive leverage to counterparties. You have to stop the bank from lending the hedge fund the $450B on $50B of collateral.

After a few non-memorable questions, the elderly gentleman in front of me stepped to the mic and chastised Barney Frank for being in favor of internet gambling (if you're unaware, Frank has been pushing to repeal the UIGEA, which banned many forms of online gambling, including poker.) This questioner threw out soundbites such as "it preys on the poor," "it causes suicides," and "it generates no value." Frank responded basically by calling bullshit on those claims, and by retorting that the measure of the validity of something is not the "value it creates." He cited video games as something that can easily be considered a waste of time, but should not be banned. The old guy kept trying to push dead end right wing claims, included the phrase "casino culture on Wall Street," and started to actually get booed by the crowd! People were yelling at him "This is not a debate!" "Sit down!" Jeez - this guy was not helping my non-liberal question cause - I was on deck and he was warming up the rabid masses to lynch me!

Finally, the guy accused Frank of telling people that gambling was ok, and Frank replied, "I don't want to tell people how to live - if everyone lived like me we'd have a population problem," which of course generated raucous laughter, and resulted in the old religious nut slinking back to his seat.

I stepped up to the vacant mic, and, not wanting to incite the bullying ire of Frank, took a subdued, submissive tone. "I actually wanted to THANK you for pushing to repeal the UIGEA, which, for those here who don't know, banned online poker. Also, online poker is not gambling, it's a game of skill, and if anyone doubts that I invite you to come over to my place any time with your deck of cards and your bankroll." This generated a few chuckles in the crowd, and I'm fairly sure an octogenarian behind me derisively called me a "whippersnapper."

I continued, "I also want to comment on what someone called the "casino culture" on Wall Street, and what you said was a perverse incentive structure regarding compensation. I was a trader on Wall Street for 8 years," murmurs go through the crowd.... "and I can tell you that it simply doesn't work like that. I'd be happy to discuss it with you after this, but we are actually dis-incented from taking large risks." At this point, Frank cut me off and said "I was talking about the guys at the top." Whoa - Barney - DYKWTFIA? Quick on the draw, I immediately played back at him:

"Ok - the guys at the top," I continued, "have any of them been removed from their positions as a result of the massive losses which required massive government response?" Rhetorical question - the answer is "No." Obviously, Frank didn't love this response, and retorted that they (Congress) had "capped the pay" of the banking executives.

"Sure, sure," I nodded, "That actually brings me to my question: Why were auto bondholders and shareholders asked to make concessions during their bailout negotiations while bank bondholders and shareholders did not have to make concessions - and how do you justify the massive transfer of wealth from the taxpayer to both bank bondholders, and bank shareholders in the form of common stock dividends which are STILL being paid by Citi and BankAmerica?"

Frank replied, "Well, first of all, the shareholders have made sacrifices." I didn't argue this point with him - it's a lost cause, especially when the entire room is nodding and murmuring their agreement, but this is not true: the bank stocks have gone down - but many of them should have gone to zero. What should happen when the banks need capital is that their bondholders convert their debt to equity, diluting or wiping out the existing stockholders. BAC has a $72B market cap - now, some of that includes newly issued stock, and some of it includes conversion of preferred shares - but the equity holders are lucky to have retained such a massive share of the company. Anyway, it gets better....

Frank continued, "But you forgot about one very important group," he paused for effect, "the autoworkers." Frank then went on a tangent, pandering to the audience about the plight of the poor autoworker and how crappy their situation was. Yes - it's crappy - I didn't say it wasn't, so I interrupted him:

"I wasn't supporting the methodology of the auto bailouts as much as I was criticizing the methodology of the bank bailouts," I explained, giving him another chance, but Frank just went right back into talking about what a travesty it was for he auto workers and the Union. So I interrupted him again, this time more forcefully,

"I am not talking about the auto workers. I'm talking about the BANK BONDHOLDERS." At this point, the crowd was 10 seconds from chanting "sit down! go back to Texas!" at me.

Frank replied that the bank workers were treated better than the auto workers, and finally acknowledged that their had been "disparate treatment between the auto bondholders and the bank bondholders." He later admitted that they (Congress, I presume) could not let the bank bondholders get wiped out because they feared it would set off "a daisy chain."

I returned to my seat, entirely unsatisfied, but knowing there was nothing more for me to do at this point except sit down and steam.

Another inquirer asked a great question, pointing out that WE are basically maxed out on debt - WE being the consumer, the corporate level, and the United States Treasury. He asked Frank if there was concern that we'd have trouble continuing this path of debt generation.

Frank responded with the insane claim that we had been in danger of actually paying off the national debt, which would have worried Alan Greenspan, until George Bush came along and ruined everything with his tax cuts, two wars and the recession. Frank claimed that this massively spiraling debt load was a new thing, the product of the GWB administration, and admitted that when the economy recovered, we'd need to increase taxes and decrease spending to remedy the situation.

Now, the claim that our debt reliance is new is false. Although Clinton succeeded in balancing the budget, this is not the same as paying off the debt - which we were never "in danger" of doing. Frank had a good, but dangerous response regarding the possibility of China ceasing to fund our debt. Frank quoted comedian Henny Youngman, who, when asked "Henny, how's your wife?" reportedly replied, "Compared to what?" The point is that although things seem crappy with our budget and economy, things aren't much better anywhere else. What can China do other than hold our debt? Keep their money "in the bank?" That is just someone else's debt! This is a great talking point, since it's probably true that we, the US, are the best credit risk, but it's also a risky Ponzi strategy to assume that we can succeed with seemingly unsustainable policies only because everyone else's situation is crappier than ours.

Frank then explained that he was working to lower the costs of municipal bond issuance by developing some sort of Federal reinsurance program. He actually said "General obligation municipal bonds never fail. They are as safe as U.S. Treauries." I strongly disagree with this point - just look at California and NYC as examples. The theory has always been "you can just raise taxes to make up the revenue," but you can't raise taxes when people aren't earning any money - right NYC?

At one point Frank mentioned that he thought we would see "most of the money back" from the bank bailouts, but that with AIG "we may not see that money back."

Asked what he would recommend to the constituents as a takeaway, Frank returned to Henny Youngman, and suggested that when evaluating policy decisions which may not be ideal, we ask ourselves, "compared to what?" In other words, what is the alternative? I have had this debate with my friend Eric numerous times - I criticize the massive continued Ponzi scheme of government debt, failure to recognize and write down bad debt, and attempts to re-inflate our way out of the bubble (too much debt? how will we solve it - I know - more debt! Brilliant!) and Eric responds that he agrees with my points, but that things would be much worse if we did nothing. This is true IN THE SHORT RUN - and as I mentioned last week, this is why we have a major problem - because politicians make decisions for the short run - for the next election. It seems clear to me that in making things better NOW, we're kicking the can down the road and exponentially increasing the potential pain we will need to recognize LATER.

In summary - I found Barney Frank to be an outrageously partisan representative who is not afraid to lie or distort the truth to further an agenda. HOWEVER, I do not hate Frank as a politician, because I can tell that he is aware of the issues and that he actually has an understanding of what good solutions are. Although Frank may attempt to mis-educate a room full of constituents by exaggerating the way things really work, his policy actions are not quite as drastic and as his words - some of them are quite logical and reasonable, even if they are not fully libertarian in nature. The bottom line is that if I apply Frank's own "Compared to What?" criteria in evaluating what I think of him as a Congressman, I'll take him over the Nancy Pelosi's of the world 100% of the time. Talk about a backhanded compliment!


Friday, May 29, 2009

An Evening With Barney Frank - Part One

Last night I had the task of infiltrating an octogenarian liberal rally which was disguised as a town hall meeting with Barney Frank. For a young former Wall Street trader who is a fiscal conservative, this was basically the equivalent of being thrown to the wolves - if the attendees at this meeting had an image of the person behind the fiscal crisis, he certainly looked like me. Fortunately, I figured if things got ugly, I could dodge the false teeth being thrown at me, or outrun their motorized carts. Also, it is clear from the fact that commenters on my blog are getting into arguments, that I have made it big in the blogging world, so I went undercover - dressed casual with my blue Boston Red Sox sweatshirt and yellow legal notepad in tow.

Here's the running diary of the evening - in general I will paraphrase Frank's comments and audience questions. I am confident that my summations are fair and accurate. When I use quotations the reader can assume that the actual quote was very close to what I wrote, although I do not have a transcript, so the verbiage may not be identical:

7:35pm: Welcome to Weston High School, where tonight's topic is "Global Economic Disaster Crisis"- heeeeeeere's Barney

7:36pm: Barney Frank: "This is a very important time... Partisanship is an undervalued part of a Democracy... The differences between the parties today is the deepest it's been since the Civil War." Frank went on to explain that there was some poll done of who were the most partisan and least partisan Congressmen, and he was very proud to have been the only person to show up on both lists. I found this intriguing, since I think the partisan nature of our political system is its worst feature - the way congressmen largely end up voting via party lines is utterly absurd and a condemnation of educated free thinking.

7:41pm: Frank makes a joke about Obama suffering "Post Partisan Depression," and the room full of octogenarians laughs like a Seinfeld laugh track. I am not exaggerating when I say that in the room of roughly 200 people, the median age was in the range of 68-70 years old.

7:43pm: BF: "The role of the public sector is to formulate rules to allow us to get the benefit from private sector innovation without generating harm." This was a solid point, but Frank ruined it by citing the creation of the SEC as an example of this public sector regulation in action. I'd hardly use the SEC, who is masterful at catching small time manipulators, but failed miserably in detecting Bernie Madoff's Ponzi scheme even after they'd been given a heads up by whistle blower Harry Markopolos, as the definition of public sector regulatory involvement as intended. Then there's the SEC's division of broker-dealer oversight that had to be closed because ALL of the firms it was charged with regulating ceased to become active broker dealers... but let's move on.

7:48pm: BF: "Securitization is a good thing if it's done right." Frank then explained that he was working to ban 100% securitization - because people needed to have "skin in the game." Basically, he's hoping that if mortgage lenders were not able to sell off all of the risk in the loans they were making (by selling securitized MBS products) - then the lenders would have been more prudent. He is probably correct, but that doesn't make the argument relevant. Our capital markets are all designed to transfer risk from those who are not willing to take it, to those who are. There were people willing to take the lending risks in all of these cases - for whatever reason (complete misunderstanding of the transactions, blind faith in incompetant ratings agencies, abundant capital seeking a pickup in yield). It's clear to me that securitization isn't the problem.

Frank then made the audacious claim: "People made loans they didn't expect to be paid back on." I figured he must have again been referring to the mortgage lenders who had sold off their risk via MBS. It so happens that in this case I consider the buyer of the MBS to be the lender: they are the one ultimately providing the capital to the home buyer. However, I didn't want to get too hung up on this point - it's quite clear to me that no one would ever argue that buyers of MBS didn't expect to be paid back.

However, Frank's next comment was that money was lent to people who clearly couldn't repay, and that the lenders didn't care because they would be able to foreclose on a home that was rising in value, and then sell the home to someone else for a profit! My jaw dropped and I looked around to see if anyone else was surprised at this comment. Apart from a suspicious raised eyebrow from my father, all I saw was a sea of gray hair nodding in approval. Look - this point can't even be argued. Lenders do not lend money with the intention of foreclosing on houses. Furthermore, if the homes in question were rising in value, the homeowner would have positive equity and there would be no default and no foreclosure. This statement was simply a blatant falsehood by Barney Frank.

Additionally, I wrote on my pad at this point: "For each of these villainous securities you mention (MBS, CDO, CDO squared) there was a willing buyer!"

7:50pm Frank discusses CDS: "Sellers of CDS thought they were selling life insurance on vampires," with the point being that they thought they'd never have to pay out on the policy, because vampires never die.

7:59pm: Frank summarizes the partisan views: from the liberals: "The problem was a lack of regulation." From the conservatives: "Liberals forced lending to poor people." Frank then went on to address the Community Reinvestment Act, which is often cited by conservatives as a leading cause of the sub prime crisis. Frank explained that the CRA was a qualitative (subjective) rule that merely required that banks be active within their local community, and that furthermore, if banks did not comply, there was nothing that the legislation could do to punish them. I don't want to get into a debate about the CRA, but there was a paper published today by the Minnesota Fed on the topic that is a good summary. One of Frank's other points on the CRA was that it only applied to banks - and that a key problem in the crisis was that while banks used to make the vast majority of home loans, that morphed into the majority of loans being made by non banks (via securitized products).

This is a sticky point, because Frank wants to say "hey - we couldn't regulate these non-banks," but my point is "hey - you don't have to - you let the non banks fail." The problem isn't making bad loans - if investors bought bad products and lost money, that doesn't cause systematic risk to our financial system. The problem was that banks were allowed to lever up massively, and own these same securitized products where the risk was completely mis-estimated and misunderstood.

8:05pm: We enter the bizarro world. Frank blames G.W. Bush for pushing home ownership for the masses. In the early part of the 21st century, he says, the percentage of FNM/FRE loans used for lower income housing was raised from 42% to 56%. Barney Frank claims he objected to this. The thought of Big Bad Bush scheming behind his Wizard of Oz curtain "I have an idea - we'll try to get all these poor people into houses - the Democrats will HATE that," while the Barney Frank screamed in the streets: "You Nazi!!! How could you suggest something so outrageous! We certainly do NOT want more people to own homes! That's a terrible idea!" Is so absolutely insane that it wouldn't even be funny if it was a story in The Onion.

Again, I looked around to see if anyone else was shocked at this claim that the liberals were fighting against home ownership while the conservatives were promoting it - but all I saw was a sea of heads nodding in response to the word they'd been conditioned to associate with evil: "Bush."

This morning, it took me all of 90 seconds on the internet to find this video of Frank speaking on the floor of Congress in 2005:

I took the liberty of transcribing the key portion: "Obviously, speculation is never a good thing, but those who argue that housing prices are now at the point of a bubble seem to me to be missing a very important point. Unlike previous examples where you've had where substantial excessive inflation of prices later caused some problems, we are talking here about an entity- home ownership - homes- where there is not the degree of leverage that we have seen elsewhere. This is not the dotcom situation - we had problems with people investing in business plans for which there was no reality...Homes that are occupied may see an ebb and flow in the price at a certain percentage level but you're not going to see the collapse that you see when people talk about a bubble and so those of us on our committee in particular will continue to push for homeownership."

I am quite certain this is exactly what readers were talking about when they called Barney Frank a hypocrite and a lier. His statement that he was against home ownership and that promoting home ownership was a tool of the evil Republican administration is the most shameful type of partisan politics.

Frank than explained that preventing foreclosures was a goal of enlightened self interest - to keep prices of neighboring homes from declining. Clearly, I disagree with this point - as manipulating home prices to keep them higher makes them less affordable, not more affordable.

8:10pm Frank outlines his 5 point plan for preventing a repeat of the financial crisis

1) Protect financial products at the retail level - ban products such as negative amortization loans. Somehow, during this point, Frank made a point of saying that he was in favor of gambling, and uttered, "I'll bet 1000 flowers bloom as long as I don't have to be in the garden." anway... I agree with this point, and I think that if we want to protect people from themselves we should require them to get educated and earn a "mortgage license" just like a drivers license - that way no one can claim after the fact that they were taken advantage of during the borrowing process.

2) Executive comp: "Say on pay" where shareholders have a vote on executive pay. Frank segued again into the perverse incentives he accused Wall Street Traders of having, where it was a case of "heads I win, tails you lose." Again - I don't think the issue is compensation and perverse incentive (although there is SOME of that) - the problem was a complete failure to accurately account for risk - not a willingness to ignore the downside risk. If banks are regulated by limiting leverage, the banks cannot blow themselves up. Cutting compensation doesn't reduce risk - cutting leverage DOES.

3) Regulators require some risk retention: this is back to the bank on 100% securitization - requiring people to keep some "skin in the game."

4) Give some federal regulators the power to takeover non-banks (like the FDIC has the power to takeover banks). By takeover, I mean "intervene and wind down if the shit really hits the fan."

5) Give federal regulators the power to regulate systematic risk: regulate CDS, have hedge funds register with the SEC. This is probably actually the most ambitious goal - it's easier said than done, but it's certainly a good goal.

8:26pm: Frank: "Because of technology, capital is mobile - we need coordinated international regulation," so that capital won't flow to nations with lax regulatory environments.

At this point, Frank opened the floor for questions, where I quickly got in line to ask mine. You'll have to tune in for Part Two for all the Q/A details.


Full Disclosure: short partisan politics, short pandering lies, short mis-education of ignorant constituents

Wednesday, May 27, 2009

Fired Up

So, as I sit here trying to think of questions for Barney Frank, I am getting bombarded with a plethora of stories that are inciting my ire (and providing me ample fodder to pepper Barney with).

First, I went to the summary of the Barney Frank Town Hall event, which explained what Frank wanted to discuss:

"He will discuss various proposed reforms, including a ban on 100 percent securitization of loans, elimination of incentives to game the system at enormous risk to investors and taxpayers, and means to monitor and limit overall "systemic risk." The financial crisis had its roots, Frank said at Harvard, in one phenomenon – the ability to make large loans outside the banking system and resell them. The need is to repair a broken system so that investors dare to return, institutions dare to make loans once again, and citizens and businesses dare to take on debt."

Well - we clearly have a significant disagreement there: the problem wasn't securitization: nearly all of our capital markets are composed of various securitized products. The problem was an ignorance of risk, a misunderstanding of correlation, and an overabundance of leverage which enabled firms to take positions where a small negative event could have large negative consequences, and a large negative event could have cataclysmic consequences.

Then, my friend MO sends me this article from today's WSJ titled "Should You Buy a Home Equity Protection Plan?"

"Watching a home's value plunge by double-digit percentages in a matter of months is enough to unnerve even the most financially secure homeowner. And, as the real estate market continues to reel concerns are growing that the free fall is far from over.

Playing into that anxiety are two companies – EquityLock Financial, based in Austin, Texas, and Lighthouse Group based in Charlotte, N.C. – that are selling products promising to put a little more control in homeowners' hands. Their pitch? That homeowners could spend a little now to hedge against declines in the value of their home later.

Here's how it works: For a fee of 1% to 3% of their home's value, homeowners buy a contract that protects them against the loss of equity in their home if the market takes a turn for the worse. The contract, which should not be confused with an insurance policy, pays the homeowner when he sells his home in a market where average home prices have dropped since their purchase. The amount he receives is tied to the size of the market's decline, as measured by one of two home price indexes (both of which are based on sales of single-family homes).

Say you buy a home in Denver for $300,000. Five years later, after Denver's home price index falls 10%, you sell it for $290,000. At closing, the company you bought the equity protection from pays you $30,000 – your original purchase price times 10%. Even if you sold your home for more than what you paid to buy it, you can still make the claim – as long as the index fell. (If the index rises, however, you can't make a claim and you're out the $6,000 you spent buying the contract.)"

Hmmm.. First off, why shouldn't this product be confused with an insurance policy? Is it not seeking to provide insurance against a decline in the price of my home? Of course it is - and if there's one thing we should have learned in the past year, it's that no one can offer this type of insurance! How will EquityLock Financial provide this insurance? They'll use their correlation matrix to determine that if only they can sell enough insurance in different areas, it will be impossible for home prices to decline all over the country at the same time? Or they will assume that since home prices have already fallen 20-odd percent, they must be near a bottom? I hope my readers are well educated enough by now to realize that this is almost exactly what brought down mortgage backed securities - the theory that things couldn't go wrong everywhere at once.

This is exactly the kind of product Barney Frank should be looking at regulating, as it's pretty apparent to me that the sellers of this insurance cannot possible hedge against their risks.

Then, I get to this story, about banks lobbying to be allowed to buy assets in the PPIP program. For your PPIP refreshers, including an explanation of why this idea would be blatantly fraudulent, check out the pieces I wrote when the PPIP was first announced. The reason the banks cannot be allowed to bid on assets sold in the PPIP is so simple that I could explain it to Maxine Waters, in fact, I already did explain it.

Today's article has an audacious claim:

"Banks may be more willing to accept a lower initial price if they and their shareholders have a meaningful opportunity to share in the upside," Norman R. Nelson, general counsel of the Clearing House Association LLC, wrote in a letter to the FDIC last month.

Ummm.. No - in reality, the banks wold be more willing to bid above the true value of the assets because the taxpayer would be eating the majority of the loss since the government is providing the majority of the capital!

So I'll have to ask Barney Frank about that one too...

Finally, there's this WaPo article about the possibility of a Value Added Tax, aka, a national sales tax. What I found interesting about this article was that there were multiple references to the unsustainability of our current budgets, but they all came to similar conclusions:

"But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity."

"Everybody who understands our long-term budget problems understands we're going to need a new source of revenue, and a VAT is an obvious candidate."

"The federal budget deficit is projected to approach $1.3 trillion next year, the highest ever except for this year, when the deficit is forecast to exceed $1.8 trillion. The Treasury is borrowing 46 cents of every dollar it spends, largely from China and other foreign creditors, who are growing increasingly uneasy about the security of their investments. Unless Congress comes up with some serious cash, expanding the nation's health-care system will only add to the problem."

Note that all these solutions mention ways to increase revenues for the government, but none of them mention the other side of the equation - CONTROL SPENDING! We can't have budgets that are only balanced when the revenues are based on bubble economies (see: California dot com bubble, then California real estate bubble, NYC Wall Street compensation bubble). In case you missed it in the article, the numbers they are talking about for VAT taxes range from 10% to 25%! I'm not a macro economist, but I'm pretty convinced that if you imposed this kind of tax on all consumption in America without drastically reducing other taxes (ie, corporate, income), it would choke our already fragile consumer to financial death.

The article also mentions the political difficulty of enacting such a tax, which is counterbalanced by the political difficulty of making spending cuts. This is especially scary for America because it's clear that any solution is politically difficult, which is why we're not solving the problem! We're kicking the can down the road by preventing pain, failures, and accounting for flawed financial models by printing new debt and new money to cover up the past losses (PONZI!). On that note, I recommend this piece from NakedCapitalism by Pension Pulse's Leo Kolivakis which looks at the inflationary risks of current fiscal policy.

I especially like this observation from Kolivakis, regarding the equilibrating tendency of deflation:

"History demonstrates that deflation is not a permanent condition. Market forces, unencumbered by fiscal and monetary intervention, eventually restore pricing equilibrium. At a certain point prices of major durables such as homes are low enough to encourage new categories of consumers to enter the marketplace. As demand is restored, prices stabilize and then resume their upward ascent. It is all a question of time. However, key decision-makers in the United States are not paragons of patience. They want deflation cured immediately, which explains why the U.S. Treasury and Federal Reserve are hell-bent on policies that are guaranteed to be inflationary. The question is how bad will inflation ultimately be."

When SnL has the best advice, you know you're in trouble:



Tuesday, May 26, 2009

Questions for Barney Frank

Barney Frank is coming to my high school this Thursday for a town hall meeting, and I will be up in Boston and able to attend it.

Does anyone have an intelligent question for Barney?


Wednesday, May 20, 2009

Sold To You, SUCKA!

Kudos to Ben Bernanke and Tim Geithner for orchestrating one of the great public relations rallies of all time - certainly the best spin-job I can remember. Why do I say "spin job?" Well, it seemed obvious to me that during the entire rally off the March lows, the economic news wasn't getting better, yet somehow America was force fed the term "green shoots" and latched onto it as a sprig of hope for the economy. Never mind that it's not even really up for debate that the economy continues to get worse, the Green Shoots Brigade managed to get people to gorge themselves on the concept of the second derivative - the slowing proliferation of "badness." Of course, when you fall off of a cliff, your rate of decent slows at some point - when you hit the ground - unfortunately, you're still lying on the ground with a body full of broken bones - you don't get up and start running again.

The public was then somehow convinced that "less badness" is the same as "more goodness" and the fear of missing a rally resulted in people drinking the KoolAid and buying stocks with both hands. After the Administration managed to quite skillfully (and I actually mean this - no sarcasm!) leak out the "Stress Test" results over a period of a few weeks, determining that banks needed tens of billions of dollars in capital, the banks in question managed to raise the funds via secondary offerings, while at the same time seeing their stock prices rally. A truly masterful controlled release of bad news which was somehow spun into good news.

Bernanke and Geithner managed to massage market sentiment to a point where it seemed nothing could harm the market. So back to the spin-job: after the bank stocks were talked up 100% off their lows (oh - I forgot that during this rally they released Q1 earnings which were pumped up by freebie PnL generated by sloppy AIG unwinds, and, in Goldman Sachs' case, by simply erasing the month of December in which they lost money), the banks sold tens of billions of dollars of new stock to eager investors.

Then Bernanke released the hounds today, noting quietly that the Fed had downgraded its economic forecasts. But wait - how can the Fed be downgrading it's forecasts if we're being bombarded with "green shoots?" It comes down to a very simple recipe for a stew I like to call "plug your customer."

1) Take the truth and bury it for a while
2) Tell your customer (in this case, private capital) that things are looking great, and that everything will be fine. In the words of Dealbreaker, "Nothing is fucked." Serve the KoolAid
3) Once everyone has drunk the KoolAid, have the banks that need capital sell ample amounts of new stock to the eager and happy public, who are now drunk on Kool Aid and high from smoking green shoots
4) When the capital raising is over, release your new economic forecasts, aka, THE TRUTH:

Which brings us to the new forecast, released today, now that the capital raising is done:
  • GDP to decline 1.3-2% in 2009 vs. prior guidance for a decline of 0.5-1.3% given in Jan
  • GDP growth 2-3% in 2010 vs. prior guidance of 2.5-3.3%
  • 2009 unemployment rate 9.2-9.6% vs. prior guidance of 8.5-8.8%
  • 2010 unemployment rate 9.0-9.5% vs. prior 8.0-8.3%
  • PCE inflation 2009 0.6-0.9% vs. prior 0.3-1.0%
  • PCE inflation 2010 1.0-1.6% vs. prior 1.0-1.5%
In case those numbers aren't clear to you - the Fed's new BEST CASE 2009 GDP forecast is equal to their prior WORST CASE forecast. The Fed's new BEST CASE scenarios for 2009 and 2010 unemployment are both worse than their prior WORST CASE scenarios (don't even worry about the fact that the 2009 unemployment forecast is already worse than the "really bad" case scenario in the successfully completed "Stress tests.")

So much for green shoots - I guess now that the Fed has attracted the private capital it desired for the market, it decided there was no more need to perpetuate the lie. SOLD TO YOU, SUCKA! Enjoy those 1.25 BILLION new shares of BankAmerica! Have fun with those 300+ million shiny new shares of Wells Fargo! Green shoots!! Wait - I think that should be meeker, with a question mark, instead of an exclamation point: like Green shoots? Anyone? Anyone? Beuller?


full disclosure: short SPY

p.s. - I've already made my lack of faith in Fed forecasts clear, but they need to at least be consistent don't they?

Merge-aholics Anonymous?

How can you not laugh when Bloomberg has the headline "Bank of America CEO Lewis Plans to Sit Out Next Wave of Financial Mergers?" I mean, isn't that like saying "man who burned down house won't play with matches anymore," or "guy who loses a hundred billions dollars in bad acquisitions decides he won't make any acquisitions for a while?"

Did Ken Lewis finally join Merge-aholics anonymous?


Monday, May 18, 2009

The Fallacy of "Cash on the Sidelines"

The concept of "cash on the sidelines" is, in my opinion, one of the simplest and yet most mis-understood concepts in capital markets today. I give John Hussman a gold star for eloquently and thoroughly explaining the fallacy (again - he's tried before) in his latest missive: "The Destructive Implications of the Bailouts- Understanding Equilibrium." A simply Google query on "cash on the sidelines" will unleash a torrent of mainstream media outlets and blogs who think they've found the holy grail of equity upside proclaiming that the stock market is bound to rise rapidly, because there is so much "cash on the sidelines" right now. Let's explain why this theory is bunk by looking at Hussman's explanation (emphasis mine) as it relates to the current crisis - where the Fed has been pumping liquidity (money) into the system at a rapid rate, and the Treasury has been flooding the market with new issuance:

The second fact is that as a result of more than a trillion dollars of new issuance of Treasury securities with relatively short durations, it is a tautology that there is a mountain of what is mistakenly viewed as “cash on the sidelines” invested in these securities. This mountain of “sideline cash” exists and must continue to exist as long as these additional government securities remain outstanding. It is an error to view outstanding debt securities as if they are “liquidity” poised to “flow back into the stock market.” The faith in that myth may very well spur some speculation in stocks, but it is a belief that is utterly detached from reality. The mountain of outstanding money market securities is the result of government debt issuance that must be held by somebody until those securities are retired. It is not spendable “liquidity” – it is a pile of IOUs printed up as evidence of money that has already been squandered. The analysts and financial news reporters who observe this enormous swamp of short-term money market securities, and talk about “cash on the sidelines” as if it is spendable in aggregate immediately reveal themselves to be unaware of the concept of equilibrium and of the nature of secondary markets (where there must be a buyer for every security sold, and a seller for every security bought).

If you sell your stocks or bonds or money market securities, they don't cease to exist. Somebody else has to purchase them. Somebody else has to hold them. As I've said numerous times, if Ricky wants to sell his money market funds and buy stocks, then his money market fund has to sell money market securities to Nicky, whose cash goes to Ricky, who uses the cash to buy stocks from Mickey. In the end, the cash that was held by Nicky is now held by Mickey. The money market securities that were previously held by Ricky are now held by Nicky. And the stocks that were once held by Mickey are now held by Ricky. There is exactly as much “money on the sidelines” after these transactions as there was before. Money doesn't go into or out of the stock market – it goes through it. Prices don't move because supply exceeds demand or demand exceeds supply. In equilibrium, the two are identical because that's exactly what a trade is. Prices move because the buyer is more eager than the seller, or vice versa.

Now, don't get confused by Ricky, Nicky and Mickey - the point is simple: every time someone buys a stock (spending cash), someone else sells it (raising cash). The "cash on the sidelines" doesn't change. You can add more people in the middle of the chain (Dicky, perhaps) and more asset classes (commodities, bonds options) - but that will never change the fact that in each trade along our hypothetical chain, each person buys an asset from someone else, resulting in a cash debit for the buyer, and an offsetting cash credit for the seller.
If you're looking for another explanation of this concept, check out Mish's piece from November, 2008, titled "Sideline Cash Theory Revisited."

Friday, May 15, 2009

Which Story is Real?

Ok, it's time for another edition of "Is it real? or is it from The Onion?"

I am warning you in advance - today's edition is quite challenging (don't click on the links until you've made your decision):

1) SEC Attorneys Probed for Insider Trading:
"Two attorneys at the Securities and Exchange Commission (SEC) are under "active" criminal investigation by the FBI for trading stocks based on inside information."

Hahaha - that's like the very definition of "irony" isn't it? clearly cannot be true...

2) Obama Says U.S. Long Term Debt Load Unsustainable
"President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries. “We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.” Holders of U.S. debt will eventually “get tired” of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. “It will have a dampening effect on our economy.”

I'm almost POSITIVE this one is fake - I mean, how on Earth could Obama give a warning like this while continuing to spend with both hands? This can't be real.

3) U.S. Slates $22Billion for Insurers from TARP
"The Treasury Department will make federal bailout funds available to a number of U.S. life insurers, acting on the embattled sector's long-running effort to get government help. The Treasury is prepared to inject up to $22 billion into the insurers under the rescue plan launched last fall as the Troubled Asset Relief Program, said a person familiar with the matter."

No WAY! That doesn't make any sense at all - this one cannot be real.

4) Woman Seeks Love for Randy Emu
"A sexually frustrated male emu is chasing a woman in the Northwest Territory because it cannot find a female mate."

Hah - they gave it away with "Northwest Territory." CLEARLY fake...

5) Jose Canseco Only Has to Picture One Person in Underwear
"In the wake of seeing another of his PED allegations proven true, Jose Canseco decided to hold a press conference in Beverly Hills on Thursday to address the inevitable horde of media eager to capture his "I told you so." Only problem? The presser was only attended by a reporter from the Associated Press, a photographer, four camera crews and his lawyer."

Now THIS one is funny. Imagine if you held a press conference and only one person came? Hilarious - but clearly fake.

Ok - are you ready for the big reveal? Yep - each of those stories is treal. Sad, but true. The Obama quote and the insurance company bailouts disturbed me the most - I could rant ad nauseum on the topics, but two angrier and more eloquent bloggers have already covered the subjects: I recommend Karl Denninger on deficit spending, and Barry Ritholtz on insurance bailouts. All I will add is that, as I addressed earlier with respect to pending FNM/FRE losses, the insurance bailouts do not jive with the government's "everything is getting better" ethos. If everything is getting better then why do we have to give $22 BILLION to these insurance companies?


Thursday, May 14, 2009

"My Personal Credit Crisis"

Kudos to Edmund Andrews, who writes a tremendously honest account titled "My Personal Credit Crisis" in the NYT Magazine this week. It's a must read. I had some comments on my last post, in which I criticized Obama for making the GM debt negotiations a main street vs Wall Street class war, that accused me of being, essentially, a Wall Street Sympathizer. It should come as no surprise that I'm a believer in free markets capitalism, personal responsibility, and that I hate the "it's Wall Street's fault" arguments.

Fortunately, Andrews makes no such arguments in his recounting of how he ended up in debt up to his eyeballs, waiting for Chase to foreclose on his home. Andrews explains the conversations with Bob, his mortgage broker (emphasis mine):

"If I wanted to buy a house, Bob figured, it was my job to decide whether I could afford it. His job was to make it happen.“I am here to enable dreams,” he explained to me long afterward. Bob’s view was that if I’d been unemployed for seven years and didn’t have a dime to my name but I wanted a house, he wouldn’t question my prudence. “Who am I to tell you that you shouldn’t do what you want to do? I am here to sell money and to help you do what you want to do. At the end of the day, it’s your signature on the mortgage — not mine. You had to admire this muscular logic. My lenders weren’t assuming that I was an angel. They were betting that a default would be more painful to me than to them. If I wanted to take a risk, for whatever reason, they were not going to second-guess me.”

Later in the article, Andrews asks himself some simple questions that he wished he had addressed earlier:

"Why had I been trying to live a lifestyle that I couldn’t afford? Why had I tried to keep up the image of a conventional suburban family man, when nothing about my situation was conventional? How could I have glossed over the fact that we had been spending about $3,000 more than we were earning, month after month after month? How could a person who wrote about economics for a living fall into the kind of credit-card trap that consumer groups had warned about for years?"

Andrews concludes the article with some pseudo-sympathy for his current lender, Chase:

"I was actually beginning to feel sorry for Chase. It seemed to be so flooded with defaulting borrowers that it didn’t have time to foreclose on my house. Eight months after my last payment to the bank, I am still waiting for the ax to fall."

Edmund Andrews doesn't make the mistake of blaming people for giving him money - he takes responsibility for his errors in judgement, and doesn't fall into the easy trap of shifting responsibility to the people who were generous/ignorant/naive enough to give him the money in the first place. (note - the proper adjective is probably "naive" - in that they completely ignored the risks, although I guess that could be classified as "ignorant" as well).

It would be nice if other in Andrews' boat demonstrated similar culpability.


EDIT: p.s. - I want to thank my friend Eric, who responded "This guy is an idiot - not sure why this is a must read." I realized that this was, indirectly, exactly my point - there is no one to blame when you borrow and spend more than you can afford - you're an idiot (sorry Edmund Andrews).

Wednesday, May 13, 2009

Useless Predictions and GM Bullying

Last week I posed a question about why we listen in awe to Bernanke's economic predictions when he has already demonstrated his inability to make accurate predictions. Today, Barry Ritholtz has a brief and simply impossible to argue with post regarding a similar prognosticator: Alan Greenspan.

"Why does the public — and the Press — constantly seek out reassurances from the same people who misled them time and again in the past?

That was the question on my mind as I pondered yet another declaration from Alan Greenspan that the Housing Market has bottomed. That he has consistently made similar such statements before is cause for doubting him here. That these prior bottom calls were as far back as 2006 is cause for ridicule."

Anal_yst @ 1-2 Knockout addressed another concept that drives me crazy: that of economists who base predictions based on the length of the "average prior recession," or the "typical length of a bear market rally."

"Contrary to the claims of others, I think its quite clear that global (and regional) dynamics and fundamentals are materially different than they have been at any earlier period of human history, which means these analyses constitute at least one type of logical fallacy, and are thus of little or dubious value...I'm of the belief that such forms of analysis - and those who propagate their use - do more harm than good insofar as almost any conclusion reached is, at best, a non sequitur, and may introduce or reinforce false beliefs to the investor population. "

Finally, I found this Bloomberg piece "GM Retirees Bully Bondholders," to be very well written.

"GM’s likely bankruptcy filing is being cast in some quarters as a fight between “money people” intent on making a killing and honest efforts by the government to save a company and jobs. In reality, GM’s demise comes down to a fight between retirees. On one side are GM’s unionized retired workers. On the other, are the rest of us -- either in retirement or savings for it. Guess who will lose as things now stand? Under the restructuring plan on the table, GM’s retirees would get 39 percent of the company, along with the promise of a $10 billion payment into their health-care trust fund. That is in exchange for $20 billion GM owes the fund. Not making out so well are current or future retirees who depend on the performance of mutual funds, 401(k) plans and insurance companies that invested in GM bonds. These debt investors, who are owed about $27 billion, will get just 10 percent of the company."

You don't have to be a math major to see that the GM retirees, who hold junior obligations (that means that the SENIOR bondholders will get the first proceeds from any funds GM has), are getting many multiples on their stake compared to the senior bondholders. The difference is that the Obama Administration has labeled the senior holders as big money Wall Street types, and pitted the bond negotiations as a battle of good "poor GM retirees" vs bad "big bad Wall Street," although Reilly points out that this claim is incorrect.

Karl Denninger takes a slightly more aggressive approach to the GM debacle here, although he's no less correct. The VEBA is GM's pension plan, and the boldface is Derringer's, not mine.

"This despite the fact that the UAW is going to get somewhere between 80 cents and the full buck for every dollar they are owed for their VEBA. VEBA obligations are unsecured and subordinate to yours under the law. That means that under the law the UAW is entitled to exactly nothing until you get every dollar you are owed."

Ahhhh... If only the populist rantings from the Administration weren't so blatantly wrong and illegal... The sweet irony in this GM case is that many who will pick up their pitchforks chanting "Yeah! Down with the rich Wall Street bastards!" in response to Obama's decree may be the same folks who actually own the senior GM debt in their own pension funds.


Sunday, May 10, 2009

Here's a Question

Believers in Obamanomics are telling us that things are getting better and that we've already begun to see the signs of a turnaround in the economy. It's patently obvious that I tend to disagree with that rosy view, and I found some comments out of Fannie Mae on Friday that also seem to throw doubt on the validity of the turnaround claims.

"Fannie Mae issued a grave warning about its future on Friday, saying it needs $19 billion in additional government aid as job losses grow and risky loans made during the housing boom go bad at an unnerving pace... The government, which seized control of Fannie Mae and its sibling Freddie Mac last September, has already spent about $60 billion to prop up the two companies. Fannie Mae's request Friday brings the total to $79 billion. Freddie Mac is expected to release its first quarter results next week. The Obama administration's estimates the taxpayer bill for Fannie and Freddie will hit $147 billion out of a potential $400 billion by the end of September 2010."

Ok, detectives - see if you can figure out where the problem is here (hint: I boldfaced the key numbers!)... Let's take it piece by piece: with this latest request for moolah, the total given to FNM/FRE is up to $79Billion. The administration estimates that this total will hit $147Billion within 15 months. But wait - help me out here: I'm confused. I've already been told that the housing market has bottomed, that the economy is turning, and that "toxic assets" are only toxic because no one wants to buy them, NOT because they are actually worth less than people think.

WHY THEN, are Fannie and Freddie expected to lose another $70 Billion in the next fifteen months? In poker terms, I'd say we just caught the Obamanomics team in a bluff: they KNOW that home prices haven't bottomed, that the economy isn't bouncing off a bottom, and that mortgage backed securities are not properly marked, all of which adds up to at least another $70B in projected aide to FNM/FRE. Why they continue to run the 3-barrel bluff of blind hope, optimism, and deceit instead of facing up to the problems and trying to fix them (convert bank bondholder positions to common equity!) - is a mystery to me.



Friday, May 08, 2009

Stress Tests and Green Shoots

Now that the banks have been blessed by Pope Tim Geithner the First, we'll move on to the real world and watch reality play out over the last 18 months. Roger Ehrenberg, a former colleague of mine, penned an excellent post titled "What keeps me up at night," explaining how the government's strategy has been to "buy time" in what it thinks is a crisis of confidence. Ehrenberg doesn't say such, but the government's view is basically that if we can TELL people that things are getting better, then things will get better eventually - and that banks will be able to earn their way out of the problems they are having by earning the capital cushions that they need.

Now, to me, it's clear that this is not a confidence issue. No matter how many times you tell the American people that we have ample "green shoots" in the economic garden just because job losses declined from 680,000 losses to 600,000 LOSSES - it doesn't help the people who are losing their jobs or at fear of losing their jobs afford the things they need. No matter how many times you tell people that home prices are stabilizing, it doesn't make their mortgage payments any lower when their interest only adjustable rate mortgages reset and they have to start paying down principal with a monthly payment that's drastically higher. No matter how many times you tell me there is no inflation, I can see that my health insurance costs are higher, and that it cost me $8.99 for a little container of pignoli nuts last night.

John Thain, the former CEO of Merrill Lynch, said something in the early summer of 2008 that stuck in my head. Without quoting Thain verbatim, he basically said "We will not need more capital as long as things don't get worse." There was only one problem - things got worse.

Which brings us to the much ballyhooed stress tests. Never mind that we're basically already bumping up against the "adverse case" assumptions that the tests used as inputs - we only need to ask ourselves one question : If the guys running the test - Geithner, Bernanke et all, have already demonstrated to us that their economic model does not work (and it's clear to me that this has been demonstrated, as they each completely failed to foresee this entire fiscal maelstrom from their perches of oversight which were supposed to foresee EXACTLY that), then why do we care what their model says?

Back in the summer of 2007 many quant models "blew up," - leading one quant to claim "we saw 10 standard deviation moves for 5 days in a row." Channeling my inner Nassim Taleb, I would respond, "Don't you think it's possible that your MODEL miscalculated the standard deviations?" Maybe (in fact, CERTAINLY) - those were not actually 10 standard deviation moves - the risk was a lot higher than the model predicted.

The ratings agencies have been rightly vilified for giving top AAA ratings to many securitized products which turned out to be worthless or nearly worthless. Their model was incorrect.

An anonymous friend of mine who runs a corporate bond trading desk at a major Wall Street firm, sends me the somewhat rhetorical:

"Question: is the govt administering stress tests on banks finding them not insolvent and causing shares to rally in which they have multi billions at stake much different than ratings agencies assigning AAA ratings to all the shit CDO's that are paying them?"

I don't think the government is concerned about marking up the capital investments it's made in the banks - after all, they've already proven those are just dollars which they are more than willing to create out of thin air - the government is concerned with a different investment - the American economy and financial system. They hope that they can talk the country down from the ledge, and that everything will just be fine eventually. The problem as I see it, and as Roger elaborates, is that they've failed to make any of the tough choices that would actually lead to a cleaner more viable financial system, "The Administration and Congress have clearly taken the path of least resistance," instead opting for the Martingale double down approach of ponzi-perpetuation -"avoid addressing the problem and hope it heals itself."

Eventually, reality will cath up with us. If the government is lucky, it will be the reality where everyone is prosperous and Americans continue to somehow spend money they don't have. I just don't see how that works.

fingers crossed...


Tuesday, May 05, 2009

Poker After Dark Cash Game - Spoiler Alert

Since my blog was decreed to be the 21st best poker blog of 2009, and considering that I haven't written about poker in about 9 months, I figured I could finally get something blogworthy out of the first episode of this week's Poker After Dark Cash Game.

For those of you who don't know, Poker After Dark is a generally awful show that's on at 2am on NBC. It's usually a tournament format where 6 players sit down with twenty thousand in chips and play a winner take all tourney. To make it even more irritating for serious poker players, they use "cash and chips" - where each player's $20k includes some $5k bundles of $100 bills... Yes - in a tournament. Completely stupid.

HOWEVER, every once in a while they put on a real live cash game, and this is one of those weeks: Tom "Durrr" Dwan, Kenny Tran, Phil Laak, Antonio Esfandiari, Phil Hellmuth and Bob Safai (an amateur high stakes player out of California, I believe) sat down to play $200-$400 no limit hold'em, with $100 antes. Each player bought in for $100k, with Durrr buying $200k.

First off, let's talk about the table talk. Durrr and Antonio make a wager on how Phil Hellmuth will answer the following question, posed to him by Antonio: "Do truly belive that you are the best player at this game in this lineup?" Phil, of course, says "Yes," and Durrr has to pay off Antonio an odd lot of $100.

Of course, this prompts Phil to defend himself, reminding Antonio that Antonio had offered to crossbook Phil's action on High Stakes Poker when Phil won $300k. "I tried, but you didn't take the action," Antonio replies, then adds, "I told you anytime you want to play heads up we can play for $100k and the winner shoots the loser with a taser gun." This made me laugh out loud - a truly impossible to respond to jibe from The Magician. You can see it at around 3:45 in the video below:

I mean seriously - what can you say when you claim you're the best NLHE player in the world, and someone offers to play you heads up for a hundred dimes, with the added stipulation that the winner slams the loser with a TASER gun!!!! Kudos, Antonio - Rocks'n'Rings baby.

In the hand during all this table talk, Durrr ends up paying off a sizable river bet from Laak after Laak flops the nuts with 8-5 after calling a preflop raise from Durrr's JdTd, which made top pair on the turn.

But there was actually MORE interesting poker! In the above video around the 6:08 mark, a triple cooler ensues, where Esfandiari raises in late position with T8, Safai calls in the SB with 99, and Durrr calls in the BB with QT. When the flop comes T-9-T rainbow, all announcer Ali Nejad can say is "UH OH." Trips, trips, full house.

Safai checks, Durrr bets $3800, Antonio calls, and Safai bumps it to $12k. Durrr calls, and Antonio calls, perhaps reluctantly. The turn is a jack, and now Safai fires $30k. Durrr calls again, having picked up an open ended straight draw, and Antonio (who also picked up an OESD) mucks, realizing he can't be good.

When the river bricks off with the 6c, Safai jams all-in for $75k, and Durrr finally eventually mucks, realizing that it's likely Antonio also had a ten, and that he can't really beat any likely ten other than T-8 anyway. Interestingly, while Durrr is contemplating a river call, Kenny Tran tells Lee-Ann Tweeden that Safai has a set of nines, and that Durrr has QT or KT. Nice read, Kenny.

Durrr exacts revenge a few hands later, where Safai raises to $2k with AQ, and Durrr calls in position with 8c6c.

The flop comes 5c 3c Qh, and Safai bets $5k, which Durrr just calls. On the turn, the Ts, Safai again fires: $12k, and Durrr smooth calls again. The river is an offsuit deuce, and Safai checks - probably planning to call any bet from Durrr. Durrr, however, spoils Safai's plans by taking a minute, asking Safai how deep he is, and then announcing "I'm all in," for $133K, into the pot of $39k. Safai tanks for a few minutes before mucking - deciding, I'm sure, that he didn't want to call such a massive overbet with just one pair, when Durrr is capable of having anything there, and look like an idiot on TV if he was wrong.

Obviously, Durrr is pretty sick, but he probably puts Safai on a hand like A-Q, KK or AA, and doesn't expect Safai to call here. Durrr has played his hand like he has a flush draw, but he can also have two pair, a set, or have rivered a straight here. The key point is that I'm guessing Durrr makes this overbet with big hands too - he has to for it to work.

Set your DVR's to record the rest of this week's Poker After Dark Cash Game action.

What I'm Reading Today

-Nouriel Roubini's Op-Ed in the WSJ: "We Can't Subsidize the Banks Forever." No mention of wall vaginas.

- The Barricade: Michael Milken on financial alchemy - turning toxic waste into AAA gold.

- Telegraph UK: Evidence that Vincent Van Gogh's ear was cut off by his friend, fellow painter Paul Gaugin.

- This one actually IS from The Onion: Nation Ready to be Lied to About Economy Again
WASHINGTON—After nearly four months of frank, honest, and open dialogue about the failing economy, a weary U.S. populace announced this week that it is once again ready to be lied to about the current state of the financial system. Tired of hearing the grim truth about their economic future, Americans demanded that the bald-faced lies resume immediately, particularly whenever politicians feel the need to divulge another terrifying problem with Wall Street, the housing market, or any one of a hundred other ticking time bombs everyone was better off not knowing about. In addition, citizens are requesting that the phrase, "It will only get worse before it gets better," be permanently replaced with, "Things are going great. Enjoy yourselves."
It's kinda sad when The Onion (or South Park) creates stories that are more on point that the Associated Press.

- ESPN's Sports Guy, Bill Simmons, has a very interesting piece about how the advent of technology has completely changed the way sports journalists do their jobs, and the way athletes market themselves.

"Today's technology means athletes don't need a middleman anymore. You know how you won't hear a peep out of Jennifer Aniston for a year, then she'll have a movie to promote and you can't get away from her? She shows up when she wants to show up, always on her terms. It's no different from Tiger's making himself "available" every summer when his video game is released. Okay, he's a superstar; he can pull that crap. But what about the other guys? I see a day when the following sequence will be routine: Player demands trade on blog; team obliges and announces deal on Twitter; player thanks old fans, takes shots at old team and gushes about new team on Facebook. We will not need anyone to report this, just someone to recap it. Preferably with links."

Simmons' piece is especially relevant considering that there is talk of a bailout of the newspaper industry. I especially enjoyed this dead-on comment from Michael Sherrin on the Clusterstock post regarding the potential for a newspaper bailout:

"Why should we want to spend money on a newspaper bailout? Journalism is not in trouble - the paper version is, and there's little reason to save it if people don't want to read them. People are adjusting how they consume news, whether from 24 hour news channels to various web sites. Readership for newspapers is dropping because newspapers aren't offering consumers a product they want. They are thus badly run companies that deserve to go out of business. Other companies will come in because there is massive demand for news and quality journalism (TV news ratings continue to increase as does web consumption). Newspapers as a medium are being replaced, but they are not the end-all-be-all of journalism."

Sherrin's comment seems to jive perfectly with Simmons' article.

From yours truly, a rhetorical question: Why do we care so much if Bernanke thinks the recession is ending or not? Bernanke has proven that he is unable to forecast what's going on in the economy - this is not my opinion, it's a fact - he flat out missed the fiscal crisis. He uses economic models which have been proven to be suspect at best, and completely inaccurate at worst.

Finally, this tremendous assortment of trick beer pong shots (with soundtrack):


Monday, May 04, 2009

Jesus Chrysler

Today's must read post comes from AQR's Cliff Asness, courtesy of ZeroHedge. Asness is responding to President Obama's populist soundbite a few days ago, regarding the greed of some hedge funds in the Chrysler Bankruptcy negotiations:

Obama: "While many stakeholders made sacrifices and worked constructively, I have to tell you some did not," the president said. "In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices, and they would have to make none."
and then

Asness: "Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice”, they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not. The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice”, you would not be happy."

Asness's entire letter is well worth the read.

I also enjoyed Howard Lindzon's piece on the "inconceivable rally" we've seen in the equity markets over the last several weeks. Lindzon takes an introspective look at what it's like being bearish during a massive rally, and comes to the age old conclusion "don't fight the tape," although he doesn't say it as such.

I sympathize with Lindzon's view, as I'm also bearish - I don't believe hope can replace money as the purchasing asset for the U.S. Consumer, who is, as Lindzon notes, "tapped out." Still, apart from a bearish options trade I put on a month ago, I have resisted adding to my short positions, as I learned long ago not to fight the tape. In the words of John Mayard Keynes: "The market can stay irrational longer than you can stay solvent."


Friday, May 01, 2009

LOL - Really?

A collection of "you CANNOT be serious" stories from Thursday:

1) MGM shares soar on lending agreement:
Under terms of the new deal, MGM Mirage will be responsible for completion costs if net proceeds form the sale of condominium units are less than $243 million and for any expenses in excess of the budgeted $8.5 billion. For its part, Dubai World has agreed to fully fund its original commitments, including some $135 million in payments that MGM Mirage recently paid out on its behalf. Until the project is done, MGM Mirage's obligations will be secured by the assets of Circus Circus Las Vegas and adjacent land through a completion guarantee.

LOL. Really?!?!?! The banks accepted the Circus Circus as collateral? Come on...

2) MBIA Sues Merrill Over CDO Losses:
The insurer wrote $5.7 billion in guarantees on these securities, which were packages of mortgages known as collateralized debt obligations (CDOs), it said in a statement. MBIA faces several hundred million dollars of losses on these contracts because Merrill misrepresented the credit quality of the CDOs, the insurer said. "MBIA believes that Merrill Lynch's effort to market the CDS contracts to MBIA was part of a deliberate strategy to offload billions of dollars in deteriorating U.S. subprime residential mortgages," the company said in a statement.

LOL. Really? Isn't that called "business" ??? How about when all the companies you sold guarantees to believed you could actually make good on them, eh MBIA? It's their job to do their own work on your worthiness as a counterparty, and it's your job to do your work on the quality of the assets.

3) Senate Defeats Mortgage "Cram-Down" Bill:

“These bankers who brought us into this crisis are literally shunning and stiff-arming the people who are facing foreclosure,” said Senator Richard Durbin of Illinois, sponsor of the legislation and the chamber’s second-ranking Democrat.

LOL. Really Mr. Durbin? The bankers brought us into this crisis - not the BORROWERS who took out loans they defaulted on? Blaming the bankers is like blaming me if I give someone on the street 5 bucks and he goes out and buys booze with it. If you're looking for a single group to blame, blame the ratings agencies.

4) AIG Said to Weigh Closing Unprofitable Mortgage Guaranty Unit

The insurer selling assets to repay a U.S. loan, may shut its mortgage guarantor after failing to turn around the unprofitable unit, said two people familiar with the matter. AIG may wind down any parts of the mortgage insurer that can’t be sold...AIG, which promised to sell businesses to repay a loan included in a government rescue package valued at $182.5 billion, has announced about $4.4 billion of asset sales since the September bailout.

LOL. Really? $4.4 Billion so far, with the number of potentially salable assets dwindling? So I guess we're not getting that money back then, right?