In keeping with the more serious nature of this blog, I thought that I'd put up some really heavy material. But first, I was reading an article in the Times this morning by Thomas Friedman. It reminded me that none of the talking heads ever offer solutions, only criticism. I suppose, that this is all right, but it has always been a source of frustration to me. I've always taken the position, that one really does not have the ability to criticise unless they actually know more than the person that they are critical of.
Anyhow, that's why I appreciate the following essay by Jack Handey from the November 24 issue of the New Yorker. I hope that it's okay to reprint it here.
THE PLAN
by Jack Handey
NOVEMBER 24, 2008
The plan isn’t foolproof. For it to work, certain things must happen:
—The door to the vault must have accidentally been left open by the cleaning woman.
—The guard must bend over to tie his shoes and somehow he gets all the shoelaces tied together. He can’t get them apart, so he takes out his gun and shoots all his bullets at the knot. But he misses. Then he just lies down on the floor and goes to sleep.
—Most of the customers in the bank must happen to be wearing Nixon masks, so when we come in wearing our Nixon masks it doesn’t alarm anyone.
—There must be an empty parking space right out in front. If it has a meter, there must be time left on it, because our outfits don’t have pockets for change.
—The monkeys must grab the bags of money and not just shriek and go running all over the place, like they did in the practice run.
—The security cameras must be the early, old-timey kind that don’t actually take pictures.
—When the big clock in the lobby strikes two, everyone must stop and stare at it for at least ten minutes.
—The bank alarm must have mistakenly been set to “Quiet.” Or “Ebb tide.”
—The gold bars must be made out of a lighter kind of gold that’s just as valuable but easier to carry.
—If somebody runs out of the bank and yells, “Help! The bank is being robbed!,” he must be a neighborhood crazy person who people just laugh at.
—If the police come, they don’t notice that the historical mural on the wall is actually us, holding still.
—The bank’s lost-and-found department must have a gun that fires a suction cup with a wire attached to it. Also a chainsaw and a hang glider.
—When we spray the lobby with knockout gas, for some reason the gas doesn’t work on us.
—After the suction cup is stuck to the ceiling, it must hold long enough for Leon to pull himself up the wire while carrying the bags of money, the gold bars, and the hang glider. When he reaches the ceiling, he must be able to cut through it with the chainsaw and climb out.
—Any fingerprints we leave must be erased by the monkeys.
—Once on the roof, Leon must be able to hold on to the hang glider with one hand and the money and the gold bars with the other and launch himself off the roof. Then glide the twenty miles to the rendezvous point.
—When we exit the bank, there must be a parade going by, so our getaway car, which is decorated to look like a float, can blend right in.
—During the parade, our car must not win a prize for best float, because then we’ll have to have our picture taken with the award.
—At the rendezvous point, there must be an empty parking space with a meter that takes hundred-dollar bills.
—The robbery is blamed on the monkeys. ♦
I like irony, don't you?
Wednesday, November 26, 2008
Friday, November 21, 2008
Thursday, November 20, 2008
Deflation or a Wicked Correction
Take that GM!
Markets are leading indicators. Right now, their telling us that the shit has hit the fan. I haven't read anything yet today, but if the markets are any indication, we really are in a lot of trouble. Here are a few numbers that I think are significant; the 90-day bill is trading at at .02% yield (that's 2/10's of one percent, more buyers than sellers?) oil closed at less than $50/barrel (the Brent crude contract was at $47.47). Last spring, oil was trading at $140 plus. The Dow closed at 7,552 a drop of greater than 5% on the day and, if memory serves, it's been less than one year since it set a record at 14,000 plus. So the drop in the Dow is close to 50% from its highs.
So, is it a correction or is it all based on proper valuation - which takes a correction in order to occur. There can be absolutely no doubt, that all markets were way overdone. When that happens, there is always a correction. So, are we there yet? Is it time to buy? Where will we be in six months? One thing is certain, there was rampant speculation in a few markets - commodities and real estate for sure but probably some others as well.
What's in a name anyhow? I'm thinking correction. The markets were overdone and now their not. I suppose that there is value out there someplace, but who really has the nerve to step up to the plate? Anybody, and if there isn't anybody, will it deflate some more?
Tuesday, November 18, 2008
KISS
Keep It Simple Stupid ...
In attempting to think through the idea of having the treasury actually pay the missing P&I payments on the mortgages that provided collateral to the defaulted MBS, I have come up with the following:
So far, the treasury has purchased about $158 billion in preferred stock with warrants in a bunch of US financial institutions. I calculated the future value of that number using a 6% fixed rate payment and 1/360 of the $158 billion as a monthly payment (hey, I know that the formula is wrong, but bear with me). The FV comes out to almost $513 billion. What this says is, that if the treasury just put the $158 billion aside and re-invested it someplace like the treasury yield curve, e.g. guess at the cash flow needed to amortize the mortgage pool and then buy a strip of government securities in an equal amount, it would have more than enough cash to pay monthly P&I. I would guess, that $440 million (158 billion/360) is a tad more than what is needed to get the cash flow running in all of the defaulted MBS. In other words, my formula is close enough for government work.
Remember folks, the big issue for AIG, as an example, is credit default swaps. That is, AIG was the counter party on swaps that, kind of, insured the credit worthiness of a bunch of equity tranches of MBS issued by the Street. CDS's made it possible for the Street to leverage the equity in these deals which, in the event of a default, compounds the problem by some really big factor. So big, in fact, that Lehman, Merrill and Bear Stearns have ceased to exist and a number of other firms have gotten their heads handed to them. So, in my last post I suggested that paying the P&I payments for the referenced securities in the swaps would restore their credit ratings. If the securities are, once again, AAA, then the problem goes away, does it not? Further, if the MBS has cash flow, it can be used as collateral and liquidity will be restored to the system.
I suppose it's really wishful thinking for me to expect that anyone who can actually do anything about this mess will ever read this blog. Or is it?
One last thought - before the first CMO was issued, the barrier that was put in front of the idea most often was, "if this is such a good idea, how come nobody has dome it?" I mention this, because I really don't think that the mindset of most folks in the system has changed in the last 25 years. That is, there is very little in the way of creativity. The Street is good at copying other people's ideas, which probably has a lot to do with the reasons why this mess happened in the first place. The point is, when one copies another persons idea, the copier usually doesn't understand the original idea. They just do it and what is good for the goose is good for the gander in the realm of getting approval to do anything that one's competitor is doing in the Street.
Remember, all of the firms know what all of the others are doing. When one is making tons of money, they ALL want to get in on the game. My original premise when writing this blog was, that managers in the street did not know the risk in this junk. But, they needed profits to keep their bonuses as high as the competition and here we are.
In attempting to think through the idea of having the treasury actually pay the missing P&I payments on the mortgages that provided collateral to the defaulted MBS, I have come up with the following:
So far, the treasury has purchased about $158 billion in preferred stock with warrants in a bunch of US financial institutions. I calculated the future value of that number using a 6% fixed rate payment and 1/360 of the $158 billion as a monthly payment (hey, I know that the formula is wrong, but bear with me). The FV comes out to almost $513 billion. What this says is, that if the treasury just put the $158 billion aside and re-invested it someplace like the treasury yield curve, e.g. guess at the cash flow needed to amortize the mortgage pool and then buy a strip of government securities in an equal amount, it would have more than enough cash to pay monthly P&I. I would guess, that $440 million (158 billion/360) is a tad more than what is needed to get the cash flow running in all of the defaulted MBS. In other words, my formula is close enough for government work.
Remember folks, the big issue for AIG, as an example, is credit default swaps. That is, AIG was the counter party on swaps that, kind of, insured the credit worthiness of a bunch of equity tranches of MBS issued by the Street. CDS's made it possible for the Street to leverage the equity in these deals which, in the event of a default, compounds the problem by some really big factor. So big, in fact, that Lehman, Merrill and Bear Stearns have ceased to exist and a number of other firms have gotten their heads handed to them. So, in my last post I suggested that paying the P&I payments for the referenced securities in the swaps would restore their credit ratings. If the securities are, once again, AAA, then the problem goes away, does it not? Further, if the MBS has cash flow, it can be used as collateral and liquidity will be restored to the system.
I suppose it's really wishful thinking for me to expect that anyone who can actually do anything about this mess will ever read this blog. Or is it?
One last thought - before the first CMO was issued, the barrier that was put in front of the idea most often was, "if this is such a good idea, how come nobody has dome it?" I mention this, because I really don't think that the mindset of most folks in the system has changed in the last 25 years. That is, there is very little in the way of creativity. The Street is good at copying other people's ideas, which probably has a lot to do with the reasons why this mess happened in the first place. The point is, when one copies another persons idea, the copier usually doesn't understand the original idea. They just do it and what is good for the goose is good for the gander in the realm of getting approval to do anything that one's competitor is doing in the Street.
Remember, all of the firms know what all of the others are doing. When one is making tons of money, they ALL want to get in on the game. My original premise when writing this blog was, that managers in the street did not know the risk in this junk. But, they needed profits to keep their bonuses as high as the competition and here we are.
Friday, November 14, 2008
Cash Flow & liquidity
Like everyone, I really wish that I could cook up an answer to this mess. Could it possibly be as simple as reversing the lack of liquidity?
Let me explain: mortgage assets are held by the most important financial institutions in the world. Those assets stopped providing the cash flow that was necessary for their holders to pay the carrying costs associated with keeping those assets on the books. When the first few holders got out, asset prices began to fall, this started a downward spiral in asset valuation, this started a mark-to-market call for more collateral or lower advance rates which caused more selling and here we are. The fed tried to step in and provide cash flow, but the problem was greatly compounded by an institutional slamming on of the brakes.
Now we seem to be in a situation where liquidity is in the system, but the banks are either not lending, or companies are not borrowing. Either way, the economy has also slammed on the brakes.
So, what causes a recession? Simple, three consecutive quarterly drops in GPD. Oh, what causes that? Well, retail sales plays a big part. Then there's a lack of corporate expansion, defined as corporate contraction which results in people getting laid off. Then there is confidence - my personal favorite - with out confidence, nobody does nuthin!
By using clever financial engineering - defined as making assets "affordable", by lowering monthly carrying costs - the wizards on the Street made it possible for a ton of people to be able to buy a ton of new stuff. Now, most people do not need new cars and new houses and new appliances, the sale of which provides the primary engine of economic growth. So, this gets me back to the whole question of liquidity. When people have no ability to pay for the stuff that they never should have purchased in the first place, it results in the default of those peoples' contractual obligation to pay. That sentence tells the whole story. But, instead of the bailout providing cash flow to defaulted assets, it is going into troubled institutions like AIG and Fannie and Freddie.
I don't have the time to really think this through, but I have mentioned the possibility of using an REIT type structure to get mortgage assets back on a cash flow basis. That is, keep as much of the foundation of the mortgage market in place by making sure that there is a "monthly mortgage constant" for all of the crap that was issued. If the defaulted assets that backed up the credit default swap market were, once again, rated where they were when the whole thing took off, wouldn't it be redundant to provide more cash to the issuers of the swaps?
Doesn't it seem to you that these dopes are treating the symptoms and not really trying to find a cure?
Am I over-simplifying? Doesn't it make sense though? Think about it! I have to go to work.
Let me explain: mortgage assets are held by the most important financial institutions in the world. Those assets stopped providing the cash flow that was necessary for their holders to pay the carrying costs associated with keeping those assets on the books. When the first few holders got out, asset prices began to fall, this started a downward spiral in asset valuation, this started a mark-to-market call for more collateral or lower advance rates which caused more selling and here we are. The fed tried to step in and provide cash flow, but the problem was greatly compounded by an institutional slamming on of the brakes.
Now we seem to be in a situation where liquidity is in the system, but the banks are either not lending, or companies are not borrowing. Either way, the economy has also slammed on the brakes.
So, what causes a recession? Simple, three consecutive quarterly drops in GPD. Oh, what causes that? Well, retail sales plays a big part. Then there's a lack of corporate expansion, defined as corporate contraction which results in people getting laid off. Then there is confidence - my personal favorite - with out confidence, nobody does nuthin!
By using clever financial engineering - defined as making assets "affordable", by lowering monthly carrying costs - the wizards on the Street made it possible for a ton of people to be able to buy a ton of new stuff. Now, most people do not need new cars and new houses and new appliances, the sale of which provides the primary engine of economic growth. So, this gets me back to the whole question of liquidity. When people have no ability to pay for the stuff that they never should have purchased in the first place, it results in the default of those peoples' contractual obligation to pay. That sentence tells the whole story. But, instead of the bailout providing cash flow to defaulted assets, it is going into troubled institutions like AIG and Fannie and Freddie.
I don't have the time to really think this through, but I have mentioned the possibility of using an REIT type structure to get mortgage assets back on a cash flow basis. That is, keep as much of the foundation of the mortgage market in place by making sure that there is a "monthly mortgage constant" for all of the crap that was issued. If the defaulted assets that backed up the credit default swap market were, once again, rated where they were when the whole thing took off, wouldn't it be redundant to provide more cash to the issuers of the swaps?
Doesn't it seem to you that these dopes are treating the symptoms and not really trying to find a cure?
Am I over-simplifying? Doesn't it make sense though? Think about it! I have to go to work.
Tuesday, November 11, 2008
HISSSSSSSSS
What's that sound? Could it be the sound of deflation sneaking into the world economy? I wonder what it will take to sell all of the RV's and all of those houses in Compton, CA and Clark County, NV and don't forget all of those big trucks and SUV's.
Which brings me to GM. The fact that those big dopes have the nerve to ask for government help is way beyond my ability to comprehend. I know that the auto industry is a big part of the US economy and there are tons of people who depend on its success for employment. But ... remember back in the early ninety's when the auto industry was faced with the dilemma surrounding the gas consumption of their newest innovation, the SUV? the solution was not to make the cars more efficient as a thinking company should, but rather to "lobby" to have the SUV's designated as trucks thereby qualifying them for lower gas mileage. Now, I take the position, that each of us has a moral responsibility, an imperative, to use as little energy as possible. Therefore, I might be a bit opposed to the whole idea of the SUV ... period. But, to get the entire consuming public of the US into buying into the idea that a big station wagon is a truck is a pretty good trick. Still not as good as light beer, e.g., make it manly and the dopes who drink it have to buy twice as much to get drunk. Now, there's a really good trick. I'll bet that whoever cooked that one up is in the advertising hall of fame.
Anyhow, AIG and the rest of the idiots that are the recipients of the government's largess should be taken into the public square and flogged by the rest of us. The economy is going into the tank. Deflation is VERY REAL and it is going to kill many businesses in the country. If GM gets a handout, then so should we. At least bike shops are responsible green businesses that deserve help. The companies that are getting it though are the ones that put us in the hole to begin with.
It is a bitter irony indeed, that I saw it coming, tried to warn about it and now may end up a victim.
Which brings me to GM. The fact that those big dopes have the nerve to ask for government help is way beyond my ability to comprehend. I know that the auto industry is a big part of the US economy and there are tons of people who depend on its success for employment. But ... remember back in the early ninety's when the auto industry was faced with the dilemma surrounding the gas consumption of their newest innovation, the SUV? the solution was not to make the cars more efficient as a thinking company should, but rather to "lobby" to have the SUV's designated as trucks thereby qualifying them for lower gas mileage. Now, I take the position, that each of us has a moral responsibility, an imperative, to use as little energy as possible. Therefore, I might be a bit opposed to the whole idea of the SUV ... period. But, to get the entire consuming public of the US into buying into the idea that a big station wagon is a truck is a pretty good trick. Still not as good as light beer, e.g., make it manly and the dopes who drink it have to buy twice as much to get drunk. Now, there's a really good trick. I'll bet that whoever cooked that one up is in the advertising hall of fame.
Anyhow, AIG and the rest of the idiots that are the recipients of the government's largess should be taken into the public square and flogged by the rest of us. The economy is going into the tank. Deflation is VERY REAL and it is going to kill many businesses in the country. If GM gets a handout, then so should we. At least bike shops are responsible green businesses that deserve help. The companies that are getting it though are the ones that put us in the hole to begin with.
It is a bitter irony indeed, that I saw it coming, tried to warn about it and now may end up a victim.
Sunday, November 9, 2008
The Country Turns A Page
We have a new president elect. It will be interesting to see where we go from here. For selfish reasons, It would be swell to see some of that bail-out cash headed towards the SBA so that it would be available to small businesses like ours.
Anyhow, like a lot of people, I was a bit of a skeptic as it relates to the way the polls had Obama in front. Reading a few things this morning on the subject, I had a thought ... the main stream news media is, obviously, way out of touch. I think that it has to do with the way that so many people, most under 35 or so, communicate. TV and newspapers are not the outlets through which information is disseminated. It now comes through Utube, blogs, facebook and other electronic media. This is a very good thing primarily because, one picture is worth 1,000 words. It happened to that big dope in Virginia when he used a racially insensitive term and welcomed a reporter to the "real Virginia" Within a few days, (was it Warner?) was on his way to oblivion. For whatever reason though, the real significance was the accuracy of the comments as presented on Utube. There is the speaker - no denial anymore. This fact did not seem to register with the main stream media. This was proven within the last several weeks as those same people missed so badly WRT Obama's popularity. This is especially true as it relates to the way that the Palin woman conducted herself. How could those dopes possibly think that her diatribes would not end up on the web?
So, the point is, we now have a new generation that's going to be making all kinds of things happen. I'm glad. I hope that, in the future, their influence will be as positive as the Obama election.
Anyhow, like a lot of people, I was a bit of a skeptic as it relates to the way the polls had Obama in front. Reading a few things this morning on the subject, I had a thought ... the main stream news media is, obviously, way out of touch. I think that it has to do with the way that so many people, most under 35 or so, communicate. TV and newspapers are not the outlets through which information is disseminated. It now comes through Utube, blogs, facebook and other electronic media. This is a very good thing primarily because, one picture is worth 1,000 words. It happened to that big dope in Virginia when he used a racially insensitive term and welcomed a reporter to the "real Virginia" Within a few days, (was it Warner?) was on his way to oblivion. For whatever reason though, the real significance was the accuracy of the comments as presented on Utube. There is the speaker - no denial anymore. This fact did not seem to register with the main stream media. This was proven within the last several weeks as those same people missed so badly WRT Obama's popularity. This is especially true as it relates to the way that the Palin woman conducted herself. How could those dopes possibly think that her diatribes would not end up on the web?
So, the point is, we now have a new generation that's going to be making all kinds of things happen. I'm glad. I hope that, in the future, their influence will be as positive as the Obama election.
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