Thursday, April 30, 2009

The Wallgina and It's Impact on Housing Prices

I have been a fan of Nouriel Roubini for a while - he didn't drink the bullish brainwash Kool-Aid and had the foresight to see the financial collapse coming. Now, critics of his will say he's been bearish forever, and that if you're always bearish, you'll certainly be correct when the Bear finally comes. I happen to find his thesis much more tenable than the bullish "hope and pray" thesis, and then I happened upon more evidence of his supreme intelligence: the details of his apartment.

So anyway, I'm ALREADY solidly in Roubini's camp, and then today I find this month old article from NY Magazine that I somehow missed, about the wall vaginas in his Tribeca loft! "What the fuck is a wall vagina?" you might ask - well click over to the pics on the NY Mag article (apparently, Roubini doesn't like the pics being publicized, and although I am not afraid of a challenge, I don't want to incur the wrath of Roubini's empire of Euro-model fembots.)

Now, if there was ever the smoking gun piece of evidence that housing prices are not going higher, this Wallgina news is it. I mean, after you've put the crown touch of the wall vagina on your apartment, what else can you possible do? There are no other improvements left in the spectrum. Remodel bathroom? check. Install skylight? check. Install reclaimed wide plank floors? check. New Viking appliances in the kitchen? check. Renovate heating and cooling system to operate off solar and geothermal power with radiant floor heating? check.

Hmmm.. What else can we do with this place? Knock down the wall between the two small bedrooms on the second floor? check. Brand new state of the art video intercom? check. Buy air rights from the building next door and create my own personal roof deck on their rooftop? check. What else.. there must be something... wait - I've got it... WALL VAGINAS!

I am left to wonder what the return on investment is on Wallginas... If a remodeled bathroom recoups 70% of its value at resale, I'm guessing the Wallgina returns roughly 135%. More importantly, now I know what "WV" means when I see it in a real estate listing:

"2BR 2BA in desirable building. Brick walls, doorman, WD, MAR MBA, PAR PAT, WV"

This clearly means: Two Bedroom, two bathroom apartment in a crappy area. The apartment is old, there is a doorman in the building. The apartment has a marble master bath, a partially fenced patio, and wall vaginas.

Thank you, Mr. Roubini, for this brilliant idea.


p.s. my most loyal reader, Bones, would like to point out the URL for the NY Mag article, and nominate it for "URL of the Year"


Tuesday, April 28, 2009

Why Isn't Anyone Talking About the IMF Bonds?

You probably missed it this weekend, but the International Monetary Fund is planning to sell bonds in order to "solve" its fiscal needs. Apparently, China and some other emerging markets countries didn't like the idea of making IMF contributions (8%) in excess of their voting percentages (4%). How China came to the conclusion that buying IMF bonds in order to fund the IMF would be better is beyond me. I guess it's back to "I'll take a shit in a box and put a guarantee on it."
This story struck me as especially bizarre, since, the IMF HAS NO REVENUES! Talk about a pyramid scheme: hey IMF - how are you going to repay the bonds when they come due? Wait - I know the answer: SELL MORE BONDS TO CHINA! In the words of an old Guinness ad: "Brilliant!" More possible explanations came from my father, who suggested "China will just pay itself back," and my friend Ted, who explained sarcastically (I think!), "When the economy gets better, we can give the IMF more money," to pay back China of course!
Hey, maybe we're the suckers here, and China is freerolling on this. After all, I don't think the US has any chance of recouping its IMF contributions - at least not directly. Obviously, the idea is to help other global markets, so they can get healthy, thrive, and buy our debt.
And Ponzi lives on...

Plane Flyover - Come ON!

In case you missed it, NYC was outraged yesterday after the government organized a flyover of an empty Air Force One 747 escorted by a fighter jet over lower Manhattan. Workers and city officials panicked, with people seeing the plane and fearing another terrorist attack. Even Mayor Bloomberg was unaware of the "photo shoot."

"But the flyover was nothing but a photo op, apparently one of a series of flights to get pictures of the plane in front of national landmarks. It was carried out by the Defense Department with little warning, infuriating New York officials and putting the White House on the defense. Even Mayor Michael Bloomberg didn't know about it, and he later called it "insensitive" to fly so near the site of the Sept. 11, 2001, attacks."

Why on earth does the government need to fly a 747 in front of national landmarks and take pictures of it? Honestly - they could do this with Photoshop in 5 minutes. Something doesn't add up here.

It's All Good!

No, it's NOT from The Onion - sorry:

"April 28 (Bloomberg) -- Home prices in 20 major U.S. metropolitan areas dropped in February at a slower pace, adding to evidence the market may be stabilizing.

The S&P/Case Shiller index's 18.6 percent decrease compares with a record 19 percent decline the month before. The gauge has fallen every month since January 2007, and year-over-year records began in 2001. For the first time since the measure started dropping in 2007, the 20-city index didn’t post a record year-over-year decline in February."

In case anyone is confused - you are supposed to be bullish because the housing index did not post a RECORD decline for the 14th straight month. It only posted a massive decline, not a record decline, so things are getting "better."

good luck with that.


Monday, April 27, 2009

Boston, You're My Home

What a week for Kid Dynamite in Beantown. First, on Tuesday, I smoked a cigar with Dirty Dave before seeing The Boss rock the TD Banknorth Garden, catching the incredible "I'm Bad, I'm Nationwide" performance. Then, the following night, I returned to the Garden with my mom and my two oldest friends: Brian, who was finally attending his first Springsteen show, and Nick, who was the one who introduced me to The Boss back in 5th grade.

Nick wielded his 1985 Born In the USA Springsteen outfit - complete with cutoff jean vest, red bandanna, and baseball hat in his pocket. Surprisingly, this outfit attracted the attention of some younger lady fans who sidled up to Nick. Brian, on the other hand, was busy fighting off a "battlecat." He explained to me that a battlecat was like a cougar, only 10 years older. Meanwhile, my mom continued to sneak closer to the stage (we had general admission floor seats) while I almost gave myself a heart attack as I bounced in the glare of a spotlight, going bezerk when Bruce played a cover of the Ramones' "I Wanna Be Sedated."

Like the improvised "I'm Bad, I'm Nationwide," from the night before, this song request came from a fan sign - this one was written on a standard 8 1/2 x 11 piece of paper. Bruce took it and gave it to Kevin, the stage tech, presumably to load the lyrics into the teleprompter. After ripping through "Raise Your Hand," Springsteen conferred with his two guitarists, Nils Lofgren, and Ramones fan/Sopranos star, Little Stevie Van Zandt. You can see them figuring out the chords in the video, before hammering out a raucous version of the song. I was so pumped up that I was using all 9 inches of my vertical leap to sky above the mass of humanity on the floor, and somehow ended up with a spotlight shining on me - although I have yet to find pics or vid of it.

We all thoroughly enjoyed the show, and what's not to like? Floor seats for The Boss with good friends?

But the week wasn't over. Each year my wife's family and my family join forces for a canoe relay race on the Charles River, the Run of the Charles. Saturday we had a pre-race BBQ, and Sunday we did the race in 85 degree sun. Although we couldn't repeat our 2008 Mixed Division Championship performance, the day was a perfect prelude to the evening activity, which was the finale of the Sox-Yanks weekend series at Fenway!

I had to spend the game mediating between the friendly taunting of the hammered Sox fan to my right, and the growing irritation of my brother in law who is a Yankee fan, who was taking the brunt of the abuse. My bro-in-law had been pounding beers with me, and was ready to snap this drunk local. I warned the guy, with a smile, "You better not test him - he'll make you tap out!" and the guy understood, "I'm pre-tapping right now."

Drunk Bostonians always provide entertaining theatrics, and this guy was no exception. I got a kick out of it every time he screamed "Strike this pussy OUTTTTTTT," when there was only 1 strike on the batter. He also had a quality third person self reference, when he said, of himself, "Hey, my daughter's daddy likes to get fucked up." The other highlight came when some doucheballs repeatedly butchered the easiest chant in sports: "Yankees SUCK!"

Now, there are two chants at Fenway: 1) "Lets go Red Sox" (clap clap, clap clap clap), and 2) "Yankees SUCK! Yankees SUCK!"

Somehow, these idiots combined the two, into a sing-songy cadence of "YanKEES Su-UUUCK, YanKEES, Su-UUUUCK," but without the clap clap clap-clap-clap.

The guy behind me had me laughing out loud as he wondered in awe, "How do you fuck up the Yankees Suck chant? It has to be the easiest chant in sports."

When Jacoby Ellsbury stole home with the bases loaded, it was one of the most amazing sports moments I've ever seen live. You can even hear the excitement in the announcers voice on the video:

The amazing thing is that Ellsbury actually stumbled right before the plate - he later said it was because he saw JD Drew flinch, and was worried that Drew might swing, so he abandoned his plan to slide feet first and dove head first instead.

Fenway (and of course, Kid Dynamite) went absolutely BALLISTIC - with a frenzied ovation, eliciting a curtain call from Ellsbury, and the Sox never looked back on their way to a 4-1 win and a sweep of the Yanks.

So, in one week I got to see three multi-sigma events live:

Springsteen's "I'm Bad, I'm Nationwide"
Springsteen's "I Wanna Be Sedated" and
Jacoby Ellsbury stealing home.

Can't complain about that...


Wednesday, April 22, 2009

The Boss

I saw The Boss, Bruce Springsteen, last night, for the forty-somethingth time. The show was at the TD Banknorth Garden, in Boston, and I went with my aunt, who took me to my first Bruce show back in 1987 at the Worcester Centrum.

My friends wonder how I can go to see the same guy so many times, especially because Bruce doesn't really mix up his setlist on tour like Phish does - when I go to Springsteen again tonight, 14 of the 20 songs will probably be the same. Anyone who has seen Springsteen live will understand though - he is a pure entertainer, and goes balls out each and every show.

Last night, Bruce produced one of the top concert moments I've experienced live. There is a part of the show where he pulls handmade signs from the crowd, which have song requests written on them. I was in the balcony on the side of the stage, and couldn't see this particular sign, but he held it up, and got mild applause from the crowd.

"The band does NOT know this song," Bruce laughed, as the crowd roared a little.

"They have NEVER played this song," he continued, chuckling, and then repeated, "The band doesn't know this song."

After cocking his head, standing stage center, and repeating one more time, "They have never played this song," Bruce rasped, "BRING ME MY GUITAR!" and his sound tech brought out a different guitar. Someone must have yelled, "Can they do it?" because Bruce answered into the mic:

"Can they do it? Fuck yeah! They're the E Street Band!"

I still couldn't tell what the sign said, but Bruce had it propped in front of him, as the fan who made it had included lyrics and chords on the back!

"I think I used to play this in bars! I'm gonna do the first round and then you guys come in," Springsteen instructed the band, and then started strumming his guitar and half-singing half-humming the first verse.

At first it seemed that Bruce was flubbing his way through a song he didn't know, but he then said "I'll figure this out in a second," and it became clear he was working it out in his head, half out loud, in the middle of the show in front of 20,000 rabid fans!

Suddenly, Bruce ripped into the guitar and began belting out the first verse: it was ZZ Top's "I'm Bad, I'm Nationwide."

Well I was rollin down the road in some cold blue steel,
I had a blues man in back, and a beautician at the wheel.
We going downtown in the middle of the night
We laughing and I'm jokin and we feelin alright.
Oh I'm bad, I'm nationwide.
Yes I'm bad, I'm nationwide.

Now, it's not that this is a favorite song of mine, or that it happens to be a great fit for Bruce's 1980's muscle car rock anthems, but watching Springsteen figure this out on the fly, and having the band chime in flawlessly behind him 30 seconds later was simply tremendous. Magical.

After finishing the song to frenzied applause, Bruce stepped back to the mic and explained, "NEVER try to stump the E Street Band."

Without sounding all artsy and metaphysical, it's rare to experience this kind of "creation" in music. I see a lot of live music, including a lot of "jam" bands who are constantly improvising and creating new experimental stuff on stage, but I can only recall one time I had the feeling that Bruce and the E Street Band created last night - and it was a show I wasn't even at.

In 2004, Phish played a show at what was then the Tweeter Center in Mansfield, Massachusetts. I wasn't at the show, but i listened to the bootlegs. At one point, the band tried to play Smokey Robinson's "Tears of A Clown," but they didn't know the lyrics. Each member took turns flubbing and humming the lyrics, until I guess some girl in the front row claimed she knew the words!

Trey Anastasio, Phish's lead singer, pulled her onstage, and gave her the mic. The girl was rightfully freaked out, and sounded like she'd be a total trainwreck as she giggled and screeched while trying to compose herself. However, after a few seconds, the band picked up her rhythym and came in full throttle behind her, which inspired her to belt out the lyrics like a karaoke star. I wouldn't call her a top notch rock star, but this performance was truly amazing - listening in real time as the band simply CARRIED a random girl picked from the crowd to sing a song they didn't know the words to, and it worked. You can download to the song, and the rest of the show, here.

The best part of all of this is, I get to do it again tonight.


UPDATE: BruceSpringsteen.Net has a video of the performance of "I'm Bad, I'm Nationwide," but they cut out the best part - where Bruce is trying to figure out how the song goes....

UPDATE 21: full version now on Youtube! not the best quality, but you can see where Bruce is experimenting at the beginning. Awesome.


Friday, April 17, 2009


I sent several of my friends a link to this fantastic graphic from Slate illustrating employment losses for the last few years. My most loyal reader, Bones, replied "looks like a nuke fallout map on 24."

I answered, "Have no fear, the bulls tell me it's a lagging indicator and things will get better soon. Green shoots, baby!"

Bones, for the win, surmised, "We should send Jack Bauer in after the TARP money. They'll talk."

Dirty Dave, master of analogies and pop culture, also deserves a shout out for this gem a few nights ago: we were talking on the phone about his imminent weekend trip to Turks & Caicos. "Don't forget your sunblock," I chided him. "I've got it," he replied quickly, "fifteen and thirty - just like the Bellagio game."

Only Dirty Dave could make the transition from sunblock to limit hold'em. Well done, sir.


Wednesday, April 15, 2009

It's Over. Maybe

I loved this comment out of Intel last night:

"In another sign that the worst of the economic downturn might have passed, Intel said on Tuesday that the personal computer industry had bottomed out in the first quarter of the year.Paul S. Otellini, Intel’s chief executive, said, “The worst is now behind us.”

and then:

"Intel said it was not confident enough in the state of the economy to provide a revenue estimate for its second quarter. But it said that “for internal purposes” it was planning for flat revenue in the second quarter."

In other words: "We are stating that we've seen the bottom for demand, but we have no confidence in that statement."

Thanks Intel!

And oh - for those getting bulled up from today's Fed Beige Book - Really?!?!?

"The Fed's latest survey of business conditions nationwide found five of its 12 regional banks reporting a moderation in the pace of the economic decline."

Wow! Green shoots indeed! Things are getting worse less slowly in 40% of the Fed's surveyed regions! Yee Hah!


Monday, April 13, 2009

Phish Meets Finance II

In addition to Phish lyrics bringing me back to freshman year psychology, I'm finding that they frequently ring true with respect to our current financial crisis. Part 1 of "Phish Meets Finance" featured the not so simple "This isn't who it would be, if it wasn't who it is" from Wolfman's Brother.

Today, every time I listen to "Fluffhead" all I can think of is Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke.

Fluffhead was a man
With a horrible disease
Could not find no cure
Won't you help him if you please?

What's the cure? Perhaps MORE debt? MORE money created? Can anyone help poor Timmy G borrow his way out of this borrowing trap?

Fluff came to my door
Askin' me for change
His eyes were clear and pure
But his mind was so deranged

I think we already know how the American people feel about this one - we're pretty pissed about the prior Treasury Secretary Hank Paulson coming to our door to ask us for a few trillion dollars to commit to aid for the ailing banks and guarantees for their bad assets...

Fluff went to a banker
Askin' for some bills
The banker said, I ain't got that
But I sure got some powerful pills.

Ahhh - the money line. Actually, when Geithner went to Bernanke at the Fed for help, Bernanke did indeed provide him some bills... Trillions of them - to be used for purchasing all the crap that no one else wanted to purchase. Of course, Big Ben also has some other powerful pills in his arsenal - like more convoluted plans to prevent banks and their debtholders from taking the losses that are rightfully theirs.

-Kid Dynamite

Wednesday, April 08, 2009

I Just Have One Question for Ken Lewis

Bank of America's CEO, Ken Lewis, did an interview today with Fox Business News. Zerohedge has the transcript.

My favorite part:

On differences between Bank of America and Citi:
“I don’t want to bash Citigroup, but there are some striking comparisons. First, I mentioned our core deposit levels. We grew our deposits $42 billion last year. We didn’t have a loss of deposits. We made $4 billion last year after tax. We didn’t lose money. So there are some striking differences. And then finally, when we were asked to go to Washington and asked to take $15 billion of the first TARP money, we had just raised $10 billion in common. We didn’t need more money. We did it for the better good. I feel like I’m living the saying, ‘no good deed goes unpunished’ because it is not a fair comparison.”

I just have one question: if BAC didn't need the initial TARP funds, and just took them for the greater good of These United States, then why the fuck did the government need to come in and backstop $118 BILLION of their crappy assets? Was that for the greater good too Mr. Lewis?

Seriously... Anyone? Bueller? Bueller?


Gross Negligence

Last night I sent some of my friends this story, with the subject line "April Fools?"
"Bank of America Corp., recipient of $163 billion in U.S. rescue funds and loan guarantees, should retain Chief Executive Officer Ken Lewis even after his “mistake” in acquiring Merrill Lynch & Co., analyst Meredith Whitney said.

Lewis “has done a great job” except for the Merrill Lynch deal, said Whitney, speaking to reporters today before appearing at a panel discussion in Toronto sponsored by Sprott Asset Management Inc. She called the Merrill Lynch purchase Lewis’s “one major mistake acquisition.” "

Nope - it's not from The Onion - and even more surprisingly, it's from the extremely well informed Meredith Whitney - who is one of the best regarded financial analysts right now.

I would have been less surprised to see the headline "Democrats Say Bush Did Great Job As President" than the headline "Bank of America Should Keep Lewis After "Mistake," Whitney Says."

This morning, I lay awake trying to think of analogies to saying "Lewis is doing a great job, except for this one Merrill mistake:"

Saddam Hussein did a great job as president of Iraq except for massacring his own people with chemical weapons.

Alan Greenspan did a great job as head of the Federal Reserve except for creating the biggest financial bubble in history with his low interest rate policy.

Tim Geihtner did a great job as head of the NY Fed, except for completely failing to oversee the firms under his watch.

Chris Cox did a great job as head of the SEC except that none of the broker dealers he was supposed to regulate exist anymore because he did such a bad job regulating them.

Hank Paulson did a great job as head of the US Treasury except for not ever comprehending that home prices might be able to go down as well as up, and not having any foresight into the current financial crisis until it was already way too late for him to do anything about it.

Ben Bernanke did a great job succeeding Alan Greenspan as head of the Federal Reserve except for not ever comprehending that home prices might be able to go down as well as up, and not having any foresight into the current financial crisis until it was already way too late for him to do anything about it.

I'm sure my readers will have other examples here.

The bottom line was that BAC's MER acquisition was not a minor mistake - it cost the firm tens of billions of dollars - and more importantly - it wasn't the only mistake! Did we already forget about BAC's acquisition of Countrywide?!?!?!


Tuesday, April 07, 2009

Play Ball!

I just came back from Opening Day at the Riviera - a Red Sox bar in the heart of Manhattan. If there's a better way to spend a Tuesday afternoon than downing 4 beers watching the Sox beat the Rays, I don't know what it is.

I'd like to take this opportunity to remember two of my favorite posts on the Red Sox:

1) City of Champions: from 9/11/2005: Making the trip to the Jungle of Yankee Stadium 3 times in one weekend - seeing the Sox lose twice, and still loving every minute of it. This weekend also featured the Patriot's unveiling their third championship banner, and my story of going to see the Sox vs Yanks in Boston on Opening day 2005, when the Sox received their championship rings.

2) JD Who? A treatise on JD Drew and Anchoring Bias - when some drunk Masshole at the Capital Grille mistook me for JD Drew on Saturday night after a Sox-Yanks game.

As any Sox fan knows - if you get to hear "Dirty Water" at Fenway, it was a good day:


Monday, April 06, 2009

The Enron Death Star

Must read piece from RortyBomb on the problem with banks being allowed to bid on asset sales in the PPIP, as I addressed last week (hat tip Zerohedge). I'd also recommend "The Smartest Guys in the Room" - the story of the deception at Enron - to everyone. The parallels Mike@Rortybomb draws between Enron's scam and the government's role in the PPIP are startling, and accurate.

"The Death Star strategy (yes, they called it that) was where Enron would take a fee for relieving a congested market of its excess supply by moving it elsewhere. Just like our legacy assets! There are too many of them, it is clogging up trade, let’s get them to someone else who wants them. However Enron would just move the energy in a circle, collecting a fee for not doing what it was supposed to. As their memo famously said, they are paid “for moving energy to relieve congestion, without actually moving any energy or relieving any congestion.” And, it appears, that the large banks are gearing up to do just that; with the Geitner Death Star that they’ll just be collecting a large fee to run them in a circle, without actually moving any of them off their collective books. For old time’s sake, I hope they route their loan bids through Oregon and then Utah before putting them back right where they started. Mind you that was the electrical grid of California - this appears to be at the scale of the entire financial market."

Oy Vey indeed...

In other news, courtesy of Dealbreaker - a case study in how to run a successful nightclub: NYC's Marquee.


Sunday, April 05, 2009

Quality Readings

Some great reading out there this weekend: well worth your time:

1) The transcript of Bill Moyers' interview with William Black

WILLIAM K. BLACK: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator.

BILL MOYERS: But he denies that he was a regulator. Let me show you some of his testimony before Congress. Take a look at this.

TIMOTHY GEITHNER:I've never been a regulator, for better or worse. And I think you're right to say that we have to be very skeptical that regulation can solve all of these problems. We have parts of our system that are overwhelmed by regulation.

Overwhelmed by regulation! It wasn't the absence of regulation that was the problem, it was despite the presence of regulation you've got huge risks that build up.

WILLIAM K. BLACK: Well, he may be right that he never regulated, but his job was to regulate. That was his mission statement.


WILLIAM K. BLACK: As president of the Federal Reserve Bank of New York, which is responsible for regulating most of the largest bank holding companies in America. And he's completely wrong that we had too much regulation in some of these areas. I mean, he gives no details, obviously. But that's just plain wrong.

2) Andy Beal: His run in with regulators for not taking enough risk (Clusterstock), and an analysis of how his actions are exposing the hypocrisy of the FDIC (ZeroHedge). Full Forbes Beal interview here.

"Standing outside the glass-domed headquarters of his Plano, Texas, bank in March, D. Andrew Beal presses a cellphone to his ear. He's discussing a deal to buy mortgage securities. In just a few minutes, the deal's done: His Beal Bank will buy $15 million of face value for $5 million. A few hours earlier he reviewed details on a $500 million loan his bank is making to a company heading into bankruptcy--the biggest he's ever done. A few floors above, workers are bent over computer screens preparing bids for chunks of $600 million in assets dumped by two imploded financial firms. In the last 15 months, Beal has purchased $800 million of loans from failed banks, probably more than anyone else."

A friend asked me - "Isn't that bullish? That Beal is stepping in to buy paper?" I responded, "Not if he's paying 35c on the dollar for it, when the banks still claim it's worth close to par (100)!!!" Zerohedge's post gets into more details of this continued gap between the buyers and sellers. Below, more from the Forbes interview:

"In late 2006 he sold $74 million of preferred stock although he had no immediate use for the proceeds. He says he couldn't resist the "stupidly mispriced" terms--as low as Libor plus 1.7 percentage points for 30 years. He wanted as much money available when the boom turned to bust. With the extra money the bank could pay off nearly all its depositors with capital on hand--nearly unheard of in the history of banking.

Then came a shocker: Amid one of the most reckless lending sprees in history, regulators focused on the one bank that refused to play along. Beal's moves confused and worried them, and so they began to probe him with questions. "What are you doing?" he recalls them asking. "You're shrinking yet you're raising capital?"

Next, the credit rating agencies started pestering him about his dwindling loan portfolio. They never downgraded him but scolded him for seeming not to have a "sustainable" business model. This while their colleagues were signing off on $32 billion of bum collateralized debt obligations issued by Merrill Lynch."

Yes - you read that right: the regulators made inquiries into Beal Bank because he was doing too good a job making sure his balance sheet was sound: he was raising capital, and not making crappy loans.

3) Tyler Cowen wrote a piece in the Sunday Times about how the creditors of the failed firms like AIG are the real beneficiaries of the bailout, and that maybe we should look at capping their compensation to prevent such moral hazard in the future.

"In truth, it’s not the shareholders of the American International Group who benefited most from its bailout; they were mostly wiped out. The great beneficiaries have been the creditors and counterparties at the other end of A.I.G.’s derivatives deals — firms like Goldman Sachs, Merrill Lynch, Deutsche Bank, Société Générale, Barclays and UBS.

These firms engaged in deals that A.I.G. could not make good on. The bailout, and the regulatory regime outlined by Timothy F. Geithner, the Treasury secretary, would give firms like these every incentive to make similar deals down the road."

Barry Ritholtz has a nice analysis of Cowen's piece.

4) ZeroHedge has been pumping out some tremendous stuff lately, and this piece titled "Wall Street Back to Its Criminal Ways" is no exception.

"To summarize: i) Merrill, which is probably not too happy with having lent out Kimco $707 million on its credit facility, underwrites a $720 (including a 15% overallotment) stock offering for which it gets $20 million, ii) Merrill's analyst changes the stock from a Sell to a Buy, causing it to pop 30% in one day, and allegedly allowing participants in the offering to sell their shares at a 30% gain in a day, a mindblowing annualized return, iii) Kimco uses to proceeds to repay Merrill's credit facility, cleaning out any credit risk exposure Merrill might have with respect to Kimco's underperforming properties and operations."

I highly recommend reading all of these well-written and thought provoking pieces.


Friday, April 03, 2009

PPIP - Deja Vu - I Hate It When I'm Right

US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JP Morgan are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system.

The plans proved controversial, with critics charging that the government’s public-private partnership - which provide generous loans to investors - are intended to help banks sell, rather than acquire, troubled securities and loans.

Oy vey - I wrote about this scam less than two weeks ago in my first post about the PPIP, titled, coincidentally, The PPIP is a Scam.

The good news is that Spencer Bachus, the leading Republican on the House Financial Services Committee, understands this is absurd and is trying to stop it:

Mr Bachus added it would mark ”a new level of absurdity” if financial institutions were ”colluding to swap assets at inflated prices using taxpayers’ dollars.”

The bad news is that the Treasury is still keeping up the charade:

“It’s an open programme designed to get markets going,” a Treasury official said. But he added: “It is between a bank and their supervisor whether they are healthy enough to acquire assets,” raising the possibility regulators may prevent weak banks from becoming buyers.

As Yves @ Naked Capitalism writes,

"That isn't just lame, it is out and out dishonest. The Treasury can and bloody well ought to rein in this kind of thing, but instead it will fob off its duty to make sure the program works as promised (ie gets bad assets off the balance sheets of banks that NOW own them, as opposed to those who decide to load up on them for fun and profit). But no, they pretend this isn't a problem of their negligence. More important, it shows very clearly that their first and only loyalties are to the banking industry. The public is a mere goose to be plucked."

Check out the rest of Yves' rant.

Finally, Tyler @ ZeroHedge has a nice piece on Charles Bowsher, the chairman of the FHLB resigning over his disgust with the relaxed FASB rules regarding mark-to-market. Go check out the ZeroHedge piece, and ask yourself the key question he quotes from Bloomberg's Jonathan Weil: "Now the question for taxpayers is this: If Charles Bowsher can’t get comfortable with these banks’ financial statements, why should anybody else be?"


Thursday, April 02, 2009

Mark to Make Believe and Other Talking Points

In case you missed it, the news today is that FASB (the Financial Accounting Standards Board) has relaxed mark-to-market accounting rules regarding how banks price illiquid "toxic" assets on their books. As the Associated Press summary explains, "The decision will allow the assets to be valued at what they would go for in an “orderly” sale, as opposed to a forced or distressed sale." As a former trader, I'm a firm believer in marking to market - maybe that's partly because I always traded assets which had liquid marks, and because I worked for a firm with real risk management policies.

You've probably heard hundreds of times the mantra, which I subscribe to, that "something is only worth what someone else will pay for it." There may be cases where you have the luxury of holding an asset - where you think you can ignore the market's currently ascribed valuations, because you don't need to sell the asset currently - but this argument is being used by the banks today, when it could not be less relevant. The "I can hold it to maturity" argument applies only when you're NOT massively overlevered and have the luxury of adequate capital, and when the final value of the security in question is clear (which is almost never): neither of which is the case for our investment banks holding massive quantities of mortgage backed securities which are likely to face impairment at some point.

I traded merger arbtrage for several years. We marked our (equity) positions at closing value every night (note: I would assume everyone did this, we weren't special or super conservative) - not at the value they'd have if the merger deals closed, even though we did NOT have to liquidate the positions at any time. The point was that IF we wanted to unwind our positions, they aren't worth whatever our model thinks they're worth - they are worth what the buyer in the marketplace thinks they're worth - plain and simple.

Another simple example of this is when people quote ASKING prices for items like homes or concert tickets. If I list my Jonas Brothers tickets on StubHub for $10k each, that's an ASKING price - it doesn't create any valuation. What matters is how much the buyer will pay me for the ticket. When I recently pulled a bunch of my prized baseball cards from my dad's attic, I wanted to figure out how much they were worth. Instead of consulting the 1980's bible of price guides - Beckett - I pulled each card up in EBAY - the cards are only worth what someone is willing to PAY for them.

Dan Greenhaus of Miller Tabak reiterates points many have made regarding abandoning mark-to-market accounting today, on Barry Ritholtz's blog: emphasis mine

I cannot fathom why investors would cheer less transparency and more involvement by management in the pricing of assets that they own. I have garbage pail kids cards from 1987 that I still think are worth $20 each. Does that make it so?

By allowing institutions to carry assets and loans at higher values, the government is effectively undermining its own program to purchase assets. If I am a bank and I believe asset X is worth 80 cents if held to maturity but the market is pricing it at 40 cents, FAS 157e gives me even more room to carry said asset at 80 cents which reduces the necessity of selling it in the meantime.

To be clear, mark to market accounting hasn’t caused this issue. It has exposed it. The cause of this issue is the overleveraging by banking institutions as they invested not in the vast array of entirely liquid markets that would facilitate their exit from any position necessary in a moment’s notice but rather an opaque and infrequently traded market that generated an extraordinary amount of fees and relied on economic assumptions that have proven to not only be wrong, but have proven to be almost diametrically opposed to what is actually occurring.

Final point on the subject - State Street doesn't mark to market its assets, but they detailed in their earnings report what the current valuation of the questionable assets would be if they needed to sell them. Take a look at their chart, and see if it made any difference when they reported earnings on January 20th. (hint: the stock dropped from $40 to $15 in a day). General Electric is in the same boat - they don't mark to market, but it doesn't matter - more transparency in asset pricing will never be the problem.

Now for some other brief talking points:

Northern Trusts's Paul Kasriel, via Clusterstock, explains the difference between Bernie Madoff's Ponzi scheme and Social Security:

"Both depend, or in the case of Madoff, depended, on being able to get new contributors into the scheme in order to pay off the previous contributors. The Social Security Administration has the power of the law to force new contributors into its scheme. Madoff did not have the power of the law to force new contributors into his scheme, therefore, he has been accused of breaking the law. Just another example of how it's good to be the king."

The 90% bonus tax bill may not happen, but the House has passed another bill restricting compensation at firms receiving taxpayer money.

"The bill adopted by the House on Wednesday would bar companies that received a capital infusion from the federal government from paying any bonus or other compensation that is “unreasonable or excessive” as defined by the Treasury, until they had repaid their bailout money to the government. The companies would also be barred from paying any bonus that was not “directly based on performance-based measures.”"

I find this problematic because it leaves the door open for all sorts of disasters in the future - after all, how can the House determine qualitative traits like "unreasonable" and "excessive?" Although they probably didn't want to put a quantitative cap like "$500k" on compensation, at least that would have been something that employees knew about up front. I don't really want to get into this debate here and now, but if, as a trader, my positions make a $100MM profit for the bank, what is unreasonable compensation for me? $3MM? $5MM? $15MM?

Chris Whalen, of Institutional Risk Analyst, writes on Barry Ritholtz's blog about what appears to be outright, unimitigated fraud at AIG:

"As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.

The significance of this for the US bailout of AIG is profound. If our surmise is correct, the position of Feb Chairman Ben Bernanke and Treasury Secretary Tim Geithner that the AIG credit default contracts are “valid legal contracts” is ridiculous and reveals a level of ignorance by the Fed and Treasury about the true goings on inside AIG and the reinsurance industry that is truly staggering."

I'm up in Boston today, and I sat down on my dad's couch to actually read the physical hard copy of the New York Times - something I almost never do when I'm at home in NYC. Amidst the sea of absurd financial shenanigans, I came across an article that struck a chord with me, and I encourage you to read it. "Cadillac Man's" recounting of his 13 years living on the streets of New York is not an account of a decade of hell - but rather a wistful memory of his former life, and perhaps a desire to resume it.

"FOR nearly 13 years between 1994 and 2007, I wandered the streets of New York, a nomad in the town where I was born in 1949. To say that I was homeless is true and yet not the whole truth. I had a mobile home of sorts — my wagon — the most recent, a grocery cart I liberated from the Costco in Long Island City. In it, I carried everything I needed: bedding, clothes, a camp stove, beach chairs, an umbrella, pots and pans, a first-aid kit and 20 or so paperbacks.

Every morning, I’d get up and say to myself: Where to today? And I’d turn my wagon either right or left and just keep going in that direction. Eventually I rolled my way through all the boroughs except Staten Island, stopping to live for a while in one place or another."

It's the concluding paragraph that I find most interesting:

"If we find a place in Astoria, I’ll be under the viaduct every day. In the meantime, my old wagon is still there, where I had a friend anchor it into the sidewalk with cement so nobody knocks it over.

Will I ever take my wagon for a spin again? Or is it a monument to my old life? I know what I hope."

What is Cadillac Man's hope? That he'll never have to return to the grind of pushing his wagon? Or that he'll get a chance to return to the nomadic freedom it provided him? I hate for this to sound like a high school book report, but I nevertheless found the article intriguing.