Category: Economy

A Big Wet Kiss, With Tongue, and Possibly on the Genitals, to the Upper Management of Bear Stearns, Courtesy of the New York Times

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Maybe I’ve grown hard hearted in my middle age, but somehow, the plight of upper management at Bear Stearns does not inspire the empathy in me that it does Landon Thomas Jr. of the New York Times.

Bear Stearns has always been one of the shadier brokerages, with line fuzzing being a part of their investment strategy, so I’m just not upset that James E. Cayne “billionaire just over a year ago when Bear’s stock soared past $160, his 5.8 million shares are now worth about $28 million at Monday’s closing price of $4.8”.

Nor am I distressed that, “Some executives had moved quickly, putting their weekend homes on the market”.

Because of their work there are now people with no home at all.

And then there are the poor investors, “Bear executives were not the only big losers. Joseph Lewis, the Bahamas-based financier, invested $1 billion at prices above $100 last year, and top institutional investors like Morgan Stanley, Legg Mason and Barrow, Hanley, Mewhinney & Strauss, a value investor in Dallas, have been recent buyers of the stock.”

Boo F*&%ing Hoo.

Krugman Says Bailout In Evitable, We Need to Go Swedish

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I think that it is likely that a taxpayer funded bailout would be the only viable option, as Paul Krugman says in his NY Times OP/ED. He also notes that while the whether to bail out is settled, the how is not:

The U.S. savings and loan crisis of the 1980s ended up costing taxpayers 3.2 percent of G.D.P., the equivalent of $450 billion today. Some estimates put the fiscal cost of Japan’s post-bubble cleanup at more than 20 percent of G.D.P. — the equivalent of $3 trillion for the United States.

If these numbers shock you, they should. But the big bailout is coming. The only question is how well it will be managed.

As I said, the important thing is to bail out the system, not the people who got us into this mess. That means cleaning out the shareholders in failed institutions, making bondholders take a haircut, and canceling the stock options of executives who got rich playing heads I win, tails you lose.

In his NYT blog, he also notes that when one looks at financial meltdowns, the Swedes handled it best, with the handling of their financial problems in the early 1990s”.

He points us to Justin Fox of Time, who in turn quotes Merrill Lynch Economist David Rosenberg from his “morning call notes” (sorry, can’t find a link, any hints?):

The Japanese credit crisis is usually cited as the benchmark for what not to do. But few cite Sweden’s crisis as a template on what might actually work. … the Swedish authorities realized early on that a banking crisis cannot be resolved until the problem is properly defined. That means assessing who the “bad” and “good” houses of issues are and be willing to allow the “bad houses” to fail (as an aside, “good houses” do not necessarily imply “big” houses).

… Sweden established a Bank Support Authority to undertake “reality testing” on the loan books of Sweden’s largest banks and had a “board of valuation” experts go in and value the assets on the books of all the lenders. Call it invasive if you will, but then again, the government was doing the work that market players could not or would not do – value the collateral and do it quickly. This is similar to what Barney Frank is proposing in the US mortgage sector today. …

It should also be noted that it was Sweden’s equivalent of the US Treasury, and not the central bank, that played the primary role in this crisis management stage (though the Riksbank maintained an accommodative monetary stance and lowered interest rates right through to December 1993, more than a year after the markets had bottomed). And, it obviously required the heavy hand of government intervention; there are solid grounds for this when there is market failure in the private sector, in this case, insufficient information regarding the quality of financial sector balance sheets. …

I would add that my post on Dean Baker’s proposal of a stock transaction tax, along with my suggestion that it more generally cover financial instruments (here) is both a good way to cover the budget hit and a good way to discourage excessive arbitrage.

Dean Baker Has a Great Idea, But it Needs to go Further

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Dean Baker suggests that we implement a stock transfer tax. He mentions that the UK has a stock transfer tax of 0.25%, and London is second only to New Work as one of the great financial capitols of the world.

He notes that it would generate $150 billion/year in revenue.

While I agree, I do not think that this goes far enough. It should apply to all financial transactions, stocks, bonds, derivatives, hedging, futures, etc.

I would have an exception for initial purchase, but not resale, of government bonds, but that’s it.

In addition to generating a lot of revenue, it also makes increasing level of arbitrage increasingly more expensive, which is also a good thing.

Shorter Alan Greenspan

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He is unhappy because people are blaming him for the upcoming catastrophe.

As I’ve said before, the idea that the noble entrepreneur must be allowed to innovate, no matter how many people it hurts, is simply delusional Randroid bull#$it.

Ayn Rand was a person to whom great evil was done, by a thoroughly evil and corrupt, much like Leo Strauss. Rand by the Bolsheviks, Strauss by the Nazis.

Their response was to create, and aggressively promote their own personal sort of evil, and both have proved, and will continue to prove disastrous.

Speaking as an Existentialist Jew, and yes they are compatible, when you create philosophies in which people are made unpeople, and in which the concept of personal responsibility for the world one creates is an anathema, you create another template for evil.

Of course, you could read his article in the Financial Times, but there may be some side effects:

The End is Nigh, One of My Predictions Has Come True

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Yep, it’s the end of the world, I got a prediction right. On August 2, 2007, I predicted that, “Bear Stearns will cease to exist. It will either be forced to liquidate, or it will be bought out in a fire sale”.

I never get my predictions right. I look at my predictions on the HD-DVD/Blu-Ray fight.

So, after the Fed lends Bear Stearns $200 billion, JP Morgan buys Bear for 236 million, and they look to be ditching off the risk on the Federal Reserve:

Shareholders of New York-based Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the two companies said in a statement today. The U.S. Federal Reserve will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns’s “less-liquid assets.”

Normally, when I say the end is nigh, I’m joking. I’m not joking now, and it has nothing to do with whether or not I got a prediction right.

It has to do with the fact that in Asia, where it’s Monday already, markets imploded. The Nikkei the Hang Seng have so far fallen by more than 4%, and the Korea Composite Stock Price Index by more more than 3%.

What’s more, on this side of the international dateline, the Fed cut the discount rate by 25 basis points, from 3.5% to 3.25%:

The central bank approved a cut in its lending rate to financial institutions to 3.25% from 3.50%, effective immediately, and created another lending facility for big investment banks to secure short-term loans. The new lending facility will be available to big Wall Street firms on Monday.

That was done on Sunday. When the last time that you’ve heard of the Fed doing anything on a weekend, much less a Sunday.

People are now talking about this in terms of being 1929 bad, not 1970s bad:

Wall Street fears for next Great Depression
….

One UK economist warned that the world is now close to a 1930s-like Great Depression, while New York traders said they had never experienced such fear. The Fed’s emergency funding procedure was first used in the Depression and has rarely been used since.

….

In the UK, Michael Taylor, a senior market strategist at Lombard, the economics consultancy, said on Friday night: “We have all been talking about a 1970s-style crisis but as each day goes by this looks more like the 1930s. No one has any clue as to where this is going to end; it’s a self-feeding disaster.” Mr Taylor, who had been relatively optimistic, has turned bearish: “It really does look as though the UK is now heading for a recession. The credit-crunch means that even if the Bank of England cuts rates again, the banks are in such a bad way they are unlikely to pass cuts on.”

I think that they are very nearly right on this, at least for the US.

Unlike during the great depression, the US is no longer an exporter of oil, nor does it have the most vibrant and advanced manufacturing base in the world.

It may be bad world wide, but it’s going to be hideous here.

Books I Need To Read: Greenspan’s Bubbles

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I read an interest review of Greenspan’s Bubbles by William A. Fleckenstein:

… He sets out to deflate Alan Greenspan’s reputation by parsing Greenspan’s own comments during his tenure as chairman of the U.S. Federal Reserve. His conclusion?

“Greenspan bailed out the world’s largest equity bubble with the world’s largest real-estate bubble,” he writes. “That combination easily equates to the biggest orgy of speculation and debt creation the United States (and the world) has ever seen.”

Bernanke was left to sweep up after the debauch while Greenspan rewrote history in The Age of Turbulence.

I’m not sure that there is a whole bunch to learn from his book, so I’ll wait until it hits the library.

What I find interesting, and well deserved, is that Greenspan will find himself increasingly reviled in the final years of his life.

In a very real way, this is more than a repudiation of Greenspan, but it is also a repudiation of Ayn Rand’s Objectivism.

The fact that Greenspan endorsed the worst excesses of the market for ordinary people, but rushed to bail out the “noble entrepreneur”, is a direct consequence of his experience of Ayn Rand’s acolytes.

Bear Stearns, I May Have Gotten a Prediction Right

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On August 2 of last year, I said that within a year, Bear Stearns would cease to function as an independent entity.

I’m not right yet, but I don’t see how I won’t be right in the next 5 months.

Dr. Peter Venkman: This city is headed for a disaster of biblical proportions.
Mayor: What do you mean, “biblical”?
Dr Ray Stantz: What he means is Old Testament, Mr. Mayor, real wrath of God type stuff.
Dr. Peter Venkman: Exactly.
Dr Ray Stantz: Fire and brimstone coming down from the skies! Rivers and seas boiling!
Dr. Egon Spengler: Forty years of darkness! Earthquakes, volcanoes…
Winston Zeddemore: The dead rising from the grave!
Dr. Peter Venkman: Human sacrifice, dogs and cats living together… mass hysteria!

And it would seem, that I actually get a prediction right, which is another sign of the apocalypse.

Just yesterday, the Bear Stearns CEO said that there were no liquidity issues, but today, JPMorgan Chase and the New York Fed have gotten together to bail them out.

Basically, the Fed can’t bail out Bear Stearns, it’s out of its authority, but it can guarantee JP Morgan’s loans to the embattled investment bank, which it did.

Actually, a closer reading makes it even more extraordinary. The Fed directly lent money to Bear Stearns, using an authority last used in the 1960s, which required a vote of the Fed’s Board of Governors.

Typically, the Fed is only supposed to lend to banks, and Bear is not a bank, but an investment house.

As to the statements of the CEO yesterday, I would call them a bald faced lie, but I don’t have a Harvard MBA, so I don’t know the fancy term for blowing smoke up everyone’s ass.

Of interest is some potential insider trading, specifically, someone traded 55,000 Bear Stearns puts Tuesday. (A “Put Option” is basically a bet that the stock will decline in value.)

One of the results of all of this is that money has been fleeing to Treasuries, or fleeing the US entirely, with the dollar down.

One of the things you have to understand is that Bear Stearns is a pretty small player in all this, with a market capitalization of “only” about $15 billion dollars, and we’ve got the markets jumping out windows.

Economics Update

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In terms of market stability, Carlyle Capital share prices have tripled after Carlyle Group co-founder David Rubinstein said that it was looking at ways to compensate investors.

I’m not sure how much it means. The collapse of Carlyle Capital, that was so yesterday….hold it….it actually WAS yesterday.

Today, it’s Bear Stearns, which gets its own thread for reasons of personal ego.

Inflation in February was 0%, largely due to some moderation in food and energy, which won’t happen in March, given that oil is still at around $110/bbl, and the dollar is still tanking.

In insurance, it appears that losses are approaching the levels of Katrina, though we are probably less than 1/3 of the way through this.

Economics Update

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It’s been a busy day today, largely due to the imminent collapse of Carlyle Capital, the investment bank of the Carlyle group.

Lenders are seizing its assets:

By yesterday the fund had defaulted on $16.6 billion of debt and said it expected to default soon on its remaining debt. The fund’s $21.7 billion in assets were exclusively in AAA mortgage-backed securities issued by Fannie Mae and Freddie Mac, traditionally considered secure and conservative investments, which it was using as collateral against its loans.

They could not meet margin calls, and their share price has fallen 90%. See also here.

Paul Krugman has a very amusing comment, that the “Carlyle Group should have stuck to what it knows. It’s great at the merchant of death thing; at investment banking, not so much“.

It’s not entirely accurate, but still really funny, I used to work for the Carlyle Group, but they sold me to buy Dunkin Donuts. Seriously. They sold United Defense, where I worked 2003-2006, to BAE Systems.

In any case, the collapse of the Carlyle Capital has the market worrying about other possible collapses, with the Times of London reporting that, “Several hedge funds with assets of more than $4 billion (£2 billion) were on the brink of collapse last night or had halted withdrawals, despite moves by the US Federal Reserve“.

This has also hit US currency with the dollar falling to a 12 year low vs the yen and an all time low vs. the Euro, see here, and here.

The Yen has fallen below ¥100:$1.00, ant the Euro hit a new record of €1.000:1.5625. We are talking big time ugly, and there is still the Yen carry trade, where people borrow low interest Yen and invest the money at higher interest elsewhere, that takes a hit when the Yen strengthened.

The falling dollar also drove the price of oil up to a new record, over $111/bbl, and is part, if not most of the reason that gold broke $1,000.00/oz as a part of the flight from the dollar and concerns about inflation.

There will be more pain.

Speaking of pain, retail sales fell in February by the largest month to month amount in 5 years, 1.1%. The preliminary numbers showing an increase that I reported a week ago were apparently just that, preliminary.

Note that this does not correct for inflation, so it’s even worse.

In it efforts to restructure, Chrysler is completely shutting down for 2 weeks in July, that’s everyone who is getting the vacation, not just the guys on the line for retooling. They are claiming that it will, “boost productivity and efficiency”, but my guess is that a lot of folks people will have their vacations extended to forever.

Finally, no monoliner insurer bad news today, or perhaps I missed in in everything else going on, but Countrywide Financial continues to see climbing foreclosures, with the Frbruary rate of 1.64% being more than twice that of a year ago of 0.80%.

I really think that the deal for Bank of America to buy them will fall through, because what looked like a decent deal a few months ago is increasingly looking like a significant overpayment.

Economics Update

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Well, gasoline prices hit all-time high today, and oil prices hit another record too.

Interesting thing though, at the start of the day, prices were down on increased inventories.

Oil Prices are rising because the dollar is falling now.

In the ever entertaining world of monoliner insurance, MBIA and Fitch Ratings are in a pissing contest. MBIA dropped them as a ratings service, because Fitch thinks that they should be downgraded.

MBIA and AMBAC’s debt is junk in reality, no matter what S&P, Moody’s, or Fitch says.

Speaking of Moody’s, they are forecasting a big drop in earnings, down from $2.17-$2.25/share to $1.90-$2.00, which tanked their stocked.

The GSE’s stock tanked too, with Fannie Mae falling 6% and Freddie Mac falling 3%. It turns out that the relaxed lending limits has the market spooked that this will lead them into more losses, which, of course, it will.

If I had to make a bet between Fannie and Freddie, I’d go with Freddie though. their CEO has a good grasp on reality, he thinks that the housing market is only 1/3 of the way to the bottom.

I’m a bit more of a bear than he is, but I think that Richard Syron is a member of the reality based community.

Despite the rate cuts, and the talk out of the Fed about more rate cuts, mortgage rates are up, and applications are down as a result.

In the more general doom and gloom scenarios, I present the following:

Citigroup is having to pump $1 billion into six of its internal hedge funds. I guess that they have to sell another piece of themselves to some Arab sovereign wealth fund.

Finally, we have ING New Zealand suspending withdrawals from two of their CDOs.

New Zealand???? New F#$@ing Zealand? Whisken Tango Foxtrot.

The meltdown is now fully global.

Merrill Lynch Bear Says this Will be Ugly

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A prominent bear, Merril Lynch economist David Rosenberg, is saying that will be the worst one since the 1970s.

I think that it will be worse, because we are in a debtor economy, and bills will be coming due sooner, rather than later.

In fact, I think that some of the indicators may show it to be more profound than that of the 1930s.

Here’s why:

  • In the 1930s, we were a net exporter of oil, now we are a net importer of oil.
  • In the 1930s, the rest of the industrialized world was still suffering from the shocks of WWI, which had left the US largely unscathed.
  • The US was running a trade surplus.
  • The Federal government was running a budget surplus.
  • The amount of leverage and risk are far higher now than in 1930.
  • The US industrial base has been decimated over the past 35 years.
  • Consumer savings is non-existent.
  • We have crushing defense expenditures.
  • The dollar is overvalued, meaning that we will be experiencing a foreign exchange driven inflation.

Note, however, that but I’m an engineer, not an economist, dammit*!

*I love it when I get to go all Doctor McCoy!!!

When the Financial Times of London Sounds Like the Workers Daily World, The Times are a Changing

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London has long had a policy of allowing rich foreigners to live there tax free.

FT columnist Martin Wolf looks at proposals to eliminate this immoral give away to the rich, and finds that too many people in the UK subscribe to the Leona Helmsley way of doing thing.

We live in strange times, as evidenced by his concluding paragraph:

Yet the experience also shows that the case for a simple, neutral and stable fiscal system, which taxes the worldwide incomes of all long-stay residents on the basis of ability to pay, is overwhelming. As soon as one departs from that principle one enters in a maze of special pleading or invidious distinctions, in which failed ideas of industrial policy – subsidising winners through the tax system – return to the fore. If the application of that great principle means some rich people leave the country, so be it.

(Emphasis mine)

Economics Update

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Oil has hit another new high, driven largely by the Dollar hitting a new low, though there has been some recovery since the Federal Reserve has agreed to issue at least another $200 billion, this time using mortgage backed securities, aka “Worthless Garbage”, as collateral.

I’m not sure that this will make a difference in the strength of the Dollar. It now appears that the United Arab Emirates is seriously considering dumping their dollar peg, which is clearly a step towards Euro denominated oil.

In today’s episode of really bad policy, it appears that Congress is moving toward privatizing profits and socializing losses in real estate, by expanding the loans that FHA insurance covers. Yep, this will work so well, like it did for MBIA and Ambac.

In more general investment news, Bear Stearns is tanking on concerns that it lacks sufficient liquidity to cover potential margin calls. It probably does not help that Moody’s has downgraded Bear Stearns Alt-A mortgage backed securities, more than half of those issued from 2005 through 2007. Ouch.

Subprime’s favorite whipping boy, Countrywide is going down like Elliot Spitzer’s hooker, the Bank of America offer is now a 32% premium, as versus a 9% premium 2 weeks ago, so people are thinking that BoA will just walk away.

In the world of Real Estate Investment Trusts (REITs), we have had downgraded price targets on three Mortgage REITs.

What took them so long.

Finally, in things that make you say, Whiskey Tango Foxtrot, we have a report that, 20% of Silicon Valley startups cannot get to their working cash, because they invested it in Auction Rate Securities to get better rates of return, and that market is completely frozen.

Many Security Exploits Financial, Not Technical Issue

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El Reg writes about an academic article that calls for making vendors liable for security exploits.

This is a good idea:

In the real world investment in risk avoidance may not be profitable. Security failures often arise due to perverse incentives rather than the lack of suitable technology. For example, credit card firms can rely on business models that push the cost of fraud onto merchants and consumers rather than investing in reducing the problem themselves. That’s because such investments would place them at a commercial disadvantage to their competitors.

Establishing economic incentives for IT suppliers to produce more secure products is arguably an even greater problem because software publishers are not held liable for the shortcomings of their products. These shortcomings may damage consumer faith in ecommerce but fail to effect sales, so a market-based solution in absence of regulatory pressure is difficult to imagine.

Microsoft would be bankrupt in 6 months.

Economics Update

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I’m not sure if it even qualifies as news any more, but
oil hit a new record today, topping $107/bbl. Gasoline prices are following this trend, with prices rising $0.09/gallon over the past two weeks.

When this is combined with the fact that houshold wealth fell by $533 billion, (3.6% apr), in q4 of 2007. That’s without considering inflation.

When inflation is taken into account, all of 2007 is down.

In the ever entertaining world of the monoliner insurance, MBIA, is asking Fitch to stop rating its insurance units. They think that Fitch’s model is inaccurate, because Fitch is still considering a downgrade.

MBIA is insolvent, Fitch gets it, and S&P and Moody’s don’t.

As a result of this, we are seeing more of the non-profit and state run college lenders unable to secure financing, and hence unable to make loans.

Remember, these loans cannot be discharged by bankruptcy, and they are federally guaranteed, and no one will buy the paper.

This might explain why Lehman Bros. is cutting 5% of its workforce, about 1400 jobs.

One bit of good news is that China’s trade surplus dropped 63% in February, though one wonders how much of that is currencies readjusting, how much is a slowdown in the world economy, and how much is the winter storm that shut down the country for about a week.

BTW, its official, Malaysia is a Kleptocracy. That’s the only way to explain why, following a defeat that kept the National Front in the majority, but at less than 2/3, that the Kuala Lumpur Composite Index fell so sharply that they had to shut down trading.

This wasn’t even a change in party rule, just a drop below 2/3, and everyone was scrambling to get out because their business positions were predicated on corruption.

O happy day.

For what it’s worth, things are not much better in the US, where hedge funds are seeing margin calls on US treasuries. If treasuries go bad, forget the Honda full of silver, you need ammunition and canned goods.

Krugman Has a Good Point, So Nu?*

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Krugman notes that while the capital infusions of the Fed are in the $200 billion range, outstanding mortgages are in excess of $ 11 trillion, so the Fed bailout is about 1.8% of the mortgage market, and the number rapidly dwindles when examined in the context of other markets also in trouble.

The idea is not that the Fed will save these markets, but rather that the it will “slap the market in the face” to calm it down from hysteria, much like those old film noire detective movies.

Thing is, the Fed has done this twice, and it’s not working. What’s more, the interest rates that really matter to the economy, “The rates that matter most directly to the economy, including rates on mortgages and corporate bonds, have been rising”, because people are having to price an unknown level of uncertainty into their lending.

This is what is meant when it is said that the Fed is, “Pushing on a string”. It can lower rates all it wants, but the rates paid by businesses and individuals are now rising.

One of the things that I harp on, but that Krugman does not have the space to deal with in the constraints of a New York Times editorial, is the effect of the strength of the dollar on the Fed, and the effect of the Fed on the strength of the dollar.

Specifically, when the Fed cuts rates, it reduces the returns on the US dollar, which makes the currency less attractive, which drives the currency price down.

While this does help exports and reduces the advantages of imports, it also raises prices, because foreign dollars compete more for US products, like groceries (I posted about this in yesterday’s economics update).

So we are in a situation where we cannot win, and we cannot get out of the game.

*It’s one of the few Yiddish idioms that I grasp as a 3rd generation America Jew. Nu literally means yes, but, “so nu” means, “So tell me something I don’t already know”?

They Sold Me To Buy Dunkin Donuts, and They Have Defaulted

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Not joking. I used to work at United Defense, and the Carlyle Group sold us BAE to buy Dunkin Donuts, at DFA meetings, I’d introduce myself, and say, “I work for the Carlyle Group”, just to see the double takes.

It now appears that the
Carlyle Capital Corp. division has defaulted on about $21 billion in loans.

They invested in “high quality” mortgage backed securities from the GSEs (Fannie and Freddie), but they have not been able to sell them in order to pay some notes coming due.

Not surprising. $21.7 billion backed by $670 million in equity is a 32.3:1 leverage, which means that if things tend down about 3%, you are broke.