Tuesday, September 30, 2008

Bailout Plan is Worse Than Nothing

Magical thinking: In anthropology, psychology, and cognitive science, magical thinking is nonscientific causal reasoning that often includes such ideas as the ability of the mind to affect the physical world, correlation equaling causation, the law of contagion, the power of symbols, and the meaningfulness of synchronicity.

Magical thinking can occur when one simply does not understand possible causes, as illustrated by Sir Arthur C. Clarke's suggestion that "any sufficiently advanced technology is indistinguishable from magic" (see Clarke's three laws), but can also occur in response to situations that are largely random or chaotic, such as a coin toss, as well as in situations that one has little or no control over, especially those one is emotionally invested in.


Since it appears that the Paulson Bailout will soon be back from the dead, I want to reiterate what I and others have said about why this particular bailout proposal is a bad idea. We are at a pivotal time for the credit markets, and something needs to be done to create stability. However, this plan will not fix the problem. There are several reasons:

  • No controls on how the money is distributed: This plan will give Paulson unlimited power to distribute $700 billion how he sees fit. There is nothing Paulson or Bush has said or done in the last 8 years that demonstrates an ability to comprehend problems of this magnitude, let alone an ability to deal with them properly. This plan allows Paulson to arbitrarily pick winners and losers in the marketplace, thus determining which firms go bankrupt, and which ones survive. That is too much power for one man to have, even the President.

  • No proof that credit will unfreeze: The plan is to buy illiquid securities at above mark-to-market prices. That will somehow unfreeze credit. The somehow is a missing link. How exactly will this happen?

  • No clear method of valuation: The Treasury will use as-of-yet undisclosed methods to value the securities they choose to purchase. Since the normal arbiter of prices is the market, we need another transparent pricing mechanism so we know we're paying a good price. (I've suggested a "mark-to-cashflow" method. Are there any others?)

  • Doesn't attack the real problem: The real problem is lack of trust. We have a situation where every company and government official has lied to each other and the American People for so long about the depths of this problem, that we've reached a point where markets cannot function. I'm willing to wager that several CEOs and bank presidents have been knowingly hiding losses, which would make them criminally responsible. The lack of regulations and the unwillingness to enforce existing ones is also to blame. This plan does nothing toward restoring that trust. If anything, it adds another layer of obfuscation and corruption to the system. 
I know a lot of people are scared right now. The stock market is volatile. The housing market is in the toilet. Job losses are mounting. The stakes have never been higher. That is why this is no time for a panic move! The House and the Senate need to have a joint hearing with a panel of economic experts in order to address this crisis. There are several hundred willing participants ready to assist.

I will say this unequivocally: Without a joint effort involving both parties in both houses in an open forum, we have no hope of solving this crisis. There is no amount of money we can give Paulson that will help. Anything else is just magical thinking.

Sacramento Regional Real Estate Trends for September 27, 2008












Monday, September 29, 2008

It's Dead (For Now)


They could still bring this back for a vote later, but the bill is dead for now.

Sunday, September 28, 2008

Vote Against Them


It looks like there's a decent chance that the bailout will pass today or tomorrow. If it does, the campaign against those that voted for it will begin.

I know there are a lot of people who think we need to do something to help unfreeze the credit markets. I don't disagree with you. However, I think this bailout plan is worse than nothing. This plan contains no requirement that forces the banks to lend. There's still a lot of magical thinking in this concept; that suddenly banks will trust each other once this facility is there to absorb their bad bets. In the short term, there will still be a credit crunch because it'll take time for Treasury to value and redeem. Since there's way more than $700B of bad paper, Treasury will have to perform some kind of triage. Triage will also determine who gets to redeem first. Winners will be picked all along the line, and losers will be hung out to dry. Just because a company has illiquid paper on its books doesn't mean they'll be allowed to participate.

The faster Treasury acts, the more arbitrary and unfair the process will seem. The slower they act, the longer the credit markets will remain frozen. Many companies will fail just because they weren't picked soon enough. Many others will fail because they weren't picked at all. The potential for corruption is tremendous.

The effect of this triage is already being felt. From the Clusterstock blog:

Citigroup Asking Feds To Backstop Wachovia Deal
Henry Blodget | Sep 28, 08 8:32 AM

Citi execs are meeting to discuss buying Wachovia, CNBC's Charlie Gasparino reports. Charlie says the deal depends on whether the feds will backstop Wachovia's mountain of bad debts. The press leak, meanwhile, is presumably in part an attempt to plant this seed and build support for such a bailout.

We can now presumably assume that, if the feds DON'T agree to backstop a deal--and soon--Wachovia will probably go to zero. Why would Banco Santander, Wells Fargo, or any other suitor step up if Citi has already tested the bailout waters and been denied?
I ask you, why would Wachovia need to sell itself if it could use the TARP to sell its bad paper? The answer: because the bailout is arbitrary.

If Congress and Treasury want to pick winners by passing this bailout, then voters will pick losers this November. Stay tuned.

Thursday, September 25, 2008

What Your Bailout Dollars Will Buy

Before we commit our tax dollars to a huge bailout of the mortgage industry, wouldn't it be nice to try before we buy? Consider this lovely development that is still under construction by Lennar on the outskirts of Sacramento. What are the odds that the taxpayers will own a piece of this, especially since Lennar is trying to get builders included in the nearly passed bailout package?

Introducing the Andravida Subdivision. It lies on the bleeding southeastern edge of Rancho Cordova, a suburb of Sacramento. The nearest grocery store is 11 miles away. The main regional garbage dump is 2 miles away. The development is not even 10% complete. However, this doesn't stop Lennar from pricing their unbuilt 2400 sqft houses at $345,000.

This is what we're being asked to bail out, folks. Bad investments by banks and builders that knew better. Here's something to feast your eyes on while you consider the bailout proposals:






Wednesday, September 24, 2008

Getting Scary

Here's the TED spread for this morning:


And here are the latest mortgage rates from Wells Fargo:


The one month Treasury bill is crashing again:


It looks like the markets are going to force the hand of Congress. I expect the bailout will be passed today or tomorrow.

While You Weren't Looking

In case you missed it, the House passed a $25 Billion bailout loan of the automakers today. The Senate expects to pass it shortly.

House approves $25 billion loan to automakers

U.S. automakers and their suppliers won a key victory on Capitol Hill Wednesday when the U.S. House of Representatives approved a measure that would allows the government to fund a $25 billion loan pool for the auto industry.

Companies such as Ford Motor Co., General Motors Corp. and Chrysler LLC had sought the funding for low-interest loans to help U.S. automakers develop and build more energy-efficient cars and trucks.

The loans were approved last year but were not funding. The loans were designed to help automakers meet Corporate Average Fuel Economy, or fuel-efficiency, standards of at least 35 miles per gallon by 2020.

The current bill provides funding as part of a broader measure that provides fiscal 2008 funding for the U.S. Department of Homeland Security.

The bill passed 370 to 58 and will be considered by the U.S. Senate as early as Friday.

Monday, September 22, 2008

Call Your Representatives

It's time to take action, folks. At this stage of the bailout negotiations, there are a lot of options on the table, and your Congressional representatives are taking calls. Here are the contact details for our Sacramento Area congress critters. If you're not sure which district you're in, click here for an interactive map.

Doris Matsui
Fifth District
501 I Street, Suite 12-600
Sacramento, CA 95814
Sacramento Phone: (916) 498-5600
Washington Phone: (202) 225-7163
Washington Fax: (202) 225-0566

Dan Lungren
Third District
2339 Gold Meadow Way, Suite 220
Gold River, CA 95670
Sacramento Phone: (916) 859-9906
Sacramento Fax: (916) 859-9976
Washington Phone: (202) 225-5716
Washington Fax: (202) 226-1298

Sen. Barbara Boxer
112 Hart Senate Office Building
Washington, D.C. 20510
Washington Phone: (202) 224-3553
Washington Fax: (202) 224-0454

Senator Dianne Feinstein
331 Hart Senate Office Building
Washington, D.C. 20510
Washington Phone: (202) 224-3841
Washington Fax: (202) 228-3954

If you're not in the Sacramento Area, Mish has a complete list of all representatives over at his site. I gave Rep. Lungren's office a call, and talked with one of his staffers. According to him, they're getting a lot of calls on the issue. Do your part, guys! Let's take it to 'em!

**Update**

This was posted on Yves Smith's site:

Protests Against Bailout Bill Registering With Congress

We received this e-mail today from one of the Congressional staffers who has taken to corresponding with us:

I know that people are often cynical about contacting their representatives. Frankly, they should be. Most days, the overwhelming volume of constituent contacts is form letter e-mails, pre-printed postcards, blast faxes, and automated phone calls. It's easy for genuine individual requests to get lost in the sea of astroturf (fake grassroots) campaigns.

But, on this issue, the calls and e-mails are making a difference. Members and staffers are talking about it in the halls and in meetings. The volumes are big (although as big as when the NRA or AARP mobilizes their members) but they're all individual. And they're running 99-to-1 against. If you read the capitol hill press (Roll Call, Politico, The Hill, CQ, National Journal), you can see the developing dissent among the rank-and-file on both sides. A lot of that is beign driven by the calls and e-mails from back home. Keep it up!

Sacramento Regional Real Estate Trends for September 20, 2008












Sunday, September 21, 2008

The Insane Are Running The Asylum

You're beautiful, more beautiful than me.
You're honorable, more honorable than me.
Loyal to the Bank of America.

- R.E.M. "Exhuming McCarthy"

The definition of insanity is doing the same thing over and over again and expecting different results.- Albert Einstein

But you already knew that. How throwing another $700 billion down the rat hole that is Wall Street's gaping maw will save the world economy is beyond me. There are many thoughtful debates taking place across the bubblesphere on the bailout proposal, but I wanted to give my take also. I hope it adds to the discussion.

For the last five years or so, the U.S. (and some might say the World) economy has operated under a collective insanity, that debt was the same as wealth. The average person buying a home, officials in every level of government, and almost every corporation, believed that purchasing assets with borrowed money would lead to prosperity. Loans were traded like money. Stocks were purchased with money from home equity lines. Credit cards were used to buy cars. Wars were fought with money borrowed from enemies.

When the debt burden became too great, defaults occurred. The problems began at the bottom of the financial food chain, where the poorest loans were made to the poorest people, and quickly moved into the financial sector and imperiled the mightiest banks in the world. Delaying tactics were used, like underreporting losses, refusing to mark down asset values, and hiding worthless securities in foreign accounts, but the market discovered the lies. Banks and other financial companies began to fail.

Last week, a climax was reached. The most precious currency of the realm, trust, was gone. No one believed anyone else would repay a loan. Banks distrusted other banks. Insurance was useless, or impossible to buy. Corporate debt was untradeable. The entire global credit market had a heart attack and froze solid.

It's still frozen. Trust in the system is gone.

Now Hank Paulson and Ben Bernanke's solution is to go another $700 billion in debt, gambling on the hope that trust in the credit market can be restored by making good all the bad loans in the marketplace. They're telling us that this trust is more valuable than the $700 billion.

What they haven't told us is how engaging in the same behavior that got us into trouble will get us out of it. They're telling us that if we let them drink our milkshake, we'll still have it. Isn't that a little insane?

Thursday, September 18, 2008

CalPERS Halts Financial Share Lending

Looks like CalPERS is responding to political pressure in an attempt to prop up the share prices of Goldman Sachs and Morgan Stanley. The "volatility" statement is obviously BS; they could simply charge more for the loan of shares if they were worried about getting paid back. We're looking at pure desperation now.

This thing could get a lot crazier.

Pension funds halt lending of Morgan Stanley, Goldman shares
By Wallace Witkowski
Last update: 2:09 p.m. EDT Sept. 18, 2008

SAN FRANCSICO (MarketWatch) -- Pension fund managers Calpers (sic) and Calstrs (sic) said thursday that it has temporarily halting lending of Morgan Stanley and Goldman Sachs Group Inc. shares. A Calpers spokeswoman said that its securities lending program remains "very active," and that the temporary halt stems from the huge volatility in Morgan Stanley and Goldman Sachs shares. Once market volatility abates, the shares will be lent again, the spokeswoman said.

Wednesday, September 17, 2008

AIG Asia Update

Hong Kong is freezing AIG assets in-country. I'm sure more Asian authorities will follow suit in an attempt to restore confidence, but this might backfire if AIA assets are in concentrated pools. This could signal a tug-of-war between Asian authorities over AIA capitol.

HK moves to avert AIA asset shift

Thursday, September 18, 2008

Hong Kong's Insurance Authority has exercised its power to ring-fence the assets of AIG's insurance subsidiaries, Financial Secretary John Tsang Chun- wah said yesterday.

The companies cannot now transfer assets or funds out of Hong Kong without prior approval from the authority.

"It's a matter of public confidence," Commissioner of Insurance Clement Cheung Wan-ching said. "We will protect policyholders' interests, in order to keep the market stable."

Tsang said the authority will "spare no effort" in monitoring the two AIG subsidiaries that offered life insurance.

"The authority will ... impose new regulatory actions if justified by prevailing market circumstances," he said.

Cheung said he believes the moves will not affect the daily operation of AIG's businesses in Hong Kong.

"Any transfer relating to normal business activities would not be barred," a government source said.

Cheung said AIG units in Hong Kong are "healthy" and said he does not see any problems in their operations.
BTW, sorry about straying from the usual blog topics lately, but there are a lot of stories falling through the cracks that might be considered interesting around here. Any abuse you wish to unleash can be left in the comments. :)

Minor Run on AIG Subsidiary in Singapore

There was a run on AIA, a subsidiary of AIG, in Singapore today. From Time World:

Philip Aee is a patient man. Patient — and very worried. Holding a piece of paper saying he was the 1,600th person in line, the 60-year-old retiree had been waiting for three hours on September 17 outside the offices of AIG's Singapore subsidiary, AIA. The sun beat down on the sunflower-yellow facade of the company's fifty-year-old flagship building in the heart of Singapore's office district, around the corner from AIA's new offices. "I never thought this would happen to AIG," said Aee, shaking his head in amazement.

Aee was well aware of the $85 billion lifeline extended to troubled insurance giant AIG by the U.S. Federal Reserve several hours before. But the news did little to calm his nerves. A day after Asian markets took a beating as investors dumped stocks in the wake of the Lehman Bros. collapse and Merrill Lynch buyout, anxiety over U.S. financial companies was still spreading. By mid-afternoon, a crowd of roughly 150 people still swarmed the entrance of AIA Singapore Ltd., many trying to pull out their funds or cancel their insurance policies.
**Update: Here's some video from CNN:



Elsewhere in Asia, government agencies and AIG managers are trying to calm policy holders:

Thailand-based AIA says its financial position remains strong
Chinese insurance regulator monitors U.S. market crisis
China: Govt officials reassure investors on AIA operation
AIG tries to put policy holders' fears at rest

The China Daily was surprisingly muted for a negative story from the US. (Usually they're very sensational):
Policyholders are worried about their investments in AIA, the Hong Kong arm of troubled US giant American International Group (AIG), although AIA said its operations are sound and financial strength is healthy.

Many customers have called up the insurer, which took up a 16.2 percent market share in Hong Kong by the end of last year, to ask whether their investments are at stake, Tim Wong, an AIA agent, told China Daily.

"I can feel investors are losing confidence. The issue will no doubt have an impact on the company's reputation and that will make it more difficult for us to find insurance customers in the near future," Wong said.

David Chan, an AIA fund buyer, said he will re-examine his investment portfolio, though his plan with AIA seems to be unaffected by the AIG crisis.

"The issue has really got me worried. It seems there is no safe place to put my money," Chan said.

Chan has been buying funds with AIA for two years, which cost him around HK$50,000.
If this turns into a regional panic, AIG could be worth a lot less than the Fed originally thought.

Tuesday, September 16, 2008

Taxpayers Bailout AIG


Paulson and Bernanke's wherewithal lasted less than 24 hours, as they've readied an $85 Billion "loan" to AIG.

It's stunning how short-term the thinking has become. We're down to worrying about events occurring within hours, not even days or weeks.

Sound, predictable policy cannot be created in such timeframes. Every decision appears arbitrary, and the problem gets exacerbated whether action is taken or not. Bailout AIG today, but what happens when the next crisis starts? Or the next? Or the next?

Monday, September 15, 2008

The Annotated Fuld

Lehman Brothers stock finished down 94.24% at $0.21 per share after declaring Chapter 11 bankruptcy last night. That is down from over $85 per share in February 2007. The fate of LEH's 28,000 employees is unknown. A few will certainly keep their jobs as the profitable units are sold to other firms, but most will be unemployed.

Now before you start feeling too sorry for these guys, consider this article from last December from Bloomberg news:

Lehman's 2007 Bonus Pool Rises Almost 10% on Higher Revenue

By Christine Harper

Lehman Brothers Holdings Inc.'s 2007 bonus payout, the first reported by a Wall Street firm, rose almost 10 percent from last year as revenue gains through August overcame a fourth-quarter decline.

Compensation, including salaries, benefits and bonuses, climbed 9.5 percent to $9.5 billion from $8.7 billion a year earlier, the New York-based company said today in a statement. Bonuses typically account for about 60 percent of compensation, or $5.7 billion compared with 5.2 billion in 2006...

The company's average pay per employee fell slightly in 2007 as Lehman added workers at a faster rate than it increased compensation. Salary, benefits and bonuses per person dropped to an average $332,470 from $334,246 a year earlier, as the number of employees rose 10 percent to 28,556 from 25,936 a year earlier.
Something tells me their hatred of Fuld is a bit misplaced...

**Update**

Here's the reaction from some former employees. Bitter? I'd say so.

Sacramento Regional Real Estate Trends for September 13, 2008

Just the graphs today.