Monday, May 31, 2010

The Foreclosure Freeroll

For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of. 

Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.
“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.” 

Freeroll!  "It's really been a BLESSING!"  Of course, the blessing is that the banks have so many houses to foreclose on, that it takes them even longer than usual to evict delinquent mortgage holders, as we find out later in the article: 

"The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics."

I wonder what happens to this "blessing" when the banks finally get around to these folks... I'm guessing it won't be such a blessing then.

"A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by."

Ok - but again, like most of our other "solutions," this is no solution!

"The couple owe $280,000 on the house, where they live with Ms. Reboyras’s two daughters, their two dogs and a very round pet raccoon named Roxanne. The house is worth less than half that amount — which they say would be their starting point in future negotiations with their lender. 

“If they took the house from us, that’s all they would end up getting for it anyway,” said Ms. Reboyras, 46. 

One reason the house is worth so much less than the debt is because of the real estate crash. But the couple also refinanced at the height of the market, taking out cash to buy a truck they used as a contest prize for their hired animal trappers. 

It was a stupid move by their lender, according to Mr. Pemberton. “They went outside their own guidelines on debt to income,” he said. “And when they did, they put themselves in jeopardy.”"

Now, ignoring the bizarre sentence about taking equity out of their home to buy a truck for a prize for hired animal trappers, this situation reminds me of the old adage:

If you owe the bank $10,000, you have a problem.  If you owe the banks $100,000, the bank has a problem.  

Mr. Pemberton has turned this right back on the banks, and, quite frankly, seems to have them by the balls.  The logic of "Eff you, we're not paying the $280k because, basically, the lender no longer has collateral for a loan of that amount - the house is only worth half of that," puts the banks in a brutal spot to negotiate from.  Obviously, his situation is not unique, and the bigger problem for the banks is that once more people realize this, the effect will multiply and expand.

It's the ultimate financial game of chicken, and the delinquent borrowers may be starting to gain the upper hand.


Shadow Inventory

Via Calculated Risk, 3 more stories about shadow inventory:

"The 35-story Lexington Park, near Michigan Avenue and Cermak Road, was surrendered last week by its Irish developer through a deed-in-lieu of foreclosure. The private-equity venture that now owns the property acquired Corus Bank’s the distressed condo loans after the Chicago-based lender failed last fall. 

Just three buyers have closed on Lexington Park’s 333 units, according to property records. The tower, 2138 S. Indiana Ave., was supposed to be ready for occupancy in 2008."

and then:
"About 55% of Lexington Park’s 333 units are under contract, according to data from Appraisal Research Counselors. But some of those units were bought by speculators when sales kicked off in 2006. The speculators are sure to walk away now rather than close, given the dramatic fall in condo values. Others buyers probably will no longer qualify for mortgages."

"Through the end of April, MGM Mirage and Dubai World, the owners of the project, have closed on 78 of 1,543 units at the Vdara condo-hotel, according to SalesTraq. Closings started in March at Vdara but CityCenter had announced earlier this year it had sold 698 units there.

At the ultra-luxury condominium tower Mandarin Oriental, where 205 of 227 condos were reported sold as of earlier this year, 32 units closed between January and the end of April, according to SalesTraq.

CityCenter just started closing units in the two Veer Towers in mid-May so those numbers won’t be available until the end of June. MGM had reported that 480 of the 670 units had been sold earlier this year.

Through Thursday, MGM counted 110 closings at Vdara, 38 at Mandarin Oriental and 16 at Veer."

"Hue, the multicolor building that is the largest condo project ever attempted in downtown Raleigh, closed its sales office without ever selling a unit.

Signs posted on the building's doors, as well as a message left on the sales office's answering machine, say Hue will be closed until further notice."

Again, this is why housing inventory data needs to be taken with a grain of salt.  As Calculated Risk puts it (talking specifically about the Chicago article above), "Unless listed for sale, these units are not included in the new or existing home inventory reports - real shadow inventory!"


Where White Man Went Wrong

Thanks to The Reformed Broker for this gem:

I don't know if that's a real clipping (I'd guess NOT,) but it still rings true.

"Indian Chief "Two Eagles was asked by a white U.S. government official, "You have observed the white mand for 90 years.  You've seen his wars and his technological advances.  You've seen his progess, and the damage he's done."

The Chief nodded in agreement.

The official continued, "Considering all these events, in your opinion, where did the white man go wrong?"

The Chief stared at the government official then replied,

"When white man find land, Indians running it, not taxes, no debt, plenty buffalo, plenty beaver, clean water.  Women do all the work, medicine man free, Indian man spend all day hunting and fishing all night having sex."

Then the Chief leaned back and smiled, "Only white man dumb enough to think he could improve system like that."


Overheating Economies and Terroirs?

My friend Ted sent me two data points today:  Canada GDP + 6.1% and India GDP + 8.6%.

Wow. Steamy.  I immediately realized that I'd recently read a story about not the overheating economy, but ACTUAL overheating in India (temperatures in excess of 120 degrees!), and out of control forest fires in Canada.  Talk about bringing the metaphor of the "overheating economy" to the real world...

"Canadians are spending more and more of their disposable income on housing. In Toronto, 44% of disposable income goes to housing and in Vancouver the figure is a whopping 68%. The trend is likely not sustainable."

"The trend is likely not sustainable...."  Understatement?

Northeast Haze? Blame Canada!

I woke up this morning to the smell of smoke - like one of my neighbors was burning a brush pile.  There was a haze over the entire neighborhood, and we wondered what was going on.  Later, Mrs. Dynamite got the answer from a neighbor:  forest fires in Montreal!  Insane:  we live 250 miles from there, and it smelled and looked like someone was burning something next door to me.  Blame Canada.

Apparently, the haze extends all the way down to Cape Cod, and throughout Maine.


Saturday, May 29, 2010

Sports: Sigmas and Bad Beats

Sigmas:  Wild night in baseball:  Roy Halladay threw the second perfect game this season in MLB, the 20th of all time, and also the second in Phillies history.  The first perfect game in Phillies history was thrown back in 1964, by now Senator Jim Bunning.  2010 is now the second MLB season with two perfect games thrown - the first being in 1880!

Sigmas AND bad beats in one:  Kendry Morales broke his leg hopping onto home plate as his teammates mobbed him after his walk-off grand slam against the Mariners.  Ouch.

Sigmas:  The Blackhawks beat the Flyers 6-5 in game one of the Stanley Cup Finals.  Wow - this one was tied 5-5 after two periods.  Sounds like I missed a good game.


Friday, May 28, 2010

Friday Thoughts

Calculated Risk can't believe there is actually legislation in motion to provide credit to "help alleviate the severe lack of credit for acquisition, development and construction (AD&C) financing that threatens to end the budding housing recovery before it has time to take root."   Felix Salmon wrote a follow up on the same subject, getting input from the author of the bill, Brad Miller.  As I noted in Felix's comments, I think there is a massive flaw, and that's Miller's claim: "The bill requires that the loans only be in “viable” markets, which means not comically overbuilt markets. Treasury should be able to tell the difference, and banks need to as well."   I think we've already proven that neither the Treasury nor the banks adequately altered their behavior during the housing bubble, so why should we expect them to be able to self-medicate this time?

Michael Panzner quotes the Of Two Minds blog at length.  My favorite snippet (emphasis NOT mine):

"The key phrase here is "borrowing," not "home ownership." The key feature of State support of housing is not legitimate "home ownership," it is the enabling of massive new sources of income and transactional churn for lenders and Wall Street loan and derivatives packagers. 

Home "ownership" when there is no equity in the purchase and no equity being built via principal payments is a simulacrum of ownership.
If a buyer puts almost no money into the purchase--even now, FHA and VA loans can be had with a mere 3% down payment--and the loan is of the interest-only or adustable-rate (ARM) variety favored during the housing bubble's heyday, then there is no principal payment being made and thus no equity being built. 

These "buyers" don't "own" anything; all they're doing is renting the money in the hopes that rising home prices will create equity for them out of thin air. What they "own" is essentially an option on a property which they "rent" monthly. If the government manages to reinflate the housing bubble (it won't, but hope and greed spring eternal), then the option will pay off handsomely. The "owner" put no money into the speculative bet, but they can then sell their option for a huge profit. 

If housing plummets, then the "bet" was lost. But since "renting" the mortgage didn't cost much more than renting a real house, and there was no capital at risk, then the downside is modest indeed. 

In other words, heavily subsidized mortgages at low rates with little money down incentivizes not home "ownership" but speculation in credit-based bubbles.
In the "old days" (circa 1994), the expectation was that equity would be built by paying off the mortgage principal over time. Equity was a result of reducing the mortgage due, not the result of speculative gambling on future asset bubbles."

Some humor from the Reformed Broker, Josh Brown: "Free Advice to the Stars RE: Ponzi Schemes"
1.  Anyone who refers to himself as a "Financier" is full of sh*t.
2.  Your financial advisor is not supposed to play polo or wear designer sunglasses, nor should he ever have a popped up collar under any circumstances.  He must never wear shoes without socks or wear a watch with a diamond bezel.

click through for the full list.

And in case you missed any of my posts from the last week, focus on these:

Finally, two rebuttals to David Einhorn's NY Times Op-ed.  First, I want to explain one thing:  the WSJ sniped that Einhorn was "talking his book."  Look - you should assume that everything you read anywhere is someone talking his book.  The great thing about Einhorn is that he makes no secrets about what his positions are.  He lays them out there, and explains his view.  If you're going to critique his thoughts, you have to do it on the basis of his arguments, not on the irrelevant fact that he's talking his book - OF COURSE HE"S TALKING HIS BOOK!  The Times Op-ED was very much related to a speech he gave the night before at the Ira Sohn Conference, a hedge fund charity dinner where the primary purpose is to give smart people the opportunity to share ideas - aka - talk their book.

Now, back to the point: Einhorn's actual argument - which is what these two posts take aim at:

Since I've already been hazed by the MMT crowd, you'll notice that I deliberately avoided quoting the parts of the op-ed that TPC and Bill Mitchell are most critical of.  I agree very much with all of the sections that I quoted in my previous post, and the one thing I'd mention about TPC and Bilbo is that they both specifically pick on Einhorn's claim  "If we wait until the markets force action, as they have in Greece, we might find ourselves negotiating austerity programs with foreign creditors."  As I've said many times, the analogy of Greece doesn't translate to the US as a whole - the two links above explain repeatedly how we are different.  But it DOES apply to our states.  I've written this analogy before:  Greece : European Union :: Troubled States (CA, NJ, MI, NY) : United States.   Greece is a model for the pending budgetary crises in our respective municipalities, who cannot print their own currencies.


Thursday, May 27, 2010

Vegas: Resort Fees?

I went to Chicago a few months ago, and noticed on the hotel bill that I had the option to refuse the free daily USA Today newspaper and get a 75c refund on my nightly rate.  Since I'm a huge hitter, I didn't go for this freeroll, but it's nice that they at least give you the option.  I mention this because I just booked another trip to Vegas, and was annoyed by the growing phenomenon of "resort fees."  

I get complimentary room offers from The Venetian all the time, on account of my persistent green chip play,  and I called to accept one of them for this trip at the end of June.   "Sir, we have a mandatory resort fee of $17 a night plus tax,"  the operator told me.  

I literally laughed at her, "Oh yeah?  What's that for?"  She seemed slightly surprised that I asked, but continued, "It's just a new fee that we're imposing this year."  I was at the Venetian in January, and wasn't charged this fee, but I didn't want to argue with this woman at this time, and explain to her that if it was a mandatory fee then the room wasn't really complimentary.  She proceeded to check availability, and told me that they had no comp offers for me for the days I'd chosen.  (See, I'm not that big a hitter...)

"What's the rate you can offer me?"  I inquired, forgetting to add in, "DYKWTFIA?"  after all, she must have known already, as I had the comp offer on my account.  

"$229 sir," she replied, but I cut her off, "AND the $17 resort fee, right?"  "Yes sir, that's correct."

I laughed out loud again, thanked her, and hung up the phone.  I dialed the Mirage, where I also had an offer.  "The rate is $45 and $55 for the two nights, sir, plus a $15 resort fee,"  the operator told me.

"No - I want the rate for the FREE offer you sent me," I explained, having already given her my account number.  "Oh yes sir, that would be just the $15 resort fee per night, can I go ahead and book that for you?"  I sighed and confirmed that would be fine, thank you.

So, first, the channel checks:  Venetian quoted me $229 a night, and Mirage quoted me around $50 a night.  These are two hotels, immediately across the street from each other, both of which would be considered high end.  They have both just undergone extensive room reservations.

NOW - wtf is up with this "resort fee" bullshit?  Look - if it's a fee you can't waive, it should just be quoted as part of the room rate!  According to, the Mirage's resort fee covers:

  • Daily in-room internet access
  • Daily newspaper available for pick-up at the Impulse Store and the Bell Desk
  • Daily bottled water delivery (two bottles per day)
  • Daily admission to the cardio room (does not include spa or fitness center)
  • Two robes provided during stay
  • Complimentary printing of boarding passes at the business center or concierge
  • Complimentary notary services at business center
  • Unlimited local and toll-free calls
  • Free copies and faxes (up to the first 5 pages) at the business center (excluding color and large print jobs)
Obviously, this is a load of crap - they've taken fees which used to be charged for a la carte, and bundled them into a mandatory package that you have to pay for.  ROBES?  You're f'ng charging me for robes now?  You can bet that I'm going to wear that friggin robe down to the Pai Gow table, light up a cigar and drink a glass of port while I put my feet up on the nearest vacant stool.   Fortunately, complimentary printing of boarding passes is still complementary - I guess, if you ignore the fact that I have to pay a $15 fee to get it.  And unlimited toll free calls!  Wow! Thanks guys! (SARCASM ALERT!)

Kudos to the Harrah's empire, who thus far has avoided "resort fees."

If you're traveling to Vegas, or anywhere else for that matter,  just make sure that you incorporate mandatory resort fees into any room quote you're given, to make sure you're comparing apples to apples. 


Hey NY TImes - How About a SPOILER ALERT?


In the DVR age, I watch almost nothing in real time.  At the least, I'll start a show 30 minutes late, speed through commercials, and finish shortly after the real time ending. if I start watching the DVR recording too soon, I catch up to real time, and have to watch commercials like a commoner.  It's a lot like this:

Internet sources have gotten much better at recognizing the fact that many viewers don't even watch the shows until a day or two later, and they no longer post spoiler headlines, even the next morning.  "LEE DEWYZE WINS AMERICAN IDOL," usually gets transformed into the non-spoiler "American Idol Crowns New Champ,"  letting you click the story if you want to know who won, and avoid ruining the surprise if you haven't yet watched.

The NY Times though, last night, had Lee Dewyze's victory splattered front and center on their main page last night less than an hour after he won.   Thanks for the spoiler alert, goofballs.


David Einhorn's NY Times Op-ed

Like Steve Wynn's quarterly conference calls, Greenlight Capital's David Einhorn's missives are not to be missed.  Today, he pens a lengthy op-ed in the NY Times, well worth reading.   Extended snippet:

"Government statistics are about the last place one should look to find inflation, as they are designed to not show much. Over the last 35 years the government has changed the way it calculates inflation several times. According to the Web site Shadow Government Statistics, using the pre-1980 method, the Consumer Price Index would be over 9 percent, compared with about 2 percent in the official statistics today. 

While the truth probably lies somewhere in the middle, this doesn’t even take into account inflation we ignore by using a basket of goods that don’t match the real-world cost of living. (For example, health care costs are one-sixth of G.D.P. but only one-sixteenth of the price index, and rising income and payroll taxes do not count as inflation at all.) 

Why does the government understate rising costs? Low official inflation benefits the government by reducing inflation-indexed payments, including Social Security. Lower official inflation means higher reported real G.D.P., higher reported real income and higher reported productivity. 

Subdued reported inflation also enables the Fed to rationalize easy money. The Fed wants to have low interest rates to fight unemployment, which, in a new version of the trickle-down theory, it believes can be addressed through higher stock prices. The Fed hopes that by denying savers an adequate return in risk-free assets like savings deposits, it will force them to speculate in stocks and other “risky assets.” This speculation drives stock prices higher, which creates a “wealth effect” when the lucky speculators spend some of their gains on goods and services. The purchases increase aggregate demand and lead to job creation. 

Easy money also aids the banks, helping them earn back their still unacknowledged losses. This has the perverse effect of discouraging banks from making new loans. If banks can lend to the government, with no capital charge and no perceived risk and earn an adequate spread, then they have little incentive to lend to small businesses or consumers. (For this reason, higher short-term rates could very well stimulate additional lending to the private sector.) 

Easy money also helps the fiscal position of the government. Lower borrowing costs mean lower deficits. In effect, negative real interest rates are indirect debt monetization. Allowing borrowers, including the government, to get addicted to unsustainably low rates creates enormous solvency risks when rates eventually rise."

and then, this:
"EASY money has negative consequences in addition to the risk of inflation and devaluing the dollar. It can also feed asset bubbles. In recent years, we have gone from one bubble and bailout to the next. Each bailout has rewarded those who acted imprudently. This has encouraged additional risky behavior, feeding the creation of new, larger bubbles. 

The Fed bailed out the equity markets after the crash of 1987, which fed a boom ending with the Mexican crisis and bailout. That Treasury-financed bailout started a bubble in emerging market debt, which ended with the Asian currency crisis and Russian default. The resulting organized rescue of Long-Term Capital Management’s counterparties spurred the Internet bubble. After that popped, the rescue led to the housing and credit bubble. The deflationary aspects of that bubble popping created a bubble in sovereign debt, despite the fiscal strains created by the bailouts. The Greek crisis may be the first sign of the sovereign debt bubble bursting."


Wednesday, May 26, 2010

Soap Eating Dogs and Other Stuff

Late yesterday afternoon I was downstairs watching TV while Mrs. Dynamite was upstairs cleaning.  Suddenly, I heard her cooing "oh, are you ok?" Followed quickly by "I need your help!"

I ran upstairs to find her holding Mr. Griffey, freaking out.  "I was cleaning the shower, and I turned around, and the bar of Irish Spring soap that was on the ground is gone!" 

"You think he ate a whole bar of soap?"  I couldn't believe it. I mean, Griffey has shown that he's not the sharpest tool in the shed, but I don't think he'd eat a bar of soap.  He's an eleven pound munchkin.

"He's got soap in his beard!"  She was almost in tears.  Griffey did have a little piece of blue soap in his beard, as he looked up at me and wagged his tail.

"Ummm, ok, so, I guess I'll call the vet?"  I suggested.

I walked down the hall to our office, where the phone is, and found the bar of soap on the floor, with a few tooth marks in it from where Griffey had carried it.  Disaster averted!

Here's what I've been reading the past few days:

Marginal Revolution:  Chocolate company bonds that pay chocolate dividends.


Tuesday, May 25, 2010

Morgenson Misses the Mark

I read Gretchen Morgenson's recent NY Times piece : "Principal-Protected Notes Aren't as Safe As They Sound," and something about it has been bugging me ever since.  Morgenson writes:

"Questions about how Wall Street marketed yet another complex product, sold as solid and secure, are now emerging in investor arbitration cases. The instrument is named, inaptly as it turns out, “100 percent principal protected absolute return barrier notes.” 

These securities are essentially zero-coupon notes sweetened by tying the return, in part, to the performance of an equity index, like the Standard & Poor’s 500 or the Russell 2000. The securities promise to return an investor’s principal, typically at the end of 18 months, with the added gain from the index’s performance if that index trades within a certain range. Brokerage firms often issued these securities. 

For an investor in one of these notes to earn the return of the index as well as get the principal back, the index cannot fall 25.5 percent or more from its level at the date of issuance. Neither can it rise more than 27.5 percent above that level. If the index exceeds those levels during the holding period, the investors receive only their principal back.
Convoluted enough for you?"

Well, no, Gretchen, it's not convoluted enough for me, and by talking about the "complexity" of the product, you're dragging a massive red herring through your own story.  Morgenson continues, talking about the investors who bought this product:
"Yet, these securities appear to have been sold to conservative individuals whose financial market forays were usually limited to certificates of deposit. Many of these investors, to their great misfortune, bought principal-protected notes issued by Lehman Brothers. They are now worth pennies on the dollar."

She goes on to recount a sad story of an unsophisticated couple who lost a lot of money buying these notes.

There's a major point of clarification that's needed here, though, and which Morgenson ignores:  The losses suffered by investors on these notes have absolutely NOTHING to do with the notes being "convoluted" or unsuitable for unsophisticated investors.  I'll make it really clear:  The reason investors suffered losses on these notes is because Lehman Brothers went bankrupt.  That's it. It's not because of confusing derivatives, complex structures, or anything of the sort - it's because the notes were obligations of Lehman Brothers.  Is it possible that the UBS brokers selling the product failed to explain this, and to stress that Lehman Brothers' credit was not quite as good as that of the U.S. Government?  Absolutely.  In fact, it's likely - but that's a very different issue from the complexity of the product.

To put this another way, the unsophisticated couple in the article may very well have been interested in a very simple hypothetical product that stipulated "As long as the sun rises in the East and sets in the West, this note will return 6% per year."  That's pretty simple.  They'd probably understand that.  And you know what?   Those hypothetical Sunrise Notes would also be worth "pennies on the dollar" if they were issued by Lehman Brothers.  THAT is the point.  Sophistication has nothing to do with it. 


The Worst Proposed Solution To Pension Problems

Last week I mentioned a NY Times article about problems with underfunded public pensions.  The Times did a follow up article/discussion with a variety of "experts" proposing ways to fix this difficult problem.  There is no magic bullet, but it's still terrifying to hear Alicia Munnell, "a former member of the Council of Economic Advisors,"  suggest:

"The only real option is to wait for the market and the economy to recover."

Gulp. * Shaking my head slowly with my lips pursed *  She didn't really say that, did she?  I'm not going to even do it... Nope... You expect me to, but I'm not going to...  OK - I can't resist:



Lots of Good Stuff to Read

"And the encounters, while distressing, appeared to take a surprisingly severe toll: the 51 drivers who went on paid leave after a spitting incident took, on average, 64 days off work — the equivalent of three months with pay. One driver, who was not identified by the authority, spent 191 days on paid leave.
Transit officials, facing a budget shortfall of $400 million, called the numbers troubling."

Barry Ritholtz linked to another brilliant effort from The Onion: "New Law Requires CEOs to Humbly Shrug Before Receiving Huge Bonuses."

"The crackdown comes on the heels of Wall Street's 2010 bonus season, during which not one executive was observed to look at the floor meekly, sink his hands into his pockets, or dig his right toe awkwardly into the ground before taking his cut of the estimated $55 billion in payouts.

The SEC rule stipulates that CEOs set to receive bonuses between $1 and $5 million will be required to raise their eyebrows in feigned surprise. Those who make between $5 and $10 million will have to smile uncomfortably and say, "Yikes, that's a whole lot of simoleons," while executives receiving more than seven figures must now audibly stammer, "It's, you know, I mean, ha! What are you gonna do, you know?" before having the funds wired directly to an offshore bank account."

The graphic table in the article is pure genius too:

Bond Girl writes a very interesting meme about the ratings agencies, and the relative absurdity of people trying to sue them.  Now, I think the ratings agencies were probably more guilty of gross negligence than any other single cog in the wheel of the asset bubble, and probably resulted in more damage, but BondGirl's points are spot on (and I don't think she's defending ratings agencies, by the way):

"Segal notes in his article that a couple of judges have dismissed the rating agencies’ arguments that their analysis is protected by the First Amendment.  OK, if the rating agencies’ grades are not opinions, what are they?  Investors like Mr. Grassi – even more sophisticated investors – seem to treat ratings like they are offering investment advice.  But surely a court would not choose to endorse that kind of silly expectation.  Mr. Grassi did not pay S&P for the ratings.  S&P did not recommend that Grassi buy the bonds (presumably, his broker did that).  S&P did not make an effort to get to know Grassi’s investment objectives, his financial position, his risk tolerance, or anything that would traditionally be associated with the process of providing advice.  So how can Mr. Grassi claim that S&P is responsible for his losses?  How can anyone present this guy as a hero?"

Paul Kedrosky presents a NY Times graphic: "Heavy Load Ahead."

MISH:  "Insanity Down Under."  MISH highlights the insanity of an article which explains:

"ING Direct, Australia's fifth largest lender, is preparing to sell loans that have no fixed term and no requirement to repay any capital along the way.

At current rates, the interest-only loans would cut repayments on a $300,000 mortgage by $5000 a year.

"People are needlessly being denied the chance to buy a property while prices spiral rapidly out of their reach" ING Direct CEO Don Koch said. "There is an urgent need to provide more affordable options and borrowers should be able to choose whether they want to repay the capital, or not.""

I don't know - maybe it's from the Australian version of The Onion.

VegasRex's latest piece, "The High Cost of Self Esteem," has so many quotable passages, I had trouble picking one out...

"Regardless of what you look like, I have nailed way hotter women than you.  I promise.  Yes, even if you are the prettiest woman in your Jazzercise class back home.  Regardless of how cute you are, or have been told you are, there is nothing you have that I haven’t seen before, and the chances of me being smitten by your beauty are damn-near non-existent."

Rex's piece reminds me of the one I penned earlier this year, titled "March of the Penguins."

File under "They actually said this:"  Bank Of America: "We believe the best way to feel better during a correction is to buy some shares."

Marty up!

Don't get sore - buy some more!


Monday, May 24, 2010

Senator Bunning's Office Responds

I received an email on Thursday from Senator Jim Bunning's legislative director, William Henderson.  Unfortunately, it was sent to my secondary account, and I didn't notice it until this evening when I returned home from a weekend trip.  I feel it's only fair to post Mr. Henderson's email in full, as it is a response/clarification/enhancement to the post I wrote last week titled "Emergency Powers."  And oh, Mr. Henderson - if you ever want to contact me, drop me a comment on my blog.  It's a much quicker way to get in touch with me, and I'm happy to provide further input on the policies you guys are looking at.

Without further ado:

KD, I enjoy the blog and am a regular reader. It has been helpful as we have been working on the financial reform bill and, most recently, the stock plunge hearing today.

I wanted to clarify what Sen. Bunning's comments regarding emergency powers at the hearing today. His point was that the SEC and the exchanges have identified some changes they think should be made (the new trading curbs) but those changes are not yet in place and able to be used because the SEC's rule approval process takes a couple weeks. He was inviting Schapiro to ask for the ability to make such changes faster if she thinks that is appropriate. That is what he meant by emergency powers.

Regarding market orders, he agrees with you. I'll paste an exchange that started with Eric Noll of NASDAQ and Larry Leibowitz of NYSE Euronext on breaking trades and ended with a bit on market orders.

Finally, he said at the beginning of the hearing that he was glad to see the curbs are for moves in either direction, and not just down.

Hopefully this will allay your concerns a bit.


Mr. Henderson also included the exchange to which he was referring:


    It's all right. Thank you.

    Mr. Noll, I'm going to start this question with you, since you talked about it more in your written statement than anyone else. But I would like the others to respond as well.

    As I said in my statement, I am concerned about the way some trades were canceled. Given that everyone seems to agree the system worked the way it was set up to do, how do you justify canceling trades and protecting sellers from their bad decisions?

    I -- I share much of your concerns, Senator Bunning. And it was a very difficult day to make that decision. It was done in coordination with all of the other markets on an ongoing discussion and, quite frankly, lasted many hours trying to decide what the appropriate decision was fair.

    So we were trying to balance the need and requirement of what we would call moral hazard issues, which is making people aware and bear the consequences of their activities in the marketplace for good or for ill, with what was clearly a dysfunctional marketplace that wasn't functioning as it should function.

    So in the absence of any clearly erroneous trade, we looked at the DK of what we would call price discovery and the provision of liquidity.

    And we tried to draw that line -- admittedly somewhat more arbitrarily than I think any of us are comfortable with -- draw that line in an appropriate area where we did not reward anyone for bad behavior, but we did solve the problem of what we considered to be a dearth of liquidity.

    That being said, I think we are very confident that the stock-by- stock circuit-breakers that we're putting into place will prevent a reoccurrence of this kind of situation.

    Looking back, we all have 20/20.

    I think that's true. So we -- we -- we believe that we'd like to put the stock-by-stock circuit-breakers in place. We think that will prevent this going forward, these kind of events going forward, but more importantly, we endorse Chairman Schapiro's desire that we have transparent, understandable, agreed-upon across all markets trade break clearly erroneous rules that remove the discretion from any one market actor or any group of market actors so that everyone knows visibly and clearly what those -- what those events are and how they will be triggered.

    Anybody else like to jump in? Go ahead.

    Sure. Sure. So I had the fortune of sitting on the Nasdaq Quality of Markets Committee at the time that the first erroneous trade policy went in. And I think, Rick, you were actually...

    I was there.

    ... the CEO at the time or the COO at the time. And it troubled me then, and it troubles me now. Markets that have to resort to breaking trades as a response to abhorrent (ph) conditions are -- are -- are just not orderly markets, in my mind. It's not the way we should do our business.

    I think, in this case, the big challenge wasn't we had institutional investors who made a mistake. You know what? You're right. They should pay the price.

    The challenge here was that we had retail investors who had submitted market orders that essentially went into a black hole. They had stop-loss orders in high-cap stocks...

    But -- but I'm sorry, sir. Sophisticated -- even if they're not sophisticated, anybody that puts a market order in knows exactly what's going to happen to a market order.

    So I would agree with you that their broker probably does -- and maybe the answer is the broker should have stood up (ph) for that trade -- I would submit to you that a lot of the public does not. And I'll tell you...

    A lot of the public doesn't know that if you put a market order in, it's executed?

    They think, maybe it'll go -- it'll go -- you know, I'll be...


    Rather than a limit order?

    Well, they don't realize that, when I trade Accenture, it's going to be down 99 percent when they get now.

    I agree with that.

    And -- and...


    But if you put a market order in, that's your execution.

    You're absolutely right in that regard. And I think we have to make sure that it just can't happen in the market. We also need to talk about whether market orders should be allowed at all and how we educate people so these things don't happen.

    But I agree. There should not be the moral hazard of breaking trades. It is not the right way to make a market function properly."

It's good to see that Bunning understands exactly what a market order is, and I agree with Larry Leibowitz that the retail public does NOT understand exactly what a market order is, and that reform is needed to either educate the public so that there is no whining and there are no "victims" after the fact, or to simply protect Joe Retail from himself by preventing him from entering market orders.


Sunday, May 23, 2010

Bloomberg Writes Some Headline Click Bait

How else could you describe this one:

"Strippers Declare Inflation Dead in Zero Coupon Bond Revival"

Nope - the article doesn't contain a single mention of stagnant prices for gentlemen's club dancers - Bloomberg was referring to the process of bond coupon stripping.  Sneaky.

I'll be offline thru Monday night.


Friday, May 21, 2010

Friday Links

Some of these I sent out on Twitter already:

 - Dubious Politician of the week: "Blumenthal's Words on Vietnam Service Differ from History."  Then today, this follow up:  "Another Case of Blumenthal Misstating Service."

 - Not as easy at it seems article of the week: "Padded Pensions Add to New York Fiscal Woes."

I say "not as easy as it seems" because I think the initial reaction is to say "that's f'n crazy."  And yet, I sympathize with the policeman who they talk a lot about in the article, who defended the situation:

"Mr. Tassone said the only reason he joined the police force was the promise of a full pension after just 20 years, and it would have been wrong for the state or city to go back on the promise after using it to recruit him."

Yes - they did promise it to him, and it's hard to just tear up that obligation...   I don't think it's reasonable to expect that Mr. Tassone could have reasonably assessed the likelihood of the City of Yonkers running out of money in the future when he took this job.  HOWEVER, the article also talks a lot about the manipulations used to increase pension payments ("Hugo Tassone, retired at 44 with a base pay of about $74,000 a year. His pension is now $101,333 a year,") which can certainly be cracked down on.  

 - early 90's crank calling comedy group reference of the week: "Greece & The Jerky Boys." Yeah - that's my own link - it didn't get enough love! RESPECT!

-least repentant accounting of the market's function during the Flash Crash:  Taste_Arbitrage @ Stone Street Advisors.

"I keep hearing how terrible this event was, and if nothing is changed it could happen again. Oh no, what ever shall we do?! Here’s a thought, if you think the price of a security is too low and you think it’s insane that it doesn’t seem to have a bid, you should just go ahead and bid. That’s it. If the price is too low, pay it and make money."

- David Merkel : "Two Experiments."

"The Fed always delays trouble in the modern era.  Slow to tighten, quick to loosen.  No wonder that we built up a mountain of debt, because the Fed would always ride to the rescue of crises, but never let the pain settle in that would liquidate poor investments.

We need fewer banks, fewer homebuilders, and fewer auto companies.  But guess what we bailed out?  We bailed out the very things that were the least productive in our economy, and taxed those more productive to do so.  Monstrously dumb.

So when the market corrects because there has been no effective change in economic policy that would allow for elimination of bad debts, and shrinkage of bloated industries, we should not be surprised.  Government stimulus can only do so much.  The markets incorporate the stimulus, and they move on.  Those stimulated gain, and taxpayers/moneyholders lose, but the markets move on."

 - Gold conspiracy theorists won't like this one:  "Seriously, GLD is Not a Scam, but PHYS Might Be."  I think the author has a factual error in her post which doesn't really alter the point:  she claims PHYS cannot issue additional shares  - I believe that is false, and a reading of the PHYS prospectus backs up my thought.


Thursday, May 20, 2010

Emergency Powers!!??!

"Federal market regulators are still unsure about the cause of the sharp stock market drop two weeks ago, and that worries Senator Jim Bunning."

Let me interrupt here - I'll tell you the cause of the sharp drop:  more sellers than buyers! If we're talking about the aberrant prints, like 1c in ACN, you don't need Sherlock Holmes for that one either:  sellers came in to sell stock regardless of price, and there were no buyers. 

"Mr. Bunning, Republican of Kentucky, told Mary L. Schapiro, the chairwoman of the Securities and Exchange Commission, that she should request emergency powers from the Senate to do whatever is necessary to prevent another market plunge until the cause of the May 6 flash crash can be determined. 

“If we get bad news out of the I.M.F. or Greece or Portugal or something that could have an adverse affect on our markets, we could see the exact same recurrence and we haven’t done anything,” Mr. Bunning said at a Senate hearing on Thursday."

Senator Bunning - there's an easy fix for this:  make sure that retail traders know that "market order" means "regardless of price."  Make sure that retail traders know that "stop orders" become "market orders" when their stops are triggered.  Once you protect the retail traders, no one care if the professionals shoot themselves in the foot with bad order types.  Yet, Bunning wants the SEC to have "EMERGENCY POWERS!"  Bunning:

“I think there comes a time you take emergency actions and if we are in that situation that we need emergency powers, all you have to do is come here and ask,” Mr. Bunning added.” We don’t want a recurrence, and we surely don’t want to arbitrarily break up trades that were legitimately done under a set of rules, and I would urge you to come and ask this committee for emergency powers.”

I can only hope that the literal translation of what Bunning means is NOT "If it looks like stock prices are going to go a lot lower, and there's nothing that can be done to prolong the Ponzi scheme, please let us know and we'll put regulations in place to prop up stock prices."
Cause that's what it sounds like to me, but maybe I'm just being cynical...

My favorite part of the article sounded like a little cynicism from the author:

"It is unclear as to what emergency powers the Senate could grant the S.E.C. to hold off another flash crash, given that the origins of the first disruption has yet to be determined."


It's So Easy In Hindsight

My friend Ted sent me this story yesterday - a flashback from November, 2007.  All you really need to know is the headline: "Rappers join models in insisting on Euros as Greenbacks fall further out of fashion."  In hindsight, I can only facepalm myself, and wonder how I didn't recognize one of the greatest contrarian signals of my generation.  Rappers & models....


note: to be fair, the Euro (vs USD)  is only now trending below the Nov 2007 level, so if the rappers & models were quick and nimble with their FX trading, they could have made out great on the trade.

Wednesday, May 19, 2010

The Fed on Housing

Mr. Griffey got neutered today.  We picked him up at 5pm, and he's been staggering around like a drunk all night, feeling the after-effects of the anesthesia.   Hopefully he'll feel better tomorrow and won't need to wear the cone on his head...

Anyway, one thing I found worth mentioning today:  the FOMC's minutes, re: housing, via CalculatedRisk:

"Moreover, the recovery in the housing market appeared to have stalled in recent months despite various forms of government support. Although residential real estate values seemed to be stabilizing and in some areas had reportedly moved higher, housing sales and starts had leveled off in recent months at depressed levels. Some participants saw the possibility of elevated foreclosures adding to the already very large inventory of vacant homes as posing a downside risk to home prices, thereby limiting the extent of the pickup in residential investment for a while"

Key word:  "DESPITE."  Just imagine what happens when the "various forms of government support" stop...


Ban Market Orders!

The SEC, in their 150 page report on the May 6th crash, has section (around page 75) on "potential regulatory responses".  I found this interesting, since I've been constantly repeating that we should ban market orders if we want to protect people from themselves:

"We are considering ways to address the risks of market orders, and their potential to contribute to sudden price moves. Areas under consideration include: (1) requiring market order “collars,” thereby effectively converting market orders into limit orders; (2) prohibiting or limiting the use of market orders; (3) requiring broker-dealers to specifically warn retail customers about the risks of market orders, particularly in volatile markets; and (4) pursuing investor education initiatives as to the risks of market orders."

I'd be shocked if they implemented #2, but it's the simplest and most effective solution, and removes any and all potential excuses from the execution side of things.  I've specifically discussed all four of the potential changes the SEC detailed in that paragraph above.    Mary Schapiro - you could at least give me a hat tip...


Tuesday, May 18, 2010

SEC: Comment Period for Individual Stock Circuit Breakers

"Under the proposed rules, which are subject to Commission approval following the completion of the comment period, trading in a stock would pause across U.S. equity markets for a five-minute period in the event that the stock experiences a 10 percent change in price over the preceding five minutes. The pause would give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion."


History Repeats Itself

Cliche:  History repeats itself because no one was listening the first time.

This morning's Bloomberg story of interest involved the continued acceleration of ignorance of risk and potential pitfalls, even though we just went through this scenario.

"Two years after suffering $213.2 billion of losses when debt markets froze, investors in junk bonds are accepting what Moody’s Investors Service calls the weakest creditor protections since 2007. 

Even with housing starts hovering at their lowest levels on record, Beazer Homes USA Inc. managed to sell bonds this month on terms that allow it to add more debt. The Atlanta-based builder couldn’t even do that when it issued debentures at the height of the housing bubble in 2006 and its credit rating was seven levels higher. In a report last week Moody’s singled out CF Industries Inc., Standard Pacific Corp., AK Steel Corp. as borrowers offering debt on terms historically available only to higher-rated companies.

“We got ourselves in trouble with that in the past and here it is again,” James Kochan, the chief fixed-income strategist at Wells Fargo Fund Management in Menomonee Falls, Wisconsin, said of the trend toward looser debt covenants. “It’s not that surprising, but it is disturbing,” said Kochan, who helps oversee $179 billion. "

Beazer Homes is issuing debt with investor-unfriendly covenants that it couldn't even issue at the peak of the bubble!  Shocking.  I mean - ignorance of risk is one thing, but ignorance of risk in a home builder?  Really?  I must be living on another planet.  

"Lenders are letting down their guard just as worsening government finances raise doubts about the sustainability of the global economic recovery. Money managers say they have little choice but to go along. They need to find a home for the record $29.4 billion that has flowed into high-yield bond mutual funds the past 16 months from retail investors seeking to join in a rally that has produced an average 69 percent return since the market bottom in March 2009."

Oy vey.   And THIS is why I blame the Federal Reserve's zero interest rate policy (ZIRP) for the current situation, folks - the bastardization of risk pricing and asset prices.  "Money managers say they have little choice but to go along" ??? Really?  And if/when it goes bad, what happens?  We blame the banks who underwrote it, right?  (that's where I need my SARCASM font!)   This is also what I meant when I explained to a commenter on a  previous thread that the Fed can indeed effect the entire corporate risk curve, not just the treasury curve - ZIRP forces investment, even where rational investment wouldn't be made.

It's a well known fact that there are cycles of risk appetite and avoidance on Wall Street - I'm just shocked at how short those cycles have become.  We JUST concluded the biggest orgy of debt consumption in our nation's history, which I'd dare to say ended badly,  and it's almost like it never happened.  Even though we saw the results of covenant-lite loans, they're back with a vengeance already!

“This trend represents more than an episode of ‘back to the future,’” Moody’s analysts including Alex Dill, the firm’s senior covenant officer, wrote in their report. “It reflects a weakening in covenant protections even below those existing at the peak of the market, in 2006 and 2007.” 

Weaker covenants than at the peak - the peak of the bubble of all debt bubbles!  WTF?

Well, at least we can offer on explanation, after we get to the details:

"Beazer sold $300 million of 9.125 percent bonds due in 2018 on May 4 that carry lighter restrictions than its 2006 issue on the amount of debt the builder can add and how it can use money raised from selling assets. The terms also allow Beazer to double its capacity to pay dividends to shareholders even after a 90 percent drop in its stock, according to Covenant Review."

"The company’s senior unsecured bonds are rated Caa2, which Moody’s defines as “judged to be of poor standing and are subject to very high credit risk.” Beazer was rated Ba1, one step below investment grade, in June 2006, when it issued $275 million of 8.125 percent 10-year notes."

Ok - so Beazer's credit rating is lower, and they're paying a higher interest rate than they did at the peak of the bubble - that much makes sense.  Why, though, are buyers of the debt making concessions?  The buyers should be the ones in control.  Ah - but it gets back to the Fed and ZIRP, and should give us an idea of exactly how powerful the Fed's effects are:  there is so much capital out there looking for a positive yielding home that even companies like Beazer, a troubled company in a troubled industry, can get investors to make concessions.

Capital re-deployment is precisely what the Fed wanted - I'm guessing ignorance of risk is NOT what the Fed wanted, but it's a side effect nonetheless, and will bring me back to the word I've often used to describe the situation:  PONZI.

A closing quote:
“In 2008, all the companies that we said would screw the bondholders did it,” said Cohen of Covenant Review. “Now, it feels like 2007 to me. We’re telling them they’re going to get screwed and they’re not paying attention.”

Note: related, via Paul Kedrosky:  "The Triumph Of the Stupidly Optimistic."


Beaten To the Starting Line on Another Business Plan

One of my best business ideas that would have been relatively easy to do was to create a sarcasm font.  We all know that sometimes sarcasm can get lost in emails or on the internet, but if we put it in a special font, it would be easy to recognize.  Unfortunately, I didn't move quickly enough on this one, so I'm not the one who gets to give out the sarcasm denoter for free download - here is: The SarcMark. Strangely, they have a video ad which purports to demonstrate uses of sarcasm, but uses several examples which are not at all good demonstrations of sarcasm...


Monday, May 17, 2010

Quotable: John Hussman

"ECB President Jean-Claude Trichet has been quick to deny concerns that the move by the ECB will be inflationary, emphasizing that the intervention will be "sterilized" in order to prevent a major increase in the amount of euros outstanding. This is "totally different," he argued last week, from the massive increase in monetary base that has occurred as the U.S. Federal Reserve has bought up over $1.25 trillion in debt obligations of Fannie Mae and Freddie Mac. A "sterilized intervention" is one where the euros created through the purchase of distressed Euro-area debt will also be absorbed by selling other assets from the ECB's balance sheet, in order to take those euros back in. 

In order to evaluate the arguments being made, it's helpful to understand the balance sheet of a typical central bank. Whether in the U.S., Europe, or elsewhere, the basic structure is the same. On the asset side, the central bank has government debt that it has purchased over time. A small proportion of total assets might be held in "hard" assets such as gold, but primarily, the assets of each central bank has traditionally represented government debt - mostly of its own nation (or in the case of the ECB, euro-area governments). As a central bank purchases these securities, it creates an equal amount of liabilities, in the form of "monetary base" (currency and bank reserves). 

Notice, for example, that the pieces of paper in your wallet have the words "Federal Reserve Note" inscribed at the top. Currency is a liability of the Federal Reserve, against which it has traditionally held assets such as Treasury securities, and prior to 1971, at least fractional backing in gold."

but this is the part I really liked, emphasis mine:
"In this context, consider the ECB's proposed 750 billion euro line of defense. Essentially the ECB is saying "We stand ready to buy as much as 750 billion euros of distressed Euro-area debt in order to defend the euro." Simultaneously, despite the fact that Euro area countries are running large fiscal deficits, the worst being in Greece, Portugal and Spain, the ECB is saying "However, we intend to sterilize this intervention, which will ultimately require that we sell Euro-area debt into the market in order to absorb the euros we create." The only way that both statements can be true is for the ECB to admit "Therefore, we are fundamentally promising to debase the quality of our balance sheet, by exchanging higher quality Euro-area debt with lower-quality debt of countries that are ultimately likely to default." 

Far from being "totally different" from what the U.S. Federal Reserve has done, the ECB is essentially promising exactly the same thing - to corrupt its balance sheet and debase its currency in order to protect the worst stewards of capital from the consequences of bad lending and poor investment."


Sarcasm - MGM - Paulson

I just found out that John Paulson is on the other side of my trade.  I'm short MGM, and he filed his latest 13-Fs today, showing ownership of 40MM shares. WTF?!?!?  This is so unfair. If I knew Paulson was on the other side of the trade, I never would have shorted the stock.  I'm going to sue Etrade for not telling me about this.


note: this post is sarcasm - I even put it in the title to avoid confusion. if you don't get the reference, don't sweat it - it's not worth your trouble.  also, it's important to note, despite mainstream media confusion to the contrary,  that the suit against Goldman Sachs isn't about the fact that Paulson was on the other side of the trade, but that the person on the other side of the trade (who happened to be Paulson) may have played a larger-than-stated role in the design of the portfolio.  Anyway...

note 2:  Paulson's purchase of MGM actually surprised me. I understand his purchase of the banks (which I'm also short!) - he's playing the "shake hands with the government" card, but MGM had me scratching my head.  I was wondering if it was possible that he might somehow be short their recent convert and long stock against it, but that's about 6 sigmas.  He also bought BYD, so I guess he's just bullish on Vegas, which I can't fathom.   Dirty Dave chimed in with a suggestion: "Hedging his upcoming stay at Aria's baccarat salon?"  As usual with Dirty Dave's inimitable wit, if you get it, you love it.  If not, well, on to the next post...

Sunday, May 16, 2010

GM Wants More Subprime Buyers

Last week I linked to a story about how GM wanted to get back into the  financing business.

Today's AP headline had me tilting my head and raising my eyebrows in surprise:

"GM's top North American executive Mark Reuss, under pressure to quickly sell more cars and boost GM's value as it gets ready to sell stock to the public, said a shortage of subprime lending is holding back sales in the U.S.

But the automaker's main lender, Ally Financial Inc., has little appetite for risky loans, having spent the last few years cleaning up its own financial mess caused mainly by its failing mortgage lending business. Both companies are majority-owned by the U.S. government.

For decades, GM owned Ally, writing its own loans through the so-called captive finance arm. Nearly every automaker makes loans in such a fashion. But a cash-starved GM sold most of Ally -- formerly known as GMAC -- in 2006.

GM and Ally now have a loose partnership that gives Ally control over who gets a car loan. If GM returned to auto lending -- either through buying Ally's auto business or starting its own in-house lending unit -- it could set lending standards itself. That could benefit the automaker by allowing it to extend loans to people with weaker credit and to more lease customers."

Amazing, right?  GM's business plan to sell more cars is to give loans to less creditworthy customers.  Wow.
The article notes:

"For example, Honda Motor Co. gets 20 percent of its sales and leases from subprime buyers, he said. GM, on the other hand, gets only 1 percent because it can't access the money to loan to those customers."

and then:
"Ally has been less than eager to resume lending to risky customers."

That damn Ally and their prudent lending practices!!! (/SARCASM!)
Now, to be fair, subprime auto loans are not quite as devastating as subprime home loans:

"Subprime lending for cars is generally considered less risky than mortgages. During the recession, borrowers didn't default on car loans as much as they did on homes because the value of cars never became overinflated. Also, if a car buyer defaults, the lender can quickly repossess the vehicle and resell it, recouping at least part of the lender's investment."

I'm not sure that the reason buyers didn't default is because "the value of cars never became overinflated" - if buyers can't pay, it doesn't matter what the value is.  The reason buyers didn't default probably has much more to do with the fact that the car payments are much lower than the house payments!
"Ally would appear to have little to gain, though, from selling its auto lending operation, by far its most profitable line of business. Writing auto loans made Ally $846 million in pretax profit in the first quarter -- the division's fifth straight quarterly profit -- up 28 percent from a year earlier."

So, if subprime auto loans are so profitable, why isn't Ally making more of them? From earlier in the article:

"After GM sold a majority stake in Ally, the lender became heavily involved in the subprime mortgage boom, a move that nearly bankrupted the company when the housing market collapsed. Ultimately, the federal government has spent $16.3 billion to bail out the lender, leaving taxpayers with a 56 percent stake in the former GMAC.

Ally has spent the last year trying to clean up its mess, diversifying its customer base beyond just GM buyers, launching a highly profitable online banking service and working to sell what remains of its mortgage lending business. Earlier in May, the company posted its first quarterly profit in more than a year and rebranded itself as Ally."

If Ally, having now found "religion" doesn't like the risk-reward of subprime auto loans, it implies to me that either subprime auto isn't the bonanza that GM thinks it is, or that Ally still has balance sheet issues and is sticking only to solid, low risk loans for now, until they can completely clean up their mortgage lending biz.