The bad banks of Europe

Jul 31, 2014 22:10 UTC

It was a day of record losses for European banks. Both France’s BNP Paribas and Portugal’s Banco Espirito Santo have just reported second-quarter earnings — somewhat unsurprisingly for those following the news in the last few months, both banks lost billions.

BES disclosed a €3.6 billion ($4.8 billion) net loss in the first half of the year. The Bank of Portugal is requiring BES to raise capital after it set aside money to cover the losses, and it may end up needing state aid. Paul Murphy writes, “the losses appear to have taken the bank’s equity tier 1 capital ratio down to circa 5 per cent – that’s the wrong side of an absolute regulatory floor of 7 per cent.” Additionally, Reuters reports, “BES’s top risk management, compliance, supervision and audit officials had been suspended over suspected ‘harmful management’ that may have contributed to the bank’s massive losses.” The New York Times quotes analyst Antonio Barroso saying the moves by the Portuguese central bank are effectively a back door nationalization of BES.

Until last month, BES was part of the larger Espirito Santo Group, the businesses of the Espirito Santo family. The group lost control of the bank in June, though it is still the bank’s largest shareholder (BES then defaulted on some bonds in July). Many of the accounting irregularities seem to be related to various other Espirito Santo holdings, such as the “120 million euros [that] was loaned to a family company in June without passing through the bank’s related party lending controls,” according to Reuters.

BNP is somewhat less intriguing. The bank posted a loss of €4.3 billion in the second quarter, but that was largely because it was slapped with an $8.9 billion fine at the end of June by the U.S. Justice Department for violating U.S. sanctions by providing dollar-clearing services in Iran, Sudan, and Cuba. Otherwise, it would have been a decent quarter for the bank. According to Dealbook, “second-quarter net income rose 23 percent, to €1.9 billion. This increase was led by the bank’s corporate and investment banking unit, which reported that pretax profit increased 31 percent, to €661 million.” — Shane Ferro

On to today’s links:

Sovereign Debt Problems
JP Morgan may bail out Argentina – WSJ
What happens to Argentina from here? It depends – Credit Slips

China
More bad Chinese housing data: prices fall at a faster rate for the third straight month – WSJ

Awful But Informative
“It’s not important if a story is real, the only thing that really matters is people click on it” – Neetzan Zimmerman

Alpha
“People were looking for the dead body… instead what they got was a three-hour detailed regulatory presentation” – Bloomberg

Firsthand Accounts
Talking to D.C. lobbyists about their jobs – Huffington Post

Bitcoin
The Bitcoin Foundation discovered PR – Bloomberg

Long Reads
Coke has a big fat problem – Bloomberg Businessweek

#Brands
Uber’s triumph: “verb-ification of a brand name is ‘the holy grail’ of marketing” – The Boston Globe

Bad News
There were “seriously harmful acts of management” at Banco Espirito Santo - Bloomberg

Intellectual Property
App that does nothing angered by parody – Techcrunch

Takedown of a Takedown
A case that the case against home ownership has been moderately exaggerated – Squarely Rooted

Inverted tax logic

Ben Walsh
Jul 30, 2014 21:42 UTC

Tax arbitrage trend stories are rare – the last time we had one was the summer of 2012 when carried interest was all the rage. Now we have another. Corporate America’s hottest new tax avoidance strategy is the inversion. This structure has everything: acquisitions of non-U.S. domiciled companies, presidential umbrage at a lack of C-suite patriotism, unreliable data, proposed but unlikely to ever be enactedlegislation, and Mark Cuban twirling a basketball and tweeting his opinion.

Matt Yglesias explains the nuts and bolts of how tax inversions work. American Company A acquires Non-American Company B. If Company B is based in a country with lower corporate tax rates than the U.S. – and it probably is because the U.S. has the highest statutory rates in the developed world – “the merged company will probably domicile itself for tax purposes in Company B’s country. In a pure tax inversion… Company A would be acquiring Company B not so much to obtain its technology or its brand or its supply chain but its tax status.”

Unlike most trend stories, this one has solid data backing it up. Reuters’ Kevin Drawbaugh reported in April that since 2008, about two dozen companies completed tax inversions, “versus about the same number over the previous 25 years.” Drawbaugh says the most desired tax residences are Britain, Canada, Ireland, the Netherlands, and Switzerland. The UK is particularly attractive for pharmaceutical companies, the WSJ reports, because patent-related revenue is taxed at just 10 percent, versus the 35 percent nominal U.S. corporate tax rate.

So what can or should be done? Treasury Secretary Jack Lew has proposed effectively ending this type of acquisition. Lew, along with the Economist and seemingly everyone in Washington, D.C., thinks the better solution is comprehensive corporate tax reform.Paul Krugman thinks a wide-ranging debate on corporate taxes is fine, but shouldn’t stop quick action on inversions.

There is solid evidence that tax inversions do lower the amount of taxes companies pay to the U.S. Martin Sullivan studied the rise of inversion and the fall of effective tax rates in the oil and gas industry. And tax inversions, he noted, don’t happen in a vacuum. They’re also, “accompanied by planning techniques that strip income out of the United States.” Corporations are simply paying a much, much smaller share of taxes than they used to. Tax inversions are just part of that trend. — Ben Walsh

On to today’s links:

History Repeating
A brief history of Argentine economic crises - Reuters
Argentina’s default: here’s what’s happening today - Shane Ferro

Mean Recovery
GDP grew at a 4% annualized rate in the second quarter - BEA
The US economy grew faster than thought in 2013. But the recovery still looks the same - The White House

The Fed
FOMC statement in a nutshell: asset purchases down to $25 billion, no change in interest rates, Plosser dissents - Federal Reserve

Interesting
Terror ransoms disguised as aid: “Europe has become an inadvertent underwriter of Al Qaeda” - NYT

Poor Bankers
How are those protected weekends going for junior bankers? - Alison Griswold

Selfie Nation
Snapchat is worth $10 billion - Bloomberg

Data Points
The cost of new financial regulations might be somewhere between $6.5 billion and $70 billion - Federal Financial Analytics

Argentina’s default: Here’s what’s happening

Jul 30, 2014 21:20 UTC

Argentine economy minister Axel Kicillof

Welcome to #GrieFault day. That’s twitter’s hashtag for the Argentine technical default, caused largely by a series of court rulings by U.S. federal court judge Thomas Griesa, which was triggered this afternoon. That is to say that the ratings agency S&P cut the country’s credit rating to selective default. The country’s representatives are still negotiating with bondholders in Manhattan as of this writing. This was the story yesterday:

After missing an interest payment on its bonds on June 30 (previous coverage in the saga here and here), the country had a 30 day grace period to reach a settlement with its holdout creditors — mostly the hedge fund Elliott Management — in order to avoid default. That grace period is up Wednesday.

As Matt Levine points out, Argentina is obligated to pay today in all of the different places it has bondholders (there are peso, dollar, euro, and yen-denominated bonds). Because of time zone complications, Argentina is now technically in default (according to one credit agency), but the details are unclear. The important point is negotiations are ongoing. Here’s what we know about those, according to various Reuters stories:

Last night the country’s economy minister, Axel Kicillof, showed up in Manhattan to finally have those talks they were ordered to have roughly 30 days ago. It seems Argentina has something of a plan, wherein a consortium of Argentine banks scoops up the debt held by the holdouts. A senior banking executive familiar with the offer told Reuters today that “the idea is to sit down with the funds and buy all their debt. We have to negotiate the final amount, the terms and how payment will be made.”

Another Reuters report confirms that “negotiations are now revolving around how much local banks need to deposit as a goodwill gesture to give Adeba time to negotiate a way to pay holdouts themselves.”  The banks would presumably be much more amenable to the plight of the Argentine government, which currently doesn’t have the money to cover its outstanding bonds in the event of a default, largely (the government thinks) because of the Rights Upon Future Offers (RUFO) clause on its bonds.

Joan Magee and Davide Scigliuzzo explain Argentina’s argument: The RUFO clause “prohibits it from voluntarily paying the holdouts, who are demanding full payment on their bonds, better terms than the 25 to 29 cents on the dollar the other investors accepted … Argentina fears that it may face billions of dollars of claims from investors who accepted the restructuring should it pay the holdouts in full.”

This would be Argentina’s second default in 12 years, and one in a series of economic crises over the last century. For the truly nerdy (like us), Reuters has compiled a chronological history of major problems in the Argentine economy.

UPDATE: Kicillof is scheduled to hold a press conference at the Argentine consulate in New York at 5:30 pm. Updates forthcoming. The press conference is live here (in Spanish).

Reuters is reporting that Argentina’s debt mediator, Daniel Pollack, says that Argentina “will imminently be in default.” The full statement from Pollack is here. During his press conference, Kicillof dug his heels in. He didn’t reach an agreement with what Argentina calls the “vulture funds” after offering them the same terms as previous debt swaps. He repeated much of what Argentina has said in the past: Argentina paid its June 30 interest payment (Judge Griesa ordered Bank of New York Mellon to return it), it doesn’t make sense to have a deal with the hedge funds and not other holdouts, the country will make every effort to continue to service the exchanged debt. Kicillof also says he will return to Argentina today

MORNING BID – On GDP, the Fed, Argentina, and lots of other things

Jul 30, 2014 13:45 UTC

To paraphrase Kevin Costner in Bull Durham, we’re dealing with a lot of stuff here. The U.S. economy did end up rebounding in the second quarter, with a 4 percent rate of growth that’s much better than anyone anticipated – and the first-quarter decline was revised to something less horrible, so investors worried about the economy are a bit less freaked out at this particular moment.

Of course, that still means that the economy only grew 0.9 percent in the first half of the year, and that’s not all that amazing, but the economy in the second quarter grew in areas that matter the most – business spending, consumer spending and to a lesser extent government, which was such a drag on GDP for a good long time that can’t be just ignored. In tandem with the GDP figure, the ADP report said 218,000 jobs were added for private payrolls for July, another strong month that portends a good showing out of the Labor Department figures on Friday. That’s all at a time when the housing indicators continue to weaken, which is still a concern, and some even believe that auto sales have probably hit their apex as well for this cycle, given so much of the buying was based on incentives, but we’ll get better clarity on that on Friday.

The good data overall has given the dollar a jolt, continuing a strong run for the U.S. currency that strategists believe will be maintained for some time now. The euro hit a low of $1.3369 overnight and is at levels not seen since November, and the dollar is at one-month highs against the yen.

The dollar in coming days and months clearly will hinge on data and how the Federal Reserve and bond yields react to it, particularly when you see the differential between U.S. and European rates. Spain’s 10-year note yield dropped through the U.S. rate as of yesterday, and Germany’s annual inflation slowed to a 0.8 percent rate of growth, which should keep the lid on the euro. Net short positions in the euro have been increasing, with nearly 89,000 in short positions among speculators as of last week, according to CFTC data, while dollar/yen short positions are slowly being liquidated, dropping to 53,000 last week from about 82,000 in mid-June.

That’s a notable shift, and similar things are happening in sterling; Marc Chandler of Brown Brothers Harriman said this morning that the dollar is “turning,” with the next technical breach on the euro coming around $1.3325, and he says it could fall to $1.3230. Again, the attractiveness of the U.S. dollar when weighed against super-low European yields should keep some funds coming into Treasuries, so the lower-for-longer argument persists, and money will keep rushing in as yields become more attractive – the two year note is now at 0.57 percent, highest since May 2011, and the CME Group’s Fed Watch puts odds on a rate increase by April at 42.7 percent today versus 38.8 percent yesterday.

Money is also rushing into Argentina’s bonds this morning as the talks continue to head off a default, although that’s a bit of a fuzzy situation. Simply not paying bondholders is the definition of a default, while ISDA’s determinations committee is the one that rings the bell on a default for those holding the $1 billion or so in insurance contracts for those who are holding those things. Talks went through all day on Tuesday, and Wednesday will be the day of more and more and more talks as people keep watching this situation with interest.

Investors who like playing some single-share volatility got their wish with Twitter earnings yesterday. The stock is up more than 20 percent following those results, a relief for those who saw the Netflix, Apple and Google releases all come out and fizzle in terms of big moves in individual shares.

Ryan Vlastelica pointed out in a story yesterday that it looks like investors are still expecting bigger moves in Expedia, Tesla Motors, 3D Systems and others, just because while harvesting, or selling, volatility is ok in a market as steady and dull as this one, when it comes to high-growth shares with much of their value wrapped up in their future growth, one never knows. Twitter ranks in Starmine’s bottom decile when it comes to its enterprise value-to-sales ratio and other ratios, so it’s a big bet on growth.

Dancing around a default

Jul 29, 2014 21:51 UTC

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Argentina is down to the wire — the likelihood it will default tomorrow is extremely high. After missing a $539 million interest payment on its bonds on June 30 (previous coverage in the saga here and here), the country had a 30-day grace period to reach a settlement with its holdout creditors — mostly the hedge fund Elliott Management — in order to avoid default. The clock runs out on Wednesday.

While the federal judge presiding over the case between the sovereign nation and the fund has ordered the country’s representatives to sit down with Elliott continuously to try to hammer out a settlement agreement, they have so far not spent more than a few hours in negotiations. So what happens if the country defaults? The question is complicated, and there won’t be clear cut answers until a default actually happens (and, probably, lawsuits ensue). Here are some thoughts:

Felix Salmon says there could be a benefit to defaulting, since everyone knows that Argentina has the money to pay its exchange bondholders (those that did restructure debt from the 2001 default), it is just being help up on a legal technicality. By defaulting, “Argentina could stop making its coupon payments for a while, and use the money instead on desperately-needed projects back home.” And while default is generally a bad political move, all Argentine president Cristina Fernández de Kirchner has to do is point her finger at the U.S. judge who forced her hand.

The Financial Times reports that “economists broadly expect a recession in the country would deepen, inflation to rise and capital flight – possibly triggering a second devaluation of the peso this year.” Indeed, while default may not have as big of an effect on the country in international capital markets (which it has been locked out of for ages anyway), it almost certainly will be an issue for the domestic economy. In the event of a default, writes David Gaffen, “Argentines would likely increase their dollar holdings, and would put severe pressure on foreign reserves, which aren’t all that great to begin with. With inflation at about 30 percent, this isn’t a fun option.”

Then, there’s RUFO. One of the big reasons that Argentina has so far refused to negotiate is because of the Rights Upon Future Offers clause on the bonds that were exchanged during the restructuring. “The clause entitles them to the upside if Argentina ‘voluntarily’ makes a better offer to the creditors who stayed out (that’s NML [Capital] and co) before 31 December 2014,” writes Joseph Cotterill. This likely means that if Argentina settles with the holdouts before the end of the year, the exchange bondholders will also be entitled to more money, which Argentina simply cannot afford. Emerging market strategist Michael Roche told Bloomberg that investors think “the default will be cured after the RUFO clause expires, so the degree of panic isn’t great.”

The question is, what happens between tomorrow and December 31? Some exchange bondholders have submitted they are willing to waive RUFO clause rights. But whether that’s enough to get Argentina to settle is another question entirely. We’ll know soon enough. — Shane Ferro

On to today’s links:

Defenestrations
JP Morgan’s trading revenue fell, so it’s cutting hundreds of back office employees – Bloomberg

Remuneration
Morgan Stanley junior bankers get 25 percent bigger salaries, smaller bonuses – Bloomberg

Sad Declines
20 percent poorer than it was in 1984: “Nostalgia is just about the only thing the middle class can still afford” – Matt O’Brien

Subtle Hints
The simplest idea for the TSA’s $15,000 “help us speed up airport lines” competition: get rid of the TSA – Jenna Kegel

Please Update Your Records
Your artisanal whiskey probably is not so much handcrafted as factory-made – The Daily Beast

Cephelopods
Goldman Sachs says it’s Too Big To Sue for gender discrimination – Matthew Zeitlin

USA! USA!
Giant American fridges waste money, pollute unnecessarily, and make you fat – Gawker

Yikes
A third of consumers with credit files had debts in collections last year – Jonnelle Marte

Wonks
Just because large retailers pay better than small ones doesn’t mean they pay well – Nick Bunker

Privatize Everything
“Citizens don’t have an automatic right to more than the water they require for mere ‘survival’” – The Guardian

Wonks
The problem with universal basic income: the U.S. is bad “at replacing complexity with simplicity, and then leaving well enough alone” – The Conversable Economist

MORNING BID – Tango de la default

Jul 29, 2014 13:00 UTC

Red letter day for Argentina comes tomorrow, with the holdout investors and the South American nation coming down to the wire on a potential deal that would offer the holdouts something better than what everyone else agreed to in 2005 and 2010. Without getting into issues of vultures vs. violating debt agreements, the situation probably comes down to three scenarios.

First, Argentina defaults. One cannot underestimate this too much – Argentina has already defaulted before, and the stakes are nowhere near as high for the country as they were the first time. But it is still pretty darned damaging – it puts the country into another level of pariah with international capital markets (double secret probation, and here’s where we once again note that had John Vernon lived, he would have solved this whole mess), it causes even more capital flight from the country and worsens the outlook for the currency, which is already trading at a level much lousier than the going real rate.

The spot rate is about 8.1 pesos to the dollar – its two-decade chart looks like a double-black diamond ski run – while the black-market rate is more like 12 pesos to the dollar. Argentines would likely increase their dollar holdings, and would put severe pressure on foreign reserves, which aren’t all that great to begin with. With inflation at about 30 percent, this isn’t a fun option. As Hugh Bronstein noted in a June story, Argentina is also a big soybean exporter – third in the world – and farmers there plan on hoarding the product in case of a default. The cost of immediate soybean exports from Argentina is up 6.3 percent in the last week or so; similar Brazilian exports are up 5.3 percent, and on the Chicago Board of Trade, soybean futures have risen 4.7 percent.

The peso continues to weaken.

The peso continues to weaken.

The second option, and this one is even less likely, is that the holdouts blink in some way. The holdouts haven’t changed their position in some way, and as Dan Bases points out in a story today, their years-long pursuit of payment on similar obligations in Peru, and the fact that this has been going on for 12 years already, suggests they’ve got some serious staying power (nimble trading is great in some markets; in others, the more important characteristic is extreme stubbornness). It’s still unclear just what the holdouts stand to make out of this, but the $1.33 billion-plus-interest judgment in their favor has the Argentines saying that’s a 1,600 percent return, which isn’t a bad day at the office if it all works out.

The holdouts would also be likely to wait until January when certain clauses that would put Argentina on the hook for a lot more money from other undeclared holdouts and then perhaps any bondholders who did negotiate might want to come back and wrangle again and extend the process. Some legal experts say that this clause isn’t going to be triggered by Argentina being forced into paying the holdouts, but try telling the Argentines that. The only recent blow to the holdouts? The hanging judge in this whole thing, Thomas Griesa, allowed the nation to pay certain obligations (or rather, for Citigroup to pay certain obligations on the nation’s behalf) that would have potentially upset a settlement earlier in the year with Repsol – the holdouts argued against this as it cracks the door to other relief somewhere, though of course the odds are pretty thin.

The third scenario, which in some ways seems equally unlikely (we’re starting to think an asteroid will hit the Earth before any other real option), is that there’s some kind of negotiated agreement that allows the exchanged bondholders to say they’re not worried about additional restitution provided they can just get their scheduled coupon payments.

Then, everyone gets paid, there are no additional claims – per what Argentina wants to happen after December 31, 2015 – and the whole thing finally finishes – the hedge funds have their victory, Argentina can claim it didn’t put itself on the hook for any more money than what the judge forced them into paying, and it will all stop there. (And then of course Argentina can sell more bonds in two years or so, because bond markets have shorter memories than people think.)

Weeding out the prison population

Ben Walsh
Jul 28, 2014 22:13 UTC

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The New York Times’ editorial board – America’s barometer of what cautious, moderately liberal elites are supposed to think  – wants America’s war against weed to end. States, they say, should be allowed to make their own marijuana policies. And states already are: nearly three-quarters have reformed their marijuana laws to legalize all use, medical prescriptions, or cut the consequences of possession.

Reforming America’s marijuana laws, along with the rest of its war on drugs, seems like the just thing to do. Vox’s German Lopez writes that based on a study by the American Civil Liberties Union, “blacks were 3.73 times more likely to be arrested than whites for marijuana possession, with the black arrest rate at 716 per 100,000 and the white arrest rate at 192 per 100,000 in 2010.” Lopez shows that racism is endemic in the enforcement of drug laws, affecting everything from sentence lengths to the neighborhoods targeted by police SWAT teams.

The policing costs alone of enforcing the criminalization of marijuana are almost $8 billion annually. America spends a staggering $80 billion on prisons and jails each year: with just 5 percent of the world’s population, it has 25 percent of the world’s inmates (17 percent of all people in U.S. prisons are there for drug offenses. In federal prisons, the number is a jarring 50 percent.)

From 1978 and 2009, the U.S. prison population grew by 430 percent. It is impossible to understand what Emily Badger calls the “the meteoric, costly and unprecedented rise of incarceration in America” without looking at the nation’s drug policy. “Between 1980 and 2010,” she writes, “the incarceration rate for drug crimes increased tenfold.” (Recently, America’s prison population has fallen fractionally, largely thanks to state reforms.)

The economic impact of this is immense, and cannot be ameliorated by a change to marijuana laws alone. John Tierney wrote last year that “black men in their 20s and early 30s without a high school diploma… [are] more likely to be behind bars than to have a job.” Harvard sociologist Bruce Western told Tierney that “prison has become the new poverty trap… creating an enduring disadvantage at the very bottom of American society.”

If legalization becomes federal law, the U.S.’s ability to effectively undo massive human damage and economic inefficiency will come down, in large part, to the deeply glamorous task of regulating the market. Mark Kleiman thinks that “letting legalization unfold state by state, with the federal government a mostly helpless bystander, risks creating a monstrosity.” He’s against commercialized legalization, but regulation, with the tax revenue it generates, and the lobbyists it attracts, looks to be where things are headed. – Ben Walsh

On to today’s links:

Charts
Barack Obama, market timer in chief  - Business Insider

So Hot Right Now
“In a data-chic world, a chief economist is the new marketing must-have” - Lydia DePillis

Explained
When bad journalism becomes a joke: the origin of “whoa, if true” - The Daily Dot

Sovereign Debt Problems
Why Argentina’s credit spreads are going down while the probability of default is going up - Felix Salmon

Yikes
The Coconut Water Wars: “Attempts at psychological point-scoring that could charitably be described as sophomoric” - NYT

New Normal
“The precariat: insecure, unorganised, taking on too much work for fear of famine, or frighteningly underemployed” - LRB

Wonks
It’s unclear that cutting unemployment benefits in North Carolina cut unemployment -Justin Wolfers
And yet, North Carolina likely hurt people when it cut unemployment benefits - Jared Bernstein

MORNING BID – Herbalife and the options market

Jul 28, 2014 15:59 UTC

One of the market’s more well known short bets, Herbalife, reports earnings after the close on Monday. The company is most notable as the target of activist investor Bill Ackman, who has had plenty of choice words for the company and yet has not been able to make good on his short position just yet, despite his fervent belief it is defrauding investors and taking advantage of poor people.

That’s a hefty set of accusations for anyone to deal with, but the stock’s 25 percent one-day surge last week just after Ackman’s presentation turned into a big loser for folks who were betting on big declines by the end of last week.

Ackman, from what we’re aware of, has big positions in put options expiring in January – so it’s a long view he’s taken, and if he took it at the right time, it’s not necessarily a loser just yet. (The options rose in value for the first few months of this year, so it’s possible Ackman got out in time – given his presentations, though, he’s clearly got a position somewhere.)

If that’s the case, he’s currently losing money, and today’s earnings report – and subsequent activity – will be another test of his staying power. Now, he’s said he’s prepared to go to the ends of the earth for this short position, but there are limits to everything, and it’s worth looking at just what the bet is like right now.

There are huge, huge amounts of outstanding contracts in various put options expiring in January – about 220,000 contracts across a swathe of nine different strike prices, to say nothing of a bunch of other less popular strikes.

Most of these big positions are currently not profitable, and are actually worth less than what they’ve been worth over the last several months.

If Ackman did his buying in chunks, a good spot to examine is in the $50 put option contracts expiring in January – a bet the stock will fall below $50 by that time. There was a hell of a lot of volume in these options in January 2014 – on January 9, volume in the $50 strike contracts came to 25,000 contracts and on January 10 volume of 20,759 contracts.

On those days, the stock was trading around $81 a share, so if Ackman is behind these purchases, it means he thought that was an opportune time to buy those puts, which cost $7.25 and $7.45 on average that day, according to Thomson Reuters data.

If he doesn’t hold those options anymore, he may have sold them at a profit, but currently those options are a loser, and as long as the stock keeps rising, they will continue to erode in value.

Doing the math, it shakes out like this – at 25,000 contracts at $7.25 each (x 100 because each contract is 100 shares of stock), those would have cost $18.125 million. The other group would cost $15.465 million, for a total cost of about $33.6 million.

Right now, those options would be worth about $18.9 million, so that’s a 40 percent loss, and that’s just for the $50 strike, never mind all of the other strikes. This of course may not be his position, but whomever took these positions, be it one person or several, is not in a happy place.

What matters is this: Since the first day the $50 strikes expiring in January 2015 started trading (back in Oct 2013), this strike has never been worth less than it is now.

If he’s holding the options now that he bought at just about any time between Oct ’13 and now, he’s losing money. Of course, given these are options, he’s easily able to keep rolling down and buying another money and selling these, but eventually, if the stock doesn’t do what he wants, he’ll be losing a ton of money. He’s got a lot of money, but how much pain can he endure? That’s a real question.

Drill, baby, drill

Jul 25, 2014 21:41 UTC

North Dakota is in the middle of something the rest of the country can only dream of: an economic boom. The state has become a massive success story over the last five years, with unemployment at 2.6 percent and its population growing rapidly to fill demand for oil jobs. “The state’s modern history has been rewritten by the energy industry in just four short years,” writes Bloomberg’s Nicholas Kusnetz. But is it sustainable? Thanks to the shale boom, the state is currently producing as much oil in a month as it did in all of 2004, and production is growing at an exponential rate. That kind of growth can’t go on forever, says Fivethirtyeight’s Ben Casselman. Eventually it’s going to have to flatten out, and that has major implications for the economic stability of a state that has been very suddenly made rich (and just as suddenly dependent on this oil production).

Predictably, Katie Brown, at Energy In Depth (which is funded by the Independent Petroleum Association of America) says Casselman is wrong. It’s not just about recoverable oil, but about changing technology, she says. The U.S. Geological Surveyrecently doubled its estimate of the amount of recoverable oil in North Dakota, an estimate which is up 25-fold since 1995, according to Brown. Better technology is going to mean more oil, essentially. “It’s important not to get trapped by assumptions of static technology, especially in an industry like oil and gas, where innovators have proved over and over … that the recoverability of resources increases over time,” Brown writes.

Brown, of course, represents the industry. Ray Long is less enthusiastic. Responding to Brown and Casselman, he writes that while production could theoretically increase, “it’s important not to assume the inevitability of fairy tale future technology that doesn’t exist yet.” He also highlights what seems to be Casselman’s more important point: better technology has both increased the amount of oil available to extract in the Bakken and the drilling productivity in the region — but that can’t go on forever. “Companies prioritize drilling in the best parts of an oil field, then gradually shift their drilling to less productive areas. But because the Bakken is so new, no one really knows how those second-tier areas will perform.” This creates a treadmill-like situationwhere it’s not enough to simply add new wells for growth. Companies also have to find ways to offset decreasing productivity in in their older wells.

Tangentially, Joe Weisenthal tweeted an interesting chart today about the secondary effects the big U.S. energy boom is having on manufacturing: which is to say not much. The data comes from Tim Quinlan, an economist at Wells Fargo, who points out that energy-intensive manufacturing industries, which theoretically should have benefitted from new domestic shale supplies, are still performing below pre-crisis peaks. —Shane Ferro

On to today’s links:

Takedowns
You don’t love language if you love to police it - Stan Carey

Equals
“The NFL’s true attitude toward women has never been quite so apparent as it is now” -Amy Tennery
The NFL made a bad business decision when it decided to go easy on domestic violence - Mina Kimes

RIP
Ace Greenberg, the paper clip conservationist who oversaw the rise and collapse of Bear Stearns, dies at 86 - NYT

New Normal
People are corporations, too (sort of) - Catherine Rampell
“For the first time, acquisitions are more appealing than I.P.O.s.” - The New Yorker

Good Questions
Welfare reform “cut spending by cutting the rolls.” Do we want to do the same thing to food stamps? - Mike Konczal

Billionaire Whimsy
Remember: super-yacht buyers are job creators - NYT

Mildly Plausible Theories
Cynk didn’t fall 100% because too many people thought it would fall 100% - WSJ

Your Daily Outrage
A company loans money to U.S. soldiers and then sues them by the thousands -ProPublica

Wonks
Paul Ryan’s plan would increase poverty and cut funding for anti-poverty programs -Robert Greenstein

A guide to Paul Ryan’s anti-poverty plan

Ben Walsh
Jul 24, 2014 21:42 UTC

Like Ronald Reagan, Paul Ryan thinks that we’ve lost the war on poverty. Ryan, the chairman of the House Budget Committee, released a draft anti-poverty plan today. About 45 million Americans are living in poverty — making less than $23,850 for a family of four — and Ryan’s proposal would “shift the federal government’s anti-poverty role largely to one of vetting state programs to distribute aid,” Reuters’ David Lawderreports. Benefits would be distributed by a single agency or charity group, and recipients would be required to set up and follow a contract to receive benefits.

James Pethokoukis pithily scores the approach as “Thomas Aquinas 1, Ayn Rand 0” — more caritas, and less ruthless, laissez faire libertarianism. Josh Barro says the plan is a huge change for Republican policy because it’s not a spending cut. Instead, “as drafted, it would not increase or decrease federal spending on anti-poverty programs.”Reihan Salam describes today’s proposals as “the most ambitious conservative anti-poverty agenda since the mid-1990s,” and argues that Ryan’s main objective is “combatting entrenched poverty” by offering a “a useful distinction between situational poverty, in which individuals fall on hard times” briefly, and “generational poverty.”Research shows more Americans are affected by the former, but Ryan argues policy does not sufficiently address the latter.

Jared Bernstein, a former White House economist, disagrees with Ryan’s assumption that U.S. anti-poverty programs are structurally flawed, arguing that there is nothing “fundamentally wrong with the safety net.” Government programs cut the poverty rate almost in half compared to the pure market outcome, he says. More than that, Bernstein highlights the point made by the Center of Budget and Policy Priorities’Robert Greenstein: the safety net is a great investment in the long-term outcomes of its beneficiaries and should not necessarily be tied to short-term requirements of a contract.

Annie Lowrey says that while “there’s a lot for liberals to like” in the proposal (see,reducing mass incarceration), it’s nonetheless paternalistic. Its central problem, she says, is the manner in which it structures aid as a contract:

This is condescending and wrongheaded. First, it presupposes that the poor somehow want to be poor… Second, it isolates the poor… Third, it threatens to punish the poorest and most unstable families for their poverty and instability… Fourth, it does not address the core problem of a lack of jobs — or the problem of a lack of jobs paying a living wage

Of course, this is just the reaction to a draft proposal of a pilot program. There will be a whole new set of analysis and reaction if Ryan is able to translate his ideas into actual legislation. — Ben Walsh

On to today’s links:

USA! USA!
Half of America’s obese kids don’t know they’re obese - Wonkblog

Charts
The relationship between CEO pay and stock price is pretty much random - Bloomberg Businessweek

Interesting
A history of autocorrect - Wired

China
The Chinese government may lift restrictions on property purchases - WSJ

The More You Know
Hong Kong is the ideal city for a spy - Global Times

Investigations
The tally of financial crisis-related fines - WSJ

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