When genius (finally) gets wise

Aug 19, 2009 17:33 UTC

The people who brought you the Long-Term Capital Management debacle want banks to get serious about cutting their own leverage, applying fair value accounting to a wider range of assets.

Writing with two colleagues in the Financial Times on Tuesday, Nobel Laureate Robert Merton said banks, their regulators and legislators are conspiring to conceal depressed asset prices in order to avoid dealing with the consequences of insolvency. He wants wider adoption of fair value accounting to force banks to fess up to losses and raise more capital.

Speaking on Bloomberg radio, Merton’s long-time associate and fellow laureate, Myron Scholes, concurred.

This is very refreshing, an honest appraisal of the disease still infecting the financial system—leverage—from two prominent economists who learned the hard way that leverage kills.

These days it’s de rigueur to declare that the worst of the recession has passed, that we’re on our way to “recovery.” Never mind that big banks remain insolvent. Take away the government guarantees that provide them cheap financing and protect the value of their assets and many would be at risk of collapse.

As I argued earlier this week, the fall in real estate prices implies huge losses for bank loan portfolios, losses that could wipe out what’s left of their meager capital.  We got another reminder on Monday of just how bad the losses might be. BB&T said it marked down loans acquired from failed Colonial Bank by 37 percent.

A loss rate half again as large, if applied to Citigroup, Bank of America and Wells Fargo, would wash away what’s left of their equity capital. In other words, despite recent capital raises, their leverage remains way too high.

Merton and Scholes know about the risk of leverage. Their hedge fund,Long Term Capital Management, was levered 25 to 1 before losses wiped out capital, pushing leverage to 100 to 1. It took a bailout from Wall Street firms to make up LTCM’s capital deficit and prevent a systemic collapse.

Even after the stress test, big banks are still levered more than  20 to 1. Far higher when you consider losses they are hiding and off balance sheet assets they have not recognized.  FASB has already instructed them to recognize off balance sheet assets beginning next year and their fair value proposals would, if adopted, kick in a year later.

True, it won’t be easy to put into effect. Banks’ existing fair value estimates are highly questionable. It’s not clear what assumptions they’re plugging into internal models in order to arrive at them. That’s why Merton argues estimates should be “independently validated by external auditors.” If that’s expensive or difficult –  well, then that’s a price banks should bear for investing in hard-to-value assets.

One legitimate criticism with fair-value accounting is its procyclicality. Marking assets to market can inflate capital during bull markets and deflate it during bear markets, exacerbating market swings.

But not if regulators respond dynamically to market conditions. As bubbles inflate, regulators should increase capital requirements so that leverage doesn’t get out of hand. That way when markets turn south, banks will be well-capitalized to handle them.

Unfortunately, regulators don’t have the flexibility to be forgiving right now. Banks didn’t build up reserves during the fat years, so regulators must force them to do so during lean ones.

The first step in solving a problem is admitting you have one. Fair value accounting would force banks to admit they still have a leverage problem and, hopefully, inspire regulators to jack up their capital requirements.


Hi Rolfe,Interesting, but a bit late. Removal of mark to market allowed more ‘willful unconsciousness’ of the insolvency of banking and the tsunami to come.As I’ve posted before, I’m a forensic loan auditor. I evaluate residential mortgage loans for violations of federal Truth in Lending laws, among others. Presently, I’m working on audits for commercial loans, and what I’m finding is quite revealing.I’ve known that banks use ‘debt’ and somehow ‘convert’ them to ‘assets’–but I didn’t know *how* they did it. I’ve found the law in the UCC that allows them to do that–though it is tricky and involves other factors.Suffice it to say that banks are woefully underfunded–and it isn’t just the naughty ones dabbling in risky exotic instruments. It’s all of them, domino tipped by the bad boys, and the result will be felt everywhere.CiaoLisa

Zimbabwe’s Hyperinflation: #2 in world history

Aug 18, 2009 18:12 UTC

Steve Hanke and Alex Kwok just published a paper calculating last year’s hyperinflation in Zimbabwe, when “conventional inflation measures were not available.” Their conclusion is that in mid-November, prices were doubling every day. That means Zimbabwe’s hyperinflation ranks second worst in world history.

(Click to enlarge in new window)


Previously I linked to a video describing the dire monetary situation in Zimbabwe.  It puts the data above in perspective…


Inflation numbers

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Lunchtime Links 8-18

Aug 18, 2009 17:39 UTC

(send links, pics, vids to optionarmageddon at gmail.com)

Cost of credit card debt soaring (Sun-Times)  Terry Savage on the way credit card terms are changing as recently passed legislation goes into effect.  Lots of good detail in here, and I like how she concludes the piece:  Unhappy with high interest rates?  Then pay off your balance.

Manhattan office sales ground to halt in first half (Bloomberg)  “Buyers and sellers are far apart on bids while low interest rates on existing loans mean many sellers can afford to wait, CB Richard Ellis said.”

Tax bills put pressure on struggling homeowners (NYT)  First reported on my predecessor blog OptionARMageddon, investors can make a killing buying tax liens from local governments.  They’re just buying a receivable and managing collections.  Municipalities can’t (or don’t want to) collect delinquent taxes so they sell the liens for cash to investors.  They get cash up front and investors can charge steep interest rates while jumping ahead of other creditors with claims on assets in foreclosure, like the bank that owns the mortgage.   Yeah, there’s money to be made here, but most investors probably couldn’t stomach it…

A CFPA research brief (Baseline Scenario)  Rortybomb guest-posting on BS this week, links to a helpful research brief that discusses why we need a Consumer Financial Protection Agency.  On a related note, Tim Duy comments on the cover story in today’s WSJ about tough regulation in Vermont’s mortgage market.  More evidence that “financial innovation” is something we can easily do without.

Options backdating was likely more widespread than previously thought (WSJ)  As far as I’m concerned, backdating is just another example of company executives looting shareholder wealth.  Options are supposed to be incentive compensation, which is why the strike price is typically set on the date of the options grant.  If in-the-money options were granted in lieu of salaries, then I wouldn’t have as much of a problem.  But that’s not what backdating is.  These guys already pay themselves millions in salary and bonus and backdated options were just another way to skim off the top.  The story doesn’t mention it, but backdating is also a way to commit tax fraud.

Hartford Courant fires columnist, refuses to publish column critical of one of its advertisers (CT Watchdog)  Here’s the column that would have run.

Supreme Court orders new look at death row case (NYT)  I’m no lawyer, but this quote from Justice Scalia seems like a major WTF:  “This court has never held,” Justice Scalia wrote, “that the Constitution forbids the execution of a convicted defendant who had a full and fair trial but is later able to convince a habeas court that he is ‘actually’ innocent.” ObsidianWings has a helpful explanation.

Punks assault native Alaskan, post recording on YouTube, get arrested (Anchorage Daily News)

Student can’t figure out automatic door, takes matters into own hands (YouTube)  Hilarious.

What are the odds?

Running low on ammo

Aug 18, 2009 01:01 UTC

On Monday the Fed announced it had purchased another $7 billion worth of Treasuries under its quantitative easing program.  Readers will recall that in last week’s FOMC statement, the Fed said it was extending the Treasury purchase program by a month, to the end of October, while maintaining its total purchase commitment of $300 billion.

After today’s $7 billion purchase, the Fed has just $40 billion left.  Spread out over the next 10 weeks, that doesn’t give it very much ammo.  To date, purchases have averaged over $12 billion per week.  That is set to fall to $4 billion.

Because I’m a glutton for this stuff, I thought I’d put together a quick chart showing the progress of the Fed’s Treasury purchase program.

(Click chart to enlarge in new window)


From the first purchase of Treasuries on March 25th through the end of October, the program will have lasted just over 31 weeks.  We have about 10 weeks to go.

The chart above plots total purchases by week (red line) and the rolling 2-week sum of purchases (blue line).  The variability of the Fed’s purchases is a little less pronounced when measured every two weeks as opposed to every week, which is why I included the blue line.

Anyway, you can see that the Fed will have to put on the brakes over the last 10 weeks of the program.  Assuming, of course, Bernanke doesn’t change his mind about stopping at $300 billion….


To Ken 8.04pm

Not only a Harvard grad BUT probably a banker too.

Thats why this Administration is doing such a fine job giving them a helping hand with the bailout and ensuring their multi-million dollar bonuses.

Goes to prove financial incompetence pays better than crime.

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Lunchtime Links 8-17

Aug 17, 2009 17:43 UTC

Squeaking by on $300k (WaPo)

Failed Banks weighing on FDIC (WSJ)  The key paragraph is this: “For the 102 banks that have collapsed in the past two years, the FDIC’s estimated cost averaged 25% of assets. That is up from the 19% rate between 1989 and 1995, when 747 financial institutions were closed by regulators, according to the FDIC.” I wonder: Is that a weighted average?  Elsewhere the writer notes that 3 of the 5 failures last Friday will cost the DIF >50% of the failed banks assets.  But that’s misleading.  The biggest failure by far was Colonial, and the estimated losses there are 11% of assets.  I also would have liked the writer to have drilled down on Joe Patten’s quote, that this crisis won’t cost FDIC as much as the S&L crisis.  If that turns out to be true it will only be because bailouts rescued FDIC from having to deal with failed behemoths Citi and BofA.

Bids for Guaranty due today (Reuters)  Looks like FDIC is teeing up another big bank failure this week!

Is this the start of the big one (Yves Smith)  Has the bear market rally topped out?  Yves also has some choice words for President Obama, who she very correctly describes as being “long on charisma and short on resolve.”

Bears prowl Wall St. as insiders dump stock (Reuters)  Drawing on data from InsiderScore, this article reports that company execs have been selling shares at a healthy clip recently.  Apparently they aren’t so taken by green shoots.

TALF extended (Federal Reserve)  The Term Asset-Backed Securities Loan Facility (TALF) is being extended from the end of this year into next year.  This if a financing scheme that provides cheap, non-recourse debt to investors wanting to take a flyer on asset-backed securities.  But it’s the Fed (and ultimately taxpayers) who would ultimately bear any losses.  Just another example of a “temporary” bailout that the government refuses to eliminate.

Little old lady? (imagevat)  Nope, that’s Aerosmith’s Steven Tyler.

Cocaine contaminates majority of U.S. currency (Scientific American)  I always thought this was an urban legend…

Fashion, Qaddafi-style (VanityFair)  An interesting slide show.

Usain Bolt’s 9.58…  (I felt a little cheated when Bolt pulled up to celebrate during the Olympics.  What could the guy have run if he finished the race strong?  At yesterday’s World Championships, we got our answer.  American Tyson Gay ran a 9.71.  That’s an astonishing time itself.)


“Being a mother on her own in married suburbia requires courage. One night, Steins is invited to a cocktail party and as usual she stands alone on the doorstep of the magnificent house and rings the bell, suspended in that endless moment of waiting until the door opens and the host appears.” Aw diddums.

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America’s Japanese banks

Aug 17, 2009 16:04 UTC

A banking system loaded down with hundreds of billions of dollars worth of unrecognized bad debt — Japan in the 1990s? No, it’s the United States today.

And where are American banks hiding their losses?  Among other places, in their loan portfolios.


(Click table to enlarge in new window)

Banks have  written down billions in toxic securities, but many toxic loans are still carried at close to full value.  According to data published by the Federal Reserve late last year, banks are carrying $3 trillion of residential real estate loans and $1.7 trillion of commercial real estate loans on their books for a total of $4.7 trillion.  Dan Alpert at Westwood Capital thinks as much as a fifth of that total could be uncollectable.

“We know lots of mortgage loans are underwater,” he says, describing the situation where the value of collateral has fallen below the principal balance of a loan.  “A majority of the loans banks are holding were originated at the height of the bubble, when securitization broke down.”

When securitization markets were fully functional, banks had been able to package and sell their loans to investors.  When those markets buckled, banks were forced to eat their own cooking — much of it rancid.

Banks argue that loans should not be marked down if they’re still “performing.”  As long as borrowers are meeting their contractual obligations, there’s no reason to take a writedown.  The problem is, this gives banks an excuse to extend, amend and pretend. They can make concessions on loan terms or delay foreclosure notices, if only to maintain the fiction that borrowers will make good.

With real estate prices likely to fall, and stay, 40 percent below the peak, borrowers have a big incentive to renege on their side of the bargain.  This is how we become Japan.  Emergency bailout facilities allow banks that otherwise would have failed under the weight of bad loans to hold those loans to maturity — pretending the bad ones will be paid off in full over time.

In reality, many loans will default and banks will bleed capital for years.   Take commercial real estate.  As the Congressional Oversight Panel has reported, few CRE loans that were originated at the peak will qualify for refinancing when they mature. Banks can pretend they will, carrying the loans at values far above what will ever be paid back.

FASB wants to bring some clarity to the issue.  A plan under discussion would force banks to record loans at fair value on their balance sheets.  But it’s not clear how much good that would do.

One problem is that it’s much more difficult to determine the fair value of a loan than it is the fair value of a security, where more liquid markets with more frequent price quotes make measurement relatively easier.  With loans, banks must rely on internal models.what-loans-are-worth

Banks are now required to report fair value estimates four times a year.  But the most recent data raises just as many questions as it answers.

(Click table to enlarge in new window)

For instance, what estimates are banks using in their models?   As Jonathan Weil of Bloomberg noted, Regions Financial carries its loans at 34 percent above fair value, Citigroup carries its loans at no premium.   This could mean Regions faces bigger losses down the road, or it could mean Citi’s fair-value calculation is too charitable.  More likely, it means both.

Determining fair value is largely subjective.  So FASB’s proposal, to make banks adjust their balance sheets accordingly, is imperfect.  It could have a positive impact if regulators use the new information to force banks to raise more capital, cushioning balance sheets from the future writedowns we know are lurking.

But will banks raise enough?  Probably not.  Alpert is highly skeptical that banks’ fair value estimates are accurate: “Given the decline in value of collateral backing these loans, it’s very likely banks are underestimating the severity of future losses.”

So what do we do?  We can start by eliminating government guarantees that allow banks to avoid dealing with the problem.  As things stand, the biggest banks have no incentive to write down loans because the Federal Reserve, Federal Deposit Insurance Corporation and Treasury Department have, in effect, promised them unlimited financing to hold loans to maturity.

As the Japanese can tell you, this is just a recipe for stagnation.  Thanks to a debt bubble that authorities refused to deal with decisively, that country is now entering its third consecutive lost decade.


Christian,That would only happen if interest rates stayed the same, *then* you’d see housing prices reinflate. But with inflation comes higher interest rates, and higher interest rates mean lower prices because the interest makes the asset more expensive to afford.A 600,000 property at 5% is relatively the same as a 175,000 property at 23%. It’s what people can afford that drives housing.Interest going up will cause property values to collapse.

Weekend Links

Aug 15, 2009 14:22 UTC

Amateur video of the helicopter/plane colission over the Hudson last week (YouTube)  Wow.

You’re Bob Dylan?  Jersey cops want ID (AP)  Twenty-something cops in NJ stop Bob Dylan, who was reported to be “wandering around.”  They have no idea who he is and demand ID before taking him in…

Mind the gap: The problem with leveraged ETFs (Tech Ticker)  Leveraged ETFs (think tickers like SDS, SKF, FAS) are very dangerous.  They don’t track their index over periods longer than a day, so retail investors using them as a hedge or speculative vehicle are getting burned big time.  And yet these funds keep getting marketed.  Fearing future lawsuits, investment banks are increasingly backing away.

FDIC Chief says parts of regulatory plan won’t fly (AP, ht Sangellone)  A good interview with Sheila Bair.  She’s still quite critical about the administration’s regulatory overhaul, which would take power away from her and give it to the Fed.  I agree that would be a mistake.  Yes, FDIC has a blemished record.  The agency has undercharged for deposit insurance for years, removing an important governor of the banking system.  But recently it’s been the only Washington agency to deal with the banking crisis, actually closing failed banks. The Fed and Treasury would prefer to kick the can down the road perpetually.

UBS client to plead guilty to tax evasion (Bloomberg)  I’m a big fan of the Justice Dept.’s efforts to chase down tax cheats.  The government desperately needs revenue, and there’s some low-hanging fruit to be picked.  My colleague Agnes has more.

Camp Sundown shines in the Bronx (ESPN)  Kids with ultra-rare skin disorder who literally can’t be exposed to sunlight go to Yankee stadium and play wiffle ball with players until 3AM.

Mexican drug lord busted, cops confiscate lots of bling (thisblogrules)  Tony Montana would be proud.

Laser Sound Test (YouTube)  I wish there were details about how this experiment was constructed.  How does the laser do that?  How is the sound generated?  Gets really weird and interesting after the one minute mark.

You deleted your cookies?  Think again (Wired)  Top websites use Flash to “re-spawn” tracking cookies that web surfers think they’ve deleted…

Monkey on porch in Downtown Atlanta (Craigslist)

Maybe you thought, remote-controlled planes are lame, yes?  No longer.   (The pass around the 3:20 mark is awesome.)


Twenty-something cops in NJ stop Bob Dylan, who was reported to be “wandering around.”
Uh, old, confusted, and wanering around aimlessly – might as well lock me up now.

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Bank Failure Friday, Talking Colonial & DIF update

Aug 14, 2009 21:04 UTC

Five bank failures tonight, bringing the total for the year to 77.  See below for a video clip and for details about the Deposit Insurance Fund’s resources.


  • Failed Bank: Dwelling House S&L, Pittsburgh PA
  • Acquiring Bank: PNC Bank, Pittsburgh PA
  • Vitals: At 3/31/09, assets of $13.4 million, deposits of $13.8 million
  • Estimated DIF damage: $6.8 million


  • Failed Bank: Colonial Bank, Montgomery AL
  • Acquiring Bank: BB&T, Winston-Salem NC
  • Vitals: At 6/30/09, assets of $25 billion, deposits of $20 billion
  • Estimated DIF damage: $2.8 billion


  • Failed Bank: Union Bank, Gilbert AZ
  • Acquiring Bank: MidFirst Bank, Oklahoma City, OK
  • Vitals: At 6/12/09, assets of $124 million, deposits of $112 million
  • Estimated DIF damage: $61 million


  • Failed Bank: Community Bank of Arizona, Phoenix AZ
  • Acquiring Bank: MidFirst Bank, Oklahoma City, OK
  • Vitals: At 6/30/09, assets of $159 million, deposits of $144 million
  • Estimated DIF damage: $26 million


  • Failed Bank: Community Bank of Nevada, Las Vegas
  • Acquiring Bank:  None.  FDIC establishes “Deposit Insurance Bank” to resolve this failure.
  • Vitals: At 6/30/09, assets of $1.52 billion, deposits of $1.38 billion
  • Estimated DIF damage: $782 million

And earlier today, I chatted with Carrie Lee about the Colonial news.*

DIF Update

Now’s as good a time as any to update vital statistics for the Deposit Insurance Fund.

At 3/31/09, the DIF had $41.5 billion worth of reserves to handle bank failures, a total that included $28.5 billion of reserves for future failures along with the $13.0 billion balance remaining in the fund after subtracting liabilities from assets.

At the end of Q2, FDIC charged banks a special assessment that they estimated would raise an additional $5.6 billion.

Since the end of Q1, there have been 51 bank failures, which in total the FDIC estimates will cost the DIF $16.1 billion. This includes the bank failures above.

Loosely figured, that puts the DIF’s resources at $31.0 billion.

The next big tests to come will be Corus and Guaranty, with $7.2 billion and $11.7 billion worth of deposits respectively.

Just so folks are clear, when a bank fails, there isn’t a 100% loss rate on deposits.  For example, though Colonial had $20 billion of deposits, FDIC estimates it will only cost the DIF $2.8 billion.  That’s because the bank has significant assets that FDIC will be able to sell.

The bottom line, though, is that the DIF is in tough shape.  It’s quite possible FDIC will have to draw down a portion of its credit line at Treasury before this banking crisis is over.

What are the total deposits backed by the DIF?  Officially, $4.8 trillion.  But if you include “temporary” increases in deposit insurance limits—-individual accounts up to $250,000, and transaction accounts unlimited—-the total jumps to $6.3 trillion.


*One quick correction on the video: FDIC seized Colonial Bank, not the holding company Colonial BancGroup.


This is nice reporting from our journalists
Instead of good banking reports from U.S.A.,we are getting bad financial results.
What happened to banks balance sheets?
what happened fixed assets of these banks?
what happened annual audit reports.
Now,American depositors,customers had to accept that the above bank top officials had not projected actual financial results.
Still have plenty of time to correct these bad managements.
Better to have very quick bail out packages from state governments,appointing best experienced finance professionals and fully transparent audit mechanism,supervision on regular basis
If the above mentioned corrective measures be implemented,future investors confidence,trust,profits will be emerged in future years.

Colonial, gone … Did FDIC tip its hand?

Aug 14, 2009 16:45 UTC

FDIC will seize Colonial and sell its assets to BB&T.  This is the largest bank failure since WaMu last fall.  Reuters:

The Federal Deposit Insurance Corp is taking Colonial BancGroup Inc into receivership and will sell the struggling lender’s branches and deposits to BB&T Corp, Dow Jones said, citing a person familiar with the situation.The deal was approved by the FDIC on Thursday night and is expected to be announced later on Friday, the news agency reported.

Colonial, based in Montgomery, Alabama, operates 355 branches in Florida, Alabama, Georgia, Nevada and Texas and has over $25 billion in assets.

WaMu had $307 billion of assets when it was shut down.  The largest bank failure since then had been BankUnited, with $12.8 billion of assets.

FDIC pulled a move with Colonial earlier this week that was eerily reminiscent of a similar move made with WaMu the week it was seized.  Those of us who thought Colonial would outlast other banks like Corus and Guaranty, should have realized this move foreshadowed a much quicker seizure.  Oops.

Here are the specifics from that filing earlier this week:

Colonial Bank … a wholly owned subsidiary of The Colonial BancGroup, Inc. … received notice on August 10, 2009 from … FDIC … directing  … a … subsidiary of the Bank, to exchange all outstanding shares of its … REIT Preferred Stock for an equal amount of Fixed-to-Floating Rate Perpetual Non-cumulative Preferred Stock, Series A of BancGroup … due to the occurrence of an “Exchange Event.”

What does that mean in English?  Reader frog said the following when I asked him about it on Wednesday:

My reaction is that its bad news for Colonial’s shareholders and debt holders.  Shifting the debt from having any claim, direct or indirect, on the BANK to having claim only on the HOLDING COMPANY makes it much easier for the FDIC to pluck away the Bank and leave the HC with nothing but debt.  The fact that the FDIC itself is tapping Colonial on the shoulder and saying, “Hey, how about you move this stuff over there so it doesn’t get in my way later” would not make me happy if I have any stake in the company.

In future I will blog such tidbits with more alacrity…


I question your use of “failed banks” description of what has been going on by the FDIC vis a vis your reference to WMI, Inc. the bank holding company of Washington Mutual Bank(WMB). WMI, Inc. had a $4.1B cash deposit(the turn over) and $17B in capitol infusion with WMB when it was seized and sold to JPMorgan for $1.88B. How do you like that-JPM take 21B of WMI,Inc. money for 1.9B of your money- Fair trade from your point of view I suppose when you refer to it as a “failed bank”. Have you done your reporting investigative due diligence? Do you know that there is a Fradulant Conveyance law suit
filed against the FDIC by WMI, Inc. in washiongton DC federal court? Do you know that several insurance companies holding equity ownership in WMI, Inc. have filed a law suit against JPMorgan for collusion in the destruction of WMB? Do you know that Judge Walrath issued an order for discovery ineffect ordering JPMorgan in a subpoena to produce records of events leading to the seizure of WMB? The records were due Aug 1, 2009?
Do you know that the WMI, Inc. lawyers have made mention of a global settlement discussions with the FDIC and JPM in there latest billing for their services?
The least you can do is admit that there is a lot about WMB seizure you don’t know? Don’t go around calling yourself an investigative reporter unless you do a thorough due diligence and report the facts. I hope your next blog will show that you are a good investigative reporter when you report Washington Mutual was far from a “failed bank” when it was seized. The question for you is Why then it was seized and sold for a fraction of its value?

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Lunchtime Links 8-13

Aug 13, 2009 15:39 UTC

Must Read–Next bubble to burst is banks’ big loan values ( Jonathan Weil, ht AK)  In their latest quarterly filings, banks were required to list the fair value of their loan books next to their carrying value.  No surprise, most banks are carrying loans at far above their fair value.  And the difference is enough to wipe out most of their capital.  I’d been working on a table of this data in conjunction with my own column, should be coming shortly.

The Forgotten (Doug Glanville)  Writing on the NYT op-ed page, former outfielder Doug Glanville writes about the plight of pro athletes trying to find a life after they fade from the spotlight.  Glanville is a fantastic writer.

Cap & Trade’s Unlikely Critics:  Its Creators (WSJ)  The economists who first envisioned a cap and trade system doubt that it will work on a global scale.  They argue a carbon tax would be a more efficient way to curb emissions.

Retail sales fall, jobless claims up (Reuters)  Retail sales fell slightly, even when you include the big boost from Cash 4 Clunkers.

Fastest Dying Cities meet for a lively talk (WSJ)

Bill Black on the bank crisis (GS666)  I’d missed this.  Thanks to Morgan for posting.

All you can fly for $599 (JetBlue)  Interesting promotion.  For $599, you can fly unlimited on JetBlue for a month.  I wonder how many people would actually take more than 4 flights in a single month to destinations JetBlue flies?  This is a great way to collect a lot of cash up front.

Great photo caption (smh.com.au)

The half-million dollar wiener (Slate) How can New York City hot dog vendors afford a monthly rent of $53,558?  Unfortunately, the article doesn’t actually answer the question.   But it is interesting…

Teen sets self on fire to imitate YouTube clip (wesh.com)  Mom blames YouTube.

Does anyone know what this is?  (Update: reader Danny W. may have figured it out)



That machine is Goldman Sach’s latest purchase with our taxpayer money. It serves two purposes.

1) It is creating an underground storage facility for all of the documents that link it to Paulson and Geithner and how their standard operating procedures for running .gov.

2) It is used to create underground storage for all of the oil they are buying so they can ramp it to $150 after they cause it to dump in the short term (since they will head fake all their clients and take their money first).


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Foreclosure Activity up 7% in July: RealtyTrac

Aug 13, 2009 04:02 UTC

From RealtyTrac:

Foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 360,149 U.S. properties during the month, an increase of nearly 7 percent from the previous month and an increase of 32 percent from July 2008. The report also shows that one in every 355 U.S. housing units received a foreclosure filing in July….

The top four state foreclosure activity totals in July were reported by California, with 108,104 properties receiving a foreclosure filing; Florida, with 56,486 properties receiving a foreclosure filing; Arizona, with 19,694 properties receiving a foreclosure filing; and Nevada, with 19,535 properties receiving a foreclosure filing. Together these four states accounted for nearly 57 percent of the nation’s total foreclosure activity….

Other states with totals among the 10 highest in the country were Texas (12,077), Georgia (11,136), Ohio (11,021), Michigan (8,257) and New Jersey (6,467).

Evening Links 8-12

Aug 12, 2009 19:39 UTC

Who talks jumpers off the Golden Gate?  Ironworkers.  And they’re ridiculously good at it. (SF Chronicle)

Inflation and the fall of the Roman Empire (ar.to)  Very interesting.  The transcript of a speech delivered in 1984.

Build a bridge, demolish it, rebuild it — The Chinese way to boost GDP (dnaindia)  Already some economists are calling the end of the recession because GDP has stopped falling.  But that’s a less than perfect indicator.  GDP measures activity, even if that activity isn’t productive.  Exhibit A: Cash for Clunkers.  Borrowing to boost auto production increases economic activity in the present, but reduces it in the future, when debt incurred to finance it today has to be paid back…

The quarter-life crisis (WaPo)  Some readers will poo-poo this piece, arguing that today’s twenty-somethings are just whiny whippersnappers.  Perhaps.  But compared to generations past, their post college years can be fraught with upheaval.  Today it’s not uncommon for college grads to have as many as half a dozen jobs before they reach 30.

Lawmakers seek “Clunker” vouchers for out of stock cars (WSJ)  “Customers trading in older cars under the program are getting vouchers worth $3,500 or $4,500, depending on the fuel-economy standards of the trade-in, to buy a new car. But if a buyer wants a particular model or color that isn’t in stock, the voucher can’t be used.” No points for guessing which state the congressmen pushing this proposal are from.

Incoming AIG CEO begins tenure with two week vacation (NakedCapitalism)

Volume of ‘subdivision’ vacant lots overwhelms banks (AJC)  Great first line: “You think it’s hard selling a house these days? Try unloading a subdivision.” No surprise this is from metro Atlanta…

Cow gives birth to calf with two heads (Telegraph)

How did he get up there? (Click to enlarge in new window)



By the way, does it make be a hopeless history nerd if my primary name for Istanbul is still Constantinople? Or would I only qualify if I kept minting my own coins with my profile stamped in them (and then debasing them repeatedly)?

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Fed extends, but doesn’t increase, Treasury purchase program

Aug 12, 2009 18:53 UTC

From the FOMC statement released a few minutes ago by the Fed:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.

The Treasury purchase program had been scheduled to terminate in September.  Instead of letting the program wind down on schedule, buying $47 billion worth of Treasuries over the next six weeks, the Fed will make those purchases over the next 10 weeks.

So far the Fed has purchased $253 billion worth of Treasuries, $109 billion worth of agency debt, and $721 billion of agency mortgage-backed securities.

The other two purchase programs, for agency debt and agency mortgage-backed securities, are unchanged.  As reiterated in the statement, they are scheduled to expire at the end of the year.

IMHO, these programs can’t end soon enough…

Catching the last plane out

Aug 12, 2009 17:44 UTC

Fears of financial collapse have receded, but they shouldn’t be forgotten. This blog has argued repeatedly that the economy is still very much infected by the disease that caused last year’s collapse: excessive debt.  And the problem isn’t going away, what with runaway government spending on stimulus, bailouts, and, potentially, a new national health care plan.

Keeping this in mind, John Rubino’s recent cover story in CFA Magazine remains highly relevant.  How do you protect your assets if the financial system collapses?  Recently that’s been a question for Argentines.  But Americans aren’t crazy to be asking it themselves.

To me, the most interesting part of the article was the sidebar at the end, “A Cavalcade of Confiscation:

Worrying about a government destroying its currency or confiscating its citizens’ wealth may seem a bit paranoid—until you read some financial history. The sad fact is that over the centuries, time and again, governments have spent and borrowed themselves into a box and forced their citizens to bail them out. They debase the currency (which is a tax on savers), impose new taxes, or simply take whatever assets are most accessible. To keep their prey from escaping, they impose various kinds of capital controls, including restrictions on the movement of wealth or price increases. A few historical examples, ranging from ancient to more recent times, suffice to make the point….

(For ease of reading, toggle to full screen mode by clicking the top-right button in the Scribd window below.  Then zoom in with the “+” button.)

Special thanks to the folks at CFAI for their permission to republish this on the blog.

CFA Mag subscriptions are available here.

Rubino’s website is DollarCollapse.  It’s a great source for interesting links.

WSJ: The Next Fannie

Aug 12, 2009 15:31 UTC

A must-read opinion from yesterday’s WSJ about the expansion of federal backing for home mortgages:

Only last week, Ginnie [Mae] announced that it issued a monthly record of $43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph Murin sounded almost giddy as he cheered this “phenomenal growth.” Ginnie Mae’s mortgage exposure is expected to top $1 trillion by the end of next year—or far more than double the dollar amount of 2007….

Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006.  Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee.

The private mortgage lending business has collapsed, especially considering that most large private lenders now operate with a government guarantee.  This is bad news for existing homeowners and banks, who are very much invested in real estate, either directly or as collateral.  Home prices are a function of the credit that’s available to finance transactions.  No credit would mean much lower house prices, even from today’s “depressed” levels.  This, we’re told, is untenable.  If house prices are allowed to fall too far, the financial sector would quickly collapse and the economy would follow.

So the government is propping up prices by providing MORE financing than it did previously, as you can see in the explosion of FHA lending.  Unfortunately, these loans are of poor quality…

The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud.

The piece mentions a report from HUD’s Inspector General which noted the FHA doesn’t have the resources to handle the explosion in lending, that it’s putting the integrity of Ginnie Mae paper at risk.

On June 18, HUD’s Inspector General issued a scathing report on the FHA’s lax insurance practices. It found that the FHA’s default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days. The FHA’s reserve fund was found to have fallen in half, to 3% from 6.4% in 2007—meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory. The IG says the FHA may need a “Congressional appropriation intervention to make up the shortfall.”

Sound familiar?  Bad home loans are being made with taxpayer money, but because they are packaged in securities that themselves are explicitly guaranteed by the government, the lenders at the other end couldn’t care less.  So they keep lending money with no regard for risk.  How well did this work out with Fannie and Freddie?

In the wake of the mortgage meltdown, most private lenders have reverted to the traditional down payment rule of 10% or 20%. Housing experts agree that a high down payment is the best protection against default and foreclosure because it means the owner has something to lose by walking away. Meanwhile, at the FHA, the down payment requirement remains a mere 3.5%. Other policies—such as allowing the buyer to finance closing costs and use the homebuyer tax credit to cover costs—can drive the down payment to below 2%.

A tax planner e-mailed me a few weeks back, noting how many folks were re-filing last year’s tax returns to take advantage of the first-time home buyer tax credit.  With the help of an FHA loan, this allows them to put almost no money down to buy a house.

So expect high default rates to continue.  And expect taxpayers to write more very large checks to finance the losses.