New Bank Regulation

I wanted to resist commenting about the "Volcker Rule" until the details were finalized, but let me just spit out a few things.  First of all, I spent time on both sides of the business on Wall Street - on the "sell side," on a customer-related trading desk, and on the "buy side" at an internal hedge fund at the same firm - a large, generally commercial bank.

The second part of my job description would be pretty clearly banned under the proposed rule changes.

"The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit."

You know what - it's kinda hard to argue with that.  I was just discussing it with a friend of mine who trades in a purely proprietary group (when I say pure prop, I mean it's completely segregated from all customer businesses - it's even in a different building usually) at a large commercial bank.   He wrote to me, "but there is very little risk in a group like this - you think we caused the financial crisis?"  And no - neither his group or any group like his caused the crisis, but I explained to him that the higher level concept of the group was the problem - he was trading MY deposits - that's just not what The People want. Never mind the issue of if my friend trading merger arb with my deposits is any more or less risky than his bank instead taking the money and lending it out to small businesses and homebuyers (cause that's what they do!) - I think the past few years have cemented the fact that mortgage lending is not necessarily less risky, but it certainly looks better on paper, in terms of subjective categories like benefit to society.

Now the real issue is in my original job - on a customer related trading desk.  We would make a lot of money, like all other trading desks, on risks we took trading around customer flow.  We would provide capital and take risk from clients who wanted to unload portfolios, and then the risk would be on our books.  Trades were coded as "agency," - that's a customer order, "customer facilitation" - that's when we take the other side of a customer order (thus establishing positions of our own), or "principal," - that's when we trade out of the customer facilitation trade.  Yet, not all principal trades are proprietary - in fact, most of them aren't - MOST of them are customer related.  When do you draw the line?  What if I want to hold that customer related position for a day, or three days - at some point does it cease to become a customer related trade, even though it was established as a result of customer orders?

When an S&P index change was announced, we'd usually buy the stock.  First, because we hoped it would go up, and second, because then we'd have inventory to sell to our customers.  We were willing to take the risk of buying the stock early, while they were not.  Fixed income syndicate desks are the same - when underwriting a new bond issue, of, say, $300MM for XYZ corp, the desk may sell $315MM worth of bonds to its customers and end up short the issue, so it can go out and actively bid for bonds, since it knows that some customers will want to sell their allocation quickly.  It's part of being an intermediary.

Are these activities proprietary trading?  That's the real question.  People are talking a lot about Goldman Sachs, a firm who makes most of its money from "trading."   GS, however, claims that roughly 10% of its revenues are from purely proprietary trading.  The remainder is from customer related desks.  Are these desks taking principal positions?  Of course - and how do you pick and choose which to allow based on customer flow interactions?  You can't be a little bit pregnant, and you can't kinda-sorta ban proprietary trading.   John Hempton brings up a few more easy dilemmas on the difference between prop trades and hedges: "You do a big equity underwriting. To hedge your risk you go short the market because you can't go short the specific." Is that a prop trade?  "How about guaranteeing a customer VWAP on a trade. Is that prop risk?"

Unfortunately, it seems like this policy is more populist reaction from an Adminstration that screwed it up the first time.  Take Goldman Sachs (And Morgan Stanley for that matter) - why on Earth are they allowed to borrow from the Fed under Bank Holding Company charters when (to the best of my knowledge) neither of them has any commercial banking deposits?  (EDIT:  EconomicsOfContempt points out that both GS and MS actually do have bank deposits.  I think the gist still holds here though - try opening up a retail depository account at either of these institutions.  The Fed window is designed for capital needs related to retail deposits in order to avoid runs on the bank) In addition to trying to separate commercial banking and prop trading, wouldn't a good first step to be to actually separate the commercial banks from the non commercial banks?   People aren't mad because GS is making money trading - they're mad because GS is making money trading with what they (the people) think is taxpayer money or taxpayer backstops.  The decision to allow non-banks access to  (near zero cost) Fed funds resulted in these non-banks making extreme amounts of money which angered the populace.

As I said, I fully understand the desire to implement a situation where commercial banks do not engage in proprietary trading.  However, the real problem isn't proprietary trading - it's leverage - it's actual risk.  Even if/after we successfully separate proprietary trading from commercial banking, what are we doing to prevent the next Long Term Capital Management blowup?  I guess LTCM is no big deal anymore - after all, it was a mere $5B in bailouts - chump change in today's land of large bailout numbers...

-KD

Vegas MLK 2K10 Part II - March Of the Penguins

If you missed Part I, check it out now.

Anyone who has been to Vegas knows that there is the strange phenomenon of female visitors acting - how do I put this - well, acting like they wouldn't act at home.  They take the "What Happens In Vegas Stays In Vegas," tourism motto at face value and unleash their inner wildcats: sucking down plastic yards of pina coladas, getting tattoos, attempting to set new records in terms of public drunkenness and shortness of skirts, and generally whoring it up.  One thing I've noticed over my last few trips, though, is that the demographic of these ladies seems to be changing.  Thirty year old wildcats have been replaced by barely legal wildkittens - and skirts have, almost impossibly, gotten shorter and tighter, and heels higher.  It seems that the only women walking around are 21 year olds out for the first time, teetering on their high heels on polished marble hotel floors while trying to make sure that their skirts are pulled down far enough to cover their ass cheeks.

After lunch on Saturday, I proposed a theory to explain this behavior to my crew.  See, as the bubble burst, most people realized that Vegas isn't something you need to do repeatedly.  Of course, for degenerates like us, the theory doesn't apply - we'll still come to watch football, play poker, and absorb negative EV at the table games -  but for ladies coming to Vegas to let loose, it's a minefield of dangers that simply don't need to be dealt with.  Women who've come to Vegas understand that it has a higher douche concentration than anywhere else on the planet (except perhaps Yankee Stadium), and that there's simply no reason to endure it.  Why get dolled up, whore yourself out to go to the club, be treated like a piece of meat, spend the night with your hand over your drink to avoid being roofied, and then try to make it back to your hotel afterward without getting assaulted by one of a million uber-douches walking around in Ed Hardy shirts and faux-crocodile loafers thinking that you should bed him just because he has a new flaming skull tattoo on his triceps?  In other words, after coming to Vegas, the ladies realize that unless they like acting like and being treated like whores, Vegas sucks for them.  Thus, the population of ladies is increasingly made up of Vegas Virgins - first time visitors making their pilgrimage and acting the part they've read about.  Of course, there are always a few who grow up to be actual professional whores, for which Vegas is the perfect home base.

Dirty Dave remarked, "Man, it's so crazy - it's like they are just learning to walk in those heels," and The Professor astutely responded, "Yeah - they teeter down the hallway toward the club like a pack of wobbly penguins,"  and thus the Vegas Theory of Evolution was born.

Penguin: Noun:  A young lady, barely of legal drinking age, who dresses up for a night out on the town in such a manner that the tightness of her skirt and the height of her heels, combined with her inexperience with such accoutrements results in her waddling/teetering like a penguin as she tries to strut confidently.

Although we chose the term "Penguins" (capitalized) to refer to this breed of coming-of-age-young-females, there are analogies to plenty of other young animal species.  The Penguins just happen to walk like penguins - on display, with people staring at them and smiling at them:

Note the zebras around the 30 second mark of the above video.  If the zebras staring at the penguins don't remind you of Vegas Douches staring at Vegas Penguins, well then, you need to go do some more research.

So, the Penguins make their pilgrimage to the club - teetering out of the cab and down the polished marble hotel floor past a row of douchebags waiting in line behind velvet ropes -  just like real penguins make their  pilgrimage to the frozen tundra to lay their eggs.  Both Penguins and penguins face many dangers.  Penguins must avoid alcohol poisoning, corrupt cabbies, predatory douches, and roofies, while penguins must avoid tainted herring, oil slicks, sea lions, orcas, and deadly cold temperatures.   I actually find the travails of the baby sea turtle to be a great analogy to the potential plight of the Penguin as well - very few will survive, but the few who do will return to the same beach to dominate their territory for many years to come - just like the few Penguins who realize they are naturals for the Vegas Skank lifestyle will return frequently to dominate the club of their choice. 

The Penguins also demonstrate protective traits seen in many animal species - taking care of the one member of the herd who inevitably finds herself too drunk to stagger home - and making sure that none of the weaker members get isolated, picked off from the herd, and taken up to strange hotel rooms by predatory douches.

We all know of young animals who have to learn how to properly kill and eat their prey, like this brown bear:

It wasn't until a day and a half after I saw two young Penguins in the lobby of the Venetian drinking Bud Light cans FROM A STRAW that I realized this was the same animal behavior - the poor things were still learning how to consume their alcohol!  Like the bear batting around a fish, unsure what to do next - awww - look how cute - beer from a can with a straw!  Sadly, they were sitting in a very vulnerable location, and almost certainly didn't survive the night without falling victim to some Kangol-cap-wearing-bedazzled-t-shirt-sporting-doucheball who told them he loved them in an effort to get into their skirts.

Sunday morning we actually saw a species rarer than the Mirage's White Tigers - a bona fide pack of late 30-something ladies eating brunch at the Grand Luxe at Palazzo, complete with two babies at the table!  In the land of Penguins, this was a truly rare sight - you'd have better luck hitting back to back snake eyes at the craps table than seeing a pack of white tigers WITH their cubs!  Clearly, this phenomenon was easily explained by the fact that their husbands had gone to Lagasse's Stadium to watch the Dallas-Minnesota football game - no group of women goes to Vegas for a girls weekend and brings the babies! Thus, my evolutionary theory was still intact, in fact, enhanced.

stay tuned for Part III, where we'll resume the weekend's recap, including real time electronic sports betting at the Venetian, dinner off strip, and a trip down town!

-KD

Vegas MLK 2K10 - Part I - The Arrival

For the past 10 years I've been flying to Vegas out of the NYC area airports - mostly JFK and Newark.  Friday, however, I had the pleasure of dealing with the much more mellow Manchester NH airport - with no traffic on the way there and no mass of humanity at the airport.  After parking my car in the outdoor lot (a decision that would later prove disastrous), I took a quick shuttle bus ride to the terminal, and made it through a 10 person security line without incident.  I enjoyed a few beers at the gate-side pub, and then sat down for 5 minutes at the gate when I saw the inbound flight arrive.

A K-9 unit, which I assumed to be sniffing for explosives (not drugs), came through the gate and checked out every single person.  I'm a huge dog fan, so this always wows me, and I'd never seen it before in all my time at NYC airports.  Although the dog put his paws up on the woman sitting next to me, he was unfazed by the wealth of aromas I presented to him:  I had about a kilo of cigars in my bag, 40 grams of watermelon Trident, a pesto chicken panini, and of course I was covered in my dog Oscar's scent.  This dog was a true professional, however, and was undeterred by my distractions, barely noticing me as he sniffed on by.  This was also my first time flying Southwest Airlines (Manchester --> Vegas direct!), and I was impressed at how efficiently their "pick your own seat" boarding process worked - relying on people to line up according to a numbered boarding pass.

I arrived in Vegas at 7pm local time, and my cabbie, Hoss, took me on the highway.  I wasn't too tilted, however, as he kept me entertained with stories about how he met Bill Russell (after he found out I was a New Englander) and about how he had a reputation with the ladies for his talented tongue.  Now, Hoss was an obese dude who could hardly be classified as attractive,  and I was even more confused at why he told me that he liked to do the Nsync "Bye Bye Bye" dance on the treadmill (which he demonstrated with pac-man-esque hand moves).  Fortunately, we were arriving at the Venetian, so I paid him and hightailed it out of there.  I picked up the keys to my comped room, dropped my gear, and hit the poker room while I awaited the arrival of the rest of my crew.

The Venetian 2-5NL game was very good - some real fish and only 1 or 2 local pros.  In one early hand, a young pro made it $20 from early position.  When I later recounted this hand to Big Show, he interrupted me, "Wait - young pro - what does that make you, an old pro?"  Which made me laugh and realize... YES!  I'm a grizzled 33 years old - ancient compared to today's young gunners.  So, this young pro makes it $20 to go, and I smooth call with JJ two off the button ($500 stacks).  The big blind, a nitty old man (NOM) smooth calls also.  On the 9-6-4 flop, the NOM checks, the pro bets $60 and I elect to smooth call again.  The NOM called also, which generated a simultaneous head jerk from both me and the young pro.  When the turn paired the bottom card - 4 - they both checked to me and folded when I bet $115.

After a few hours,  Dirty Dave, Junior, The Professor, and Matty arrived.  Dirty Dave had sent an email earlier asking Matty to pick up a bottle of Crown Royal.  Now, the crew on this trip is a very sharp bunch - on top of pop culture like no other, and spewing a non-stop stream of sarcasm and advanced metaphorical enunciations.  I thought Dave's email was a joke, even though he didn't use the sarcasm font, but lo and behold, there was a handle of Crown up in Matty's room, which adjoined mine.   We got cleaned up, I was peer pressured into drinking Crown & Coke,  and we rendezvoused with Big Show and his wife at Lavo - the "club" at the Palazzo, where Dirty Dave had reached back into the time machine and hit up his club host from the bubble era to secure us a table, with buy one get one free bottle service.  Of course, the BOGO means that instead of being insanely stupidly expensive, the bill is merely expensive.  We were downstairs at Lavo, which is more of a lounge than a club.  It's part restaurant, which was closing down for the night, but the downstairs vibe still suited us fine, as it was much less loud and obtrusive than the upstairs melee.  Matty executed a purely amateur move by indulging the shot girl, buying shots immediately after Dirty Dave had just placed the order for a bottle of Ketel and a bottle of Macallan's from the waitress.   Rule number 1:  when you have two bottles coming, you don't order shots!  Big Show rolled his eyes, and joined me in steadfastly refusing shots.

Over the next few hours we polished off the majority of our bottles before the host moved us to a table upstairs.  The club part was packed, loud, and cold.  Big Show and I decided to smoke a cigar and then head downstairs to play blackjack.  After a few minutes, a young Asian guy came by and asked "Hey man - can I have a puff of your cigar?"  Huh?  DYKWTFIA?  I was confused, and not sure what to say.  Big Show muttered, "No, dude, that's just creepy,"  while I responded "I have swine flu."   We finished the stogies and retreated to the serenity of the double deck blackjack pit at the Palazzo.  After running up a nice profit in less than half an hour, Big Show decided to pull the plug, and I bumped into Dirty Dave (who was staying in my room with me) on the way back up to the room.  Now,  I immediately closed and locked the door between the two suites, explaining that there was no way I was having Dance Party USA in my room, as I knew that the other guys were still raring to go at 5am.  Dave agreed, but when there was a knock on the door a few minutes later, he had a moment of weakness and wanted to open it.

"Don't you dare open it," I warned him.

"But what if it's Junior seeking late night asylum after being sexiled?"  Dave had a point, and checked the peephole just to make sure the knock wasn't coming from the hallway.

I dozed off, but was surprised when I heard Dave in the shower before 9am.  I looked over at his bed, expecting that he'd had some sort of alcohol related accident, but the sheets looked dry and there was no sign of puke anywhere.  When he came out of the shower he explained that he was suffering the classic Red Bull symptoms -  you can't sleep, and lie awake barely able to move like a dying cockroach.  I know these symptoms well - with cards flashing across your eyelids every time you close your eyes - and it's why I don't drink Red Bull anymore.  He went downstairs to absorb some negative EV in the 6-deck blackjack game, while I slept for another 90 minutes before rallying the crew for brunch at BLT Burger at the Mirage.

The Professor, on a serious bender, has some Budda-esque words of wisdom.  "I may have been born yesterday, but I've been up all night,"  he told the table, before ordering a bloody mary accompanied by the astute observation: "This drink will either make things much better or much worse."  No mean reversion here - The Professor was hitting the tails of the distribution.    BLT's burgers, fried pickles, milkshakes, waffle fries and nachos refueled us and got us ready for a big day of picking NFL playoffs losers and expounding on the theory of the evolutionary cycle of the young American female, which I'll get to in Part II...

-KD

Homeownership Update

I'm back from Vegas, and busy crafting a trip report which will be well worth your time to read.  In the meantime, the total in the New Hampshire mouse wars so far is Kid Dynamite 2, Mice 1:  they managed to snatch superglued dog food kibble off one of the traps, but two mice succumbed to Mrs. Dynamite's patented bait technique.   We have another batch of baited traps ready to go.

Friday morning, before I departed for Vegas, I came downstairs to find that my freezer had melted.  The fridge/freezer unit was on, but not cold.  Crappola.  Mrs. Dynamite handled it, calling the company who dispatched a certified technician.   This guy noted that he could see from the records that in September of 2008 a technician from a different company had been dispatched when the previous owners had the same problem.  This prior scumbag told KitchenAid that he replaced the compressor, but merely did a craptastic patch job on it - unbeknownst to anyone until this new technician pulled the unit out and could easily diagnose it. 

This is another joy of home ownership - not only do you have to worry about shoddy work and being cheated by service providers,  here we got hosed because the PRIOR owners got cheated by a service provider.  Since their technician screwed them over by not actually replacing the compressor, we have to eat the cost of installing a new compressor.  Sweet!  Fortunately, we are lucky enough to have a second fridge/freezer unit to take care of our food while we await the replacement parts.

Stay tuned all week for the Vegas recap.

-KD

Vegas Imminent

I'm off to Vegas Friday afternoon, rekindling the pattern of annual Martin Luther King Day trips to the desert.

While I'm gone, there's a lot of reading to catch up on here.  Of course, you can always hit my tip jar and donate to my efforts.  The link is on the right sidebar.

In case you missed it, I've been busy the past few weeks, cranking out what I think are pretty worthy reads.

Just before Christmas, I penned a post titled "Isaac Newton, Momentum, and Mean Reversion,"  which tells one of the most valuable concepts I learned in my time on the buy side - you want fat tails of distributions working in your favor, not against you.

Later that week I wrote "Fiduciary Duty and the Victim Mindset,"  which tried to get at the point that as long as we continue to label those on the losing side of trades as victims, they will never change their behavior.  Many of these "victims" were grossly negligent and need to be removed from their money management rolls.  This theme continued in a post titled, "Synthetic CDO's, Spanish 21, and Sports Betting,"  which I'm very happy with.

After New Years, I named my trade of the year:  the Ponzi scheme epitomized by the TLGP, and eerily reminiscent of Tommy Boy's "I'll take a crap in a box and put a guarantee it" quote.

I was surprised that Regulators found it necessary to explain to banks that interest rate risk was a big deal for them, and Tim Geithner's seat heated up a little with news that he may have tried to prevent some disclosures from the AIG settlements.

The unemployment report sucked - no matter what the mainstream media wants you to believe.

I penned a few homeowner related posts.  "The Joys of Home Ownership," attracted a lot of reader comments, and I followed that up with my travails attempting to buy a ladder, titled "Eff You Brick and Mortar."  I went home and bought the ladder online at Amazon.com

I took issue with the Administration's blaming the banks for the collapse of the automakers.

Finally, I wrote a reaction to the populist fury over the confusion surrounding the difference between front running- which is blatantly illegal, and talking your book - which is the essence of our entire financial markets.  Every commentator you see or read is talking some sort of book/agenda - don't forget that.

If you want some lighter reading, to prep you for next week's Vegas Trip Reports, the "posts of fame" section on my right sidebar has all my old Vegas Trip Repors.

enjoy,

KD

Bank Taxes, GM, and Chrysler

Today's story is "Obama to Unveil Proposal on Bank Taxes"  from the WSJ, regarding taxes/fees the Administration will assess to the big financial firms.

"If approved by Congress, the new tax -- which the White House calls a "financial crisis responsibility fee" -- would force about 50 banks, insurance companies and large broker-dealers to collectively pay the federal government roughly $90 billion over 10 years. Of the 50, about 35 would be U.S. companies and 10 to 15 would be U.S. subsidiaries of foreign financial firms.A senior administration official said the largest 10 institutions would pay about 60% of the tax's total cost."

I just want to focus on one quote from the article:

"The taxed firms are expected to pay the cost of bailout money that went to General Motors Co. and Chrysler LLC, which are exempt from the tax. The administration official defended the omission by contending that U.S. auto makers collapsed in part because of a financial crisis of the banks' making."

Wow - talk about a mis-statement of the truth.  That statement could be rewritten as follows:

"U.S. auto makers collapsed in part because of a financial crisis of their own banks' making."

or

"U.S. auto makers would have collapsed sooner if not for a massive credit bubble driven by low interest rates"

or, as my friend Ted put it:

"U.S. auto makers collapsed because they've made shitty cars for decades and overpromised benefits to unions." 

Blaming the collapse of the automakers on the banks ignores the fact that before there was the bust there was a boom!  Automakers didn't collapse in the early part of the 21st century because the Fed fueled a new bubble in the wake of the collapsing internet bubble.  If we'd never had a credit bubble (and subsequent bust,)  the auto companies would have faced their day of reckoning years ago.

-KD

The Year of the Tiger

Ironic?  2010 is the Year of the Tiger in the Chinese Zodiac.  Are you telling me he won't be back?  It's his year!

-KD

Eff You Brick and Mortar

So I am buying a ladder.  I did some research on the internet, and decided on the Werner MT-22 telescoping multi-position telescoping super duper interchangeable heavy duty ladder.  I have been doing most of my home store purchases at Lowes, which is right next to where I go grocery shopping, so I went to pick up the ladder and ingredients for the next few nights worth of dinner.

Of course, I checked prices on the internet first.  Amazon.com had the ladder for $179, with free 2-day shipping via Amazon Prime, and Home Depot also had it for $179.  Lowes wanted $198 for the ladder, but they match competitor's prices, so I checked to make sure Home Depot had the ladder in stock (the internet indicated it was in stock at the Concord store, which is about 3 miles from the Lowes that I was going to), and then I headed off for Lowes.

At Lowes, I quickly found the ladder, had a store employee help me with a demonstration of the slightly smaller 17 foot model that was open as a display, and then confirmed that they'd match the price.   "Of course we'll match Depot," two guys standing there told me, and eagerly fetched me a cart.  "Just tell them up front - they might call over to Depot to verify the price."  Now, I've already purchased a washer and dryer at Lowes  for which the clerk simply looked up the Home Depot price on the internet and matched it, but anyway.  The lady at customer service was nice, but clearly seemed to take the ladder as a personal challenge to look for an excuse to NOT match the lowest price.

"It has to be the exact same item," she challenged me.  "Ok - it is," I calmly replied.  "They have to have it in stock,"  she reloaded.  "Yes - I checked the internet - they have it in stock at the local store,"  I explained.   She jumped all over this mention of "the internet," explaining "The internet doesn't count! It has to be in the store!"   I sighed, "Yes, I know, I checked the availablility of it in my local store on the internet."   So she picked up the phone and called Home Depot.  And waited on hold.  And waited. And waited.... Finally, she gave up, called back, and waited on hold some more... and waited.  At one point she relayed a question, asking me "Is that aluminum, or fiberglass?"  "Aluminum," I explained, and resumed waiting...I stretched my quads.  I browsed the flashlight display.  I stretched my hammies.  Then, after 15 minutes, I realized I needed mouse traps, which she pointed me towards.  As I returned with my loot, she was hanging up the phone, and triumphantly told me "They can't find any in the store, so I can't match the price."

"Do you think that maybe they person you were talking to didn't understand what you were looking for, since it took 15 minutes for them to figure out what was going on with a top selling item?  Can't you look it up on the internet?"  I suggested, failing to mention that the washer/dryer department had done just that on items costing $1300 more than this ladder, but she was having none of this "internet" idea.  I should have known the person on the other end of the phone at Home Depot didn't know what they were looking for when they asked if the ladder was aluminum or fiberglass - this ladder only comes in aluminum.

"Sorry, there's nothing I can do,"  she smiled.  So I left the ladder at the register, told her I wasn't going to argue with her, and walked out.  Now I was steaming though - I didn't want to do business with Lowes because they were being doucheballs, and I didn't want to call Home Depot to see if they actually had it in stock, because if they did I'd be just as pissed at them for wasting my time.  Mostly, I was furious at myself for accepting this "no" answer, instead of either suggesting she try the other local store (there's another one 5 more miles away), or asking for a manager.  Some people fear confrontation.  I am not one of these people, yet I still failed to resolve this issue.   Perhaps it's because I knew I could go home and order it from Amazon.com, and have it in my hands on Thursday morning with free 2 day shipping.  Amazon's return policy is as good as Lowes, so that wasn't an issue either.

My wife and I buy everything we can on Amazon.  Trash bags.  GPS.  Ladders.  Tools.  I just bought a 2010 desk calendar from them yesterday.  When the internet big boys, like Amazon, can get you stuff in 2 days with no shipping charges, at prices better than local big box retailers, the brick and mortar boys better heed the warning call.   Everytime I end up at a store like Best Buy, Borders or Barnes and Noble looking for the Family Guy Season 5 DVD set,  the latest season of It's Always Sunny In Philadelphia, or the complete anthology of Curb Your Enthusiasm, I get frustrated within 5 minutes and turn to my wife asking, "Why are we even here?  Let's go home and buy it on Amazon, save money and avoid all this bs incompetence."  Then I walk out, go home and order it on Amazon.  I'm now at the point where I'm buying large, bulky home improvement goods  (like 22 foot ladders!) from Amazon too.  Suck it Lowes and Home Depot.

-KD

(disclosure: no position in AMZN)

ps - my wife wants me to give a shoutout to SimpleHuman for their tremendous customer service.  We have a SimpleHuman trashcan. They are expensive, and they have parts which can break.  Two years ago, we broke the small plastic kickstand that keeps the lid open.  Mrs. Dynamite called the company and they sent her a new one, free of charge.   On New Years Eve, one of my inebriated friends tried to close the lid when the kickstand was propped open, which resulted in the lid bending in half.  Again, Mrs. Dynamite called the company, and they sent us out a new one free of charge.  Thanks, SimpleHuman, for your quality customer service resolutions.

Financial Crisis Inquiry Commission Hearing

The Banking Big Boys are testifying this morning in front of the FCIC.

"The Commission was established to "examine the causes, domestic and global, of the current financial and economic crisis in the United States." The 10 members of the bi-partisan Commission, prominent private citizens with significant experience in banking, market regulation, taxation, finance, economics, housing, and consumer protection, were appointed by Congress on July 15, 2009. The Chair, Phil Angelides, and Vice Chair, Bill Thomas, were selected jointly by the House and Senate Majority and Minority Leadership. The FCIC is charged with conducting a comprehensive examination of 22 specific and substantive areas of inquiry related to the financial crisis."

You can find the 22 specifics on the FCIC's website.

I'm watching this hearing, where MS's John Mack, JPM's Jamie Dimon, GS's Lloyd Blankfein, and BAC's Brian Moynihan are testifying, and one thing stands out in contrast to previous testimonies that have been held in front of Congressional panels:  The FCIC commissioners are more concerned with actually getting answers to their questions, which is refreshing, since usually we see the members of the House Financial Services Committee or the Senate Banking Committee firing off grandstanding questions in 3 minute time frames without even intending to get real answers.  The FCIC is made up of civilians, some of whom were previously elected officials.

Bess Levin at Dealbreaker has her usually unique "live blog" of the hearings running now, including a reference comparing Lloyd Blankfein's testimony to a classic Mike Tyson blowup.

One thing I definitely miss is Ken Lewis's big red flummoxed looking face. His replacement, Brian Moynihan, looks like a slightly turtled up version of Patrick Swayze (R.I.P).

-KD

Talking Your Book vs FrontRunning

So today's non-story that's been somehow turned into a story relates to a letter that Goldman Sachs sent to clients of its "Fundamental Strategies Group,"  which was published by Andrew Ross Sorkin on the NY Times' Dealbook.

"Dear client,

We may from time to time discuss with you Trading Ideas generated by our Fundamental Strategies Group. As part of our commitment to managing conflicts of interest appropriately, this message is to explain how the Fundamental Strategies Group interacts with other parts of our organisation and how that impacts on the Trading Ideas.

The Fundamental Strategies Group is a group of cross-capital structure desk analysts employed by our Securities Divisions to assist our traders. They develop Trading Ideas in conjunction with traders. We may trade, and may have existing positions, based on Trading Ideas before we have discussed those Trading Ideas with you. We may continue to act on Trading Ideas, and may trade out of any position, based on Trading Ideas, at any time after we have discussed them with you. We will also discuss Trading Ideas with other clients, both before and after we have discussed them with you.

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Clusterstock had it right initially, with a post titled "Goldman Sends A Really Boring Email to Investors,"  but as a commenter on that site points out, they quickly realized that they would get more clicks by changing the title to "Goldman to Clients:  We May Be Frontrunning you."  The URL for the entry shows the initial non-sensationalized title. 

Unfortunately, the folks at the influential ZeroHedge also chose to mis-inform their readers, not only with the headline "Goldman Admits to Frontrunning Clients Through Its Prop Desk," but by suggesting that the letter at hand is a smoking gun for the completely unrelated story they (ZH) published back in July, 2009 about GS's disclaimer for the REDI electronic execution platform.  Believe me - as soon as someone provides evidence that GS is taking client orders that it sees entered in the REDI platform and actually frontrunning them, I'll be up in arms, but today's letter is about an entirely different group at the firm, and has nothing to do with frontrunning. 

This letter is a good thing - it removes any ambiguity and lays it out quite clearly for trading clients that they will not be the only ones getting a given trading call, that they probably wont be the first or the last client to get the call, that they may not get another call if and when the firm's opinions change,  and that, most importantly, the firm may have positions in the relevant securities before the client gets the call.  This is essential for EVERY client to realize, and it applies to every firm - not just Goldman Sachs.

It's also important to realize that this letter refers to the "Fundamental Strategies Group."  This is a group making trading calls - and is distinct from their equity research department. I am fairly certain that GS is not saying that its equity research calls are given to its prop desk before being released to the public, but even if they are - so what - if you don't like the research, don't use it.  If this letter does apply to GS's equity research, all it should do is lessen the validity of the research.  If people still want to ramp stocks on GS's calls even though they know that GS is talking up its own positions ("talking their book," in the lingo), well, shame on the suckers.  If you don't like the trading calls, don't use them.  The point is, these trading calls are calls that GS thinks will make money, and you can be damn certain that they have either acted on them already or at least thought about acting on them, and that they've probably told better clients than you about the trades already.   Rather than rant and rave about it, all one has to do is not do business with this group at Goldman Sachs.  Of course, that's unlikely to happen, because people are greedy, and I'm guessing that these trading calls from GS are still money makers - be it simply because of the "follow GS" phenomenon, or because their insights are actually more insightful.

Put simply, who should be mad about this? No one.   Either you're one of the clients who is getting trading calls, which you KNOW may be biased (biased in the sense that GS wants you to buy stocks that they are already long), and they are working, in which case you're still happy; or you're one of the clients who is getting biased trading calls and they are not working - in which case you stop listening to GS's trading calls.  If the trading calls don't make you money - DON'T LISTEN TO THEM!   Then there is the entire group of people who are NOT getting GS's (biased) trading calls in a timely manner,   yet are still furious at the possibility that the trading calls are biased.  It's patently absurd, like saying "Damn you, GS, I can't believe you're giving out biased trading calls talking your own book, but you're not giving them to me!"

Now, frontrunning is something else entirely.  Frontrunning is when a client gives an order to GS, and GS, instead of executing the client's order, goes and executes the same order in its proprietary account first, usually with the intention of moving the price of the underlying asset and then trading it back to the client at a price advantageous to the firm.  It's outright illegal, and it's a big deal.  However, it's completely unrelated to what the letter released today is talking about.

Goldman Sachs' letter today acknowledges something that should be standard knowledge for anyone talking to any sell-side firm:  a firm may be, and probably is, talking its own book when it gives you a trading call.  These firms are in the business of making money on their trades - they put on a trade, and then try to convince others why it's a good idea.  It's not a smoking gun, and it's not frontrunning.   As a customer, you may actually be suspicious if a firm like GS is hyping a trade to you but they have no prop position - after all - if it's such a good trade, why don't they have it on themselves?  One of the favorite questions my boss used to ask sell side analysts and traders when we were on the buy side was "What do you own in your personal account?"  Those were usually the highest conviction ideas.

-KD

Bubble Datapoint of the Day

Felix Salmon points to a NY Times article on a brilliant (brilliantly stupid?) oversight by lenders to Foxwoods Casino's Pequot Nation.  See, the Pequot tribe is allowed to run Foxwoods because they are a sovereign nation - it's an Indian casino.  This means that if bondholders lend money to the Pequots, which they did, they have one major problem - they, the bondholders - can't really foreclose on the assets of the Pequots, because no one but the Pequots are allowed to run Foxwoods.  The collateral isn't really collateral for the lenders.

Felix sums it up:

"Essentially, the lenders can’t foreclose on the casino, because the current owners — the Pequots — are the only people who can own it. If it’s not an Indian casino, it’s can’t be a casino at all. That, in turn, gives the debtors enormous leverage over their creditors: they can pretty much name their terms, and the lenders have little choice but to agree to them."

and the Times article quotes:

“It’s kind of uncharted territory,” said Tom Foley, a lawyer who specializes in Indian gambling issues and is a past chairman of the National Indian Gaming Commission. “Many of the banks and bondholders should have been aware of these kind of risk factors, but when everything is good, nobody is really looking at the downsides.”

 What a magnificent example of the pure ignorance of risk we saw in the credit bubble of the last 10 years.

-KD

NFL Stat of the Week

In yesterday's 51-45 NFC Wildcard playoff victory over the Green Bay Packers, the Arizona Cardinals ran 57 offensive plays, racking up 531 total yards.  Peter King points out that quarterback Kurt Warner, who was 29/33 for 379 yards, 5 touchdowns and no interceptions, had more touchdown passes than he did incompletions!   Still, there's a more amazing stat lurking in the box score: Arizona was 3 for 5 on third down conversions.  They scored 51 points while only facing third down FIVE times!   Incredible.

-KD

Time Warner - AOL Revisted

The NY Times has a semi-interesting recap of the history behind the negotiations preceding the merger between Time Warner and AOL roughly 10 years ago.  It's worth reading, if only for this quote from Ted Turner, who lost $8Billion as a result of the deal:

"The Time Warner-AOL merger should pass into history like the Vietnam War and the Iraq and Afghanistan wars. It’s one of the biggest disasters that have occurred to our country."

-KD

The Joys of Home Ownership

The NY Times has an article today about, basically, how much home ownership sucks.  I think the key is that owning a home (like everything else in life?)  is much easier if you don't have to worry about money.  It's WICKED expensive, and that's why the current housing situation is all the more precarious - homeowners with little or no money down are massively leveraged.  Some of them are intentionally leveraged to provide maximum return, but I'd guess that most are leveraged because they simply couldn't afford to put more money down.  If you spend your last dollars on a 3% down payment, you're going to be hosed when you need minor repairs.  The Times article mentions a family whose swimming season was ended when "$500 worth of pool pump filters died."  They show a picture of the homeowner sitting beside his algae ridden pool. I have no idea how much this home owner makes, if he has savings, or what his mortgage looks like, but if $500 is going to be an impossible expense for you, then maybe you should reconsider buying a home with a pool.

I am learning on the fly just how expensive owning a home is, because I just bought one.  Never mind the expense of furnishing the home - things add up quickly:  property taxes (mine are nearly 3% of my home's value!), oil (in the winter we'll probably spend $600/month on oil for heat, even though I've adopted my Father's "put a sweater on!" technique and tried to keep the temperature below 68 degrees), minor repairs ($400 to have the angle of the granite block leading into my barn changed so that our Honda Civic could enter without bottoming out on the threshold).  Of course there's also insurance, snow plowing, landscaping, and now this morning: mice!  My wife declared war on mice while we lived in NYC, and spent many hours devising a bait which they couldn't deftly pluck from the traps.  She settled on dog food kibble super glued to the trap, after the mice proved adept at licking peanut butter clean.  We'll see if the NH country mice are as savvy as the NYC urban mice.  Early indications hint that the country mice are a bit sneaky - they actually opened the top of my cereal box rather than gnawing through the bottom - but they were a bit sloppy and left some clusters of cereal and mouse poop behind, betraying their theft.

The article also quotes a homeowner with an interesting philosophical take on do-it-yourself home repairs:

"“Why would I have any interest in fixing the bathroom sink?” he said. “I’m in my 30s. If fixing something made me happy, I would have learned how to do it.”"

I'm the opposite - I have spent my life so far generally bereft of practical real world skills which I would now like to acquire.  Since we've moved in, my wife and I (she's the brains of the operation) have changed 3 electronic thermostats, and yesterday we replaced an outdoor light.  I enjoyed wiring the new light myself, mostly because we didn't get electrocuted, we didn't have to pay anyone, and it was easy:  we didn't have to install the box that the light goes in - our new light fit on the old box that was there.  In the coming days we'll change two more side mounted lights, and three more challenging hanging pendant lights - but we definitely like the sense of accomplishment that comes with these repairs.   I blogged several weeks ago about how I managed to jump start my lawn tractor.  It probably seems stupid to some, but for a city boy, it was an accomplishment!

After our bathroom toilet became clogged (not with doo doo - the bowl was clear, it just wouldn't flush so much as a piece of toilet paper) my wife shut off the water,  removed the entire toilet from the base, drained the water from the tank, and, at the advice of her father,  snaked the "s" curve with a piece of co-axial cable (my idea!) with a sock knotted around the end of it.   I later heard her whispering to her dad about something, and I busted into the bathroom to find her holding the obstruction:  a sponge that she'd left in the toilet while cleaning!  She was scheming with her dad about how to blame me for this one - since she assumed it was one of my massive dumps that had done the deed in the first place.  She settled on blaming me for "shitting on the sponge,"  but the point is that her ingenuity resulted in an educational learning experience in home plumbing with a simple solution caused by a simple problem - rather than a $300 call to a plumber. 

We are dealing with one total clusterfuck right now - getting a chimney lined.  Our house is an antique home with original chimneys, and every mason who comes to the house to look at it tells me something different. Unfortunately, this is not the kind of thing one can do himself, so I'm stuck continuing to evaluate different proposals and decide who I can trust with this major job.

Anyway - I've learned one thing quickly in the few months in our new home - if you're buying a home for an investment, good luck to you.  I happen to have very little doubt that I overpaid for my home, and that I wouldn't be able to sell it for my purchase price any time in the near future - but that doesn't matter, because we bought it to live in - not to make money off of.  Hopefully, we'll be here for a long time, and in the end the cost benefit analysis of buying and selling a home with its embedded costs of ownership will be favorable to the costs of renting.  If not, we'll have incurred some sort of net cost over the long run, in exchange for owning our own home that we can make decisions about - rather than living under a landlord's roof and being subjected to his whims.  In any case, we're not counting on making money our home - that would be gravy if we did.

-KD

Unemployment Data

The BLS released its December employment report today. 

"In December, both the number of unemployed persons, at 15.3 million, and the unemployment rate, at 10.0 percent, were unchanged."

I've previously discussed why the unemployment rate itself is kinda silly, but the "number of unemployed persons" is an even more irrelevant number - here's why.  Looking at Table A from the BLS release, you can see that the number of "unemployed" people actually decreased by 73k.  Of course, the survey only counts people as unemployed it they remain a part of the labor force, when they are still looking for a job.  If you are unemployed but you give up your job search, VOILA - the number of unemployed people goes down!  Problem solved !! ????

|                 |                          |         
                         |    Quarterly    |                          |         
                         |     averages    |       Monthly data       |  Nov.-  
        Category         |_________________|__________________________|  Dec.   
                         |        |        |        |        |        | change  
                         |  III   |   IV   |  Oct.  |  Nov.  |  Dec.  |         
                         |  2009  |  2009  |  2009  |  2009  |  2009  |         
_________________________|________|________|________|________|________|________ 
                         |                                                      
     HOUSEHOLD DATA      |                 Labor force status                   
                         |_____________________________________________________ 
                         |        |        |        |        |        |         
Civilian labor force ....| 154,235| 153,544| 153,854| 153,720| 153,059|    -661 
  Employment ............| 139,339| 138,138| 138,242| 138,381| 137,792|    -589 
  Unemployment ..........|  14,895|  15,406|  15,612|  15,340|  15,267|     -73 
Not in labor force ......|  81,858|  83,195|  82,696|  83,022|  83,865|     843 
                         |________|________|________|________|________|________ 

So, we can see in Table A that the size of the Civilian Labor Force decreased by 661,000, and that the number of employed persons decreased by 589,000.  I would propose to you that it's probably a much better indication of the health of the economy to look at the trend in employment, which is an actual number, instead of the trend in "unemployment,"  which is a bastardized number.

We can get a further look at the real trend by looking at the employment/population ratio, as well as the labor force participation rate.  Unfortunately, both continue to trend lower (I clipped only the Not Seasonally Adjusted data in the interest of space)

Not Seasonally adjusted                   
                                                                                                                                        
        Employment status, sex, and age                                                                                                 
                                                                                                                                        
                                                  Dec.      Nov.      Dec.      
                                                  2008      2009      2009       
                                                                                                                                        
                     TOTAL                                                                                                              
                                                                                                                                        
 Civilian noninstitutional population.........  235,035   236,743   236,924    
   Civilian labor force.......................  154,349   153,539   152,693    
         Participation rate...................     65.7      64.9      64.4       
     Employed.................................  143,350   139,132   137,953    
         Employment-population ratio..........     61.0      58.8      58.2       
     Unemployed...............................   10,999    14,407    14,740     
         Unemployment rate....................      7.1       9.4       9.7        
   Not in labor force.........................   80,686    83,204    84,231     
     Persons who currently want a job.........    5,180     5,618     5,939      

In plain English, a smaller percentage of the population is employed. 

update: See Calculated Risk for pretty graphs on the subject. 

-KD 

Bizarro Press Release From the Federal Reserve

You'll be reading a lot about this one tomorrow.  A list of regulators, including "the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the Federal Financial Institutions Examination Council (FFIEC) State Liaison Committee (collectively, the regulators)" put out a press release today  urging banks to stress test their interest rate exposure.

"The financial regulators are issuing this advisory to remind institutions of supervisory expectations regarding sound practices for managing interest rate risk (IRR). In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates."

There are 11 pages in total, which I find pretty bizarre.  If the Regulators need to lecture the big boys on managing interest rate risk, don't we have a huge problem?  Isn't the job of the banks to know how to manage this risk?  Is the whole press release an effort by the Regulators to "bluff" the market, in the sense that they think they can manage interest rates by threatening to raise them or insinuating that there might be interest rate hikes, rather than by actually raising rates?

In any case, I found the conclusions on page 9 to be the most interesting, among them: "Reduce levels of IRR exposure."  Really?  Great idea!  But... ummm.. how exactly?  By buying interest rate derivatives to shift the exposure to someone else?  I feel like I just discussed that - oh wait - I DID!  GS "hedging" its AIG exposure buy buying protection on AIG from someone else.  Can the system really reduce its interest rate exposure, or just move it around from one bank to another, or from the banks to the Fed!?!  Isn't the whole problem with the system right now that the Fed is increasing interest rate exposure massively by providing near zero cost short term funding for the banks, and that once this funding goes away, the banks will have to actually pay for funds?  Ah hah - maybe the Fed is telling banks to lock up some long term funding by selling corporate debt at relatively low fixed rates - to ween themselves off of the Fed's Free Money Teat..

The final line of the press release wins the "no shit sherlock" award for today:

"IRR management should be an integral component of an institution’s risk management infrastructure."

Totally bizarre...  Really Regulators?  Really?  Interest rate risk management is important for banks?  You don't say!   I guess we'll watch and wait on this one...

-KD

The Beginning of the End for Geithner?

When the top story on Bloomberg is "Geithner's New York Fed Told AIG to Limit Swaps Disclosure," it does not bode well for the Treasury Secretary's future.

"Jan. 7 (Bloomberg) -- The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee."

The fact that the banks were paid out 100c on the dollar on the CDS trades is not news - it's been a source of outrage for a few months now.  There is actually logic behind it, although I'm certainly not defending the decision.  The basic thought process was that GS, for example, had hedged exposure by buying credit default swaps from AIG.  Of course, this leaves GS with exposure to AIG in case AIG runs into trouble, so they bought CDS on AIG from a third counterparty (they insured against AIG's collapse).  Thus, if AIG defaults on its obligations, GS, in theory, still gets the same amount of money, because  if AIG can't pay GS the money it "owes" them, GS collects on the AIG CDS it bought from someone else.  (This may sound complicated, but it's not.  Let's just say that GS bought insurance on some assets from AIG, and then bought insurance on AIG from someone else, in case AIG couldn't pay of on that insurance.  Sounds like another Ponzi scheme right?)

Obviously, this means that the "someone else" will have huge liabilities and then be in trouble, and perhaps the entire daisy chain of  Firm A writing  protection on Firm B who wrote protection on Firm C who in turn wrote protection on Firm A would have imploded.  That's why the decision was made to prevent such an implosion, by just giving the AIG CDS customers payments they otherwise "would have collected anyway."  I put that last part in quotes because no one knows if they would have been able to collect on such a recursive chain of CDS obligations if everything blew up.  Although GS claims to have been hedged (in theory) against troubles at AIG, it's almost impossible to believe that all the banks were - after all, we know that AIG's CDS obligations (promises made by AIG to provide insurance) could not be paid off - and transferring the end risk around to other banks doesn't eliminate it.

Today's story, however, hints that Geithner knew that this decision would, at the minimum, generate some furor.  The attempt to cover up the disclosures will result in another tidal wave of (deserved) scrutiny on Geithner and the Treasury/Fed's handling of the crisis.

Bones wrote me a George Costanza quote perfect for the story:

"George Costanza: [pause] Was that wrong? Should I not have done that? I tell you, I gotta plead ignorance on this thing, because if anyone had said anything to me at all when I first started here that that sort of thing is frowned upon... you know, cause I've worked in a lot of offices, and I tell you, people do that all the time."

-KD

What I'm Reading This Week

Bill Gross's monthly outlook:

"Explaining the current state of global fiscal affairs is often confusing – it’s much like Robert Palmer’s 1980s classic song where he laments that “She’s so fine, there’s no telling where the money went!” Where government spending has gone is not always clear, but one thing is certain: public debt is soaring and most of it has come from G7 countries intent on stimulating their respective economies.

John Hussman's latest update:

"What will be a game-changer is if Congress fails to recognize that the Treasury's action is at minimum an evasion, and possibly a usurpation of powers that are enumerated to Congress alone. If Congress does not forcefully defend that prerogative – even if it ultimately ends up voting for exactly the same policy – it will have relinquished the power of fiscal policymaking into the hands of unelected bureaucrats. This is real public money that is being spent to make bad mortgage loans whole. It may not appear to be costly at present, since risk-averse individuals conscious of credit risks, and foreign countries running massive trade surpluses, are still willing to accumulate the Treasury securities being issued, with no apparent impact. But ultimately, those securities will either stand as claims on our future national production, or they will be inflated away."

NY Times: "Mortgage Modifications Are Seen as Adding to Housing Woes"

"“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”

Barry Ritholtz: "Bernanke Still Does Not Understand Credit Crisis"

"What Bernanake seems to be overlooking in his exoneration of ultra-low rates was the impact they had on the world’s Bond managers — especially pension funds, large trusts and foundations. Subsequently, there was an enormous cascading effect of 1% Fed Funds rate on the demand for higher yielding instruments, like securitized mortgages"

and MISH: "Ben Bernanke Looks In Mirror, Sees Barney Frank"

"Fed chairman Ben Bernanke is back at it again, pointing the crisis finger at everyone but himself. To be sure there are plenty of congressional clowns deserving of a Babe Ruth style "big point", but the biggest point belongs straight at himself."

Michael Panzner:

"Investors who see much better returns ahead are making the same mistake as those who expect a V-shaped recovery...They fail to grasp that the crisis-led downturn was not a cyclical event, but the first stage of a secular recalibration."

State budgets continue to look like a ticking time bomb:

MISH:

"Politicians are unwilling to stand up to unions and demand reform. Instead they put off fixing the problem year in and year out selling long-term bonds to finance short-term needs...The system is flat broke and the state of Illinois is bankrupt. Meanwhile greedy unions refuse to even compromise. At this point compromise is not needed. A taxpayer revolt and all out war on unions, graft, pension promises, and corrupt politicians is."

Panzner:

"Washington has been spending money like a drunken sailor to "rescue" the economy, but its efforts have been at least partly offset by the fiscal constraints other levels of government have to contend with. Hence, while federal authorities can (seemingly) borrow as much as they like to fund the difference between revenues and outlays, municipalities don't have that luxury. They must maintain balanced budgets (or the fiction of such), which means they've had to sharply scale back spending as sales, property, and income tax receipts have plunged (and social safety net costs have surged). That's one reason, among many, why all the pump-priming is not producing the gusher of activity that policymakers and economists were expecting."

MISH again: "Showdown in Cleveland: Unions Refuse Nominal Pay Cuts"

Ritholtz: "Banking Sector Remains (Literally) Unchanged"

“The prospects for a robust prudently guided financial sector have been substantially clouded by the fact that both the corporate governance structure and the executive leadership of the financial sector remain largely unchanged—92% of the management and directors of the top 17 recipients of TARP funds are still in office.”

David Rosenberg via Clusterstock: Government handouts now account for nearly 1/5th of personal income.

I said from the moment it was announced that the PPIP was a scam. (see: Kid Dynamite: "The PPIP is a SCAM").  Karl Denninger reminds us that he said so too - and that, sadly, we were right.

-KD

Mainstream Media Catches Up

David Leonhardt in the NY Times has an article today asking the question the financial blogosphere has been repeating for many many months: "If the Fed missed this bubble, will it see a new one?"

"The fact that Mr. Bernanke and other regulators still have not explained why they failed to recognize the last bubble is the weakest link in the Fed’s push for more power. It raises the question: Why should Congress, or anyone else, have faith that future Fed officials will recognize the next bubble?"

Just this week, Mr. Bernanke went to the annual meeting of academic economists in Atlanta to offer his own history of Fed policy during the bubble. Most of his speech, though, was a spirited defense of the Fed’s interest rate policy, complete with slides and formulas, like (pt - pt*) > 0. Only in the last few minutes did he discuss lax regulation. The solution, he said, was “better and smarter” regulation. He never acknowledged that the Fed simply missed the bubble."

Although the financial blogs I read daily have pounded this point mercilessly for the better part of a year,  it's still good to see it voiced in the mainstream press.

-KD

Let's Talk About Football

For those unaware, the Indianapolis Colts, coming into their game two weeks ago against the NY Jets, were 14-0, and looked like they could easily finish the season undefeated and have a legitimate shot to achieve  football immortality by running the table and putting up a perfect 19-0 record.  However, the Colts' goal is not an undefeated season, it's a Super Bowl Title, and having already locked up home field advantage throughout the playoffs, they had nothing to gain, so in an effort to ensure that none of their essential players suffered drastic injuries, Indy pulled their starters in the second half of the Jets game while holding a small lead, and promptly got blown out.

Now, there are arguments to be made on both sides here:  go for the everlasting glory, vs play  it safe and prepare for the playoffs.  I'm torn, because I think that the physical abuse that professional football players withstand is simply remarkable, and I'm shocked that any lineman or running back can ever last a full season when every play involves a gang of very large men falling into your legs or trying to tackle him.  I'm also aware of the legacy of sports records, especially amazing achievements, which a 19-0 season would certainly qualify as, and tend to want to go for it.

One thing is for sure: anyone yelling 4 letter words at  Indy Coach Jim Caldwell for his decision to pull the starters two weeks ago lost a whole lot of their argument's heft when the Patriots' offensive weapon, Wes Welker, went down with what appears to be a torn ACL and MCL in the first quarter of the Pats' game against the Texans last weekend. Welker, untouched, cut with the ball and crumpled in a heap.  It was quickly obvious that he was in serious trouble, and the first thing I did was call my dad and say "Well, I guess Jim Caldwell can tell his critics to "suck it!"   The Patriot's game was not totally meaningless, although they had little to play for - but if something like that had happened to Indy's Reggie Wayne, we can only imagine the crap-storm of second guessing that would have rained down on Caldwell's head.

ESPN's Bill Simmons had a good solution:

"Take it from a Patriots fan: Going 16-0 is overrated. You want to win the Super Bowl. That's all that matters. So it didn't bother me that Indianapolis rested its starters last week against the Jets, even if it nearly caused a riot at Lucas Oil Stadium. What bothered me was Jim Caldwell's lack of imagination.

Now, it's unclear whether Jim Caldwell is even alive. I am assuming he is because I've seen him blink at least five times this season. And because he's alive, that means he made one of the most indefensible coaching blunders of all time: playing his starters for one half, but doing it in the FIRST half. How does that make sense?

Let's think about this logically. Say Caldwell's goal was to keep his starters healthy while also getting them some work. Playing them for one half would accomplish this goal, as we know. So two days before the game, Caldwell makes the following announcement: "I'm playing our backups in the first half. If they can keep it close, then I'll play my starters in the second half."

Now the fans know what to expect, and so do the players. Even better, this happens: The fans go into that game thinking, "We want to stay undefeated, we need to affect this game and help our backups!" And the starters are on the sideline urging them along. Come on, fellas! Keep it close for us! A "Hoosiers"-like atmosphere is spawned. Everyone rallies behind the ragtag underdogs, who end up playing over the heads and keeping it close. At the start of the third quarter, Peyton Manning and the starters jog out with the stadium going bonkers. Would the Jets have had a chance? No way."

CNNSI's Peter King also had some on point comments regarding the fact that the Colts trotted out their starters again this week for some personal milestone statistical records:

"I think if records don't matter much to the Colts, why did Indianapolis play Reggie Wayne and Dallas Clark only long enough to get to 100 catches? It's fine that they did; I want a player to want to leave his footprints on NFL history. But to say Reggie Wayne or Dallas Clark catching 100 balls, or to say the record of consecutive regular-season wins by a team, is more significant to a franchise than becoming the first team ever to go 19-0 (and only the second team in modern pro football history to go undefeated for an entire season) is just flat wrong. And that's what the Colts have said.

This is likely my last word on the Colts' decision to bypass the chance to go for the unbeaten season, but I couldn't let president Bill Polian's comments to Rich Eisen on NFL Network the other night pass without a challenge. Polian said the perfect season "we did not feel was a historic achievement.'' But, Polian said, winning more games than any team in a decade, and winning the most consecutive regular-season games are "historical milestones that were worth going out there and risking everything for.''

I categorically disagree those milestone are more significant than 19-0. In my mind, they're not even close. Every football fan knows there's been only one 17-0 team, Miami in 1972, and never a team better than that. No football fan can tell you (with certainty anyway), nor does any football fan care, which team won the most games in the eighties, or nineties. The consecutive regular-season wins are certainly nice, but it's not imprinted on the brain stem of any football fan. Now, 19-0 ... that's immortality right there. And if you don't want to go for it because you don't want to risk injury, please say that. But to say it has no historical significance -- as Jimmy Johnson would say, "Puh-leeeeze.''

I was shocked to see Indy starting its starters again this week (for a few drives) given that it was snowing in Buffalo, which seemed to be guaranteed to carry a higher risk of injury than a dry field.  King's comments nicely summarize the inconsistency in Indy's reasoning.

-KD

KD's Year In Review: Part II: Trade of the Year

In the movie "Speed,"  Keanu Reeves attempted to keep the speed of a bus above 50 mph to avoid the triggering of a bomb placed by the villainous Dennis Hopper.  Our economic policy response increasingly resembles this sort of runaway freight train "can't stop" philosophy, which is why I've frequently used the term "Ponzi" to describe it.  Recall the Kevin Duffy quote I used in my last post: "Each crisis leads to an even greater crisis. The solution is always greater doses of intervention. So the system becomes increasingly unstable."

The greatest trade of the year was the one that best personified all the Ponzi values we embrace:  the Fed's Temporary Liquidity Guarantee Program (TLGP).   The official description of the program, from the FDIC's website:

"The FDIC has created this program to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount."

In layman's terms, the TLGP utilized one insolvent institution (the FDIC) to guarantee the debt issued by a bunch of other insolvent institutions (the big banks and pseudo banks).  Jackpot!  Marty Up!  The FDIC managed to collect over $10B in fees, as firms took advantage of the stamp of approval to issue over three hundred BILLION of debt under the program.  The FDIC could never actually make good on this guarantee, but that doesn't matter, see, because the act of providing the guarantee "solves" the liquidity problem, and allows firms to re-fund their debt needs so that default won't be an issue.  Maybe... For two or three years at least, until the firms need to roll this debt, at which point the plan is that everything will be "better," and that investors will readily buy non-guaranteed debt. 

I've referenced a quote from Tommy Boy about taking a crap in a box and marking it guaranteed several times on this blog, but this seems like the perfect time for the full quote:

Tommy: Chicken wings! Let's think about this for a sec, Ted, why would somebody put a guarantee on a box? Hmmm, very interesting.

Ted Nelson: Go on, I'm listening.

Tommy: Here's the way I see it, Ted. Guy puts a fancy guarantee on a box 'cause he wants you to feel all warm and toasty inside.

Ted Nelson: Yeah, makes a man feel good.

Tommy: 'Course it does. Why shouldn't it? Ya figure you put that little box under your pillow at night, the Guarantee Fairy might come by and leave a quarter, am I right, Ted?

Ted Nelson: What's your point?

Tommy: The point is, how do you know the fairy isn't a crazy glue sniffer? "Build model airplanes!" says the little fairy, well, we're not buying it. He sneaks into your house once, that's all it takes. The next thing you know, there's money missing off your dresser and your daughter's knocked up, I've seen it a hundred times.

Ted Nelson: But why do they put a guarantee on the box?

Tommy: Because they know all they sold ya was a guaranteed piece of shit. That's all it is, isn't it? Hey, if you want me to take a dump in a box and mark it guaranteed, I will. I've got spare time. But for now, for your customer's sake, for your daughter's sake, ya might wanna think about buying a quality product from me.

Ted Nelson: Okay, I'll buy from you.

Tommy: Well, that's... What?

Here's to 2010, and seeing what exactly is inside that box.  It may take a few years, but the truth is inevitable.

-KD