Felix Salmon

Ted Stevens has died at age 86, and the news is getting a lot of play this afternoon because of the very Alaskan cause of death: a plane crash. Stevens reportedly had a premonition that he would die in such a manner, and at the same time was instrumental in keeping the regulations concerning flying in Alaska as light as possible.

The site of the crash — the small town of Aleknagik — is unreachable by road from Anchorage or from anywhere else, really, unless you’re driving from Dillingham. Alaska has precious few roads, and most of the state can be reached only by small planes, which are by their nature pretty dangerous things. But if you’re going to do the whole Alaska thing — and Stevens has been called the “Alaskan of the Century” — then you’re going to have to come to terms with the danger and make peace with the fact that you might end up in a crash.

In other words, this crash is not a sign that there was any irony in Stevens’s opposition to flight-safety rules in Alaska, and nor is it a sign that such rules need to be introduced or tightened up. It’s just symptomatic of what the NYT calls “a fate that is not unknown to many in Alaska”. A free country is one in which informed individuals can and should be allowed to take life-threatening risks, including smoking and drinking and driving cars. In Alaska, many people regularly take the risks associated with flying in small planes, largely because without those risks, much life in the state would become unlivable.

Stevens was a great defender and proponent of the Alaskan way of life. It’s not for everybody. Indeed, Alaska has the smallest population of any of the 50 states*, with a population roughly a quarter that of Brooklyn. Those who do choose to live and settle in Alaska are a pretty unique and special breed, and the risks they take are very different to those familiar to most of the rest of us. That’s part of being Alaskan.

It’s tragic that a plane crash has killed Senator Stevens. But it’s also something he was well aware could happen any day, and in a weird way it’s a fitting way for this individualist to go. He certainly wouldn’t have wanted any government meddling to constrain his ability to die this way.

Update: Apologies if there are difficulties commenting on this post. Working on it. And I’m informed that Alaska is not the least populous state, Wyoming is. But they’re not far apart.

Update 2: James Fallows is, predictably, the go-to guy on this subject.

The big market reaction following today’s FOMC statement took place in the 10-year Treasury bond, where yields sank to 2.77% right after the statement came out, from 2.82% beforehand. That’s a big move by Treasury-bond standards, and constitutes the continuation of a longer trend: the yield was above 3% as recently as July 29, and we’re now well into yields not seen except during the very worst part of the financial crisis, when the flight-to-quality trade was in full force.

Today’s Treasury yields aren’t a function of flight to quality, necessarily, and the immediate impetus for this move was the fact that the Fed has committed to buying up more Treasury bonds itself:

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.

In other words, the Fed’s balance sheet had been shrinking, up until now, but that shrinking has now come to an end, and it’s going to remain at its current bloated level for the time being.

This is tantamount to a very modest rate cut — not a full quarter-point, perhaps, but maybe half of that. Of course, when rates are at zero, basis points loom larger than they normally do, so these moves on the side of quantitative easing become very important. And more important still is the signal that the Fed is sending: we thought we were OK to tighten things up a little bit, but now we’ve changed our mind, and we’re getting a little bit looser instead. The recovery, in other words, still needs Fed support in order to maintain any semblance of sustainability or momentum.

The bigger picture, however, is one of the Fed largely having run out of ammunition. Most of what it’s doing now is symbolic: the real national response, as Mohamed El-Erian says, needs to come from the government rather than the central bank, and needs to be structural rather than monetary in nature. Given today’s decision, though, we can at least assume that any moves from the White House to try to bolster the national economy will be met with the strong support of Ben Bernanke.

Otto Rock, over at IKN, has uncovered one of the more bizarre prospectuses I’ve ever seen. It’s an attempt to raise up to $370 million in 8% bonds, with the money ostensibly being used to develop a gold mine in California. The mine will make lots of money, we’re told, because there’s a “proprietary process” involved, which “allows us to extract approximately 98% of the metals, compared to the paltry 20% by current day standards”.

But it gets so much weirder than that. The company being used to raise the money is the Urban Broadcasting Company, a company “dedicated to promoting and showcasing up-and-coming talent and airing programs that might not otherwise be seen or heard”. Which doesn’t seem to have much to do with mining, although UBC does feature an “AstroNumerologist” on its home page. Maybe he can use the stars to find gold!

Otto is convinced that the offering memorandum is a scam, and that anybody investing in these bonds will never see their money again. But I can’t imagine that anybody would dream of investing in these bonds, given how amateurish the prospectus is: the law firm is one guy in Atlanta, and the prospectus includes a photocopy of the CEO’s passport before going on to say of UBC that “it is a lifestyle network that has crossed all races and boundaries and has evolved into a global revolution” which “has entered into numerous mega agreements that will begin to propel UBC-TV into the national spotlight in 2010″.

I have no idea what’s really going on here: perhaps there’s some plan to take over the mining site through a debt-for-equity swap when the bonds default. But the prospectus does say that a qualified mining engineer who has nothing to do with the scheme is part of the management team, so maybe this really is a crazy attempt to raise millions of dollars from unsuspecting investors. If it is, I suspect it was doomed to fail even before Otto got his hands on it.

Louise Story continues to talk to the SEC, and it seems that Merrill Lynch is now in the spotlight, and specifically a vehicle it underwrote named Pyxis. I wonder whether Merrill/BofA, like Goldman before it, has received a Wells notice and hasn’t bothered to disclose the fact.

Just like in the Goldman and Citigroup cases, the SEC seems to be concentrating on disclosure problems here: specifically, that Merrill failed to disclose to its own shareholders the extent of its subprime exposure. (Yves Smith thinks this doesn’t go nearly far enough, but it’s unclear what other kind of case against these banks would be legally colorable.) Failure to disclose to shareholders is bad, but it’s Citigroup bad, not Goldman bad. The fraud which the SEC alleged against Goldman was failure to disclose to direct investors in securities that the bank was underwriting, which is worse.

I would love to see a bit more reporting on the Pyxis case, though, especially now that it seems to have caught the attention of the SEC. Specifically, Jesse Eisinger and/or Jake Bernstein should write something on this: they have covered the Magnetar story in great detail, and Pyxis was a Magnetar deal.* They, I think, are probably better qualified than Story to explain clearly exactly what’s going on here. Because I, for one, am very confused.

Story writes of Pyxis, and similar entities named Steers and Parcs:

These programs generally issued short-term I.O.U.’s to investors and then used that money to buy various assets, including the leftover C.D.O. pieces.

But there was a catch. In forming Pyxis and the other programs, Merrill guaranteed the notes they issued by agreeing to take back any securities put in the programs that turned out to be of poor quality…

To further complicate the matter, Merrill traders sometimes used the cash inside new C.D.O.’s to buy the Pyxis notes, meaning that the C.D.O.’s were investing in Pyxis, even as Pyxis was investing in C.D.O.’s…

To provide the guarantee that made all of this work, Merrill entered into a derivatives contract known as a total return swap, obliging it to cover any losses at Pyxis. Citigroup used similar arrangements that the S.E.C. now says should have been disclosed to shareholders in the summer of 2007.

This makes it sound very much as though Pyxis was an SIV, much like the notorious Citigroup entities which had embedded “liquidity puts” and which forced Citi to take enormous losses even though they were nominally off Citi’s balance sheet.

SIVs, after all, were exercises in maturity transformation: they would issue short-term IOUs and then buy longer-term securities like those issued by CDOs. That’s exactly what Story says was going on here. And in some cases, like Citi’s, the parent bank would be on the hook for losses at the SIV, which is also what Story says happened at Merrill.

But as far as I can make out, Pyxis was not a Citi-style SIV, but rather an old-fashioned CDO. And after Story’s single reference to its “short-term IOUs”, she never once mentions them again, so it’s far from clear what she’s talking about. I’ve certainly never heard of a CDO issuing short-term paper.

I suspect — but I’m not sure — that the big picture is relatively simple. Merrill created Pyxis, and in doing so managed to move a lot of subprime exposure off its balance sheet. But somewhere in the deal was a mechanism for those exposures to bounce back onto Merrill if things went very bad. And that’s what happened. Most likely, Merrill used the Pyxis deal as a way of getting its subprime exposure insured by MBIA and/or ACA. But that insurance became worthless when both companies imploded.

If that’s the case, however, then I reckon the SEC case is pretty weak. If Merrill had a subprime exposure which was insured by MBIA or ACA, I think they could make a strong case that the exposure did not need to be disclosed to shareholders. But if it turns out that the Pyxis affair is more than just a bad choice of insurers on the part of Merrill, then it would be great to get some much clearer detail on what went on than I can find in Story’s article.

*Update: Pyxis was not a Magnetar deal after all, I was confused by Yves Smith’s post. There were a couple of Magnetar trades with that name, but they had nothing at all to do with Merrill. The Pyxis that Story is talking about was a Merrill SIV, and not a CDO at all. Which makes much more sense.

So I’m back from holiday — what did I miss? I even caught a fish, although it wasn’t a very big one; I can certainly recommend Arctic Wild and the Lodge at Black Rapids if you’re headed to Alaska any time soon.

I know I missed the dreadful jobs report on Friday. What else? Is the WSJ flash crash investigation as good as it looks at first glance? I did read Economics of Contempt on the Lehman report on the plane back to New York, it’s truly first-rate stuff. Romer’s leaving the White House, which is a loss, but the bench is deep. The Televisa/JP Morgan saga resurfaced, with much more press this time around, none of it redounding to Morgan’s benefit. The NYT started mooting pricing schemes where print-newspaper subscribers might find themselves outside the paywall, but I still reckon they’ll stick to their initial promise that all print subscriptions will have full web access included. Stephanie Clifford became the latest journalist to parrot dreadful counterfeiting statistics, and in my absence Mike Masnick did a good job of calling her on it. And the FT launched a blog by Gavyn Davies called Econoclast, but it seems to have disappeared entirely already.* Wonder what happened there. More transparency would be a good thing: all the old blog entries have been deleted, which is something no news organization should do lightly.

Apparently “banking sectors with high regulatory capital ratios entered the crisis with more leverage and took far greater losses than those with supposedly worse capital positions”. Fannie and Freddie seem to be enabling some extremely sleazy lawyers in their quest to make millions from others’ misery. Baruch is still bullish on equities. And my sister, sailing across the Pacific, calculates her carbon emissions while sailing to be about 1 ton per year, compared to 24 tons for the average American. She also notes a simple substitution which she uses instead of carbon:

I use time to learn to cook (in the absence of take-aways), wash clothes by hand (in the absence of washing machines), and collect water from rain (in the absence of a tap). Time to make or fix things instead of buying new. Time to row instead of using an outboard motor. Time to sail rather than fly, walk rather than drive.

I’ve just realised something… for many activities we’re using time instead of oil.

If people started using less oil and more time, what would that do to GDP, I wonder? The best thing about dropping off the grid for a couple of weeks is that it really helped to put my hectic NYC schedule into perspective. I do love it, but I suspect it’ll be a few days before I’m back up to my usual velocity.

Update: It didn’t disappear, it just moved, with no redirect. It’s now here.