Wednesday, October 29, 2008

Vote 'Em Out

The bailout madness continues unabated, with this latest floater out from the FDIC and Treasury. It seems picking winners among banks wasn't enough. They now want to pick winners among house buyers as well:

Government May Guarantee 3 Million Mortgages

Officials with the Treasury and the Federal Deposit Insurance Corp. are nearing agreement on a plan under which the government would guarantee the mortgages of millions of homeowners now struggling to avoid foreclosure.

According to three sources familiar with the discussions, the plan would cover up to three million homeowners. It would cost between $40 billion and $50 billion and cover as much as $600 billion in mortgage loans.

Under the program being discussed, the lender would agree to reduce borrowers' monthly payments based on their ability to pay. The reductions could be achieved by lowering the interest rate, slashing the amount owed or extending the repayment period.

These reconfigured loans would help homeowners avert foreclosure.

In exchange, financial institutions that agree to participate in the program would receive a government guarantee for a portion of any losses occurring if borrowers default on the reconfigured loan.
We're now way passed the point where we should expect rational policy out of the current batch of cowards and thieves that run our government. That means it's time give a new bunch of cowards and thieves a chance to act in the interests of responsible citizens. If they fail: wash, rinse, repeat until some decent ones turn up.

I say we start by voting against any incumbent that voted for the misguided $700,000,000,000 Wall Street bank and bonus pool bailout, and go from there. In the Sacramento region, that means voting for Bill Durston (D) instead of Dan Lungren (R) in the Third District, and voting for Paul A. Smith (R) instead of Doris Matsui (D) in the Fifth District. For areas with no incumbent, I would look at the candidate's statements. For example, in the Fourth District election, Tom McClintock said he would have voted against the bailout, while Charlie Brown said the package was "flawed, but still the right move."

If you want to know how all Congressmen voted on the bailout, has a list. There's also some good information at Stop The Housing Bailout and Supported The Bailout.

It's time to take the fight to them! Vote 'Em Out!

Tuesday, October 28, 2008


Here is a graph of the S&P 500 index vs the CBOE Volatility Index (VIX) since 1995:

The VIX is a tool traders use to try and gauge the uncertainty of the price of S&P 500 stocks 30 days from now. The higher the VIX, the less sure traders are that their guesses about future prices will come true. As you can see, the recent spike dwarfs any other uncertain time in the past, including the Dot Com Crash, September 11, 2001, and Gulf War II.

I believe that the lack of a clear vision from the Federal Reserve and what appear to be arbitrary policy decisions by the Treasury are at least partially to blame for this volatility. Every single bet being made right now could be altered by the decisions of government. Until January 20, 2009, any wager made at the gambling tables of Wall Street could be taken by the house.


Here's a list of the 15 best and worst DOW days of all time, courtesy of Macro Man. Strange bedfellows indeed:

Thursday, October 23, 2008

CalPERS Lost $30 Billion in Three Weeks

The Sacramento Bee broke the story on Monday, but a simple search of CalPERS press releases also tells the tale.

CalPERS has a generic tag line it uses at the end of some of its press releases that mention the total size of the fund. Here's what it said in January 2008:

CalPERS is the nation’s largest public pension fund with assets totaling more than $240 billion. The System provides retirement and health benefits to more than 1.5 million State and local public employees and their families. For more on CalPERS, visit
Here's what it says now:
CalPERS is the nation’s largest public pension fund with more than $190 billion in assets. It provides retirement and health benefits to 1.6 million active and retired state, local public agency, and non-teaching school employees on behalf of 2,600 public employers. For more information about CalPERS, visit
CalPERS has lost around $50 billion (21%) this year, and $30 billion in the last three weeks! Ouch! Here's a graph of the CalPERS PR Fund Size Indicator for 2008 (Note: The scale doesn't start at zero to better illustrate change):

**Quick Edit**

Found a CalPERS agenda item discussion paper on the issue (pdf warning). If the 20% losses remain in place after fiscal year end, CalPERS will only be 68% funded for 2009. This means that California state employer contributions will have to increase by 2%-4% of payroll. State payroll is around $16 billion per year, so that's another $540 million in additional unanticipated spending on top of the $7 billion deficit the state already has. Also, the increases will add up well into the future. From the report:
Beyond those fiscal years, if CalPERS does experience a negative return in 2008-2009 as illustrated above then employer rates would likely continue to rise slowly over time even if CalPERS earns its anticipated 7.75% return. It would take returns well in excess of 7.75% in subsequent years to prevent a steady rise in employer rates.

If for example the investment return in 2008-2009 remains at -20% for the fiscal, investment returns of 7.75% in the next few years would result in increases in employer rates of about 0.2% to 0.6% of payroll each year. Under that scenario, it would take a return in excess of 28% in 2009-2010 to prevent further increases in rates in subsequent years.
Since the state is on the hook for any losses CalPERS sustains, there's really no upper limit to what this will cost the state. In addition, there's a huge retirement wave approaching that will strain the retirement fund like never before.

Thursday, October 16, 2008

Missing Link

Treasury Secretary Paulson was on Larry Kudlow's show last night. CNBC has the video. This exchange took place at 9:00 in:

KUDLOW: So many people want to know--I mean, I get this, I hear this, people stop me on the street, callers on my radio show on Saturdays--how can you get the bankers to deploy the government capital that you are injecting? I mean, for example, the yield on the preferred is 5 percent. Their cost on the preferred is 5 percent. Now, they've got--some of them have preferred stock that's 11 percent in yield. They have bonds outstanding that are 7, 8, 9 and 10 percent.

Mr. PAULSON: Yeah.

KUDLOW: What's to stop them from getting the new government money at 5 percent and retiring the outstanding paper that's much more expensive rather than deploying this new capital in the economy for the purposes you've just described?

Mr. PAULSON: Well, that's a--that's a key question, and let me say, even before that, the reason we set the terms where they were set, we didn't think this term should be set at the--what the market would demand in a crisis situation. That's why the government's coming in to begin with. We wanted the terms to be like that you would have in a normal situation. Now, the way you get bankers to deploy the capital--because they know it's their job to deploy the capital, making the loans which are so vital to our economy, the way you get them to do that is they've got to have, first of all, plenty of capital; they've got to be well capitalized. Secondly, they've got to be confident in the system. They've got to be confident that as the money flows between and among banks that they've--they're confident in that and confident in the strength of the system. (Magical thinking at its finest. - Max)

KUDLOW: Rather than pay down their own debt.

Mr. PAULSON: And--oh, listen, they're not going to be paying down their own debt. This is--they're--this--the regulators understand that, and they understand.
Unless Paulson made them an offer they couldn't refuse, what's to stop the banks from using taxpayer's money for whatever they want?

1. Give banks lots of taxpayer money.
2. ...
3. Liquidity is restored.

Tuesday, October 14, 2008

Winners Picked

Here are the winners of the Too Big To Fail Sweepstakes:

  • Bank of America
  • Merrill Lynch
  • Bank of New York Mellon
  • Citigroup
  • Goldman Sachs
  • J.P. Morgan Chase
  • Morgan Stanley
  • State Street
  • Wells Fargo

If you have uninsured money anywhere else, or own stocks in any other bank, you're a fool.

Saturday, October 11, 2008

Not Out Of The Woods

The G7 are meeting in Washington, where they hope to cobble together a plan to save the global financial system. The hope is through a coordinated effort, the plan will "will help restore stability to our markets and confidence to our financial institutions." Right now, details of the plan remain sketchy, although it looks like Paulson has finally seen the light, and will use the $700 billion bailout to acquire equity positions in banks, rather than buy worthless mortgage-backed securities. (Whether even this action causes banks to lend remains to be seen.)

That the crisis has moved this rapidly into the geopolitical realm has given me pause; I think we all take for granted how tightly coupled the world has become. The financial glue that binds us also has a way of diminishing the importance of other conflicts. As that glue weakens, those other conflicts reassert themselves in unexpected ways.

I think this statement from Bush yesterday was the most telling, and the most scary:
As our nations carry out this plan, we must ensure the actions of one country do not contradict or undermine the actions of another. In our interconnected world, no nation will gain by driving down the fortunes of another. We're in this together. We will come through it together.

I'm confident that the world's major economies can overcome the challenges we face. There have been moments of crisis in the past when powerful nations turned their energies against each other, or sought to wall themselves off from the world. This time is different. The leaders gathered in Washington this weekend are all working toward the same goals. We will stand together in addressing this threat to our prosperity. We will do what it takes to resolve this crisis. And the world's economy will emerge stronger as a result.
There are already signs that some countries with relatively strong economies are starting to assert themselves in Europe. For example:
(Notice I haven't talked about Asia. I think they have been keeping a lid on things up until now, and we could start seeing their problems emerge in the very near future. The other shoe to drop, if you will.)

Events have rapidly outpaced domestic political efforts, so there is no reason to expect heroics from the G7 this weekend. I do think they'll come up with a plan. I'm not confident it will work. One thing is for sure: this crisis will test the limits of global diplomacy.

Thursday, October 09, 2008

5.5 Year Low

Interesting past Dow closing day values:

October 9, 2008: 8,579
October 10, 2007: 14,280
May 2, 2003: 8,583
September 14, 2001: 8,236
January 19, 2001: 10,588

Wednesday, October 08, 2008

Our Glorious Leader

Hong Kong Riots?

News on the financial crisis coming out of China is heavily controlled by the government, but news is beginning to leak out about riots in Hong Kong. Take these stories with a grain of salt, but they're probably a sign of what's to come as Chinese savers realize how much they're losing.

Riots in Hong Kong after heavy stock losses
Wednesday, 8 October 2008 13:34
There have been riots on the streets of Hong Kong following heavy losses at the city's Hang Seng index.

The Hang Seng closed over 8% lower with losses in banks, communications companies and exploration companies.

Customers are trying to get their money out of bank branches and many are protesting about losses related to the collapse of Lehman Brothers.

'Give me back the money I made'
Furious investors take their case for a full refund to Legco and the Bank of China

Close to 1,000 investors in minibonds and other Lehman Brothers products clamoured for a full refund at the Legislative Council and the Bank of China yesterday.

"Give me back the money I made with my blood and sweat," they shouted.

The crowd spilled from Chater Garden into the Legco car park. Most were retirees. Some cried, others shook their fists in anger. One woman arrived in a wheelchair.

The investors arrived in the morning before the Legco meeting began to urge legislators to give their complaints top priority. They shouted their opposition to the government's proposal, on Monday, for banks to buy back the minibonds at market value.

Thousands of investors in minibonds - high-risk credit-linked derivatives - issued by or referenced to the now-bankrupt Lehman Brothers have complained and demanded a refund for weeks. They claim banks did not disclose the risks involved or explain that the minibonds - which have since plunged in value - were linked to Lehman.

Legislators from the Democratic Alliance for the Betterment and Progress of Hong Kong, the Civic Party and Democratic Party promised investors they would discuss their complaints during the Legco meeting and urged the crowd to remain calm. "We assure you that the first thing we'll do is help all of you," the DAB's Chan Kam-lam said.

At midday, about 100 investors moved to the adjacent Bank of China building and clashed with police as they attempted to enter. Many investors had bought minibonds from the bank. One woman fainted.

The three parties met separately with representatives from the Bank of China (Hong Kong) yesterday. Mr Chan and other DAB legislators met them in the morning. In the afternoon, Civic Party legislator Alan Leong Kah-kit met BOCHK's head of personal banking, Lawrence Law Hong-ping, with 10 investors.

Democratic Party legislator Kam Nai-wai took 10 investors to his meeting in the evening.

Mr Chan demanded the banks pay a full refund and complete their appraisal of the minibonds' value. The banks were responsive, he said.

However, by afternoon, the investors said hope was fading as the meetings produced no new answers. "I am quite disappointed," said Peter Chan Kwong-yue, an investor and group leader for BOCHK complainants who attended the meeting with Mr Leong. "To this day, it seems as if Bank of China has no knowledge of mis-selling by its frontline agents."

BOCHK deputy chief executive David Lam Yim-nam said the bank must consider information from HSBC before making a decision. HSBC was the minibonds' trustee - middleman between the US bank and local distributor banks. He did not indicate whether BOCHK would accept the proposal of a full refund.

Tuesday, October 07, 2008

Captains Not Courageous

We have leaders who are anxious. We have captains not courageous. Captains tumbling into madness -Midnight Oil "Bedlam Bridge"

From a speech given by Ben Bernanke today at the National Association for Business Economics 50th Annual Meeting, Washington, D.C. Comments from me in bold:

On the heels of nearly a year of stress in credit markets, investors' and creditors' concerns about funding and credit risks at financial firms intensified over the summer as mortgage-related assets deteriorated further, economic growth slowed, and uncertainty about the economic outlook increased. As investors and creditors lost confidence in the ability of certain firms to meet their obligations, their access to capital markets as well as to short-term funding markets became increasingly impaired and their stock prices fell sharply.
No. It wasn't a "lack of confidence in the ability," it was lack of ability, plain and simple. The firms were insolvent. Period.
The Federal Reserve believes that, whenever possible, such difficulties should be addressed through private-sector arrangements--for example, by raising new equity capital, as many firms have done, by negotiations leading to a merger or acquisition, or by an orderly wind-down. Government assistance should be provided with the greatest reluctance and only when the stability of the financial system, and thus the health of the broader economy, is at risk. In those cases when financial stability is threatened, however, intervention to protect the public interest may well be justified.
Bernanke and the Fed have never defined what "financial stability" is. How can you take action if you can't define the problem to begin with?
The difficulties at Lehman and AIG raised somewhat different issues. Like the GSEs, both companies were large and complex and deeply embedded in our financial system. In both cases, as the firms approached default, the Treasury and the Federal Reserve sought private-sector solutions, but none was forthcoming. Attempts to organize a consortium of private firms to purchase or recapitalize Lehman were unsuccessful. With respect to public-sector solutions, we determined that either facilitating a sale of Lehman or maintaining the company as a free-standing entity would have required a very sizable injection of public funds--much larger than in the case of Bear Stearns--and would have involved the assumption by taxpayers of billions of dollars of expected losses.
So Bear was OK, but Lehman wasn't? Was it simply the amount of money involved, or was it too complex to figure out? Or not complex enough to bother with? The question remains unresolved, and the decision appears arbitrary.
In the case of AIG, the Federal Reserve and the Treasury judged that a disorderly failure of AIG would have severely threatened global financial stability and the performance of the U.S. economy. That judgment reflected our assessment of prevailing market conditions, AIG's central role in a number of markets other firms use to manage risks, and the size and composition of AIG's balance sheet.
Again, an arbitrary distinction. I'm not criticizing the move, I'm criticizing the explanation. Even a stopped clock is right twice a day. When the government spends $80 billion on the bailout of one company, we need details.
All told, economic activity is likely to be subdued during the remainder of this year and into next year. The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth. To support growth and reduce the downside risks, continued efforts to stabilize the financial markets are essential. The Federal Reserve will continue to use the tools at its disposal to improve market functioning and liquidity.
How do you improve market functioning without becoming the market? How do you improve liquidity when solvency is the problem? Answer: you can't!
The intensification of the financial crisis in recent weeks made clear that a more powerful and comprehensive approach involving the fiscal authorities was needed to solve these problems. On that basis, the Secretary of the Treasury, with the support of the Federal Reserve, went to the Congress to ask for a substantial program aimed at stabilizing our financial markets. As you know, last week the Congress passed and the President signed the Emergency Economic Stabilization Act. This legislation provides important new tools for addressing the distress in financial markets and thus mitigating the risks to the economy... Notably, the legislation establishes a new Troubled Asset Relief Program, or TARP, under which the Treasury is authorized to purchase as much as $700 billion of troubled mortgages, mortgage-related securities, and other financial instruments from financial firms that are regulated under U.S. law and have significant operations in the United States.

The TARP's purchases of illiquid assets from banks and other financial institutions will create liquidity and promote price discovery in the markets for these assets. This in turn will reduce investor uncertainty about the current value and prospects of financial institutions, enabling banks and other institutions to raise capital and increasing the willingness of counterparties to engage. More generally, increased liquidity and transparency in pricing will help to restore confidence in our financial markets and promote more normal functioning. With time, strengthening our financial institutions and markets will allow credit to begin flowing again, supporting economic growth.
Magical thinking at its finest. If these assets were so easy to value, we wouldn't be in this mess. The only "price discovery" that will happen is finding out how big of a sucker the Treasury is willing to be. Since there's no way to price these disparate assets consistently, how will counterparties know when it's safe to lend? I just don't see how to connect the dots here.
These are momentous steps, but they are being taken to address a problem of historic dimensions. In one respect, however, we are fortunate. We have learned from historical experience with severe financial crises that if government intervention comes only at a point at which many or most financial institutions are insolvent or nearly so, the costs of restoring the system are greatly increased. This is not the situation we face today. The Congress and the Administration chose to act at a moment of great stress, but one at which the great majority of financial institutions have sufficient capital and liquidity to return to their critical function of providing new credit for our economy.
This goes to the heart of the problem. Nobody knows what the "costs of restoring the system" will be, or what the system should look like after this is all over. Clearly, something about the status quo was wrong, so the goal shouldn't be to "restore the system," but to repair it. No amount of liquidity can create solvency. He's treating the symptoms, not the disease. Until his approach changes, our economy will suffer.

More on Iceland

The Icelandic president addressed his people today:

Fellow Icelanders...

The entire world is experiencing a major economic crisis, which can be likened in its effects on the world’s banking systems, to an economic natural disaster...

When the international economic crisis began just over a year ago with the collapse of the real estate market in the U.S. and chain reactions due to the so-called sub-prime loans, the position of Icelandic banks was considered to be strong, as they had not taken any significant part in such business. But the effects of this chain of events, have turned out to be more serious and wide ranging than anyone had expected.

In recent weeks the world’s financial system has been subject to devastating shocks... The effects have been that large international banks have stopped financing other banks and complete lack of confidence has developed in business between banks. This has caused the position of Icelandic banks to deteriorate very rapidly in the last few days...

The Government has, for its part, aimed for the sale by Icelandic banks of foreign assets and a reduced presence abroad, so that the Icelandic state, so small in comparison with the Icelandic banks, would have the capacity to support them. We should bear in mind in this connection that the huge measures introduced by the U.S. authorities to rescue their banking system represent just under 5 percent of GNP. The total economic weight of the Icelandic banks, however, is many times the GNP of Iceland...

There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy....

The position has today altered completely and for the worse. Major credit lines to the banks have been closed and it was decided this morning to suspend trading with the banks and with the savings funds in the Icelandic Stock Exchange.

The task of the authorities over the coming days is clear: to make sure that chaos does not ensue if the Icelandic banks become to some extent non-operational. For this the authorities have many options and they will be used. Both in politics and elsewhere it will be important to sheathe our swords. It is very important that we display both calm and consideration during the difficult days ahead.
How long before Governor Schwarzenegger has to give a similar speech?


Looks like a lot of UK savers who used an Icelandic bank could be screwed:
Icesave: Question mark over compensation
The government faces having to explain to thousands of British consumers how they have may lost savings following the collapse of the Icelandic back Landsbanki.

More than 300,000 Britons are thought to have had their cash in the bank's UK savings arm Icesave.

Most thought they would have up to £50,000 of their savings covered by the Financial Services Compensation Scheme (FSCS) in the event the bank failed.

The UK's FSCS confirmed today that it is only responsible for "top-up" payouts to customers of Icesave.

It said this afternoon it was only gearing up to cover amounts over and above the €20,000 (£16,264) protected by the Icelandic government's deposit protection scheme.

This means that if the Icelandic government was unable to meet its obligations to UK savers they would only get back any holdings between €20,000 and £50,000; those savers with less than €20,000 would receive nothing.