Negative Alpha

If I told you that I saw the license plate: +ALPHA on a 7-series BMW in Chappaqua, you probably wouldn't be surprised.  I was somewhat taken aback, though, when I saw the vanity plate: -ALPHA (yes, we have +'s and -'s) on a circa-2001 Subaru Impreza today in Concord.

Either this guy got the greatest self-deprecating vanity plate in history, or he had something else in mind.

This weekend my wife and I saw a vanity plate in California:  LUV2PASGAS, only instead of LUV it had an actual heart character.  I screamed out "LOVE TO PASS GAS - FOR THE WIN!" but then I realized it wasn't about flatulence, but rather about infrequent refueling - driving past gas stations - as it was on a hybrid car.

anyway...

-KD

Wine Country - A Case Study in Customer Service

Thursday, the Wife and I headed out to Sonoma county to build a long weekend around one of her friend's weddings.  I think this was our sixth trip to Wine Country in the last 10 years or so.  Every time we go we make sure to visit our favorite winery, which I've written about before, Vincent Arroyo.  Last time, in 2008, Vince himself took us under his wing, got down on his knees in the dirt and dug with his hands to show me the root stock, and generously gave me three bottles of wine from his own cellar.  This trip, we hit Arroyo early on Friday morning, and Dave in the tasting room provided similarly exceptional hospitality.  He poured roughly 14 different wines for us, and took us out to the vineyard to show us how the young vines that we'd observed two years ago were progressing, and even how a few of them didn't make it.  He also showed us how they measure brix (sugar content) in the grapes by smushing some fresh grape juice onto a refractometer and letting us look through it.  Very cool.

Arroyo's continued friendly atmosphere, quality wine, pristine hospitality and lack of snootery, including absence of tasting fees, actually have the effect of making me want to give them more business.  By that, I mean that if you treat me like a VIP for free, it makes me want to buy more of your wine, which I did. This isn't rocket science, but I mention it because it was in stark contrast to another experience we had the following day at Lambert Bridge Winery.

One of my wife's friends had booked 8 of us for a tasting at Lambert Bridge, including a catered lunch.  It worked out to $100 a head with tax and tip included, which included a tasting of their "reserve" flight ($25) and a mandatory purchase of a total of three bottles of wine. (Note:  I would positively not recommend booking something like this - buy a nice lunch at one of the many high end gourmet deli's around, like the general store right at the end of Lambert Bridge Road, do the normal tasting, picnic outside at the winery, and save your money to buy the wines!)

So, Lambert Bridge is beautiful - they tore out a few acres of chardonnay grapes several years ago and put in gardens and picnic tables.  Their 1975 winery is flat out stunning - made of redwood - and looks like it was just built.  Additionally, they make some excellent, although certainly not cheap, wine.  For my tastes, there is plenty of great wine to be had at much more reasonable prices all over Napa and Sonoma counties.

We were seated at a nice setup in a side room away from the throngs in the main tasting room.  As our host, Tony, poured 6 different wines for us, discussing each of them in depth and doing a good job answering our questions, we pondered the ordering sheet and price list on the back of the tasting notes.  Lambert Bridge, in the last several years, has slashed their production (from 50,000 cases to closer to 8,000, I believe), and now markets largely through their wine club.  They have two versions, one of which commits the buyer to 4 shipments per year of 6 bottles each, and the other of which is 6 shipments of 12 bottles each.  This is relevant because they only allow wine club members to purchase their "reserve" wines - their special selections, which comprised 4 of the 6 wines we were tasting that day.

I asked Tony, "Can we taste the regular releases as well?"  and he responded "These are the regular releases."

"I meant the non-reserves,"  I prodded him, and he coldly answered "These are the wines that you've chosen for today."

Now - this is the wrong answer.  Come on Tony - DYKWTFIA?  When we're sitting in the private room, paying a hundred bucks a head for a private tasting like this, and I ask to taste their more "common" wines as well, the answer is "no problem."  I'm not asking to taste your super elite, tiny production, massively expensive rarities, I just want to taste what's on the basic tasting flight.

Obviously, wineries (like all businesses) have to balance their costs and giveaways, but you can't get customers if you won't let them taste or buy the wine, or if you treat them coldly or like a revenue source.  Contrast this with Arroyo, where Dave happily poured us everything they had available and then threw in a free bottle of Pinot Noir for us to enjoy at dinner after I added 6 bottles to my order and my wife bought three more for her sister, or Hawley, where Drew in the tasting room eagerly poured every one of the 12 wines from their list I asked him to pour for me and my 6 friends, while Dana Hawley doted over us and talked about her art with us (and of course, waved the tasting fees for everyone because I was a wine club member of Hawley's).  My wife and I had noticed several years ago on our second trip to Napa that things had changed massively from our first trip - the entire region seemed to be morphing into a much more commercial enterprise, treating customers like revenue sources instead of guests, and ruining the experience in the meantime.  Hawley and Arroyo vineyards stood out to us as winemakers who avoided that pitfall, and we reward them with our repeat business.

Back to Lambert Bridge: as previously noted, Lambert Bridge's policy is that you have to be a wine club member to buy their special wines.  We assumed, erroneously, that this "rule" would be waived if we wanted to buy any of the wines that we were sampling today.  Nope - Tony refused to budge, even though we were talking about 1-3 bottle quantities - not threatening to buy him out of his inventory.  Atrocious answer, again.  If you're going to host a private tasting for people who are willing to pay $100 a head to be there (which is far more than anyone should pay for something like this, in my opinion), you need to sell them the product when they want to buy it!  Here we were,  fish on the line, trying to pay Lambert Bridge's premium prices for their premium products, and he wouldn't let us!  I didn't say a word, merely shrugging.

I asked Tony where the bathroom was, and he made a joke about how I wanted everything, trying to be funny, and asking "Where's the wine order?"   I laughed it off, raising my eyebrows in confusion, and then wished I'd told him what I'm about to write here:  "Let's see - I asked if we could taste the regular wines, and you said "No."  I asked if we could buy the wines we tasted, and you said "No."  Hey Tony - WTF do you expect me to buy?"

I'm a member of Hawley's wine club, and I have a "standing order" at Vincent Arroyo, which is equivalent to their version of a wine club.  I buy a decent amount of wine every year, and this goofball's pompous policies eliminated any possibility there was of me becoming a customer of Lambert Bridge.

There are certainly people who will like Lambert Bridge.  As I said, the tasting room is beautiful, as are the grounds.  However, their pompous service and lack of value will keep me from becoming a customer.  

-KD

Stuff You Should Read

-Via Dealbreaker, quarterly letters from
1) Ackman (Pershing Square)
2) Loeb (Third Point) - sizzling!

"So long as our leaders tell us that we must trust them to regulate and redistribute our way back to prosperity, we will not break out of this economic quagmire." - Dan Loeb

- Paul Kedrosky simply explains how charts and data can be misleading, using a chart from Arnold Schwarzenegger's recent WSJ Op-ed as an example.  I have to admit that I fell for this chart at first too, which is why Kedrosky's point is a must read.

-via Barry Ritholtz, the Periodic Table of Wall Street Criminal Elements

- Ritholtz:  Your Info Is Not Private as a Bidder on EBAY

-Howard Lindzon with the best post title of the month:  "The Internet Makes Me Pee Less"


-KD

Back in The Saddle

I'm back from Wine Country - I have a lot of catching up to do; on both sleep (after my red-eye flight home) and readings.

In the meantime, did you know that Katy Perry has a cat named Kitty Purry?  Yep - according to her Rolling Stone interview at least...

-KD

Warren Zevon - Lawyers Guns and Money

"I went home with a waitress, the way I always do.  How was I to know she was with the Russians too?   Gambling in Havana, I took a little risk.  Send lawyers, guns and money, they'd kept me out of this." - Warren Zevon, "Lawyers Guns and Money"

I was lucky enough to see Warren Zevon live a few times in the 90's.   For those unaware of anything beyond Werewolves of London, Zevon's songwriting is top notch.   

As a bonus, Widespread Panic covering the song:




R.I.P Warren.

-KD

Springsteen - Wings For Wheels

I hadn't heard this until a few years ago, and as a huge Boss fan, it blew me away.  This video below is audio only, but any fans should enjoy listening to what would eventually become Thunder Road.  Springsteen called it Wings for Wheels at the time, in 1975:

"Tonight we're gonna find out how it feels - I'm gonna trade in your wings for wheels"

-KD

Phish - Killing In the Name Of

I'm out in Sonoma for a few days for a wedding, but I've scheduled some auto-posts:  mostly videos to keep you entertained.  Current offering:  Phish, Live from Alpharetta, GA on 7/4/2010.  If you don't want the intro, the song starts at around 1:25





-KD

Revisiting the Citigroup-SEC Story

Last month I wrote about the strange disparity between Citigroup's $75mm SEC settlement and Goldman Sachs's $550mm settlement.  Please read my prior piece on the subject, but the bottom line is that Citigroup misled investors as to the risks on $43 billion in subprime CDOs.  The settlement was subsequently rejected by a judge, and today the NY Times gives us an article about judges who have rejected SEC settlements lately.

What I found interesting about the NYT article was the claim

"The S.E.C. calculated that the company realized an economic benefit of up to $123 million from its misrepresentations, but proposed to settle for a fine of $75 million."

Now - how did they come up with that number?  It's a little hard for me to reconstruct exactly when Citi's writedowns occurred, and when they raised capital, but here's what I've scrounged together quickly:

November 26, 2007:  Citi prices $7.5B in 11% mandatory converts to Abu Dhabi

Jan 17, 2008: Citi prices $2.9B of 6.5% convertible preferred stock (public)

Jan 17, 2008:  Citi prices $12.5B of 7% convertible preferred stock (private)

April 30, 2008:  Citi sells $4.5B of common stock ($25.27 a share)

and summarizing from Citi's annual report (page 15):

"During the first quarter of 2008, Citigroup issued $12.5 billion of 7% convertible preferred stock in a private offering, $3.2 billion of 6.5% convertible preferred stock in public offerings, and $3.715 billion of 8.125% non-convertible preferred stock in public offerings.

In the second quarter of 2008, Citigroup raised $8.0 billion of capital through public offerings of non-convertible preferred stock and issued approximately $4.9 billion of common stock. 

In total, the Company raised $32.3 billion in capital in private and public offerings during 2008, excluding issuances to the UST under TARP. See Note 21 on page 172 for further information."

Now, of course, Citi was disclosing larger and larger writedowns this entire time, so it's not as if the effects of the $43B in mis-disclosed assets that were the subject of the SEC settlement were entirely unseen by this time.

So let's get back to the "economic benefit" cited in the NY Times article, which was said to be "up to $123mm."  Does that seems strange to anyone else that, considering that they raised over $32 Billion in capital in the first half of 2008, and another $7.5B at the end of 2007?  Isn't it perfectly reasonable to assume that their economic benefit from their non-disclosure of risky assets could have been a whole lot more than $123mm, considering that investors may have demanded a higher return on their nearly $40 BILLION in capital investment had they known the extent of the exposures?  I'd love to know how that $123mm number was arrived at.

-KD

disclosure:  long C

disclosure 2:  I don't know if Citi had disclosed the extent of their Subprime CDO exposure by the time this capital was raised - I don't think they did, although it is possible.  Nevertheless, the question of how the $123mm economic benefit number was arrived at still remains.

Existing Home Sales - LOL

This really shouldn't be a monster surprise - it's been discussed at length how the tax credit pulled demand forward, how crappy the economy really is, and how home values are still too high.

Bloomberg:

"Aug. 24 (Bloomberg) -- Sales of U.S. previously owned homes slumped more than forecast in July and the number of unsold houses swelled, evidence the market is depressed by foreclosures and limited job growth. 

Purchases of existing homes plunged 27.2 percent to a 3.83 million annual rate, figures from the National Association of Realtors showed today in Washington. The pace compares with the median forecast of a 4.65 million rate, according to a Bloomberg News survey. 

A tax credit of up to $8,000 boosted sales earlier in the year, pulling forward demand and indicating additional advances will prove difficult. Mortgage rates at record lows have provided scant relief to the industry as unemployment hovers close to 10 percent, foreclosures hold near record-highs and the economy cools. 

“To have a full recovery in the housing sector we need a full recovery in the job market,” Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, said before the report. “The low mortgage rates normally would help quite a lot but we really need to see the job growth pick up for housing to improve.” 

The pace of existing home sales is the slowest since comparable records began in 1999. 

Economists projected sales would fall from June’s previously reported 5.37 million pace. Estimates in the Bloomberg survey of 74 economists ranged from 3.96 million to 5.3 million. Previously owned homes make up about 90 percent of the market. "

Now remember - I do not have a PhD in Economics, yet apparently the 74 economists surveyed by Bloomberg didn't gain some sort of magic insight from their PhDs in Economics either - as every single one of them was too high with his estimate (with the MEDIAN estimate being off by over 21%!  Of course, that means that half of the economists had a more than 21% error in their estimate).

Yay economists!

-KD

Are Readers Having Format Problems?

A friend of mine told me that as of a few weeks ago my blog wasn't formatting correctly in his Blackberry Column View.  Now, I don't know what Blackberry Column View is, but he tells me it's a re-formatter that makes it easier to read blogs on the Blackberry without scrolling all over the place.

I postulated that perhaps my new Amazon.com sidebar widgets (look how pretty they are!) may have something to do with it, and that no, I couldn't take them off.  See, these Amazon widgets are my only source of income! I make like $3 a month in a good month off them (thank goodness I'm not in Philadelphia - they'd make me pay $300 for the privilege!).  By the way - I strongly endorse all of the books in my "recommended books" widget, and all of the music in my "music" widget which is further down the right sidebar. Disclosure:  If you click through to Amazon from my site and buy something other than the link you clicked on, I get a little commission too, but you don't pay any additional charges.

Anyway - are other readers having this formatting problem? Does anyone even use Blackberries to surf the 'web anymore?

-KD

Readings From the Past Few Days

Over the past several days I've read a lot of stuff which was Tweet-worthy but that I didn't blog about.  I rehash some of that list here for you:

-The Reformed Broker:
1) Welcome to The Jungle
2) It's Not A Flight to Safety, It's a Cash Out

-MISH:
1) "The Question: Are Stocks a Screaming Buy Relative To Bonds?  Creates  False Premises"
2) Mishkin's Iceland Report Was Horribly Wrong, And He Was Paid to Write It

-NY Times:
1) India Tries Using Cash Bonuses to Slow Birthrates
2) In Case of Emergency: What Not to Do
3) Wells Fargo's Odd Mortgage Essay Question

-Steve Randy Waldman's recap of another blogger meeting at Treasury

-Abnormal Returns:  The Art of Reading 13-f Filings

-KD

It's That Time Again - Which Of These Stories Is From The Onion?

An old favorite feature here on Kid Dynamite's World is "Which of these stories is from The Onion?" 

Here are today's choices:

1) "LA Unveils $578MM School, Costliest In the Nation"

"LOS ANGELES – Next month's opening of the Robert F. Kennedy Community Schools will be auspicious for a reason other than its both storied and infamous history as the former Ambassador Hotel, where the Democratic presidential contender was assassinated in 1968.

With an eye-popping price tag of $578 million, it will mark the inauguration of the nation's most expensive public school ever.

The K-12 complex to house 4,200 students has raised eyebrows across the country as the creme de la creme of "Taj Mahal" schools, $100 million-plus campuses boasting both architectural panache and deluxe amenities.

"There's no more of the old, windowless cinderblock schools of the '70s where kids felt, 'Oh, back to jail,'" said Joe Agron, editor-in-chief of American School & University, a school construction journal. "Districts want a showpiece for the community, a really impressive environment for learning."

Come on.  This is easy - THAT one must be from The Onion, right?  How could a district with a $640MM budget shortfall be opening a school costing in excess of half a billion dollars?

2) "Unemployment High Because People Keep Blowing Their Job Interviews"

"WASHINGTON—With unemployment at its highest level in decades, the U.S. Department of Labor issued a report Tuesday suggesting the crisis is primarily the result of millions of Americans just completely blowing their job interviews.

According to the findings, seven out of 10 Americans could have landed their dream job last month if they had known where they see themselves in five years, and the number of unemployed could be reduced from 14.6 million to 5 million if everyone simply greeted potential employers with firmer handshakes, maintained eye contact, and stopped fiddling with their hair and face so much."

Seem reasonable!  People out of work for a long time lose their sharpness and interview-ability.

3)  "Philadelphia Wants to Tax Bloggers $300 for a Business License"

For the past three years, Marilyn Bess has operated MS Philly Organic, a small, low-traffic blog that features occasional posts about green living, out of her Manayunk home. Between her blog and infrequent contributions to ehow.com, over the last few years she says she's made about $50. To Bess, her website is a hobby. To the city of Philadelphia, it's a potential moneymaker, and the city wants its cut.

In May, the city sent Bess a letter demanding that she pay $300, the price of a business privilege license.

"The real kick in the pants is that I don't even have a full-time job, so for the city to tell me to pony up $300 for a business privilege license, pay wage tax, business privilege tax, net profits tax on a handful of money is outrageous," Bess says.

It would be one thing if Bess' website were, well, an actual business, or if the amount of money the city wanted didn't outpace her earnings six-fold. Sure, the city has its rules; and yes, cash-strapped cities can't very well ignore potential sources of income. But at the same time, there must be some room for discretion and common sense."

Really Philly?  No way - I don't believe it.  They are really going to ask for $300 from everyone who has a blog with an ad on it, any "activity for profit?"  Yikes. Good luck with that one, Philadelphia.

answers below, in the full links

-KD 

1) LA's Taj Mahal School

2) Blowing Job Interviews

3) Philadelphia Business Privilege License

As If On Cue, More on Property Taxes

Leaving the grocery store this morning, I happened to glance at the cover of the Boston Globe and see this story about property taxes rising despite falling home values.  Eureka! It's almost like I just wrote about that subject on Wednesday!  I don't think the point needs to be belabored - it's a pretty simple concept, yet one worth making again.  The opening line of the Globe article is:

"Despite dropping home values, Massachusetts property tax bills continued to rise last year."

Again - property taxes need to be proportioned to town spending.  Many of us have been somehow conditioned to think about property taxes as a percentage of our home value - but that's an irrelevant benchmark.  The amount of revenue the town needs to collect is not a function of the paper value of all the homes in town - it's a function of how much the town spends.

If you want lower taxes, you need lower spending.  Lower home values do not, and should not imply lower taxes.

-KD

Unions vs Business: The Mott's Plant Strike

I'm surprised, yet somewhat relieved that I haven't read much about this Mott's strike story.  Steven Greenhouse at The NY Times actually did a pretty good job presenting both sides of the case without bias, so I think I can cut and paste the arguments here for you with just a little of my own commentary...

First, the beef: 

"After nearly 90 days of picketing in the broiling sun outside the sprawling Mott’s apple juice plant here in upstate New York, Michelle Muoio recognizes that the lengthy strike is about far more than whether the 305 hourly workers at the plant get a fatter or slimmer paycheck. 

The union movement and many outsiders view the strike as a high-stakes confrontation between a company that wants to cut its labor costs, even as it is earning record profits, and workers who are determined to resist demands for wage and benefit givebacks. 

“It’s disgusting, honestly, that they want to take things away from the people who made them profitable,” said Ms. Muoio (pronounced MOY-oh), a $19-an-hour machine operator who has worked at the plant 15 years."

So, the workers are angry that Mott's is asking them to make concessions, especially considering that Motts is reporting strong profits.  The Company responds:

"The company that owns Mott’s, the beverage conglomerate Dr Pepper Snapple Group, counters that the Mott’s workers are overpaid compared with other production workers in the Rochester area, where blue-collar unemployment is high after years of layoffs at employers like Xerox and Kodak.

Chris Barnes, a company spokesman, said Dr Pepper Snapple was seeking a $1.50-an-hour wage cut, a pension freeze and other concessions to bring the plant’s costs in line with “local and industry standards.”"

So are they overpaid or not?  That seems to be a key issue, to me.  We'll get to that in a minute.  We even get the crux of the back and forth simplified for us:

"Rebecca Givan, a professor of industrial relations at Cornell, said the strike has taken on broader symbolism. “The union wants to tap into the public backlash against perceived corporate greed,” she said. “The company wants to emphasize the depressed local labor market.”"

Then we hear from the union head:

“Companies have asked for concessions throughout the history of the labor movement because they’ve faced hard times and needed help to survive,” said Stuart Appelbaum, president of the Retail, Wholesale and Department Store Union, which represents the Mott’s workers. “Dr Pepper Snapple is different. They don’t even show the respect to lie to us. They just came in and said, ‘We have no financial need for this, but we just want it anyway because we figure we can get away with it.’ ” 

Negotiations have not been held since May, and Dr Pepper Snapple says it has no intention of resuming them. The company has continued to operate the plant using replacement workers and says that production of apple juice and apple sauce is growing each day. Union officials say production is one-third of what it was before the walkout."

Ok - so production is down - that's a business decision Mott's has to deal with.  As for "financial need,"  ugggh - Mott's is in business to make money.  So, the relevant question remains - are their workers fairly compensated?

"Justifying the proposed cuts, management says the Mott’s workers average $21 an hour, compared with the $14 average hourly wage for production, transportation and material moving workers in the Rochester area. Union officials say that 70 percent of the plant’s workers earn $19 or less an hour and that many are highly experienced and deserve well more than $14 an hour."

Well, I don't think readers will be surprised to know where I stand on this.  It seems to me that Mott's employees are likely compensated quite well for their jobs, and that it's a simple matter of economics.  Already paid well (or "overpaid") + ample supply of available replacement labor + replaceable without serious consequences to the company =  perhaps workers should rethink their entitlements.  (Oh - by the way - in case anyone wants to flame me about how hard these guys work and how badly they need the work and how they're not getting rich doing this - yeah - no kidding - and Motts apparently thinks that there are plenty of other would-be-workers in the Rochester area who would be happy to do the job also, and who need the work just as bad).

Motts is fighting its own battle in the court of public opinion:

"Dr Pepper Snapple, based in Plano, Tex., has sought to win public support by running full-page ads in Rochester’s main newspaper. One recent ad said, “Mott’s pays more. Would you walk away from a manufacturing job that paid you as much as 50 percent more than you could make elsewhere? That’s what union workers did at Mott’s.” (The company said that it had offered not to cut wages if the workers ratified its offer by April 15.)"

Makes sense to me.  Then, the workers respond:

"The workers, meanwhile, are incensed that the company is demanding givebacks when it posted record profits last year and increased its dividend by 67 percent in May. 

“Corporate America is making tons of money — this company is a good example of that,” said Mike LeBerth, president of the union local representing the strikers. “So why do they want to drive down our wages and hurt our community? This whole economy is driven by consumer spending, so how are we supposed to keep the economy going when they take away money from the people who are doing the spending?”"

I think that's a pretty silly, entitled argument.  If you're an essential employee, you can make a claim to your boss that you deserve more money.  The person running the business understands who is essential and needs to be paid more when they demand it, and who is replaceable.  If you're not a standout employee, well, you might be a replaceable commodity - but we'll get to that in a minute also.  The company responds to this line of attack as well:

"Dr Pepper Snapple has vigorously defended its stance. “The union contends that a profitable company shouldn’t seek concessions from its workers,” the company said in a statement. “This argument ignores the fact that as a public company, Dr Pepper Snapple Group has a fiduciary responsibility to operate in the best interests of all its constituents, recognizing that a profitable business attracts investment, generates jobs and builds communities.”"

Well, maybe a little overboard with the "generates jobs and builds communities" stuff, but they're right - the company's job is to make money. That's not to say that I'm in favor of sweatshops, treating workers horribly, and using and abusing them before discarding them with the trash - but I think it's already been established above that this is not the case.  We get one more comment from a young union member:

"Tim Budd, a 24-year employee who belongs to the union’s bargaining team, said he was shocked by one thing the plant manager said during negotiations. 

“He said we’re a commodity like soybeans and oil, and the price of commodities go up and down,” Mr. Budd recalled. “He said there are thousands of people in this area out of jobs, and they could hire any one of them for $14 an hour. It made me sick to have someone sit across the table and say I’m not worth the money I make.”"

Ah hah - but this is precisely the point, Mr. Budd - when you joined the union you BECAME that commodity.  That's what COLLECTIVE bargaining means - you join the union, and they presumably vouch that your skills meet some sort of standard - you've commoditized yourself.  Side note:  I have no desire to turn this post into a debate about the merits of labor unions - I'm guessing that if one wants to work at Motts, he has no choice but to join the union.

Anyway, kudos to the NYT article's author - Steven Greenhouse - for his unbiased, level presentation of both sides of the story.

-KD

Clemens to be Indicted on Perjury Charges - NYT

NYT has the story.

I will simply refer readers to my classic blog post on the subject, from back in February of 2008, expressing my displeasure at 1) Congress's involvement in the first place and 2) the disgusting grandstanding by many of the congressmen involved.

Of course, the highlight was Brian McNamee's testimony about how he knew that Rocket Roger was indeed at a party in question at Jose Canseco's house because Clemens' wife and Canseco's wife were showing off their boob jobs to each other.

"Q: We've received evidence that there was a team party at Canseco's house, but that Mr. Clemens was golfing that day and wasn't at the party. It sounds like you have a pretty clear recollection of seeing Mr. Clemens at this party along with some family members, is that right? Are you certain about that?

A: Roger showed up after golf, I believe. Maybe he was golfing. I don't know if he was golfing. He might have showed up a little bit later, but no, he was there the whole time for the most part. He was in the house. I could tell a specific story about him being there, which was involving Jose (Canseco), Jose's wife and Roger's wife when they went inside, when the guys showed up. I mean, they talked -- no disrespect, but they talked about how great Jose's wife's augmentation job was to Debbie and showed her. And then Debbie showed her her augmentation job."

-KD

Yes, Of Course Bank Bond Investors Should Absorb Losses!

The first story I read this morning was "Basel Committee Says Bank Bond Investors Should Absorb Losses."

"The Basel Committee on Banking Supervision is proposing that bond investors should help bear the cost of future bank bailouts as it seeks to reduce moral hazard and the burden on taxpayers. 

All regulatory capital instruments sold by banks should be capable of absorbing losses in the event that a bank is unable to fund itself in the private markets, said the committee, which sets international banking rules, in a consultation document. The securities could either be written off, or converted to common equity, the committee said. 

“A public sector injection of capital needed to avoid the failure of a bank should not protect investors in regulatory capital instruments,” the committee said in the report, published on its website today. 

The committee is seeking to redress the situation during the financial crisis, when holders of Tier 2 capital instruments, such as subordinated debt, benefited alongside depositors from government assistance and avoided losses. The committee is reviewing the role that contingent capital and convertible capital instruments could play in the regulatory capital framework. 

The committee, which represents central banks and regulators in 27 nations and sets capital standards for banks worldwide, was asked by Group of 20 leaders to draft rules after the worst financial crisis since the 1930s. The committee said it will welcome any comments on the proposals until Oct. 1."

But it's not just subordinated debt - it's all debt.  As we've said many times - stockholders should get wiped out, bondholders should have their obligations restructured, take haircuts, and become the new equity owners of the company.  I even asked Barney Frank this very question back in May, 2009 at a Town Hall Q&A session - "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?"

I can't help but think of the movie Usual Suspects - do you remember the scene where Kevin Pollack's character (Tom Hockney is being interrogated?):

Cop:  "I can put you in Queens on the night of the hijacking."

Hockney: "Really?  I live in Queens. Did you put that together yourself, Einstein? What, do you got a team of monkeys working around the clock on this?" 

In other words, it shouldn't take a committee of central banks and regulators in 27 nations two years to come up with the most obvious solution of all.   But hey - at least it's a start!

Edit:  Commenter Greycap notes that I misinterpreted this article (which has since been expanded and elaborated on in the Bloomberg link).  His point is that the Basel committee is not talking about who should take the pain in bankruptcy, but rather, how to avoid bankruptcy in the first place by regulating the quality of capital.  So, read this article as a condemnation of the bailouts that subsidized bondholders who should have taken the losses, and not as a condemnation of the Basel Committee taking 2 years to state the obvious - since that's not what they're doing here.

-KD

How Do Your Town's Property Taxes Work?

Several readers have mentioned that a reason "we" need home prices to remain elevated is because property taxes depend on home values.  That's true in some areas, and irrelevant in others.  In my town, for example, we don't have a cap on property taxes as a % of home value.  In other words, the town needs X dollars to fund its budget. It needs these dollars regardless of what the property values of the town are. 

I made the mistake, when I was looking at my home before I bought it, of assuming that since I was paying 15% below the assessed value, that when I bought my house and got it reassessed, my taxes would go down by 15% of what was listed on the old sheet.  Instead, all the houses in town got reassessed at the same time as mine, with mine actually getting assessed correctly to the price I paid for it.  Hence, my taxes actually went up - because the town still needed to collect its X dollars.

If this doesn't make sense to readers, think about it like this:  my house can be thought of as owing 10 tax units (I picked 10 as a random number)  in my town, where as other houses owe fewer tax units, and some houses own more tax units.  That number of "tax units" doesn't change with home values - unless my home's value changes out of proportion to the average home value in town, since the town still needs to collect the revenue to fund its budget.  (I keep saying this, but the bottom line is, even if home values went down 50%, as long as we don't cut spending, we still have to fund our budget. The budget has nothing to do with property taxes.)

Now, in some towns, that's not true - because they've instituted laws that make it so that the property taxes can't be more than a certain % of the home's value.  This may have seemed like a good idea at some point - with a desire to keep taxes low, but of course, as I've mentioned in previous posts, I feel that the better way to fix this equation is to work on the spending side.

Towns that have legislated max property tax ratios have now handcuffed themselves as home values fall, and they cannot collect enough property taxes to fund their budgets.

So - how does your town do it?  Do you live in a capped town?  Is it working?

Basically, I live in an "uncapped" town, and it actually makes sense to me.  We don't slash the town budget in proportion to home valuations, so we shouldn't expect property taxes to fall in proportion either.  Property taxes are (or at least, in aggregate, should be) a function of municipal spending - not home values.

-KD

Interesting Idea, Idiotic Example

Ron Lieber in the NY Times writes: 

"Coming soon: credit and debit cards that cut you off when you disregard your own monthly budget. 

In the next couple of days, MasterCard is expected to announce that Citigroup will be the first company in the United States to issue MasterCards with special features intended to protect consumers not only from thieves but also from themselves. 

The service, called inControl and already in use by some Barclaycard holders in Britain, is a sort of financial chastity belt that offers the potential to prevent a variety of budget sins and other money traps. 

Worried about your restaurant habit? If your bank adopts MasterCard’s service, you could tell it to have your debit or credit card reject any restaurant purchase above whatever monthly cap you set."

Ummm. Yeah - cause that would help (SARCASM ALERT!) - having your credit card declined when the bill is presented to you after you've already eaten the meal.  Obviously, restaurants are probably the worst possible example of potentially good uses for auto-budget-enforcing credit cards, since you pay for the product after you consume it.  So, while it might help if your card automatically rejected your purchase of a new pair of  $700 Jimmy Choo shoes and they take them and put them back on the shelf, it won't help you so much if it rejects your $700 dinner at Per Se that is already residing comfortably in your tummy.

However, the service has some interesting customizable features:

"The inControl system, at its most basic level, is intended to let people do two things: be warned about charges on their cards and block the wrong kinds of transactions. 

Alerts can be sent when a purchase is made with a credit or debit card in particular geographical areas or at certain dollar levels. Also, if you use your card only for in-person purchases and never use it online or for recurring charges, you could arrange for an alert every time your card is used when you’re not present at the merchant ringing up your purchase. That way, if fraud is afoot you can call the company right away to cancel the charge. 

If the alerts start to get annoying, you can alter them or turn them off at any time through your bank’s Web site or over the phone."

Interesting - no reason we shouldn't be able to do this with current payment processing technologies.  There are myriad potential applications; like cards for your children that you program to be used only at gas stations and grocery stores, or only at drug stores, etc...  Employers can give their employees cards that can only be used at certain types of stores, programmed by the user.

"The real leap with inControl, however, is being able to turn off certain forms of spending altogether. Dining out is the one I sometimes have trouble keeping in check, but for you it might be your iTunes habit or something else. While inControl now sorts companies into merchant groups that you can set budgets for or ban altogether, MasterCard said that if it had enough demand for company-specific caps it would add those, too."

Well, ignore the asinine dining example again, but otherwise the whole selected budget control by category idea couldn't really hurt.  After all, we've already established that we need all the help we can get.

-KD

The Problem Is that Home Prices Are Too High

Karl Denninger nails it in his post today about the housing market, responding to Bill Gross's recent comments (Gross said that as a private investor, he'd require purchasers to put 30% down, which, he clarified, isn't feasible for most first time homebuyers).

I could cut and paste and blah blah blah, but hey - go read Denninger's post.  Here's the bottom line (my words, not Denninger's):

The reason that people can't afford to make real (that is: in the neighborhood of 20%) down payments is because, and I've said this many times before, home prices are too high - not because home prices need more stimulus/support/propping up. 

Ok, now I'll give you the Denninger cut & paste:

"In point of fact the government should encourage prices to contract to affordable and stable levels, from which they should not vary materially on a forward basis.  This then turns homes into a place to live, instead of a speculative asset class.

Bill Gross says that the "cost" of a private system could be 300 basis points over Treasuries.  So what?

He says this makes housing "unaffordable."  My retort is at what price?

Notice what's not being talked about here: actually deflating the bubble, and returning homes to a price where Americans can actually afford them."

Now, why don't we do this?  Why don't we let home prices fall to lower levels?  Why do we want home prices to stay inflated?  Well - that's another question, and I think it gets back to the whole issue of pretending that the  Big Banks are still solvent.  If home prices fall, borrowers walk away, and banks get hosed on the loans they've written against bad collateral... Hence, policy is designed to prevent this reality.

disclosure:  long a home

-KD

Garden 1.1

In our first iteration of garden improvement, we pulled out our broccoli plants and peas and replanted both of them:

In the pic above you can see the four new broc plants, and the Brussels sprouts in the foreground.  The newly planted peas are on the outside of the little white fence, and there is new cilantro planted on the inside of the left side.  The cuke/eggplant/green pepper/bush bean patch is in the top right in the background, more visible in this pic:

Every time I think the cucumbers are played out, they assault us with another batch of cucumber goodness.   Last week I said to Mrs. Dynamite, "I think the cukes have pretty much had it."  Then, this week, from Wednesday to Saturday, we harvested these:

Clearly, they are still producing rabidly.  Every once in a while, we miss one, and don't find it until it's a monster like this one, scaled next to Oscar for size:

Note Oscar's super sad facial expression. Maybe he thought I was going to make him eat the cucumber.  Griffey loves all veggies, and Oscar likes many, but not cukes.

I'm still eager to see what comes of the hot pepper plants which I grew from seed - they are monsters, but are just starting to show some flowers - hopefully they'll have time to develop fruit (some additional Brussels sprouts are in front, and you can't even see the dominant sage anymore - it's down between the hot peppers and the basil on the left hand side of the pic:)

My tomatoes have a disease, but they also have lots of tomatoes, which are just starting to ripen up nicely.  I'm not sure if it's septoria leaf spot or fusarium wilt - they look similar.

You can see how many of the lower branches are dead and gone, picked off by yours truly.  Hopefully it's not blight, but in any case, I'm not ripping out all of my plants, so, suck it, blight.  My plants are so tall that they're falling over again - not a great thing, but anyway, I harvested enough tomatoes (and green pepper and basil) to make marinara sauce last night, which we combined with fresh picked eggplants to make into an eggplant parm.

-KD

Barry On Bailouts

Although I find myself disagreeing with Barry Ritholtz more frequently these days, I think his post today about bailout counter-factuals is pretty much dead on, and is a must read.

"My disagreement with the Zandi-Blinder report is not its theoretical underpinnings — it is by definition a hypothetical counter-factual. Rather, it is the counter-factual Blinder/Zandi used: “What would the economy look like now if we had done nothing?”

Instead, I propose a better counter-factual: “What if we had done the right thing, instead of nothing — or the wrong thing?”"

Click on over to Barry's blog to read the whole thing.

-KD

Garden Insects

We've found some interesting creatures in and around our garden lately.

First, this walking stick is kinda neat:

Then, at last,  the wasps are helping me out:  there's a parasitic wasp that feeds on tomato hornworms.  I finally found a zombie hornworm in my garden, easily recognizable by the wasp egg sacks all over his back (click to enlarge):

That guy now lives a sad zombie hornworm life, existing solely to feed the wasp eggs eating him from the inside out.  You're not supposed to kill them - because you want the wasps to hatch and grow to eat more hornworms.  Note that the hornworm is clearly messed in the head - he's on a dead leaf, which he would never bother with if he were sane.  He hasn't moved from that leaf in days, but he did quickly rear up when I touched him yesterday.

Then there's this monster spider:

I guess she was hungry for a monarch butterfly, because she was smart enough to build her web between two milkweed plants, which the monarch loves.  Although this spider looks scary, it seems she's harmless to humans (Black and Yellow Argiope).

stay tuned for the latest on the garden crops.

-KD

The Week That Was

I've written a ton of stuff in the last ten days or so.  In case you missed any of it:

- On "bailouts" for traditional journalism 

- On bailouts for states and municipalities

- A Comedic Interlude, courtesy of Jon Stewart (The gentleman is CORRECT in sitting!)

- more comedy - my wife and country music

- Sneak some zucchini onto your neighbor's porch day!

- Complaining about charity???

- The facts behind Colorado Springs turning off their streetlights (Can't vs Won't)

- Bernanke:  ""Unlike the federal government, every state except Vermont is required to balance its budget, forcing spending cuts, tax increases or both -- actions Federal Reserve Chairman Ben Bernanke said last week are contributing to the nation’s sluggish recovery."

Translation:  Our inability to spend beyond our means is hurting our "recovery."

- The White House's Spin on Financial Reform

- On changing outlooks

- Aid for responsible delinquent homeowners

- You can't force people to make markets

There were also some worthy reads which I didn't write about, some of which I tweeted:

- Denninger is never shy

- Poole Op-ed on FNM/FRE

- Carney Op-ed on FNM/FRE

- Financial Reform's unintended consequences - op-ed

-KD

Iconic Movie Songs

There are certain songs which, when I hear them, immediately make me think of a specific scene in a movie.  I view these songs as a complement to the director's use of music in his film, as it clearly creates a lasting association.  This post is an open thread to ask which songs those are for you.

For me, the top three that come to mind are:

- Werewolves of London - The Color of Money (VINCE: and his hairrrr was PERFECT)

- Stuck in the Middle With You - Resevoir Dogs (the ear scene)

- Take My Breath Away - Top Gun (strangely, I have two Tom Cruise movies!)  

There are actually several more top candidates for me from Top Gun (Great Balls of Fire - Goose on the piano, and Danger Zone - the combat scene)

Rules:  1) you cannot use songs that are "anthems" for the movie.  For this reason, I disqualified Eye of the Tiger, Footloose, and Chariots of Fire, which were suggested by my friends.  You also can't use songs from musicals, like Mama Mia. 2) you can't use the internet to look it up! If you don't know the song/movie association instantly, it's not strong enough.  I'm sure this list has been done elsewhere many times on the internet, but I want ones off the top of your head - straight from where they were seared onto your cortex.

Other suggestions from my friends were:

Mrs. Dynamite:

Unchained Melody: Ghost

Foxy Lady: Wayne's World

Blaze of Glory: Young Guns II

Ginger Ted's list, which I found the most unusual:

New Slang or Let Go - Garden State
Mrs Robinson - The Graduate
Sway - American Pie
Great Balls of Fire - Top Gun
The Wind - Rushmore
De Ushuaia A La Quiaca - The Motorcycle Diaries

Yangabanga had:

Mrs Robinson - The Graduate

Stuck in the Middle Qith You - Resevoir Dogs

Girl You'll be a Woman Soon - Pulp Fiction

Erik weighed in with: "Any song from Pulp Fiction," which I very much agree with, and he seconded Stuck in the Middle With You.

Bones added "You've Lost That Lovin' Feeling" from Top Gun, and the Ferris Bueller "song"

Dirty Dave came up with:

Don't You (Forget About Me) - The Breakfast Club
Miserlou - Pulp Fiction

Lose Yourself - 8 Mile

and Big Show rounded it out by adding:

Working For The Weekend - Farley and Swayze Chippendales skit (SNL)

Sister Christian - Boogie Nights

The Stroke - Billy Madison

I could probably do this all day, but I want to hear from the readers. 



-KD

Happy Birthday Mrs. Dynamite!

Happy Birthday Mrs. D!

Oscar and Griffey are singing you "Happy Birthday" in this picture!

-KD, O & G

Deja Vu All Over Again

I found these paragraphs in Katherine Stone's NYT op-ed today to be especially ironic, emphasis mine:

"Until recently, most Americans paid for their homes through 30-year self-amortizing mortgages, in which interest and principal are paid at the same time. These work well as long as homeowners have stable, long-term jobs that enable them to regularly make their monthly payments. 

But these days such careers are increasingly scarce. Therefore, any effort to recover from the crisis must include more flexible mortgages that take today’s employment landscape, with its frequent job-hopping and episodic unemployment, into account. 

It’s not as if the 30-year self-amortizing mortgage has been around forever. In fact, it is a fairly recent invention. Before the 1930s, homes were financed by three- to five-year balloon loans. Homeowners made interest-only payments for the duration of the loan, then typically rolled them over into new loans when they came due. 

During the Great Depression, however, many borrowers were unemployed when their loans came due; banks were reluctant to offer new loans, and owners had not accumulated enough money to pay off their loans. The result was a wave of foreclosures."

Sound familiar?  "Homeowners made interest-only payments for the duration of the loan then typically rolled them over into new loans then they came due."   Deja vu all over again.  It didn't work then, and it didn't work this time.

-KD

You Cannot Force People To Make Markets

At the risk of beating a dead horse, I want to come back to an essential point that is necessary to remember in any discussion of market structure reform.  This morning I praised Floyd Norris for an interesting article about how MBIA's loss expectations have evolved.  Tonight I give him a thumbs down for his analysis of "liquidity providers" versus "market makers."  Norris writes:

"I have heard people from Wall Street say that it is unreasonable to require market makers to make markets rather than simply post “stub bids” of one cent when they do not want to take part.  One even suggested that the solution was to bar retail investors from placing orders to sell at the market price, lest such orders hit a market unwilling or unable to handle them at reasonable prices.  Such an order should have a 3 percent range of allowed prices, so that the order would not be executed at an unreasonably low price, it was said.

Give me a break.

 

This could never have happened a decade or two ago. Then markets had market makers, who were required to maintain bid and ask prices.  There were primary markets that set prices.  Prices could plunge — see 1987 — but not like they can now without anything really happening other than a breakdown of Wall Street systems."

Since I've addressed these topics at length previously on this blog, I'll just copy&paste the comment I left on Norris's post, and refer you to my prior writing on the subject:

"Floyd - the point of preventing market orders is to protect unsophisticated retail investors who don't understand what "market" means. I'm all in favor of it, because I would guess that 99% of the time a retail investor sends a "market" order they don't really mean "market" - they assume that they will be filled near the current price, which is a faulty assumption.

As for other possible solutions: you can't force market makers to step in front of a falling market. It's impossible. It doesn't matter what you call them - market makers, specialists, liquidity providers - markets can still crash.

I'm not sure why you claimed "This could never have happened a decade or two ago" and then provided evidence that it did - 1987. Markets have always crashed, and they will always crash - it cannot be legislated away.

Note that the markets recovered almost instantly from the May 6th "flash crash's" temporary lack of bid-side liquidity - the same cannot be said for the 1987 crash which was presided over by real live market makers."

-KD

Aid For Responsible Delinquent Homeowners

This announcement from HUD is starting to make its way around the interwebs.

"WASHINGTON – The Obama Administration today announced additional support to help homeowners struggling with unemployment through two targeted foreclosure-prevention programs. Through the existing Housing Finance Agency (HFA) Innovation Fund for the Hardest Hit Housing Markets (the Hardest Hit Fund), the U.S. Department of the Treasury will make $2 billion of additional assistance available for HFA programs for homeowners struggling to make their mortgage payments due to unemployment. Additionally, the U.S. Department of Housing and Urban Development (HUD) will soon launch a complementary $1 billion Emergency Homeowners Loan Program to provide assistance – for up to 24 months – to homeowners who are at risk of foreclosure and have experienced a substantial reduction in income due to involuntary unemployment, underemployment, or a medical condition."

Here are the parts I found interesting, emphasis mine:

“This is part of the Administration’s comprehensive housing policy that has helped to stabilize a fragile housing market and allows responsible homeowners the chance to reduce their monthly mortgage payments to affordable levels.

What is the program exactly? emphasis mine:

"The program will work through a variety of state and non-profit entities and will offer a declining balance, deferred payment “bridge loan” (zero percent interest, non-recourse, subordinate loan) for up to $50,000 to assist eligible borrowers with payments on their mortgage principal, interest, mortgage insurance, taxes and hazard insurance for up to 24 months."

Then later, the qualifications:

Under the program, eligible borrowers must:

Be at least three months delinquent in their payments and have a reasonable likelihood of being able to resume repayment of their mortgage payments and related housing expenses within two years;

Have a mortgage property that is the principal residence of the borrower, and eligible borrowers may not own a second home;

Demonstrate a good payment record prior to the event that produced the reduction of income.

And the method for dividing the money amongst the 18 states qualifying (by having unemployment above the national mean):

" The states eligible to receive funds through this additional assistance, along with allocations based on their population sizes, are as follows"

You can see the table with the allocations in the HUD link above. But why is the money allocated based on population?  Why isn't it allocated based on the number of responsible homeowners who are currently unemployed and at least 3 months behind who will be likely to resume payments within two years?  Are they really equally distributed?  Seems unlikely...

I want to point out one thing, in relation to the post I wrote earlier about how expectations change - the problem with this solution, along with most of the kick-the-can (delay and pray, extend and pretend) solutions we've come up with so far, is that is presumes that things will get better in two years.   Note that the reason we currently have 99 weeks of unemployment benefits is because things have NOT gotten better.  I'll say again that we are returning to normal times - THIS is normal  - the bubble era was abnormal, and hoping for some magical return to prosperity seems illogical to me.

Somehow I can't shake the feeling that this is reminiscent of another post I wrote several months ago about how what appears to be a homeowner bailout is actually another bank bailout in disguise.  Shouldn't these loans be recourse loans, so that, since the homeowner will use the funds to pay the bank, if the homeowner eventually defaults the bank has to pay back the government?  In other words, this "homeowner aid" prevents the banks from losing more money - shouldn't they participate in the costs? Seems reasonable to me...
 

-KD