Category: Finance

Economics Update

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Only a few bits of news, besides the auto bailout update, which I will cover later, but they are fairly significant.

First, the New York Fed’s Empire State Manufacturing Index hit another record low, though it has only been kept since July, 2001, so that’s not an enormously long time.

On the other side of the pond, though we have rumors that Ireland is on the brink of defaulting on its debt, which could make things very ugly very quickly.

It would likely also trigger events that would lead to defaults by other nations, the Baltic republics and Ukraine come to mind, as a rush for the doors starts.

Oil is down again, and the continued flight to safety has driven the dollar up.

Have You Heard the One About the Executive Compensation in the Stimulus Bill?

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Well, it appears that the final version of the stimulus bill has restrictions on executive compensation, no “compensation incentives that encourage senior managers ‘to take unnecessary and excessive risks that threaten the value of a company, no golden parachutes for senior management, “claw back” provisions to get money back from executives when they enrich themselves at taxpayer expense, and require (nonbinding) “say on pay” votes of the shareholders.

Sounds good, but it turns out that Congress gave the Treasury a year to draw up the regulations, and I’m sure that former Federal Reserve Bank of New York President, and general Wall Street butt boy, Timothy Geithner (as well as Larry Summers) will make absolutely sure to take the full 365 days, all the while lobbying for a relaxation of the law.

Oh to live in the UK, where the Conservative Party is calling for a bonus limit of £2,000 (about $2800) for all bank employees.

Yep, the Tories….The party of Margaret Thatcher….Is calling for bonus limits.

Economics Update

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Japan’s economy contracted at an annual rate of 12.7% in the Q4 of 2008. Those are numbers more than a recession, they are near implosion, so I would take the Confederation of British Industry’s prediction that the UK economy will shrink 3.3% in 2009 with a grain of salt.

The UK is far more dependent on banking and investment than Japan is in its economy, the Japanese actually make stuff and sell it to people.

A further indicator of the likelihood of a brutal downturn is that the companies in the S&P 500 just turned their first ever aggregate quarterly loss ever, with something like 400 of the 500 companies declaring a loss.

However, today was not without good news, as junk bond sales hit a 6 month high, which implies that people are no longer fleeing so strongly to safe havens like US treasuries, though there is still enough uncertainty to push the dollar and the Yen higher.

Still, demand concerns are driving oil down, even as retail gasoline prices continue their march back towards $2.00 a gallon.

Economics Update

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Well, GDP in the Euro Zone fell by 1.5% in the 4rth quarter, and 1.2% from the 4th quarter of 2007.

The quarterly drop is the largest in 13 years, and the year over year drop is the first recorded ever…..One of the joys of integrating your economy is that you integrate your recessions.

It’s no wonder that OPEC’s predictions for world oil consumption have been slashed again, though interestingly enough, oil is up today, by the largest amount this year, largely on the expectation that the stimulus bill will pass.

In real estate, the New York Federal Reserve is continuing its aggressive policy of buying from the sh$% pile, purchasing another $23.2 billion in agency mortgage-backed securities this week, for a total of $114.96 billion.

There is an interesting bit here though, this quote, “The Fed has also said it may soon begin modifying mortgages it owns within the assets it owns.”

Somehow I figure that this is part of a much bigger story, only I don’t know what it is yet.

Also we have Citi and J.P. Morgan Chase Agreeing to a foreclosure moratorium, and I think that this might be a part of the rest of that story. Specifically, I think that they are worried about Geithner’s “Stress Test,” and they are doing this because they are hoping for goodwill from regulators.

Finally, the dollar is down today, for the same reason that oil is up. The stimulus package looks like a light at the end of the tunnel, and so the “flight to safety” moderated a bit.

Is “Stress Testing” Spooking the Banks?

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This is interesting. It seems that Timothy Geithner’s announcement of a bank rescue plan sent big name banks into full panic mode, because it looks like Goldman Sachs held an emergency meeting, which included, “20 of the firm’s biggest hedge fund and private equity clients from around the country,” as well as, “representatives of KKR, Fortress Investment Group , Bain Capital, Perry Capital, Capital Research, Putnam and Citadel.”

While Goldman claims that it was a regular meeting, CNBC’s report seems to indicate that this was not the case:

Goldman sachs says the meeting was planned well in advance. But people who attended tell CNBC that they received the invitation after the speech and decided to attend because of the speech. Goldman Sachs initially denied that the meeting, hosted by co-presidents John Winkelried and Gary Cohn, took place.

(emphasis mine)

Where I think the reporter did not go deep enough is to accept the line from the participants that this meeting was primarily about concerns that the plan is not coming together quickly enough.

That isn’t the sort of thing that has you call an emergency meeting. Something has them spooked.

My guess is that they are afraid that Geithner’s “stress testing”, which is a deep accounting analysis of their balance sheets, will show one, or more of the major banks (probably most of them) to be insolvent, and then the government will have no choice but to seize them.

I have this image of something resembling a meeting of Bond villains.

Economics Update

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Well, the obvious lede here is the weekly initial jobless claims, which dropped 8000 to 623,000, still well within OMFG territory, and the four-week moving average, which is to my mine a better and less noisy metric, jumped from 583,500 to 607,500, while continuing claims rose to 4.81 million…..Ouch.

We have some more numbers for the real estate bloodbath too, with the NAR reporting that median home prices declined in Q4 of 2008 by 12.4% as compared to Q4 of 2007.

Foreclosures fell in January, but this is largely because the GSEs have put a temporary moratorium.

More telling is the fact that foreclosures and short sales accounted for 45% of sales in Q4.

Mortgage rates are down this week to 5.16%, which is still above the 4 and change percent from last month, so I do not expect this to do much to the market.

We do have a bright spot, with , it was +1% over December as opposed to the expected -.8%, but look as the chart on the right shows, it’s still very grim.

It’s worth noting that some of the increase is because retail gasoline prices have been trending higher (bottom chart), which along with increased spending for food and for clothing, were largely responsible for the increase.

In currency, the Yen and the dollar strengthened as investors fled to their relative safety, and in energy, oil fell below $34/bbl on high inventories and low demand.

Competition For Thee and Not for Me

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As part of his initiative to make state government more efficient, New Jersey Governor, and former chief of Goldman Sachs, John Corzine is is looking to mandate competition for almost all goods and services that are purchases.

But, there is one exception, municipal bonds….You know, where companies like Goldman Sachs make an awful lot of money managing the sales of these instruments, and competitive bidding does save money:

Competitive bond offerings force banks to line up on an advertised day and submit the lowest interest-cost bid to win underwriting business. In a negotiated sale, states and cities decide in advance which banks will market the bonds. Underwriters have promoted the no-bid method, saying it allows them to get the best prices for issuers by tailoring the debt to specific types of investors.

Bid sales saved issuers 17 to 48 basis points, “on average and all else equal,” according to a study published in the Winter 2008 issue of the Municipal Finance Journal. A basis point is 0.01 percentage point. On $100 million of debt, the savings mean $1.7 million to $4.8 million less interest over the life of a 10-year bond.

I guess that his buddies at Goldman Sachs are suffering under the restrictions Obama has placed on executive compensation.

We Were Played By Hank Paulson and His Evil Minions&trade on TARP?

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I think that we’ve all seen the video (below) where Rep. Paul Kanjorski (D-PA) said on CSPAN that there was a run on the money markets, and we were hours away from a complete meltdown of the financial system.

The money quote, if you don’t want to watch the vid, is, “If they had not done that, their estimation is that by 2 p.m. that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it.”

The New York Post, the right wing flagship of Rupert Murdoch’s media empire, and there are no on the record sources, though there is a cool graphic with Marlon Brando from Apocalypse Now (right).*

So, not only is the story completely based on anonymous sources, but there are no other contemporaneous reports of this happening.

Enter Felix Salmon of Portfolio.com, who looks at the underlying data, and finds out that it never happened. There was no massive run on the banks.

There were a lot of redemptions to the tune of tens of billions of dollars a day, not trillions per hour.

So, how did this bit of disinformation get out, and why did it get out to a paper not known for financial reporting in the financial capital of the world?

Inquiring minds want to know.

*As a purveyor of news, the New York Post sucks, but I do like their headlines and the way that they spice up their graphics.

Media Consolidation

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Barry Righoltz’s book Bailout Nation has been dropped by McGraw Hill, largely because he refused to soft pedal the ratings agencies role in the financial crisis, and McGraw Hill owns the largest of the ratings firms, Standard & Poors.

They claimed stylistic issues with his first description, which called the ratings agencies, “Pimps to the fixed-income fund managers’ Johns,” which to my mind is a fairly accurate description. (He did come out with an alternate chapter, which, while slightly milder in language, was even more damning, because it was more extensively sourced)

As Mr. Ritholtz himself notes, “The problems came not from Legal, but from Corporate within McGH. Legal had not even finished reviewing the manuscript at this time.“

If you wonder why newspapers and magazines are “dying”, it’s because of crap like this, where conglomerates allow other corporate issues to water down their content.

Not Enough Bullets: The Whole Damn Banking Industry

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Tom Randall, Alex Nussbaum and Peter Robison at Bloomberg News talk about how awful the Obama salary cap for bank executives on the Federal dole is. Their lede:

Eric Langan could run a U.S. bank, based on his $494,713 salary last year, according to President Barack Obama. Langan would rather stay in his job, overseeing 18 strip clubs as chief executive officer of Rick’s Cabaret International Inc.

Well, Mr. Langan actually made a damn profit in 2008.

So they are claiming that $½ million, “may not buy a seasoned executive for a major U.S. financial institution.”

These are the folks who bankrupted the United States, and continue to pay themselves obscene bonuses.

Wanting to hire one of them for your bank is like betting on the Washington Generals when they play the Harlem Globetrotters.

I would also note that Mr. Langan’s job is a lot harder than your senior bank executives. He has to deal with people who stalk the dancers, and how to handle security, and hiring responsible bouncers, etc.

Besides, who is hiring in banking right now.

Timothy “Eddie Haskell” Geithner Wins, We Lose

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First, some context here, even before Geithner’s plan, we should note that the taxpayer exposure in all this is, “$9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages,” or about $30,000 for every man woman and child in the US.

For what Geithner is proposing, we are looking at as much as another $2 trillion.

By comparison, the 2006 US GDP was a bit over $13 trillion, so all of this is a serious chunk of change.

The short version of his plan is that he wants to go with the bad bank, with a fig-leaf of subsidies to bring in “private” money, so my report of the CNBC story was wrong:

Officials said the plan was fashioned after a spirited internal debate that pitted Mr. Geithner against some of the president’s top political hands.

Some of President Obama’s advisers had advocated tighter restrictions on aid recipients, arguing that rising joblessness, populist outrage over Wall Street bonuses and expensive perks and the poor management of last year’s bailouts could feed a potent political reaction if the administration did not demand enough sacrifices from the companies that receive federal money.

They also worry that any reaction could make it difficult to win Congressional approval for more bank rescue money, which the administration could need in coming months.

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.

So it’s more welfare for fat cat bankers, in this case backstopped by, “The Fed will use its balance sheet to provide the financing, and the Federal Deposit Insurance Corporation might provide guarantees to investors.”

Nemo at self-evident does the numbers on how this will screw the taxpayers, and I cannot do better than his numbers:

If the Plan involves convincing private equity firms to take “first loss” position on the assets they purchase, and merely limits their downside with some form of insurance, does that make it a good deal for the taxpayer?

Well, let’s see. Suppose some insolvent bank, like Citigroup or Bank of America, has 10 mortgages or MBSes or CDOs. Now, nobody knows what any of these things is worth. Most of them are worth nothing, but some of them are probably worth something, depending on who defaults on what. Suppose, just for the sake of example, that each of these toxic assets has a 10% chance of being worth $100 and a 90% chance of being worth zero.

Obviously, a rational investor would pay at most $100 for the entire pool of 10 assets, or 10 cents on the dollar.

Now, suppose the D.C. branch of Goldman Sachs the U.S. Treasury comes along and offers to insure every one of these investments to the tune of $45 for any private equity firm who purchases the entire pool for $50/asset. In other words, the private equity firm is in “first loss” position on each asset to the tune of $5, while Team Timmay is on the hook for the remaining $45.

Since one of the assets is probably worth $100 and the other nine are probably worth zero, the private equity firm expects to make $50 on one and lose only $5 on each of the remaining nine, for an expected profit of $5 on their $500 investment. (Which they can lever up via the Fed, if the NYT is to be believed. Not to mention that this is just an illustrative example…)

Meanwhile, the taxpayers expect to pay insurance to the tune of $45 * 9 = $405. Thus, despite private equity being in “first loss” position, the most likely result is for the private firm to profit even as the taxpayers get hosed.

Change units to trillions, rinse, lather, repeat.

Now, it appears that Geithner plans to set up some sort of triage, he is calling it a “stress test”, to ensure that banks are strong enough to be a part of the program.

I’ll believe it’s something more than a cute phrase when they seize Citi as insolvent and start a serious criminal investigation of Geithner’s protege Robert Rubin, because the former is insolvent, and the latter is a crook.

I still say that the best solution is seizing insolvent banks, and breaking up the rest so that they are “small enough to fail.”

This has epic fail written all over it.

Economics Update

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Well, in terms of the stuff I put here, there was very little today. My guess is that everyone is waiting on Timothy “Eddie Haskell” Geithner’s bank bailout plan.

We do have a rumor on the plan though, and it’s that Geithner has dropped the federally funded bad bank, and instead any disposal of the financial dioxin out there will be handled by encouraging private money to drain the cesspool, which, when I last checked, was paying about 35¢ on the dollar for the top tranches of this.

Good luck with that.

He was supposed to release it today, but he put it off a day, which pushed the dollar down and it also pushed oil down, despite OPEC talking about more supply cuts.

I will post a bit about Nancy Pelosi’s scary graph.

Changes in Philosophy Bubbling Up in Banking Rescue Plans

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In the Wall Street Journal (!), Paul Romer is suggesting something rather similar to my proposal, you know, the one where I suggest amputating the financial industry:

Everyone agrees that the United States urgently needs a few good banks. Turning bad banks into good banks is a difficult and risky way to get them. It’s simpler and safer to start entirely new banks.

In this context, “good” means a bank with assets and liabilities that are easy to value using market prices. At a good bank, officers, regulators and investors can be confident about the value of the bank’s capital.
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The government has $350 billion in Troubled Asset Relief Program (TARP) funds that it can use to encourage new bank lending. If this money is directed to newly created good banks with pristine balance sheets, it could support $3.5 trillion in new lending with a modest 9-to-1 leverage. Right out of the gate, the newly created banks could do what the Fed has already been doing — buying pools of loans originated by existing banks that meet high underwriting standards.

This sounds an awful lot like what I was suggesting.

BTW, it also appears that Timothy Geithner is backing away from the bad bank idea, and looking at having equity shares that have votes, as opposed to preferred stocks.

He’s fighting this kicking and screaming, but the banks are insolvent, and need to be nationalized or otherwise cut loose.

Economics Update

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So we have the new, official jobs report, Oh My God!!!

The unemployment rate went up to 7.6%, and 598,000 jobs were cut, the most since 1974, and it happened across all sectors.

Barry Ritholtz looks at the number in more detail, and finds (excerpting):

  • Total job losses since the recession started in December 2007: 3.6 million;
  • Over the past 12 months, the number of unemployed persons has increased by 4.1 million;
  • For the first time since records began in 1939, there were three consecutive months of 500k + job losses;
  • Household survey showed a record 1.24 million job plunge (Since data began in 1950)
  • The employment-population ratio fell to 60.5%, down from 62.7% at the beginning of the recession, — the lowest rate since 1986.
  • Unemployment rate: 16-year high (1992);
  • The 3.5 million job loss since January 2008 is the largest 12-month decline since the government started compiling those figures in 1939;
  • U-6 Marginally attached and involuntary part-time workers: 13.9% last month — up almost five percent;
  • The employment-to-population ratio was the lowest since 1986.

Except for the jobs report, it’s a slow news day, which is kind of like saying, “Apart from that Mrs Lincoln, how did you enjoy the play?

Then again, I expect at least one bank closing shortly after I shut down for Shabbos, because Friday is bank regulator seizure day (cue Prince Spaghetti Day ad).

The good news is that it looks like the SEC and Treasury are denying any plans of suspending mark to market.

Going back to mark to model would be like pouring gasoline on a the bonfire of the fraudulent.

One odd thing here is that the Federal Reserve appears to be walking away from expanding its Term Asset-Backed Securities Lending Facility (TALF) program, a sh%$ pile for cash givaway lending program, to include consumer credit derived instruments.

Not sure what is going on here, but it would seem to me that this might be one of the better ways to throw money at the problem.

Meanwhile, oil fell on the jobs reports, and the dollar was mixed, up against the Yen, down vs the Euro, and flat vs. the Sterling.