Bernanke Redux

It's too bad I've had reason to write so many posts about Ben Bernanke... First, he was named Foreign Policy's "Top Global Thinker."    Then he was named Time Magazine's "Person of the Year."   In the Time interview, he produced the no-it's-not-from-the-Onion-he-really-said-it quote "We had to do it because we had an adjustable rate mortgage and it exploded, so we had to," while explaining why he refinanced into a 30 year fixed (although something smells fishy with that answer - as some commenters pointed out - since interest rates are still low on most ARMs... Did Big Ben have some sort of negative amortizing loan where he had to actually start to make payments?  How else could an ARM "blow up" with such low interest rates?).

Also in the last week, he took time to answer Senator Jim Bunning's lengthy question list.  If you're interested in reading critiques of Bernanke's answers, check out Yves Smith's in depth challenges here, and Karl Denninger's few points here.  But wait - as the informercials say... THERE'S MORE!

Today, Clusterstock highlighted another come-on-there-is-no-way-the-Fed-chairman-could-have-said-that-you-must-be-making-it-up-for-financial-satire quote, but sadly, it's NOT from The Onion - Bernanke really said it:

"Pressed by Committee chairman Chris Dodd on the matter of the carry trade, the cheap dollar being used to buy higher-returning assets, Bernanke responded that it’s only a problem for the U.S. if you think the economy is going down again, which is not the Fed’s view."

WOWZA!  REALLY?!??  So, since it's not the Fed's view, it can't happen!?? Marty up!  Ponziiiiiiiiiiiiiiiii.  It's almost as if Bernanke is having a "let me see if I can put my foot any deeper inside my own mouth" contest with himself!  Doesn't he know that he and the Fed have had a less than stellar record forecasting the impact of the economic crisis thus far?

Finally, Felix Salmon gave me a shout out today, suggesting that perhaps I was the "blogger" who Senator Bunning was quoting in Bernanke's confirmation hearing when he compared Bernanke to the captain of the Titanic.  As a believer in righteous attribution for blog work, I must mention that I certainly didn't create that analogy - I believe it was Dean Baker who I first heard using it.  I would be honored if Bunning read this blog, but that analogy has been widely used.

-KD

A Triple Shot of Citibank: Taxes, the Prince, and the Government

Citibank made news yesterday with three very interesting stories.

First, I woke up to the Washinton Post's: "U.S. Gave Up Billions in Tax Money In Deal For Citigroup's Bailout Repayment."  Here are the details:  Companies, like people, can accumulate tax loss carry forwards.  If you as an individual, lose $100k trading next year, you can carry that loss forward to next year, so that if you make $100k trading next year, you can use your prior loss to offset the gain.  Companies to the same thing, but it's with income too, along with capital gains.  Citi had $38B in tax loss carry forwards, but there is a provision in the tax code that nullifies these future tax benefits when there is a change of control at the company - this provision exists so that companies don't buy the "losses" of other companies just to get tax benefits.

The Treasury's stake in Citi fell under this provision, so Citi was going to lose its tax loss carry forwards, until, that is, the government changed the rules.   Now, Treasury spokeswoman Nayyera Haq makes a reasonable point in saying "This rule was designed to stop corporate raiders from using loss corporations to evade taxes, and was never intended to address the unprecedented situation where the government owned shares in banks."  Also, as a fiscal conservative, I'm aware of hypocrisy - generally, me and my kind are not in favor of higher taxes, and wouldn't really be screaming and yelling about companies being able to keep tax loss carry forwards.   So why is it different here?  Because Citi exists only due to a government  (taxpayer!) bailout, and thus they should not be given any tax breaks at all.  It is important to clarify that the value of this tax break is not $38B - it's the TAXES on $38B, which, assuming a roughly 35% tax rate for Citibank comes to about $13B.  (see Ritholtz and Denninger for more on this story)

The next major Citibank story yesterday was that the Abu Dhabi Investment Authority (ADIA) is suing Citi over some mandatory convertibles (which required ADIA to pay a certain price for Citibank stock) that ADIA bought a few years ago.

"Citigroup said on Tuesday the Abu Dhabi Investment Authority filed an arbitration claim against it, accusing the U.S. lender of misrepresentation over a $7.5 billion investment by the sovereign wealth fund.

The sovereign wealth fund, considered by some the largest in the world, bought securities from the U.S. bank in 2007. In the original deal, the Citigroup bonds must be converted into common stock at a price between $31.83 and $37.24 a share between March 2010 and September 2011."

Obviously, with Citi stock hovering above $3, ADIA is, to put it gently, PEEVED at the prospect of having to pay more than $30 for the stock.  The irony here is palpable - as Citi has been on the lender side of the table many times in similar situations:   as we've seen in the past few years, Citi held many bad mortgages where the borrower (homeowner) misstated their income or the value of the home was incorrectly assessed.  Now, Citi is the borrower, and their lender, ADIA, is asserting that Citi made fraudulent misrepresenations.    Further complicating the matters, ADIA is a huge client of Citi's, and investors from the  Middle East have been instrumental in Citibank's health and survival over the past 15 years (see: The Prince!)

The final story was Citibank issuing shares to raise capital and repay TARP funds.    Never mind that this decision is an absolute disaster for shareholders and seems designed primarily to free up the bank from government compensation restrictions (see James Kwak's take here, and I actually agree with Dick Bove for once!)  - I want to focus on the fact that the government decided not to sell shares on the offering.

The government planned to sell $5B of its Citi stock (a portion of the common stock that the government owns as a result of converting its preferred stock position) alongside Citi's $17B of new issuance.  However, when the price of the deal came in at $3.15, the story was that the government decided not to sell.  Now, let's consider what really happened:  CNBC last night said that they heard that the deal was 17 times oversubscribed.  We can pretty much write that off as total bs, as a deal with massive demand would not price at such a huge discount.  My colleagues this morning confirmed that there is no way the deal was massively oversubscribed.  Then, we must consider, is the government really playing the role of Joe Stocktrader?  Should the government be saying "we think Citibank is worth more - we're going to hold it for the long term?"

The answer to that question may be debatable, but to me the answer is a resounding "no."  Never mind the conflicts of interest present with the largest shareholder being the fiscal policy maker too, it's simply not the Treasury's job to play portfolio manager here. They should be trying to sell their stake in the least impactful way possible.  Which brings us to what I think really happened:  that the government had to pull their share sale because no one wanted to buy the stock!  That explains the steep discount, which was exacerbated by the problems mentioned above with ADIA.    I can only hope that the truth is that the government pulled out because there was no demand, and not because either 1) the government didn't want to sell the stock below its $3.25 cost basis as the Bloomberg article mentioned, or because 2) the government is playing portfolio manager.

Lending further evidence to the theory that there was a dearth of buyers is the fact that the Treasury agreed to a 90 day further lockup on its shares, and their statement that they will be disposing of the shares over the next 12 months.  It seems to me that investors were worried about buying Citi shares and getting steamrolled by the government selling more shares in the near future (you don't want to buy shares if you know there is still a big seller who needs to sell more!) - so the government had to abort its sale and make the lockup concessions just to attract enough buyers for Citi's share issuance.

-KD

You Can't Make This Stuff Up

Calculated Risk reported this gem, from the Time Magazine Person of the Year extended interview with Ben Bernanke, which I couldn't read because I wasn't drunk from drinking the Kool-Aid:

"What's your interest rate?
That I'm earning?

No, on your house. Do you have a mortgage?
Oh, yes, we refinanced.

Oh, perfect. When?
About 5%. A couple of months ago.

Good time.

Yes.
We had to do it because we had an adjustable rate mortgage and it exploded, so we had to."

ummm.... silence...cricket... cricket...   Let me recap:

"We had to do it because we had an adjustable rate mortgage and it exploded, so we had to."

That's from Time Magazine Person of The Year Ben Bernanke, Chairman of the United States Federal Reserve, who has bought roughly a TRILLION dollars worth of mortgage backed securities to keep mortgage rates artificially low, and has kept short term interest rates at zero in an effort to continue to stimulate the economy and the housing markets.  

WTF is going to happen when these subsidies stop???   To the bomb shelter!!!! The ARMs are exploding!!!

Interesting times indeed...

-KD

Bizarro World - Time Names Bernanke "Person of the Year"

I think I've already covered why Ben "Person of the Year" Bernanke should not be lauded for helping to abate (note: abate - not eliminate or solve!)  the pain from the crisis he helped create, so I'll simply say that our society has become a satire of itself.  If some alien race were watching us right now, they'd surely be laughing.

Bernanke analogies include: Rewarding the Captain of the Titanic for getting everyone off the sinking ship after he rammed it into an iceberg.    Rewarding a doctor for sewing your leg back on after he accidentally amputated it.   Rewarding someone for putting out a fire in your burning house after they set it.  Rewarding someone for cleaning up a pile of crap on your floor after they took it.

Leave your own favorite Bernanke analogy in the comments.

-KD

Damned If You Do, Damned If You Don't

We had a major financial crisis because banks made bad loans with high leverage.  We yelled at the banks for causing all these problems, and we yelled at them for not exercising sound risk management.  Now, they're trying to be prudent and not lend money to people who won't be able to easily pay it back, but the American economy is like a crack addict in need of a fix - so we're yelling at the banks for not lending enough - for being TOO prudent.

We've become addicted to easy credit - but people forget that the current, tighter credit situation is not abnormal - it's the reversion to the mean!  The orgy of credit and appetite for risk that fueled the growth of the last 10 years is what was abnormal.  This is the single most important realization for policymakers to wake up to.  It shouldn't be a shocking epiphany, when you consider the paragraph above  -   the people who can most readily payback loans are, by definition, the ones who don't need the loans.

Today, President Obama "Pressured the heads of the nation’s biggest banks on Monday to take “extraordinary” steps to revive lending for small businesses and homeowners, drawing a firm commitment from one large bank to make more loans and vaguer assurances from others," according to the NY Times.  Remember, this is a day after he blamed the same "fat cats" for causing the crisis. 

Let's consider a few more soundbites from today:

“America’s banks received extraordinary assistance from American taxpayers to rebuild their industry,” Mr. Obama said in remarks after a midday meeting with bankers at the White House."

That is indubitably true. And then:

“Now that they’re back on their feet we expect an extraordinary commitment from them to help rebuild our economy.”

But what does that mean?  From the start of the bank bailouts, one theme from critics of the policies enacted was that they would result in us ending up with a bunch of zombie banks, like Japan did in the 1980's.  The problem, when you fix damaged banks with duct tape, is that they can't resume normal lending - they become zombies, holding onto their capital and trying to earn enough to cover future writedowns, but unable to take new risk because they are still in a fragile state!  Remarkably, this problem was made even WORSE this week, when C, BAC, and now WFC were allowed to pay back TARP funds.  

US Bancorp CEO Richard David responded:

"Mr. Davis said financial institutions would re-examine small business loans that had been denied, but he cautioned that banks had a responsibility to carefully evaluate the qualifications of each client. “We simply want to assure that we make qualified loans,” he said."

That sums it up. The reason Banks are hoarding money and not making loans is not because they hate America.  They are hoarding money and not making loans because, amongst other reasons,  1) they learned something from their collossal screw ups in risk management 2) the current risk-reward, with consumer purchasing power deflating and a murky economic outlook at best, doesn't favor massive loan origination, and 3) consumers/businesses are unable/unwilling to borrow more - they are maxed out.   Are there small business who want to borrow money?  Of course there are - THERE ALWAYS ARE! That doesn't mean they should be given money though!  Haven't we learned anything?  There are also always people who want to take out mortgages to buy houses - that doesn't mean that writing mortgages to these people is a good risk reward - as we've seen beyond the shadow of a doubt in the last 3 years.

MISH has a piece up today quoting FDIC chair Sheila Bair:

"Federal Deposit Insurance Corp. Chairman Sheila Bair said she’s “concerned” that U.S. banks are making only the safest loans, and encouraged the companies to step up their pace of lending.

“There needs to be well-managed risk-taking to get the economy going again,” Bair said today"

I'm trying to think of proper analogies, and some sports ones are coming to mind.  Imagine a baseball manager telling his cleanup hitter: "I need you to hit more home runs - but don't strike out anymore."  Or perhaps a football coach telling his quarterback: "We need more big plays down the field - big yardage pass plays - but don't throw any interceptions."   Maybe a site-boss tells his construction foreman: "I need this job done today - you have to do it in half the time with the same manpower, but make sure the quality is still perfect and that no one gets hurt."

Or perhaps a politician tells a bank manager "I need you to make more loans - but only good ones that won't default - because we're still trying to recover from the last wave of bad loans you wrote."

Boggles the mind...

-KD

Citi and The Prince

In light of Citibank's news today that it's paying back TARP funds, which prompted this story about how Prince Alwaleed Bin Talal will hold onto his Citi stake, I feel the time is right to post this picture of the Prince that BigShow just emailed me:

I love this guy. He's tremendous - a satire of himself.  Look at that 'stache!  And the stallion!  Brilliant.

Of course, this is also a perfect time for one of my favorite videos (potentially NSFW) of all time:  the fake Prince Alwaleed interview:

I've posted it before, but it makes me laugh every time I watch it.

-KD

Timing

oops:

-KD

Vegas, Re-fi's, and Obama

warning: potentially NSFW language below...

Vegas Rex writes a blog about all things Las Vegas from the perspective of a Vegas local - and insider.   He's funny, irreverent, and most importantly, he knows what he's talking about when it comes to Vegas.  While I've been bearish on MGM's imminent City Center for some time, thinking that the additional supply it creates would crush the city, Rex has been a big City Center bull - until lately.  (The bull case for CityCenter is that it will result in a bump in tourism for the ailing city.  The bear case is that it's a zero sum game (mostly) and that City Center will just eat up demand from other existing properties.)

Rex writes about the soon to be opened City Center casino hotel: Aria:

"Allow me an analogy if you will.

When you see a very attractive female, be it in a movie, on TV, or in person, your first reaction is usually to fantasize about seeing her naked.  If she is exceptionally hot, you may even get to the point where there would be no greater joy in life than to see her sans-clothing.

“Wow, Juggs McSnatch is sooo smoking I would pay a million bucks just to be a fly on the wall in her dressing room”, or something of the sort.

Later, you hear that Juggs is posing for Playboy, and when it is released, you immediately run to 7-11 clutching a $20 bill sure that you are about to see the greatest nude female ever.

You get home, open the pages, and find … boobs, an ass, and a vagina.  The kind of boobs, ass, and vagina you have seen a thousand times before.  You may still be excited, but it’s usually at this point that you realize the anticipation and illusion of her nudity was far more interesting than her actual nudity.

Most fake boobs are pretty standard, the airbrushed ass looks almost indistinguishable from that on Miss December, and let’s face it … if you’ve seen one vagina, you’ve more or less seen them all.

I’m starting to worry that Aria will be a vagina."

It's been well documented in these pages that I'm not fan of Matt Taibbi's sensationalistic reporting, but his latest skewering, "Obama's Big Sellout,"  of the Administration's status quo coddling of Wall Street is worth a read.   I liked Taibbi's last paragraph best:

"What's most troubling is that we don't know if Obama has changed, or if the influence of Wall Street is simply a fundamental and ineradicable element of our electoral system. What we do know is that Barack Obama pulled a bait-and-switch on us. If it were any other politician, we wouldn't be surprised. Maybe it's our fault, for thinking he was different."

The final must read from this weekend is a NY Times piece titled "Rates Are Low, but Banks Balk at Refinancing."    From the Times article:

"Mark Belvedere bought a condominium in a San Francisco suburb in early 2004 and refinanced it in 2005. He now owes $235,000 on a property that would sell for barely half that today.

Mr. Belvedere said he would be willing to live with all that lost equity if he could refinance his loan from a variable rate, which could eventually go as high as 12 percent, into a 30-year fixed term.

His lender said no, citing the diminished value of the property. “It makes no sense and is so frustrating,” Mr. Belvedere said. “I’m ready and willing to pay the mortgage for the next 30 years, but they act like they’d rather have me walk away.”

Calculated risk does a nice job summing up the problems succinctly:

"Unfortunately  (NY Times author) David Streitfeld doesn't provide any further information on Belvedere's loan. If the loan was held by a bank, then it might make sense for the bank to refinance the loan (this lowers the bank's risk of default). However Belvedere's "lender" might be a servicing company and the loan may have been securitized. Then it is impossible to refinance because the current holders of the note would be paid off, and no new lender would make a loan greater than the value of the collateral.

As Streitfeld notes, the GSEs have a program called Home Affordable Refinance Program (HARP) that will allow lenders to refinance loans upto 125% of the property value. But this is only for loans the GSEs already holds or insures (and because refinancing lowers the risk of default). This wouldn't help Belvedere because he owes almost twice what his property is worth."

In case that doesn't make sense, let me try to re-simplify.   Many mortgages have been collateralized and sold off to investors - that's what allowed people to buy these homes in the first place:  insane appetite for paper (bonds) led to miscalculation of risk by the buyers of the bonds (aka, the real LENDERS) and loose lending standards.  The problem is that if the bank doesn't own your loan, it's impossible to get a new loan, because you don't have adequate collateral:  who in their right mind would lend you $235,000 on a property worth only $125k just because you promise to pay?  Well - don't answer that - it happened hundreds of thousands  (millions?) of times already in the last decade, but NOW lenders seem to have learned their lesson and, sensibly, will not make any more such loans.

However, if the bank DOES own your loan, it seems reasonable that they would allow you to refinance from a loan you will not be able to pay off (and will eventually default on) into one which, at current interest rates, you will be able to pay off.  Remember, the bank doesn't lock up that money lending it to you for 30 years at 5% - they sell the paper off to Fannie and Freddie and other mortgage buyers.  BUT, and this is a big BUT that's been written about extensively elsewhere, many banks are still unwilling to negotiate/refinance in these spots if you are still timely with your payments.  In a perverse paradigm, they generally require you to fall behind on your payments before they will work with you.

-KD

Happy Hanukkah!

I almost forgot...  and yes, that's the same Oscar picture I used last year...

-KD

Jack Of All Trades

In the past 10 days, I've managed to get my riding mower jump started, ride it around my lawn and even cut some tall grasses, prune my apple trees, install 3 electronic thermostats, clog my toilet, and shovel 10 inches of snow.  In between, I made a trip back to NYC, and wrote blog posts on a variety of subjects.

I've been posting more frequently lately, so in case you missed anything, here's a recap:

AIG partially paid us (the government, the taxpayers) back by giving us a stake in businesses we already owned.

I went to see Phish on three consecutive nights at MSG in NYC.   The recaps are:

Wednesday: The Hangover

Thursday: Waiting For the Time..

Friday:  Inside the Bee Hive

I also brought you an exclusive "straight from the streets" anecdote about how one of Tiger's mistresses, Rachel Uchitel, takes it in the dooker, but surprisingly, no one care about that post.   I guess my new audience is too high brow.

Then there was another piece on high frequency trading and latency arbitrage, which was balanced by a piece on my dog's butt.

In between, there were a few good linkfests, and a "pick which story is fake," composition.

I don't want to toot my own horn, but I'd say that demonstrates some serious diversity:  Phish, finance, people's butts, dog's butts.

Also, I've added Google Adsense to my blog in an attempt to earn a few scheckles for all the time I put into it.  I'm expressly forbidded from urging people to click on the links, so I'll have to resort to jedi mind tricks...

-KD

MidWeek Readings

-PIMCO hired former assistant to the Secretary of the Treasury, Neel Kashkari.  Bill Gross told us a year ago his strategy was to "shake hands with the government."  I guess he wasn't kidding.

-WSJ Op-Ed: "A Transaction Tax Would Hurt All Investors"

-Morgan Stanley thinks the Fed will raise rates to 1.5% in the second half of 2010

-Goldman says no rate hikes until 2012

I'm with Goldman on this one, especially as Citi/BAC are paying back TARP funds.  Why does that matter? Well, It should be clear that C/BAC are far from financially lush - they are paying back TARP funds hastily because they don't want the government all up in their bid-ness.  The government knows that once it lets these guys pay back TARP, there can be no second bailout - the public would riot in the streets.  THUS, they have to ensure that policy is kept such that C/BAC can continue to print money - via near zero rates.

-MISH: Questions on Inflation Expectations.  MISH raises some great points here (a sampling):

1. When was the last time you bought a computer? Did you expect prices to drop? Did you buy a computer anyway?

2. When was the last time you bought a flat panel monitor or TV? Did you expect prices to drop? Did you buy them anyway?

3. If you expected the price of steaks to keep rising, would you buy a years’ worth? Six months worth? Do you even have a freezer?

4. If you expected the price of milk to keep rising, how much supply would you keep?

5. Do you have a storage tank for gasoline when you expect gas prices to keep rising?

6. If your refrigerator was in good shape would you buy another one if you thought they were going up in price.

7. If your refrigerator, microwave, TV, or even car went out, would you buy them or wait if you thought prices would drop?

8. I keep hearing how inflation expectations will cause people to buy consumer items, or deflation concerns cause people to not buy consumer items, but in light of the above practical test questions doesn’t that seem to be a potty notion?

9. What about asset prices? Would people buy stocks if they thought they were going up? Houses? This one I will answer for you (you bet).

-Michael Panzner "Doesn't Sound V-Shaped to Me."  More anecdotal evidence from the front lines showing that things may not be improving as fast as the spin job would have you believe.

-MISH again: "The Coming Collapse of Municipal Bonds"

"Assuming a 28% tax bracket, the effective yield on a 4% yield muni is 5.56. 20 year treasuries are yielding about 4%. A lousy 1.5% is all you get for the additional risk that a municipal bond blows up. I hardly see how it can possibly be worth it."

It's return free risk, MISH!   Of course, there's also clearly the widespread belief that the government will not let municipalities default on their debt. 

-KD

One of These Stories Is From The Onion

Can you spot which one?  Don't cheat by clicking on the hyperlinks.

1) "Nakheel's $12 billion Palm Island May Sink, Flood - Surveyor"

"Dubai World's troubles aren't limited to its $26 billion debt pile after a surveying expert said Palm Jumeirah, the landmark development of its real estate unit Nakheel, may be sinking into the Persian Gulf.

The island, dredged from the Gulf's seabed, is sinking by an average of 5 millimeters a year and may flood in the future if ocean levels rise, according to an executive at leading European ground survey company Fugro NPA Ltd."

2) "Chinese Husband Allows Wife To Attack Him Once a Week" (hat tip Tyler Cowen)

"The 32-year-old man, who was named by the Chongqing Evening News as Mr Zhang, took the unusual step after suffering intense abuse from his wife, who studies kung fu.

"I don't want to beat him, but arguments are inevitable and I can't help myself," his wife told the newspaper. She added that in the week before they signed the deal, she had beaten him up three times."

3) Labor Department: "Available Labor Rate Increases to 10.2%" (hat tip Barry Ritholtz)

"In what is being touted by the Labor Department as extremely positive news, the nation's available labor rate has reached double digits for the first time in 26 years, bringing the total number of potentially employable Americans to an impressive 15.7 million.

 "This is such an exciting time to be an employer in America," said Labor Secretary Hilda Solis, adding that every single day 6,500 more citizens join America's growing possible workforce.

"There's such a massive and diverse pool of job-ready Americans to choose from. And each month the number only gets higher."

"While our current available labor rate of 10.2 percent isn't quite as robust as it was in 1982 or 1933, we're happy to say that reaching that benchmark is no longer out of the realm of possibility," Solis continued."

4) The Power of Arbitrage

"Enthusiasts of frequent-flier mileage have all kinds of crazy strategies for racking up credits, but few have been as quick and easy as turning coins into miles.

At least several hundred mile-junkies discovered that a free shipping offer on presidential and Native American $1 coins, sold at face value by the U.S. Mint, amounted to printing free frequent-flier miles. Mileage lovers ordered more than $1 million in coins until the Mint started identifying them and cutting them off.

Coin buyers charged the purchases, sold in boxes of 250 coins, to a credit card that offers frequent-flier mile awards, then took the shipments straight to the bank. They then used the coins they deposited to pay their credit-card bills. Their only cost: the car trip to make the deposit."

5)  Man Picks Up Half A Million Dollars Worth of Discarded Winning Horse Racing Tickets over 10 Years

"For the past 10 years, Jesus Leonardo has been cleaning up at an OTB parlor in Midtown Manhattan, cashing in, by his own count, nearly half a million dollars’ worth of winning tickets from wagers on thoroughbred races across the country.

During his glorious run, Mr. Leonardo, 57, has not placed a single bet.

“It is literally found money,” he said on a recent night from his private winner’s circle. He spends more than 10 hours a day there, feeding thousands of discarded betting slips through a ticket scanner in a never-ending search for someone else’s lost treasure.

“This has become my job, my life,” he said. “This is how I feed my family.”

Leonardo, who favors track suits and wears his graying hair and bushy beard in long ponytails, is what’s known in horse racing parlance as a stooper — a person who hangs around racetracks and betting parlors picking up tickets thrown away by others. Most tickets are losers, but enough are winners to make it worth his while"

-KD

Here's What I Did Today - warning: Potentially TMI

For the uninitiated,  TMI = Too Much Information, usually used to describe something that you just wished you hadn't heard.

Let me just put it this way:  any time you come home with a bill from the veterinarian that consists of the line items:

"Anal Gland Expression Courtesy"  and

"Anal Infusion"

you KNOW it wasn't a good day.  They dinged me for so many things that they expressed Oscar's anal glands for free.  Courtesy!  Without going into details about this, I will refer you to this animated graphic, and leave it with the explanation that Oscar is far from cured - having serious bum issues.

this isn't from today, but this is how Oscar feels right now.

-KD

Umm - Yahoo - I don't Think That's What Obama Said

First of all, put aside all partisan political views and all opinions of the validity of the Administration's economic response for a minute.  I want to focus on simple validity of reporting.

I steamed into bajungi tilt when I saw the Yahoo headline:

"New Obama Plans "Spend our way out" of Downturn."

I'm clearly in the "you can't spend your way out of it when you're already up to your eyeballs in debt" camp. There's just one problem - according to the text of the speech released by the White House, that's not what Obama said.    What he actually said was

"Even as we have had to spend our way out of this recession in the near term, we have begun to make the hard choices necessary to get our country on a more stable fiscal footing in the long run."

I'm no fan-boy of the administration's economic policies, but I think Yahoo's headline is simply factually incorrect and sensationalistic, which is especially interesting because I feel like this administration has had better control of positive spin in the mainstream media than any other administration in history.  Obama's plans may very well still be to spend our way out of the downturn, but Yahoo quoted it as if he actually said that, which he did not.

-KD

More on High Frequency Trading

The sworn enemy of high frequency trading, Themis Trading, has a new "white paper" out titled "Latency Arbitrage: The Real Power Behind High Frequency Trading."  In my opinion, this paper is better written than Themis's prior missives on the subject of HFT, which is rendering them obsolete as traders, yet there are some glaring errors in the report that undermine its points.

The paper attempts to illustrate by way of example how exactly the latency arb algos are eating your lunch - let's call them LAHFT for short.    Themis describes it:

Here’s an example of how an HFT trading computer takes advantage of a typical institutional algo VWAP order to buy ABC stock:
1. The market for ABC is $25.53 bid / offered at $25.54.
2. Due to Latency Arbitrage, an HFT computer knows that there is an order that in a moment will move the NBBO quote higher, to $25.54 bid /offered at $25.56.
3. The HFT speeds ahead, scraping dark and visible pools, buying all available ABC shares at $25.54 and cheaper.
4. The institutional algo gets nothing done at $25.54 (as there is no stock available at this price) and the market moves up to $25.54 bid / offered at $25.56 (as anticipated by the HFT).
5. The HFT turns around and offers ABC at $25.55 or $25.56.
6. Because it is following a volume driven formula, the institutional algo is forced to buy available shares from the HFT at $25.55 or $25.56.
7. The HFT makes $0.01-$0.02 per share at the expense of the institution.

Now, item #2 above is the first problem - it implies that the LAHFT "knows" that there is an order that is coming in to buy stock.  This is not correct.  Themis continues to imply that the LAHFT is frontrunning orders, which is simply not the case.  What is happening is that the LAHFT is reacting to publicly available trade data faster than other people are.  The LAHFT computer does not see your buy order and trade ahead of it.  What MAY happen is that the HFT algo is offering stock, and when they get lifted, they go and lift offers on other market centers.  Again, this is nothing new, and is a basic, old, trading strategy - they just do it faster. Similarly, HFT Latency Arb algo's may see (and react to) publicly available trade data before JoeSixPack, but there is nothing immoral or illegal about that.  The LAFHT can see the publicly available data that shows 100 shares of ABC just traded on exchange ABCD, and go lift offers on exchange WXYZ.  So can you.  They just do it faster than you.  You are free to go write the software code to process the information faster  - there is no secret club you have to join - all you have to do is do the development work and pay for the connection.

Even more importantly, though, Themis writes

"6. Because it is following a volume driven formula, the institutional algo is forced to buy available shares from the HFT at $25.55 or $25.56."

NO. NO. NO .NO .NO.. NO ONE is forced to buy shares from anyone else.  If the institutional algo thinks the price is to high, it can sell stock instead of buying it.  That's the beauty of markets.   NO ONE forces you to trade at a price you don't want to.  The LAHFT is not forcing anyone to lift their offers or hit their bids.   If the institutional algo is leaving a footprint that lets everyone see what it's doing, that's it's own fault.  Again, this is especially ironic because Themis's Saluzzi has previously admitted that he's a "tape reader" which tries to do EXACTLY what he complains about:  forecast stock movements based on trading volume patterns.   Why Saluzzi continues to think it's ok for him to try to do this, but not for a computer to try to do it faster is beyond me, and it's why I continue to write these reubuttals everytime he pens a piece against the technology that's making him obsolete.

-KD

ps - The term "predatory trading" is redundant:  trading is predatory.

For more on the subject of high frequency trading, see:

We Fear What We Don't Understand
You Really Shouldn't Care So Much About Flash Trading    and
Dark Pools Are Not The Enemy

Heard It Through The Grape Vine - Exclusive! (Possibly NSFW)

WARNING: If you're looking for a thought provoking post on finance, you might want to come back another day - this post may be unsuitable for workplace reading.

still here?  ok...

While I was in NYC to see Phish, I got my haircut for the first time in almost 6 weeks.  The New Hampshire woodsman look was perfect for blending in with the Phish crowd, but my beard was starting to look like curly pubes, and I had an unruly mop on the top of my head.  I made an appointment to see my trusty old Italian barber, who I'll call Dino to protect his anonymity.

After exchanging pleasantries, Dino immediately got into a rant on Tiger Woods, and more importantly, one of Tiger's alleged concubines, Rachel Uchitel.  Dino's inimitable Italian accent made the story world class:

"Heya man - let me-ah tell-ah you something my friend.  Dis guy I know - his-ah friend, he-ah meet dis girl in the Hamptons this summer.  He-ah at-ah a party, and he-ah meet her on a Monday night.  He-ah call me on-ah Tuesday morning and he-ah say "Dino - that-ah girl, I-ah banged her in the ass-ah last night-ah"

Boom. Great stuff. If it comes from an Italian barber in NYC, we all know that's about as reliable a source that exists in the world of information.  So there you have it.  Rachel Uchitel gives up the butt on the first night.

-KD

The Financial Week That Was

I've been busy enjoying myself in NYC at Phish this week, but I saved a bunch of financial stories to mention:

 - Nassim Taleb gives up:

"What I am seeing and hearing on the news -- the reappointment of Bernanke -- is too hard for me to bear. I cannot believe that we, in the 21st century, can accept living in such a society. I am not blaming Bernanke (he doesn't even know he doesn't understand how things work or that the tools he uses are not empirical); it is the Senators appointing him who are totally irresponsible -- as if we promoted every doctor who committed malpractice. The world has never, never been as fragile. Economics make homeopath and alternative healers look empirical and scientific.

No news, no press, no Davos, no suit-and-tie fraudsters, no fools. I need to withdraw as immediately as possible into the Platonic tranquility of my library, work on my next book, find solace in science and philosophy, and mull the next step. I will also structure trades with my Universa friends to bet on the next mistake by Bernanke, Summers, and Geithner. I will only (briefly) emerge from my hiatus when the publishers force me to do so upon the publication of the paperback edition of The Black Swan."

-Dan Loeb:  "It's a bull market in government regulation and intervention."  Via Dealbreaker

- Karl Denninger:  none of the trial mortgage modifications have been made permanent.

- Via Felix Salmon:  Fama and French's latest study on fund returns:

"For the vast majority of actively managed funds, true α is probably negative; that is, the fund managers do not have enough skill to produce risk adjusted expected returns that cover their costs."

- MISH 3-pack:   Virginia Borrows Money To Pay Unemployment Benefits,  Arizona Maxes out Credit Line in Two Weeks Flat,  24 States Borrow Money To Pay Unemployment Benefits

 -Somali Pirates Form Stock Exchange:  again, a real story - not from the Onion:

"The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials ... we've made piracy a community activity."

A COMMUNITY ACTIVITY!   My graphics department, which consists soley of my most loyal reader, Bones, provides this graphic for the pirate story:

-Karl Denninger on how banks are ripping off the FDIC 

-Baseline Scenario:  BankAmerica paid back TARP money to avoid executive compensation caps. 


-Michael Panzner: "An altogether different picture,"  anecdotal stories of just how "not good" things are.


-Floyd Norris thinks unemployment may have peaked.  I happen to think he's wrong (see: exhaustion rate, average length of employment, employment/population ratio, number of people unemployed over 26 weeks, etc)



-quality satire:  Zero Hedge announces new partnership with Google

- The solution to our economic woes.  cartoon: "much like the Federal Government, my wife has a plan to spend us out of debt." 


Another graphic from my hard working graphics department, Bones:

"Come on - that HAS to be photoshopped,"  I told him.  He merely replied with the link: http://www.columbiadailyherald.com/, where the ad is displayed.


-KD

Inside the Bee Hive

I joke with my friends that I'm a terrible trader.  Never mind my market prowess, or lack thereof - it extends to other avenues, like procuring Phish tickets.  Although I thought that tickets to the three MSG shows would be virtually fungible: trade-able for each other, I somehow ended up with 8 nearly worthless tickets to Wednesday's show and had my friends bail on me, while I needed 4 tickets to Friday's show which had a Super Bowl aura of impossibility to them.

After spending 4 days staring at the screen on StubHub, prowling Craigslist relentlessly, and reaching out to my network of ticket providers with zero results, I stumbled upon a 4-pack online that looked to be golden.  Section 62, Row C, for a relatively reasonably price (note: it's all RELATIVE!).  I pounced on them, and the only concern now was how I would be able to get them in time for Friday's show, since it was Thursday afternoon.  At Thursday night's show, I noticed that there might be a slight issue with these seats, as Phish has a little soundboard guy on Page's side of the stage, and these seats might be directly behind said soundboard.

Well, Friday came, the tickets arrived without incident, and all fears diminished when Dan, Lee, Mitch and I sauntered down to our seats.  Front row, level with the soundboard guy, right next to Page.  I have been to hundreds of concerts, plays, and other events in my life, but I have never before had a seat that I would not trade with any other seat in the venue.  Until tonight.   I finally got one trade right.

My buddy Alex had bailed on me for Wednesday and Thursday's show, telling me he wasn't going to any of the three.  He got caught when I found out he was taking a former colleague of mine to Friday's show, and was in the 8th row on the floor.  Alex tried to make amends by offering to "stub me up."  "Stub me up?  Stub up my balls bro - your seats are the cheap seats compared to mine!" I taunted him back, thinking of Moe Green's "No, I buy you out, you don't buy me out," from The Godfather.

Things got groovin early in Possum, and then absolutely frenzied during the anthemic Wilson, with the screaming question: "I must inquire Wilson - CAN YOU STILL HAVE FUN?"     I've used the word "anthemic" in each of my three recaps, and it's really the word to describe Phish.  Although so many of their songs are anthemic to the fanatical fan base, there are still a handfull that are really rallying cries for Phish nation.  Wilson is in this basket, in my opinion.  The security guards in the front of the floor were pretty cool - retrieving balloons that ended up over the rail and putting them back into play.  Our section had the most miserable usher in the history of civilization, who was a major buzzkill for everyone, but at least she kept ticketless wooks out of our seats.  Mitch made several leaning reaches to keep balloons up in the air, and I marveled at how dedicated the fans were - having taken the time to draw smiley faces on each and every balloon. 

I also laughed at a guy on the floor holding a sign that read "I AM HAPPY," which seemed to be a partially sarcastic reply to Trey's new craptastic song, "Joy," and it's refrain of "We want you to be happpppppy."  I tried to hit Alex with several glowsticks, but only managed to ding the girl standing in front of him.

The first set closed with an absolutely insane trio of Guyute, Maze and First Tube.    I saw Phish about 5 years ago in Vegas - in the Thomas and Mack Center which is like a smaller version of MSG - a tight bowl.  I will never forget the description by one of the people I was with of the energy at those shows - he said it was like being inside a bee hive.  There is no better way to describe the way the energy ripped around the Thomas and Mack Center that week - like bees buzzing louder and louder in their hive, reaching a crescendo, feeding off each other.  I felt a lot of that on Wednesday night, but not much Thursday.  Friday, during First Tube, there was a bona fide bee hive moment, as the crowd just went ballistic.   As Dr. Pauly described it, everyone went "batshit crazy."  It was, quite simply, a "moment."  Check out Dr Pauly's review for a more detailed description of Trey's on stage orgasmic actions.  In the video below, you can get a sense of the hysteria starting around the 3 minute mark, and you can see Trey waving the guitar at the end.

Alex came up to visit us during the set break, and we busted his balls for having crappy 8th row seats.  I don't know what happened to my memory during the beginning of the second set, because I have absolutely zero recollection of "Scents and Subtle Sounds."   I definitely remember Rock'N'Roll, however, which brought the energy back up.

Mike's Song was one of the highlights of the three nights.  Absolutely RAGING.  It anchored the second set, leading into Hydrogen and then Weekapaug of course.  After the mellow Horse --> Silent in the Morning, YEM closed the set.   Mayhem ensued when the band reached the crescendo and MSG exploded in an ejaculation of energy.   My boy Lee always has Loving Cup on the top of his list of "songs to hear," but he was pleasantly satisfied with the Shine a Light encore closer.

As the lights came up, I noticed that the hippie chicks in the row behind us were barefoot.  Oh man.  Under what circumstances does one go barefoot in Madison Square Garden? None, in my book. Perhaps they needed to take off stiletto heels to dance?  Nope - they pulled on their boots and trudged up the aisle.  I just don't get it.

I woke up this morning, back home in the silence of a snow covered New Hampshire with my ears ringing.  Note that it's Sunday.  The third MSG show was Friday night.  Why are my ears ringing?  I wondered.. Oh yeah - three nights of Phish in NYC followed by the system shock of total silence in the country.  Three nights of raging.  Three top notch nights.  I got out of bed and my knees creaked.  I have dark yellow bruises on the tops of my calves.  Huh?  Oh yeah - I repeatedly smashed into my own chair as I was bouncing up and down during the shows.

My voice has recovered, my calves will recover, and I still have my wallet and my cellphone.  

I'd say it was a raging success.

-KD

Waiting For The Time When I can Finally Say...

Last night I returned to Madison Square Garden for the second of three consecutive Phish shows.  I was not about to make the same mistake I made on Wednesday night - drinking on an empty stomach - and got a solid cheeseburger base in me before the show.  I remembered a few more funny tidbits from Wednesday night too:  at the bar preshow, I reached into my pocket for my cash, and a individually wrapped Lactaid pill I was carrying fell to the ground.  I could sense the tension in the place, as the Phish wookies contemplated diving on my potential contraband.  "Relax folks - it's just Lactaid,"  I laughed.  It won't get you high, it will just save you from agonizing stomach pain when you eat milk products.

There was a scary moment early on in Wednesday's show, where a girl who was probably about thirty years old was nodding and swaying a little to the music at the end of my aisle, 3 people away.  Suddenly, she stopped moving, stared straight ahead, teetered, and then collapsed as her friends shook her and yelled at her.  Ten minutes later, she was back, fine, as her friend explained to me "she doesn't even do any drugs."  Just a Kuroda-induced bona fide seizure i guess.

On Thursday, we were sitting in section 309, which was fine - it was near the stage, and offered a sweeping bowl of the mass of gyrating hippie humanity that was Madison Square Garden on that night.  I said hi to Doctor Pauly before the show, and finally met the elusive Change100.  I also spotted a guy in my section wearing one of Pauly and the Joker's Phish/Lost Dharma Initiative lot shirts.

I didn't think the crowd was nearly as loud as the night before.  Perhaps it's because I was in a different spot - the music was bone shakingly loud the night before in section 73, and the sound was significantly more dissipated up in the 300 level, but I wouldn't think that would effect the crowd noise I was hearing.   

Hans shot this pic on his Iphone, through the lazer glasses I brought, which he throroughly enjoyed wearing.

To me, the crowd didn't really get rocking until Julius closed the first set.  The second set led off with another anthemic song:  Down With Disease.  I had a Phish Virgin with me, my friend Hans, and I urged him to try to listen for the part when Phish would come out of the jam and bring it back to the closing refrain of the song.  Sadly, they didn't finish DWD, they segued into Piper instead.  Piper is good too, but I love the way the band ends DWD jams, and was diappointed not to get brought back to the hook.  Piper, in turn, morphed into Fluffhead, which really got the crowd fired up again.

"Fluff came to New York

Askin' me for change

His eyes were clear and pure

But his mind was so deranged"

The second set was quite solid, including Free, David Bowie, 2001 and a Character Zero encore.

A few funny moments:  1) security/ushers simple gave up trying to corral the mass of dancing wookies that flooded the aisle around the 300 level.  I saw an usher with a simply exasperated look on her face - she wasn't even going to try to stop the dance fest.  2) there were two guys behind me who were probably 17.  One looked to be the chaperone, guiding his buddy who was clearly stoned out of his mind.  During the set break, stoner-boy was expounding "dude - we are just so inherently SMALL. Do you realize that the universe is expanding at an ever-increasing rate?"  It was like Donald Sutherland's character in Animal House.   I laughed and turned around, to find the chaperone buddy looking completely embarrassed.  "Enjoying the show?"  he asked me, rolling his eyes at his buddy.

Tonight we return for the final show, which is likely to be a barn-burner.

-KD

Papa Needs A New Pair of Shoes

Some of you may have noticed that I've finally whored myself out and added Google Adsense to my blog.    I know, I know, I'm a sellout, blah blah blah.  I don't choose the ads that are displayed - Google provides them based on some algo that determines what my readers would like to see based on the content I write about.  This can also result in some funny ads (meaning: odd/inappropriate) showing up.  If you see anything bizarre, let me know.

Please click on my sponsors every once in a while if you see something you find interesting - if you click through, I get paid.

Ship it.

-KD

The Hangover

I tried to write a post about last night's Phish show at MSG, but it simply didn't translate and I deleted it in frustration.  Without further ado, here's what I remember about last night:

Severe inebriation.  There is really no other way to describe it.  Staggering.

"Can't I Live While I'm Young?!!?"  Anthemic.  That's the word.

"Brain dead, and made of money - no future at all" for some reason I always feel like that line is for me - not that I'm brain dead, but that I'm wasting my talents.  Anyway.

The crowd was DEAFENINGLY loud.  Probably the loudest I've ever heard.

There were an ample supply of wookies looking for freebie tickets before the show.

Trey was fired up during Tweezer Reprise - so much so that I thought they might audible one more song.

"I sawwwwwwwwwwwwwww you - with a ticket stub in your hand!"

"Set the gearshift for the high gear of your soullllllllll. You've gotta run like an antelope - out of control." - also anthemic.

My boy Ryan pulled an advanced maneuver when I went to "cheers" him by knocking my beer bottle against his.  He simply took the beer from my outstanded hand, tipped it in my direction, and drank it.  Well done, sir.

I texted Dr. Pauly "I cannot drive right now."  "I thought you took the train?" he replied. "I did. I'm just giving you a benchmark of how drunk I am" I explained.

Staggering out of the subway in the rain after the show, I walked the wrong direction for 3 blocks before I realized that I was off target. 

I knocked down a cheeseburger at 1am - which was essential to absorb some of the booze in my stomach.

Beers at MSG cost $8.25 and up!  What recession?

Ryan brought a pair of 3D glasses - which were tremendous to wear during the show, distorting all the lights. "It's like drugs, without the drugs," we opined.

This morning I was awakened at 5am by the sound of a little kid screaming, coming from the air conditioning vent in the bedroom I was in.  I quickly realized that this was a fun game - for the kid at least - he was literally screaming INTO the vent (on another floor of the same building).  Thanks, parents. 

Checking my inventory - I seem to still have my wallet, phone and clothes from last night - so we'll call it a rousing success.

Can't wait to do it all over again tonight - and tomorrow.

-KD

AIG Gets Foreclosed On - "I'm Paying You With Your Money"

Irony continues to flourish.  The first story I saw this morning was: "AIG Reduces Government Borrowings by $25B."  Hmmm.. note the careful wording - clearly AIG didn't pay back $25B to the Government - let's read on:

"American International Group Inc. on Tuesday slashed the amount of money it owes the government by $25 billion as it moved two subsidiaries into special holding units ahead of their planned spinoff or sale.

AIG moved American International Assurance Co. and American Life Insurance Co. into special purpose vehicles, which are used ahead of a move to separate a unit from a parent company. The government is receiving preferred equity stakes in the two life insurance companies worth $25 billion in exchange for a reduction in the amount of money AIG owes the government.

AIG will continue to hold the common stakes in AIA and Alico until it determines whether to complete initial public offerings for the companies or sell them privately. No timetable yet has been announced for when an IPO or sale will be completed."

This actually isn't a total shock - it was announced preliminarily back in June, and I wrote about it then.    AIG tried to sell these two businesses, but couldn't get either 1) a buyer or 2) a buyer at the price they wanted.  Thus, they decided to make the Government the buyer at their price, and somehow the Government agreed.

The analogy here is if you have a house with a $1mm mortgage (in AIG's case, it's more like a $180 BILLION mortgage, but let's play make believe).  You owe the bank $1mm, and you've lost your job, so you put your house on the market.  After a year, no one wants to buy your house, and your neighbors' comparable houses have sold for $500k.   You can't just call the bank and say "hey man, the house is really worth $1mm, so you can just take the house and we'll call it even."   Actually - you CAN!  It's called foreclosure - the US Government is foreclosing on AIG.   Also note that while this relieves you of your debt, the bank (the Government in this case!) eats the loss!

What can we learn from this?  Well - we're never getting back the money that was lent to AIG - this is more evidence to that fact.  Once we (the Government) start accepting assets that no one else wants to buy as repayment of debts, it's because they're better than nothing - better than the cash we will NOT be getting!

Now, let's get back to the absurdity.  There's another big problem with this transaction: the Government already owns 80% of all of AIG - from the bailout a year ago.  Sooooo.... Why do we need to get paid back with stakes of companies (AIA, ALICO) which WE ALREADY OWN?!?!?!?!?!    Pure insanity.

Finally, notice that AIA and ALICO will be placed into special purpose vehicles to facilitate this chicanery.   Is anyone else laughing out loud at this?  One of the big problems for the banks was that they had all sorts of off balance sheet assets - lousy MBS, CDO's and other structured products - sitting in SPECIAL PURPOSE VEHICLES, which is a fancy term for "off balance sheet black holes where we can pretend that we no longer have risk, but are merely an accounting ploy."   The banks pretended these assets weren't really effecting their balance sheets, and avoided recognizing the losses associated with them for as long as possible (and some still haven't been recognized.)

Investopedia explains it thusly:

Investopedia explains Special Purpose Vehicle/Entity - SPV/SPE
Thanks to Enron, SPVs/SPEs are household words. These entities aren't all bad though. They were originally (and still are) used to isolate financial risk.

A corporation can use such a vehicle to finance a large project without putting the entire firm at risk. Problem is, due to accounting loopholes, these vehicles became a way for CFOs to hide debt. Essentially, it looks like the company doesn't have a liability when they really do. As we saw with the Enron bankruptcy, if things go wrong, the results can be devastating.

I guess when AIG is giving us assets that we already owned and no one else wanted to buy in exchange for a reduction in $25B of debt, the SPV nature (place the assets in a bucket with a made up value slapped on them) of the transaction is the least of our problems.

This post wouldn't be complete without this apropos quote from Teddy KGB

Still Up 20 Grand sound bite  Matt Damon sound bites

"It's a fucking joke anyway, after all, I am paying you with your money."

-KD