In an article on an incipient bank run in Greece, Zero Hedge wonders, "What is perhaps more shocking is that anyone still had money in Greek banks at all..." I agree. With talk for weeks of capital controls and the example of raids on depositor funds (even supposedly insured deposits) in Cyprus, my money would have been long gone. Even in the US in 2008-2010, I took our corporate funds out of the main Bank of America account and spread them all over. It was a pain in the butt to manage but even facing much smaller risks than in Greece, I thought it was worth it.
Posts tagged ‘Zero Hedge’
Just when we thought the absurdity that marks every single day of Obama's reign could not possibly be surpassed, we learned that 4 hours (3 hours and 47 minutes to be precise) after the US president vowed to sign a new law banning bulk data collection by the NSA (named, for purely grotesque reasons, the "USA Freedom Act"), the Obama administration asked the secret Fisa surveillance court to ignore a federal court that found bulk surveillance illegal and to once again grant the National Security Agency the power to collect the phone records of millions of Americans for six months.
Or, as the Guardian's Spencer Ackerman, who spotted this glaring page out of Josef Stalin's playbook, summarized it:
June 2, 6:03pm: Obama says he'll sign law banning bulk collection. June 2 9:50pm: DOJ asks secret court for 180 more days of bulk collection
— Spencer Ackerman (@attackerman) June 8, 2015
According to Ackerman, this latest travesty by the administration "suggests that the administration may not necessarily comply with any potential court order demanding that the collection stop."
Bloomberg (via Zero Hedge) had this chart on Disney theme park entrance prices:
A few random thoughts:
- This highlights how hard it is to do inflation statistics correctly. For example, the ticket being sold in 1971 is completely different from the one being sold in 2015. The 2015 ticket gets one access without additional charge to all the attractions. The 1971 ticket required purchase of additional ride tickets (the famous, among Disney fans, A-E tickets). So this is not an apples to apples comparison. Further, Disney has huge discounts for multi-day tickets. The first day may cost $105, but adding a fourth day to a three day ticket costs just a trivial few bucks. Local residents who come often for a single day get special rates as well. So the inflation rate here grossly overestimates that actual increase in per person, per trip total spending for access to park attractions
- This is a great case in pricing strategy. Around 1980, the Bass family bought into a large ownership percentage of Disney. The story I am about to tell is often credited to their influence, but I am not positive. Never-the-less, someone had a big "aha!" moment at Disney. They realized that families were taking trips just to visit DisneyWorld. These trips cost hundreds, even thousands of dollars. The families were thus paying hundreds of dollars per person to enjoy Disney, of which Disney was reaping... $9.50 a day. They had a stupendously valuable product (as far as consumers were concerned) but everyone else in the supply chain was grabbing most of the value they created. So Disney raised prices, on the theory that if a family were paying over a thousand dollars to get and stay there, they would not object to paying an extra $50 at the gate. And they were right.
Don't have an opinion on what this means, but it is interesting. Via Zero Hedge
A few quick thoughts:
- I have a constant frustration that we never see these comparisons just on a straight purchasing power parity absolute dollar number. Numbers related to income distribution are always indexed to a number that is really high in the US, thus making our ratio low. I seriously doubt Turkey has a higher minimum wage in the US, it just has a much lower median wage. Does that really make things better there? I have this problem all the time with poverty numbers. The one thing I would like to see is, on a PPP basis, a comparison of post-government-transfer income of the US bottom decile or quintile vs. other countries. Sure, we are more unequal. But are our poor better or worse off? The fact that no one on the Left ever shows this number makes me suspect that the US doesn't look bad on it. This chart, from a Leftish group, implies our income distribution is due to the rich being richer, not the poor being poorer.
- Drum or whoever is his source for the chart conveniently leaves off countries like Germany, where the minimum wage is zero. Sort of seems like data cherry-picking to me (though to be fair Germany deals with the issue through a sort of forced unionization law that kind of achieves the same end, but never-the-less their minimum wage is zero).
- All these European countries may have a higher minimum wage, but they also have something else that is higher: teen unemployment (and I would guess low-skill unemployment).
Admittedly this only has a subset of countries, but I borrowed it as-is from Zero Hedge. By the way, by some bizarre coincidence, the one country -- Germany -- we previously mentioned has no minimum wage is the by far the lowest line on this chart.
Via Zero Hedge, Time's covers around the world this week. Spot the outlier
I am actually sympathetic to the case that the NCAA should allow student athletes to make money as athletes (just as student business majors are allowed to make money in business and student musicians are allowed to make money in music).
But seriously? Probably the highest profile, most contentious international diplomatic crisis of the last five years and Time chose not to put it on the cover this week? There are only two explanations, and neither are good. 1) Time felt that a story about American mis-steps might hurt sales. or 2) Time is protecting their guy in the White House. The athlete cover story does not have an expiration date, so is the kind of story a magazine holds for a slow week. It is hard to describe last week as a "slow week."
The Obama administration on Thursday acknowledged that it is collecting a massive amount of telephone records from at least one carrier, reopening the debate over privacy even as it defended the practice as necessary to protect Americans against attack.
The admission comes after the Guardian newspaper published a secret court order related to the records of millions of Verizon Communications customers on its website on Wednesday.
A senior administration official said the court order pertains only to data such as a telephone number or the length of a call, and not the subscribers' identities or the content of the telephone calls.
Such information is "a critical tool in protecting the nation from terrorist threats to the United States," the official said, speaking on the condition of not being named.
"It allows counter terrorism personnel to discover whether known or suspected terrorists have been in contact with other persons who may be engaged in terrorist activities, particularly people located inside the United States," the official added.
The revelation raises fresh concerns about President Barack Obama's handling of privacy and free speech issues. His administration is already under fire for searching Associated Press journalists' calling records and the emails of a Fox television reporter as part of its inquiries into leaked government information.
A few thoughts:
- I have no doubt that this makes the job of tracking terrorists easier. So would the ability to break down any door anywhere and do random house searches without a warrant. The issue is not effectiveness, but the cost in terms of lost liberty and the potential for abuse. The IRS scandal should remind us how easy it is to use government power to harass political enemies and out-groups
- The FISA court is a bad joke, as it seems willing to issue "all information on all people" warrants. I think there is little doubt that similar data gathering is going on at all the other carriers.
- Luckily, Susan Rice is now the National Security Adviser. I am sure with her proven history of not just being a political puppet but really digging in to challenge White House talking points that she will quickly get to the bottom of this.
Zero Hedge pointed out this ad for California state bonds:
In light of the recent Stockton bankruptcy, this should carry a warning label: "California reserves the right to repudiate up to 100% of these bonds whenever payment of the interest or principle interferes with paying state employees the maximum possible pension benefits. These bonds are subordinated to any promises made at any time by any politician to state employees unions, past, present, or future."
...uh, just because
Update: Whenever I argue with people about this, I find out that we share different assumptions. Those who seem to support the bailouts assume that given some breathing space, the reckoning in Europe can be avoided. I assumed the reckoning is unavoidable, and will come either soon or at best in the next cyclical downturn. And it will be far worse in, say, 2015 than it would have been in 2010. Every time we delay the reckoning, we make it far worse.
And then there are politicians. I don't think they honestly know or care if the reckoning is unavoidable. They only care if it does not happen this minute. For politicians, the discount rate on pain is infinite. Future pain is thus always better than current pain.
The $604 million issue from consumer lender Springleaf Financial, the former American General Finance, will bundle together about $662 million of loans secured by assets such as cars, boats, furniture and jewelry into ABS, according to a term sheet. Some loans have no collateral.
Personal loans haven't been a part of the mainstream ABS market since securitizations from Conseco Finance Corp. in the late 1990s, according to Michael Dean, co-head of Fitch Ratings' ABS group. That market dried up as the recession hit and, under the weight of bad subprime loans, Conseco filed for bankruptcy in 2002.
Springleaf's issue comes as prices on traditional issues backed by auto loans, credit cards and student loans have soared as investors pile into debt with extra yield over Treasurys. As those yields fall, ABS investors have been giving unusual assets that were previously shunned a second look....
The 190,627 loans in the Springleaf deal have an average FICO credit score of 602, in line with many subprime auto ABS. But the average coupon of 25% on Springleaf's personal loans is above that on even "deep subprime" auto loans, probably because there is no collateral for 10% of the issue, an analyst said.
Bonus points for AIG's involvement in this offering (btw, now that AIG has repaid obligations to taxpayer, expect a corporate name change in 3..2..1..)
We had a credit bubble in part where the market likely under-priced certain risks. Bubble bursts and risks take their toll. Economy floundered. The Fed reduced interest rates to zero. Frustrated with low interest rates, investors have begun seeking out risk, likely driving down the price of risky investment. Repeat.
It is interesting to me that the government has chosen to subsidize the least desirable actions
via Zero Hedge
Or so says California's Gavin Newsom, in a great Reuters quote found by Zero Hedge:
California Lieutenant Governor Gavin Newsom says he wants the U.S. Department of Justice to investigate "threats" against local communities considering using eminent domain to seize and restructure poorly performing mortgages to benefit cash-strapped homeowners.
Newsom sent a letter on Monday to U.S. Attorney General Eric Holder asking federal prosecutors to investigate any attempts by Wall Street investors and government agencies to "boycott" California communities that are considering such moves.
"I am most disturbed by threats leveled by the mortgage industry and some in the federal government who have coercively urged local governments to reject consideration" of eminent domain," he wrote in a letter, a copy of which was provided to Reuters.
Newsom, a Democrat who was previously mayor of San Francisco, warned the influential Securities Industry and Financial Markets Association in July to "cease making threats to the local officials of San Bernardino County" over the proposed plan to seize underwater mortgages from private investors.
Some towns in San Bernardino County, which is located east of Los Angeles, have set up a joint authority that is looking into the idea of using eminent domain to forcibly purchase distressed mortgages. Rather than evict homeowners through foreclosure, the public-private entity would offer residents new mortgages with reduced debts.
Newsom said in the letter on Monday that while he is not endorsing the use of eminent domain at this time, he wants communities in California to be able to "explore every option" for solving their mortgage burdens "without fear of illegal reprisal by the mortgage industry or federal government agencies."
This quote is so rich with irony that it is just delicious. Certainly ceasing to do business in a community that threatens to steal all your property strikes me as a perfectly reasonable, sane response. Calling such a response an actionable threat requiring Federal investigation just demonstrates how little respect California officials, in particular, have for private activity and individual rights.
The third paragraph might be worth an essay all by itself, classifying a voluntary private boycott as illegally coercive while treating use of eminent domain, intended for things like road building, to seize private mortgages as so sensible that it should be sheltered from any public criticism.
So far, I have mainly been concerned about inflationary risks from quantitative easing, which is effectively a fancy term for substituting printed money for government debt (I know there are folks out there that swear up and down that QE does not involve printing (electronically of course) money, but it simply has to. Operation Twist, the more recent Fed action, is different, and does not involve printing money but essentially involves the Fed taking on longer-term debt in exchange for putting more shorter term debt on the market.
In 2008, just before the first of two rounds of quantitative easing, the Federal Reserve had $41bn in capital and roughly $872bn in liabilities, resulting in a debt to equity ratio of roughly 21-to-one. The Federal Reserve’s portfolio had $480bn in Treasury securities with an asset duration of about 2.5 years. Therefore, a 100 basis point increase in interest rates would have caused the value of its portfolio to fall by 2.5 per cent, or $12bn. A loss of that magnitude would have been severe but not devastating.
By 2011, the Fed’s portfolio consisted of more than $2.6tn in Treasury and agency securities, mortgage bonds and other fixed income assets, and its debt-to-equity ratio had dramatically increased to 51-to-one. Under Operation Twist, the Fed swapped its short-term securities holdings for longer-term ones, thereby extending the duration of its portfolio to more than eight years. Now, a 100 basis point increase in interest rates would cause the market value of the Federal Reserve’s assets to fall by about 8 per cent, or $200bn, leaving it insolvent, with a capital deficit of about $150bn. Hypothetically, a 5 per cent rise in interest rates could cause a trillion dollar decline in the value of the Federal Reserve’s assets.
As the economy continues to expand, the Federal Reserve will eventually seek to normalise monetary policy, resulting in higher interest rates. In this scenario, the central bank could find that the market value of its portfolio has declined to the point where it no longer has enough sellable assets to adequately reduce the money supply and maintain the purchasing power of the dollar. Given US dependence on foreign capital flows, if the stability of the dollar is drawn into question, the ability of the US to finance its deficits may falter. The Federal Reserve could then find itself the buyer of last resort for Treasury securities. In doing so, the government would become hostage to its printing press, and a currency crisis or runaway inflation could take hold.
George Dorgan observes, on the pages of Zero Hedge, that European countries are taking even large balance sheet risks. The most surprising is the Swiss.
I found this chart interesting, but am not entirely sure what conclusion to draw (via Zero Hedge)
In 2009, I think most everyone understood that the economy would have to reduce debt and that this process would be painful in terms of creating years of slow growth. The good news from this chart is that the financial and consumer deleveraging has indeed been occurring, so at least our pain is not for naught. The debate that will likely go on for years after this recession is whether the rapidly increasing Federal debt helped or hurt: did it help offset the cost of the private deleveraging, or did it drag out the recession by keeping total debt levels from dropping? Is it private debt that matters, or total debt? Of course this makes the analysis more complicated.
Why should we worry about 5c or 10c on a gallon of fuel down the local gas station when the US Navy (in all her glory) is willing to pay a staggering $26-a-gallon for 'green' synthetic biofuel(made we assume from the very same unicorn tears and leprechaun nipples that funded the ESM). AsReuters reports, the 'Great Green Fleet' will be the first carrier strike group powered largely by alternative fuels; as the Pentagon hopes it can prove the Navy looks just as impressive burning fuel squeezed from seeds, algae, and chicken fat (we did not make this up). The story gets better as it appears back in 2009, the Navy paid Solazyme (whose strategic advisors included TJ Gaulthier who served on Obama's White House Transition team) $8.5mm for 20,055 gallons on algae-based biofuel - a snip at just $424-a-gallon.
In its defense, the Navy Secretary said, ""Of course it costs more. It's a new technology. If we didn't pay a little bit more for new technologies, we'd still be using typewriters instead of computers." Of course, the switch from typewriters to computers proceeded without government mandates (or taxes, as they are called now) and in fact was led by the private sector -- the government trailed in this transition. Further, people paid the extra money for a computer because they found real value in it (document storage, easy editing, font flexibility). What real value is the Navy getting for the extra $22 a gallon? How much better will this task force perform? The answer, of course, is zero.
Breaking news via Zero Hedge
EU LAWMAKERS APPROVE AMENDMENT TO END USE OF CREDIT RATINGS
It is always amazing to me that so many people view the government as a reasonable fix for perceived failures in private accountability systems. Government officials are the worst about avoiding accountability.
Update: The point that Basel II/III has big discrete jumps in capital requirements for small shifts in bond ratings is a reasonable observations. Smoothing this out makes sense, but there is more than this that needs to be fixed in the Basel requirements (particularly the now largely dated idea that any assets are "risk-free"), which played a huge but largely unsung role in inflating the demand in the last decade for AAA rated mortgage bonds.
I don't know how one would even think to graph these two variables, but it is an interesting picture of the life cycle of development, where infrastructure improvements are initially an important part of the development equation, and then fall off, percentage wise, as wealth is enhanced with softer goods.
Anyone off the chart on the high side are going to be what I would call the triumphalists, who do what Thomas Friedman seems to want and pour a disproportionate share of money into high-visibility monuments (e.g. tall buildings, dams, bridges, high speed rail, etc). I don't see Dubai on here but if they were they might be off the top of the chart.
Zero Hedge links this chart to make a point they have made for a while about a massive bubble bursting coming soon to China, a position with which I agree (though the timing is always a question in such things -- the state has the ability to delay the reckoning at the cost of a worse crash when it eventually comes).
Disclosure: I am short Chinese real estate and stock funds.
The hoped-for April spike in personal income tax revenues for the State of California fell once again below theoveroptimistic assumptions used to get the budget to “balance.” Instead of the $9.4 billion that the government had counted on collecting in April, it only collected $7.4 billion, according to the nonpartisan Legislative Analyst's Office. A 21% shortfall! In addition, corporate taxes were $450 million below forecast. After months of “disappointing” tax revenues, the total shortfall in income taxes now amounts to $3.5 billion for fiscal 2012 ending June 30.
The budget, supposedly balanced when it was passed last summer, had been spewing red ink from day one. Tax revenues were one problem. Expenditures were the other. The most recent re-revisions pegged the deficit at $9.2 billion. That was a few weeks ago. Now it’s going to be re-re-revised to nearly $12 billion.
Just how bankrupt does a budgeting process have to be for a budget that is supposedly in balance turn out to be $12 billion overdrawn barely 9 months later? I have a California state tax refund on my desk -- better cash it quick or else its going to be replaced by scrip again.
The same article has this interesting tidbit about California high speed rail:
The CHSRA plan assumes that it would cost 10 cents per passenger mile (the average cost of carrying one passenger one mile at a given load factor) when international high-speed rail systems averaged 43 cents per mile, according to a report that just surfaced. The low-cost leader was Italy with 34 cents per mile; at the upper end were Germany and Japan with 50 cents per mile; Amtrak’s Acela Express, though not truly high speed, was in the middle with 44 cents per mile. And in California, it’s going to be 10 cents per mile?
The CHSRA correctly assumes that train tickets compete with air fares and the cost of driving, which, despite our incessant complaints, are lower in California than overseas. Thus, the US market requires cheaper tickets. And to make the project appear profitable, and thus more digestible for the taxpayer, the CHSRA lowered its projected operating costs to less than a quarter of the international average.
But if actual operating costs are 43 cents per mile and not 10 cents per mile, annual subsidies of $2 billion to $3 billion would be required just to keep the trains running, according to the report. Yet, AB3034, the California High-Speed Train Bond Act, makes these subsidies illegal. A conundrum that the Legislature, the Administration, and the CHSRA have so far successfully ignored.
For a while now, a few authors have been quipping at Zero Hedge that the best investment strategy is to do the opposite of what Goldman Sachs is telling is retail customers. The theory is that if Goldman tells the public to buy, it means that they are selling like crazy for their own account.
This seemed a bit cynical, but on Friday Zero Hedge observed that Goldman was telling its retail customers to buy European banks. This advice seemed so crazy -- the European agreement last weekly explicitly did not contain anything to help banks in the near term with over-leveraged bets on shaky sovereign debt -- that for the fun of it I played along. I shorted a couple hundred shares of EUFN, a US traded fund of European financial firms (took a bit of work to find the shares to borrow).
Made 6% in one day. Thanks Goldman.
today, in a unanimous vote, "The U.S. futures regulator approved on Monday a rule that puts tighter limits on how brokerage firms can use customer funds, a measure that the now-bankrupt MF Global had encouraged the agency to delay." In other words, while before commingling client accounts was assumed to be a clear violation of every logical fiduciary imperative, now it is set in stone. For real. The CFTC means it.
In the past, I believed that a lot of financial regulations were honest (though often misguided) attempts to create transparent and trustworthy markets. I am increasingly being pushed to the cynical conclusion that financial regulations, like, say, licensing of funeral homes, are mainly aimed at making it impossible for small competitors to survive, while larger competitors either have the scale to pay for compliance departments, or in the case of MF Global, have the political muscle to get themselves exempted (by Administrations of both parties, I should be clear, though the current one certainly gets a hypocrisy award for standing beside OWS while handing out finance and health care law exceptions to the powerful).
MF Global is far worse in my mind than, say, Enron. In Enron's case, the management was at least mostly pursuing the activities and investments that they were supposed to be pursuing. They were making bets of the type shareholders expected, though they were likely masking the cost and risk of these bets by aggressive pushes at the margins of accounting rules.
MF Global was doing exactly what everyone supposedly knew to be an absolute no-no, ie using client funds to make leveraged bets for their own account. If Joe Schmoe in Florida did the same thing, he would already be incarcerated. In the case of MF Global, no one even seems to be interviewing Corzine and so far the bankruptcy committee has put a higher priority on repaying JP Morgan and Goldman for Corzine's bad bets than on getting investors' money back.
in 2011 initial and continuing [unemployment] claims have been revised higher the week following [their initial release] 91% and 100% of the time, respectively. A purely statistical explanation for this phenomenon is "impossible."
Wow. Something like 50 out of 50 times, the Administration has under-estimated the economic bad news in its statistics. Just bad luck, I guess.
I found this fascinating, if unsurprising, via Zero Hedge:
Ran Duchin and Denis Sosyura of the University of Michigan looked at the U.S.’ Capital Purchase Program. You may recall that this became the centerpiece of TARP once Hank Paulson decided that the money would be better spent directly buying into the banks as opposed to overpaying them for dodgy asset-backed bonds. (Mind you, other parts of TARP were spent overpaying for dodgy asset-backed bonds.)
The CPP lasted a little more than a year and invested $205 billion of taxpayer funds into various qualifying institutions. Not every bank that filled out the 2-page application was successful in gaining access. Others were approved but ultimately decided not to take the funds (probably because of the attached restrictions on pay and on paying out dividends.) In the end, 707 financial institutions received the funds.
Duchin and Sosyua looked at a sample of 529 public firms that were eligible for CPP and slotted them into categories based on whether they applied, whether they were approved and whether they ultimately took the money. They controlled for non-random selection (via measures of the banks’ financial condition, performance, size and crisis exposure); for changes in national and regional economic conditions; and finally for potential distinctions in credit demand.
They then viewed the banks’ CPP participation status in comparison with their subsequent risk appetite as demonstrated by (1) their consumer mortgage credit approvals or denials (viewed on a risk-profile controlled, application-by-application basis); (2) their participation in syndicated corporate loans for riskier credits and; (3) the risk profile of their investment asset portfolios. What did they find?
They found more risk, across the board. There is a lot of detail, so I will leave it to you to go to the source for more, but Zero Hedge concludes:
The bail-out itself increased our chances of having the bail the banks out all over again. Moral hazard is no longer in the realm of the abstract
A few months ago I went through an unbelievable hassle refinancing my loan. Based on current appraisals, my loan to value was less than 50%, but I still ended up coming to the table with more equity to reduce the new loan size. I was staggered at how hard it was to close what should have been a dead-safe loan, given the LTV and my income and credit history. The study actually has a finding related to that:
For mortgages the bailed-out banks increased their risk–
“after CPP capital infusions, program participants tilted their credit origination toward higher-risk loans by tightening credit standards for the relatively safer borrowers and slightly loosening them for riskier borrowers.”
–while at the same time ensuring that they didn’t trip off any alarms
“This pattern would be consistent with a strategy aimed at originating high-yield assets, while improving bank capitalization ratios, since the key capitalization ratios do not distinguish between prime and subprime mortgages.”
This is a fascinating sort of metric manipulation. Having my loan go from 45% to 40% LTV does nothing, really, for the overall safety of the bank, but it improves their averages and makes them look safer, while all the way they are actually engaging in more risky behavior.
The AIG moment was the first time that the US threw any pretense of real capitalism out the window. Bear Stearns at least was done by JPM with government help. Fannie and Freddie were taken over, but they were always quasi government entities. It was AIG that was truly special. The government didn't even attempt to see if the banks had managed their exposures at all. The government didn't even care if they had. They panicked and saved the banks from their own folly - they didn't give capitalism a chance. The US has never truly recovered from that. The entire system looks to government support more and more. Since AIG the Fed has been running at least one massive easing program or another constantly. The government is lurching from spending program to spending program to keep the economy churning.
At the first signs of weakness we beg for the FED or ECB or the government to do something big and fast. The European credit crisis seemed a final chance to put some capitalism back into capitalism. To allow dumb decisions to pay the price for failure. To reward the institutions that had properly navigated through the risks. There was even a brief moment when it looked like Germany would do that - would force those who failed to pay the price and support those who had taken the best steps. But now with Dexia bailed out and some super SIV on the way, it looks like we are once again heading down a path of not allowing failure - in fact we are once again rewarding failure and living beyond your means. It isn't communism, but it certainly doesn't fit any classic definition of capitalism.
Bruce Krasting at Zero Hedge has been on the case of the Federal Financing Bank. I am still unclear if the agency is actually providing the cash or just the guarantee, but it was the one rolling out the Solyndra loan (under DOE auspices, I suppose).
In July, it was still sending cash of some sort to Solyndra - it may be that this was just a drawdown of money under its original loan commitment, or it may be new money. A couple of things you can see are:
- A heck of a lot of money was still going out the door to solar programs, likely with no oversight
- Ford, the supposedly bailout-free company, sure seems to be gobbling up a lot of government guaranteed loans for something.
- We were lending to Solyndra at 0.89% interest.