Category: regulation

Economics Update

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OK, the markets went wild on the expectation that the Fed will cut rates tomorrow….I’m not impressed, truth be told….As I’ve said before, I think that the Fed is pushing on a string with interest rates.

What is or more interest is the fact that the Federal Reserve’s intervention in the commercial paper market has appeared to raise rates, rather than lower them. From Bloomberg:

Yields on commercial paper rose as the Federal Reserve began buying the debt directly from companies, showing the central bank’s efforts to unfreeze short- term credit markets have yet to take hold.

I think that the Fed is looking at a monetary solutiuon, when the solution is government legislation and government spending.

Still, this has not stopped GMAC from going in with the Fed’s commercial paper facility.

BTW, the Fed is doing something else, currency swaps with other central banks, most recently the Central Bank of New Zealand, though it has set up similar arrangements with Australia, Canada, and Japan too.

It’s supposed to help maintain liquidity, but I have no clue how this works. Anyone want to explain this to me?

What I do understand is the Federal Reserve going into the commercial paper market in the US. Ge just borrowed $5 billion from the fed.

Of course, even there, there is stuff that I don’t get, like why is the Federal Reserve starting to buy foreign commercial paper?

In any related news, the Treasury is looking at extending the bailout to privately held banks, though one wonders how they get a meaningful equity stake, as Bush Paulson and His Evil Minions™ had promised for any direct aid.

I’m not sure if this is working, as is noted at Calculated Risk:

  • 3 month treasuries are essentially unchanged.
  • TED spread is marginally better.
  • The two year swap spread is a bit worse.

Of course, that is just the world of banking. In the real world, the perceptions are actually worse, with the Conference Board’s measure of Consumer Confidence hitting the lowest reading ever recorded, dropping to 38 from September’s 61.4

This graph (click for full size), courtesy of Calculated Risk, of the Case Shiller numbers and makes a good counterpoint to the most recent housing data, also from Calculated Risk, and it is rather grim.

Short form, house prices are retrenching in a major way, and I would expect significant overshoot on the way down:

  • The Composite 20 index is off 20.3% from the peak.
  • The Composite 10 is off 17.7% over the last year.
  • The Composite 20 is off 16.6% over the last year.

In energy, oil has continued to fall rapidly, and I think that I have finally come across a good reason for this, which I will cover in a separate post.

And In An Emergency, Your Lobbyist Can Be Used as a Flotation Device*

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I’ve written about efforts to allow free wireless connectivity access to what is called “White Spaces”, bits of spectrum allocated to over the air TV, but not used.

It has been proposed that these spaces be used for unlicensed devices, much in the same way that WiFi works now.

The difference is that the ranges and penetration of the signals are much greater.

Well, there are two groups lobbying very hard against this, the broadcasters, who have their channels allocated from this spectrum, and the wireless microphone industry, who use the white spaces illegally, and have done so for years.

Since the FCC tests showed that there was no problem with interference with TV stations, the prototypes did the necessary, “sense and avoid,” of occupied space, there isn’t a problem there, so my take is that their opposition is because they think that they “own” this space, and they think that there may be a way to monetize the space, so they have enlisted wireless microphone users: (quoting Harold Feld on
For a good background on all this, check out Harold Feld at Wetmachine.com):

I gotta admire the broadcasters (as represented by their trade orgs, the National Association of Broadcasters (NAB) and the Association for Maximum Service Television (MSTV)). Even with the facts completely against them, they never give up trying. Sadly, they all too often succeed through a combination of heavy duty lobbying power (what politician doesn’t suck up to his or her local broadcaster?) and the fact that most decision makers don’t know squat about engineering and regard the whole thing as black magic. Heck, it worked to hamstring low-power FM (LPFM) radio, despite a subsequent independent government report showing the broadcaster interference claims were unsubstantiated bologna.

But embracing radio pirates by proposing to expand the availability of wireless microphones in the broadcast white spaces for their political allies and tacitly agreeing to amnesty for illegal wireless microphone users? Even I never thought they would go that far.

He also notes that the US military uses the technology in question for protection of their troops in life threatening situations.

In any case, it looks like the broadcasters have brought in the big guns,† a Megachurch Preacher Rick Warren and Dolly Parton to claim that, white space devices will “will create an unnecessary interference in the worship services of hundreds of thousands of churches across the country,” according to the preacher man, and may have a, “direct negative impact” on Dollywood, the Grand Ole Opry, and “9 to 5: The Musical.”

You are illegally squatting on a public resource already, Ms. Parton.

*Pun most certainly intended.
†Yeah, this pun is intended too.

Hedge Fund Schadenfreude

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Well, something interesting happened today; for a few hours today, Volkswagen had the largest market capitalization in the world, exceeding that of Exxon-Mobil.

It appears that what happened is that Porsche, which had previously held 42.6% of VW shares, cut a deal to increase this to 74%, and just announced it.

Combined with the German state of Lower Saxony’s slightly more than 20% share in the auto maker, this meant that only 5% of the shares were available, and there were a bunch of short sellers who bid up the stock, because there was not enough out there to cover their short sales.

My take is that the hedge funds can go Cheney themselves. Their stock in trade is to make money from just such of a lack of transparency, they call it “market asymmetry,” and they just lost money on a lack of transparency.

Hoist by their own petard….Heh.

There is going to be an German regulators looking into this though.

My guess is that Porsche did this in this way because they wanted to punish the short sellers.

They succeeded, but I’m not sure if all is in accord with German securities law.

We’re Lending Them Money for This????

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Well, it looks like the US Department of the Treasury is looking at laoning General Motors, so that they can afford to They will use the money to buy Chrysler.

I don’t know why they need the loan, according to Daimler Benz, who still owns an equity stake, Chrysler is worth nothing. They have depreciated their stake in the troubled automaker to $0.00.

They had the stock on their books at $268 million at the end of june.

I gotta think that the only motive behind this is that Bush Henry Paulson and His Evil Minions™ they are trying to make companies out there so big that they can block any regulations Congress might want to achieve in the future, because they will be throwing around so much lobbying cash.

Japanese Move to Restrict Short Selling

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I’m not surprised by their temporary ban on short naked sales and additional rules on reporting and transparency on shorting.

What surprises me is why someone selling something that they don’t have to someone else is legal in the first place, unless you are a completely incompetent acolyte of Ayn Rand who believes that anything done by an investor is capitalism in its highest form, like Alan “Bubbles” Greenspan….Wait, now I get it.

Not Enough Bullets: Tax Loophole Edition

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Well, now we know why Wells Fargo wanted wanted to buy Wachovia, a tax loophole

The day after Citigroup made its bid, the Treasury changed a tax rule that lets banks accelerate the losses and writedowns on banks they acquire against their own net income, offsetting the charges as tax write-offs.

Wells plans on writing off some $74 billion of Wachovia’s $498 billion loan portfolio — an insanely large amount that reflects just how poisoned Wachovia’s books really were. With the new tax rules, it gets to use all of that $74 billion as a charge against its own net income, which means one thing: Wells Fargo’s going to be a tax-write-off machine for years to come.

Not enough bullets.

Economics Update

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In energy, OPEC formally announces production cuts, though the price of oil continues to fall, as does the price of gasoline.

It should be noted that even with falling energy prices, the markets are so spooked that the futures contracts triggered so called circuit breakers for the S&P 500.

It’s not just the S%P that has gone into the twilight zone. The credit meltdown has pushed the interest rate of long term interest rate derivatives to negative numbers. Basically, it’s a “safe” way to lock in an interest rate, and the market is so uncertain, that people are willing do do worse than their mattresss.

Meanwhile currency is…well…confused, with the dollar gaining against the Pound and Euro, but the Yen hit a 13 year high. No clue as to what is going on there.

In any case, even if the recession isn’t official yet, it is in the UK, where GDP fell by 0.2%.

When Ideology Makes You Stupid

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The FDIC is trying to create a program to guarantee home mortgages to encourage modifications to contracts. This is stupid, particularly because in many of the cases, you can’t find anyone to modify the contract, because the instrument is held in a portfolio of bonds with hundreds, if not thousands, of stake-holders, all of whom have a legal right to veto any change,

The solution is simple, and does not cost the taxpayer anything: Modify bankruptcy to allow judges to modify mortgages. When you can’t find the owner of the loan, an judge handles it, and when you can, it to force lenders to the table.

Argentina Plans to Renationalize Pensions

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Of course, Moody’s investor’s services hates the idea.

I will make a note on the bigger picture: When Argentina privatized its pension system over a decade ago, it set the stage for its brutal economic implosion in the first place, because it stripped the government of all reserves in the process.

In response to the reports of the plans the Argentina markets dropped like a stone (13%).

I will note Brad Delong’s blog, and this quote:

The private retirement system, set up in 1994 to help bolster capital markets, owns about 5 percent of companies listed on the Buenos Aires stock exchange and 27 percent of shares available for public trading, data compiled by pension funds show.

The market crash was inevitable. It would either happen now, or when the population cohorts start sellling stocks when they retire.

This should have been done sooner.

Another Bald Guy Gets Top Bailout Bailiwick

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I did not come up with bon mot, rather it was John Carney at Clusterstock did. He was talking about James H. Lambright, former head of the Export-Import Bank, who has been tapped to serve as interim Chief Investment Officer for the Troubled Asset Relief Program (TARP).

Mr. Carney notes that we should be concerned, and not just because we have, “Bald midwestern ex-Wall Streeter running our banking system.”

In his time at the Ex-Im Bank, it appears that his main accomplishment was to remove it from congressional scrutiny by making it self financing.

In English this means that Congress has no control, but is still liable for the bill if the Ex-Im bank sees losses.

And now they want him to be in charge of investments at TARP….Lovely.

Gary Larson Works for Standard & Poors and Caused the Credit Meltdown?

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I’ve always wondered what he did after he shuttered his daily The Far Side job, and now we know that he got a job at S&P, because, when cows are at the center of malfeasance, Gary Larson will be there:

Official #1: Btw (by the way) that deal is ridiculous.

Official #2: I know right…model def (definitely) does not capture half the risk.

Official #1: We should not be rating it.

Official #2: We rate every deal. It could be structured by cows and we would rate it.

(emphasis mine)

Gary Larson rules our world.

Alan “Bubbles” Greenspan Is Shocked At Meltdownan

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So now Greenspan is shocked that a completely unregulated market leads to irrational speculation and abuse.

At the core of the theory capitalism is the idea that selfish people thinking only of themselves are what make the system work.*

If you had ever gotten your head far enough out of Ayn Rand’s long dead festering ass, you would have noticed that there were dozens, if not hundreds, of people you worked with who told you that this was going to happen.

You sir, are not a tool, because a tool has a use.

*Yes, I am paraphrasing Keynes.

Economics Update

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I think that the first story is a real biggie, the Insurance Bureau at the Financial Supervisory Commission of Taiwan has forbidden Insurance companies in that nation* from buying mortgage backed securities from the GSEs, Fannie Mae, Freddie Mac and Ginnie Mae.

The scare quote of the article is, The FSC has not only limited insurance company exposure to Fannie, Freddie and Ginnie bonds and mortgage-backed securities, but has decided that existing credit ratings are meaningless.“

Taiwan is not huge in relation to world GDP, but it’s a lot bigger than Iceland….We may be seeing the first furtive steps toward an exit that will likely end in a stampede.

If I’m wrong about a stampede away from US securities, it’s clear that there
is a stampede away from hedge funds…Makes sense, why pay these guys something like 20% when they are losing money.

In the real world or ordinary people and work, the weekly US jobless claims were worse than forecast, 478,000. The standard caveat about this being a noisy metric applies.

I would be remiss in not noting that the 4 week moving average fell, to 480,250 from 484,750.

BTW, it looks like the credit crunch is not near over, because very little let up on interest rate spreads. (H/T Calculated Risk.)

For what it’s worth, Oil prices were up a bit, because there are indications that OPEC might actually make a small supply reduction stick amongst its members.

The thing that really scares me is the fact that Washington Mutual’s Credit Default Swaps will be sold at 57¢ on the dollar, and this is considered a relief to investors.

Even scarier is the little note at the bottom that losses in the Lehman debacle, when investors got 8¢ on the dollar ended up losing less money than expected, because it was a small group who all sold in a big circle to each other.

What happens when one of the members of this circle jerk goes down in flames?

*Or whatever the frack the Taiwan’s status is right now.

Countrywide, the Gift that Keeps on Giving

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Well, it looks like one of my predictions, that Citi CEO Ken Lewis would be shown to be a complete moron to take on the corrupt and insolvent mortgage lender Countrywide Financial is turning out to be true.

Cases in the point: Countrywide, and thus Citi is being sued over accusations it blackballed appraisers who gave accurate assessments of property values, and Illinois Department of Financial and Professional Regulation just forbade them from making new loans in the state for the foreseeable future.

Not Enough Bullets, Regulation Edition

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Even after the government bailout, AIG is still lobbying to relax regulations on its business:

When the U.S. took control of failing mortgage titans Fannie Mae and Freddie Mac, it prohibited them from lobbying. But it hasn’t banned the practice at AIG, a huge insurer that is still 20%-owned by public shareholders.

AIG is currently working to ease some provisions in a new federal law establishing strict oversight of mortgage originators, according to state regulators. The law requires that originators be licensed by the states, and that they supply comprehensive information so state regulators can track their activities.

To quote Bruce Cockburn, “If I had a rocket launcher, some son-of-bitch would die.”

Making a Bad Situation Even Worse

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It looks like Hank Paulson and his bully boys at the US Treasury will be actively encouraging banks to merge with government money.

So, because some banks have to be bailed out, at taxpayer expense, because they are too big to fail, we should have even more really big banks, because it benefits the guys that Secretary Paulson plays golf with.

Well, it appears that some Senators have not viewed this development positively, and they just sent Paulson a “Whiskey Tango Foxtrot” letter regarding this.

Economics Update

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In war, it is said that amateurs talk tactics, while professionals talk logistics.

It may be the case with financial crises too, which makes the
FDIC decision to sign a lease for a lot of office space in Southern California very interesting.

Of course, the tactical developments, like investors taking losses in excess of 90% on complex financial instruments attached to Lehman and Iceland is still interesting, even if just a tactical development.

In currency, the dollar has hit a 2 year high on concerns of a coming recession.

I think that this is temporary. People are fleeing to the dollar in times of trouble out of habit which is not justified by the reality.

In any case, recession fears pushed oil to a 16 month low.

BTW, here is a very nice primer on the financial crisis: