Lunchtime Links 12-31

Dec 31, 2009 16:53 UTC

Bankers get $4 trillion gift from Barney Frank (Reilly, Bloomberg) David pours over HR 4173, all 1,279 pages of it. He finds some interesting nuggets. One of the bigger problems I see is the proposed insurance fund that would pay for resolving systemically dangerous banks. Talk about moral hazard!

Show some balls (Saletan, Slate) A colorful take on new TSA security procedures.

New jobless claims hit 17-month low (Kaiser, Reuters) Good news for the economy but, paradoxically, bad news for stocks (and gold). If the economy improves, the Fed will have to raise rates. That will hit equity values and strengthen the dollar. But don’t count on strength lasting very long. As soon as the Fed meaningfully tightens, we’ll head right back into debt deflation…..which is why many think the Fed is trapped.

The land of the rising bearish wager (Zuckerman/Slater, WSJ) Betting on a “sudden stop” in Japan. (ht Walker Todd)

Shoplifters? Keen an eye on workers (Greenhouse, NYT)

UBS whistleblower asks why he’s going to prison (Brown, Reuters) This will be an interesting 60 Minutes piece.

Europe’s vast farm subsidies face challenges (Castle/Carvajal, NYT)

How corruption stalks the stimulus (IBD) The IRS can track who is actually eligible for many of the tax breaks offered as part of stimulus measures…

The maker of the Times Square ball filed for bankruptcy in 2009 (TrueSlant) The story says they filed last January, yet they’re still making the ball. There is life after bankruptcy….

IKEA job interview (imgur)

Train travels through market (reminds me of this video posted previously)

train market

2010: Walking away will gain cachet

Dec 31, 2009 01:27 UTC

Why bother? That’s the question more underwater Americans are asking themselves about their mortgage.

Trapped in the abyss of negative equity, more will decide to quit paying. As they should.

About a quarter of all mortgages in the United States are on houses that are worth less than the unpaid balance of the mortgage, according to real estate consultant First American CoreLogic. About half of that group, 5.3 million borrowers, are 20 percent or more underwater. For 2.2 million, the property is worth less than half the mortgage balance.

Those folks are called “homeowners,” but “homeborrowers” would be more accurate. All they own is an obligation to whatever entity services their mortgage. They’re essentially renters paying above-market prices.

But that “ownership” tag is often felt to be important. Americans who are trained to believe that a mortgage is a moral obligation fear punishment or a bad conscience if they walk away.

But foreclosure is hardly the mark of Cain, especially in states like California and Arizona, where lenders have no practical recourse to pursue a borrower’s other assets.

As more underwater homeowners realize there’s no hope to regain their equity, more will cut their losses. The reduction of liabilities brings immediate debt relief and often a lower cash outlay — on rent — for comparable housing. The financial shot in the arm should outweigh the stigma of foreclosure.

Financial self-interest is likely to be contagious. A study by three economists suggests that when a few borrowers in a neighborhood just say no, others are likely to follow.

Lenders do what they can to keep the disease of economic rationality from spreading. They try to “extend and pretend” with lower interest rates, extended terms, and the pretence that eventually the borrower will make good. Anything, really, to avoid the hit to capital that comes from a writedown of the principal.

Until now, borrower guilt has helped protect bank balance sheets. That is likely to change. If it does, the next chapter of the financial crisis could be a painful one.


The economy is terribly interesting right now.

Pimco was shouting from the rooftops that the Fed needs to not merely stabilize but actually reflate. In other words, they felt it was important for the Fed to bring house equity levels back toward where they were so people aren’t underwater in large numbers. They are not convinced that reflation has happened.

Pimco is now actually backing the truck up on long bonds, which on its face seems crazy with quantitative easing and the like. But they are terribly smart. Apparently they have judged that deflation is winning. Tightening of lending standards together with debt repudiation by Americans is shrinking the money supply steeply.

Meanwhile, efficiency and productivity by companies and prudence and thrift by individuals is soaring. While that’s terrific, it means high unemployment for quite a while.

We are in for a slog. The decline in the money supply caused by the collapse of lending is in the tens of trillions.

There may be one last bond rally yet! As the next round of resets hit and many cannot refinance, there may be a second deflationary gust. If the fed comes to the rescue again at that time, the decades-long super-rally in treasurys may be over at last!

Posted by Dan Hess | Report as abusive

Move your money

Dec 30, 2009 18:05 UTC

Arianna Huffington and Rob Johnson are organizing a big bank boycott. They want depositors to take their money out of Too-Big-To-Fail banks and put them in smaller, high quality banks.

They’ve launched a new website and have teamed up with Chris Whalen to give folks other options. Whalen’s firm, Institutional Risk Analytics, has a proprietary system that grades banks using FDIC data. Enter your zip code and Whalen provides a list of high quality banks in your area.

It’s a potentially powerful combination. Huffington has wide reach due to her media ubiquity and popular website. Johnson, once a portfolio manager for George Soros’s Quantum Fund, is a successful veteran of high finance who’s spoken out against the danger of derivatives and will head Soros’ $50 million Institute for New Economic Thinking. Leveraging Whalen’s data means the two can do more than simply ask folks to move their money. They can provide better options.

(You can read more about it in this column published at HuffPo.)

I applaud the effort and plan on taking them up on it. Some of my savings currently reside at a TBTF bank, earning nothing, and I plan to move the account shortly.

When bloggers like me talk about creditors holding banks responsible for the risk they take, that includes bank depositors. If you have deposits in a bank — a CD, checking or savings account, for example — you are a creditor of your bank. Moving your deposits out of banks that benefit from too-big-to-fail guarantees is a tangible way you can protest bailouts.

I do have one small quibble with the Huffington/Johnson site, in particular the YouTube video they’ve produced. The idea that fat cat bankers — “Potter” from It’s a Wonderful Life stands in — are solely responsible for the crisis oversimplifies the issue. Plenty of smaller banks have gotten themselves into trouble with irresponsible lending. FDIC’s problem bank list now stands at 552, composed mainly of smaller banks.That’s 7% of all FDIC insured institutions in case you’re wondering.

It also lets the rest of us off the hook. Without willing investors and an assist from Alan Greenspan’s low rates, big banks couldn’t have inflated the bubble. Yeah, many should have known better. But let’s face it, Wall Street bankers aren’t the only ones that are greedy.

I also worry that big banker baiting could lead to violence if/when the financial sh*t again hits the fan.

But again, that’s a small quibble. Huffington/Johnson/Whalen — all great folks I’ve had the chance to speak with in the past — are spot on with this effort.

What truly separates community bankers from the big boys is that they can fail. If they mess up, they end up in FDIC receivership. If they lose, they pay for their own mistakes. That’s why this effort should hold particular appeal to financial conservatives.

If it weren’t for the moral hazard created by deposit insurance, depositors would flock to banks that lend conservatively. In the meantime, the best thing we can do is take our money out of quasi-public banks like Chase, Citi, Wells, BofA, Ally, et al and move them to banks that operate free of government support.

More at Move Your Money.


If you plan on moving away from the “Big Banks” , look over the Credit Unions with easy terms to join. (Some are Very easy to get a account with…)

Ken N.

Posted by Ken N. | Report as abusive

More ammo for the bazooka

Dec 30, 2009 13:05 UTC

Treasury has reloaded its bazooka and stands ready to shock and awe the housing market.

Though, Standard & Poor’s/Case-Shiller data showed a fifth month of improvement yesterday, analysts still expect prices to fall 10 percent or more next year as various government supports wind down.

Political pressure ahead of midterm elections will likely force the administration to do something in response and Treasury’s Christmas gift of nearly unlimited support for Fannie Mae and Freddie Mac gives them a powerful weapon to do so.

But it will be a tough fight as artificial, government-sponsored demand dries up.

The housing tax credit — $8,000 for first-time buyers, $6,500 for move-up buyers — ends in April. Meanwhile, the Federal Housing Administration plans to tighten its loose lending standards as its reserve fund has dwindled.

Moreover, mortgage rates may head higher as the government ends purchases of mortgage-backed securities. Treasury’s $220 billion buyback program ends this week. The Federal Reserve’s $1.25 trillion program ceases in March.

And then there’s the continuing flood of Treasuries to finance the federal deficit. Morgan Stanley estimates that could drive 30-year mortgage rates back above 7.5 percent, an effective 40 percent increase in the cost of financing home purchases. That looks high, but even a smaller jump will drive buyers from the market and force house prices down.

But the biggest threat may be foreclosures. Credit Suisse expects 4.2 million next year and says that 3.2 million must be prevented to keep prices stable. That’s a tall order, considering unimpressive results from modification efforts that mostly focused on extending terms or lowering interest payments.

Banks, mortgage bond investors and servicers are loath to go further, by forgiving principal, because it’s either a direct hit to capital or tricky to do under current bond documents. Extend and pretend is less painful.

Enter Fannie and Freddie. With unlimited support from Treasury the two have theoretically unlimited capacity to eat losses, useful to Treasury if it wants to finance an expanded modification program that includes principal forgiveness.

It’s a tempting weapon to deploy ahead of midterm elections. But financing principal writedowns with taxpayer money only adds to America’s debt burden while rewarding irresponsible borrowers and lenders.


If we need to stop 3.2M of 4.2M foreclosures, then Frandie doesn’t hold enough of the paper to do this. If hiding losses is the reason mortgage holders are holding out, then they are unlikely to sell the mortgages to the government at a loss.

Looks like its $1T of additional window dressing.

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Lunchtime Links 12-29

Dec 29, 2009 19:27 UTC

Was the global financial crisis a mathematical error? (Steve Keen, Business Spectator) Keen’s latest. Another great piece explaining the flaws of neoclassical economics. (ht Yves)

Not just Tiger’s temptations (Glanville, NYT) Another great column from ex-Cub/Phillie Doug Glanville.

Housing crash leads to falling divorce rate (Waller, WSJ)

Fed proposes selling term deposits to absorb excess reserves (Torres, BusinessWeek) To prevent banks from lending too much of the free money it gave them, the Fed will sell them CDs.  Earning interest on free money is another reason why it’s good to be a banker…

In new way to edit DNA, hope for treading disease (Wade, NYT) “Only one man seems to have ever been cured of AIDS, a patient who also had leukemia. To treat the leukemia, he received a bone marrow transplant in Berlin from a donor who, as luck would have it, was naturally immune to the AIDS virus.”

Video tour of 96 sq ft house (Unclutterer)

Lots ‘o lights (imgur) Impressive Xmas decorating.

Polar bear attack…



Other than the optics, why is a “term deposit” strategy better for the Fed than just raising or lowering the interest rate paid on excess reserves?

I can only see how soliciting the longer maturity deposits will only be more expensive for the Fed.

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IMF: Bad lenders did more lobbying

Dec 29, 2009 13:50 UTC

An interesting piece of holiday research from the IMF … A Fistful of Dollars: Lobbying and the Financial Crisis

Our analysis establishes that financial intermediaries’ lobbying activities on specific issues are significantly related to both their mortgage lending behavior and their ex-post performance. Controlling for unobserved lender and area characteristics as well as changes over time in the macroeconomic and local conditions, lenders that lobby more intensively (i) originate mortgages with higher loan-to-income ratios, (ii) securitize a faster growing proportion of loans originated; and (iii) have faster growing  mortgage loan portfolios. Our analysis of ex-post performance comprises two pieces of evidence: (i) faster relative growth
of mortgage loans by lobbying lenders is associated with higher ex-post default rates at the MSA level in 2008; and (ii) lobbying lenders experienced negative abnormal stock returns during the main events of the financial crisis in 2007 and 2008.

In English that means that the lenders that lobbied most intensively tended to engage in riskier lending practices.

Not that we should be surprised.

(ht Margaret Doyle)

AT&T unsuspends online sales of iPhone in NYC

Dec 28, 2009 19:56 UTC

AT&T’s iPhone problems keep getting worse. The phones are behaving so badly in NYC that AT&T tried surreptiously to discourage sales. From Jeffrey Bartash, Dow Jones:

In a holiday-shortened week, AT&T has spawned a raft of headlines on the Internet after the company halted online sales of the iPhone in New York City, at least temporarily. The phone is still available to New Yorkers in Apple (AAPL) and AT&T stores, however….

Since reports of AT&T’s online move surfaced Sunday, a number of people have tried to order the iPhone online using New York City ZIP codes. An effort by this writer to do the same showed that “there are no phones and devices that match your search criteria,” according to AT&T’s Web site.

Now CNBC is reporting that AT&T has resumed online sales in NYC.

AT&T is in quite a pickle. According to a great NYT article by Randall Stross published two weeks ago, the problem isn’t AT&T’s network, it’s the iPhone’s electronics.

The iPhone performs so poorly (and not just in NYC as I can personally attest) that the reputation of the company’s network — and thus its brand — is taking a huge hit. But what’s AT&T supposed to do? It can’t throw its best-selling product under the bus.

No doubt there are some heated discussions behind the scenes between AT&T and Apple. My hope is that Steve Jobs can deliver a functional phone by the time my contract expires…

UPDATE: Reader LH offers the following link rebutting Stross’s piece. I guess I’m inclined to defend AT&T versus Verizon because of personal experience. I lived in FL for a few years and switched from AT&T to Verizon because of Verizon’s vaunted network, which for me performed terribly. AT&T’s was so good that even on drives over the Sunshine Skyway Bridge, I rarely dropped a call. Verizon couldn’t get me a good signal in my apt. Just one opinion….


Rolfe, you might want to read John Gruber on the Stross piece: _lying_eyes

“Who Do You Believe, Randall Stross or Your Own Lying Eyes?”

Posted by LH | Report as abusive

Lunchtime Links 12-28

Dec 28, 2009 18:18 UTC

Morgan Stanely sees 5.5% yield on 10-year (Biggadike/Kruger, Bloomberg) A continued flood of supply coupled with fewer buyers should drive rates higher. Mortgage rates vary closely with the 10-year. If the latter goes to 5.5%, MS notes that 30-year mortgages could get back to 7.5%-8.0%. House prices will suffer another steep decline if mortgage rates climb that much.

A master of disaster (Carter, Nation) You’ve probably not heard of John Dugan. As head of the OCC, he’s supposed to be regulating biggest banks. Instead, he’s been working hard as their advocate.

Adding fees and fences on media sites (Perez-Pena/Arango, NYT) Users want content to be free, but it can’t be produced for free.

VIDEO: Max Baucus, drunk on Senate floor? (Gavin, Politico)

Fargo reporter punk’d (TwitPic) Read the photo caption.

Worst driver on planet? (LiveLeak) This video actually captures a number of drivers on the same slippery street. But the first guy is a real doozy.

Paper plane enthusiast sets record (McCurry, Guardian)


Sprott: Is it all a Ponzi?

Dec 28, 2009 14:51 UTC

In his latest missive to investors (pdf link here), Eric Sprott asks if our Ponzi economy is at risk of collapse. In fiscal 2009, foreigners scooped up $698 billion of Treasuries while the Fed upped its holdings by $286 billion. But the public debt increased $1.9 trillion. So who bought all the rest? According to Treasury, “other investors” bought $510 billion, up from just $90 billion in 2008. With the Fed’s printing press turned off, the question for next year is whether “other investors” can buy more Treasuries than they did this year…

As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.

Sprott has over $4 billion under management, the majority of which is in physical bullion, both gold and silver.

This blog has also argued that the American economy is a pyramid scheme:

At the end of the day, flushing more debt through the system is the only lever policy-makers know how to pull. Lower interest rates, quantitative easing, deficit spending, it’s all the same. It’s all borrowing against future income. Each time we bump up against recession, we borrow a bit more to keep the economy going. With garden variety recessions, this can work. Everyone wants the good times to continue, so no one demands debts be paid back. Creditors accept more IOUs and economic “growth” continues apace. If it sounds like Bernie Madoff’s Ponzi scheme, that’s because it is.

Each time Bernie’s scam got a few too many investor withdrawals, he’d simply plug the hole by raising more investor cash. The guys at Fairfield Greenwich were making so much in fees, they were happy to funnel more his way. But at a certain point, Ponzis get too big. There simply aren’t enough new investors to pay off older ones. In the aggregate, the same is true for Western economies. Their debt loads are now so huge, they are simply unpayable.

Naturally, policy-makers sound just like Ponzi-schemers: Just give us a little more cash to get us through this rough patch and everything will be copacetic. Ben Bernkanke at the National Press Club alluded to the famous quote by St. Augustine: “Oh Lord, give me chastity, but do not give it yet.” President Obama convened his “fiscal responsibility” summit days after passing the stimulus bill and days before proposing huge increases in health care spending.

Like pyramid schemes, fractional reserve banking systems simply don’t work in reverse. “It’s A Wonderful Life” demonstrates why.There must always be new money coming into the system to refinance debts. If investors/depositors suddenly demand their money back, the system crashes.

Deflation to a central banker is like withdrawals from a Ponzi scheme. Too much at once and the scheme collapses. The Fed’s (impossible) job is to make sure it never does.

Bernanke says he’ll stop printing money to absorb debts, and he may for a time. But the American Ponzi has grown so large, the private credit system is, IMHO, no longer capable of generating sufficient debt finance to keep it going. So to avoid a debt deflationary depression the Fed will have to rev up its printing press again.

Japan has been wrestling with its own Ponzi collapse for 20 years, keeping it at bay with trillions of dollars worth of deficit spending and money printing.

Hasn’t worked for them and it won’t work for us.


From the economist, “America is a Ponzi scheme that works”

‘Immigration keeps America young, strong and growing. “The populations of Europe, Russia and Japan are declining, and those of China and India are levelling off. The United States alone among great powers will be increasing its share of world population over time,” predicts Michael Lind of the New America Foundation, a think-tank. By 2050, there could be 500m Americans; by 2100, a billion. That means America could remain the pre-eminent nation for longer than many people expect. “Relying on the import of money, workers, and brains,” writes Mr Lind, America is “a Ponzi scheme that works.”‘ tes/displayStory.cfm?story_id=15108634&s ource=hptextfeature

Demographically speaking, our underlying trend is growth, if only due to demographics, and this can cover a great many sins. Contrast this with Japan, where the overbuilding up to 1990 can’t be absorbed, EVER, because the population is shrinking. Here in the DC area, house inventory overhang is 40% less than it was at the peak, and prices are climbing again.

We’ve had inflation over the years, and lots of it too. We’ve gotten through… Government budgets will get crunched and fiscal sanity will return. Guess what: There are 1.9 million people employed by the federal government (ex post office and military), same as 1963.

Compared with all history the standard of living of Americans is far higher than ever before. And the vast majority of goods and services in the economy are by Americans, for
Americans. Trade is only a minority of the economy. Speaking of trade, our deficit for the first 3 quarters was just $300B, less than half of what it was a year ago. That is also less than 3% of GDP.

Posted by Dan H | Report as abusive

Lunchtime Links 12-27

Dec 27, 2009 15:34 UTC

How overhauling derivatives died (Smith/Lynch, WSJ)

Debt ceiling raised $290 billion (Rogers, Politico) Another Xmas Eve vote. Dems had wanted to raise the ceiling at least $1.8 trillion to avoid having to raise it again before midterm elections, but they didn’t have the votes. Congress has bought itself about 4-6 weeks of breathing room. Senate Repubs made a showing of not voting for the measure, but had they been in the majority, you can bet they’d have done the same to avert default.

At tiny rates, saving money costs investors (Strom, NYT) “Duh” is the obvious response to this piece. Savers have been getting hammered ever since the Fed started dropping rates two years ago. Yet it’s well written and important to see in the paper of record. It makes the point that low rates are forcing many folks to chase risk. Low nominal rates would be fine IF the Fed were allowing the economy to delever/deflate as it clearly needs to. If the cost of goods/services is falling, then rates can be zero and savers still come out ahead. But the CPI has stayed positive, so savers lose. Of course punishing savers is precisely what economists like Paul “paradox-of-thrift” Krugman and Greg “confiscate-cash” Mankiw say is needed for the economy to recover. Krugman wants to steal savings via shock-and-awe deficit spending, i.e. future taxation. Mankiw would literally confiscate a portion of unspent savings.

Good news alert: Hunting trash for cash (Hudak, Orlando Sentinel) The recession is causing us to produce less trash. This is problematic for Covanta, which burns trash to create energy. But it’s great for the environment.

Investors see farms as way to grow Detroit (Huffstutter, LA Times) Urban renewal…

VIDEO: Stopping purse snatchers (LiveLeak)

Alcohol substitute that avoids drunkeness in development (Rodgers/Alleyne, Telegraph)

Japan’s “grass eaters” turn their back on macho ways (McCurry, Guardian) Twenty years of economic stagnation appears to be neutering Japan.

Teflon Buffett (Felix)

Fannie/Freddie support increased

Dec 25, 2009 01:59 UTC

No better time than Xmas Eve to announce the expansion of the administration’s housing slush fund. Previously, Fan and Fred each had a $200 billion credit line from Treasury. Though they’ve drawn only $111 billion so far, the administration thought it prudent to offer unlimited support … to give the markets “confidence.” Personally, I think the markets could do with a bit less confidence. Confidence leads to complacency, to chasing risk, to progressively easier credit terms that inflate bubbles.

In other words, stability creates instability.

By the way, read to the bottom for an interesting bailout factoid you may not have known, but first the story…  (Christie/Shenn, Bloomberg)

The U.S. Treasury Department will remove the caps on aid to Fannie Mae and Freddie Mac for the next three years, to allay investor concerns that the companies will exhaust the available government assistance.The two companies…have caps of $200 billion each on backstop capital from the Treasury. Under the new agreement announced today, these limits can rise as needed to cover net worth losses through 2012.

Treasury says the two aren’t likely to need the full $400 billion they’d been offered, but its authority to expand the guarantee unilaterally expires Dec 31. Tim Geithner doesn’t want Congress getting in the way if he needs to offer more support later…

Besides expanding taxpayers’ commitment to Fan and Fred, the diktat demanding they shrink their balance sheets has been watered down.

The Treasury also relaxed its timeline for Fannie Mae and Freddie Mac to shrink their portfolios of mortgage assets. Previously, the companies were instructed to reduce their portfolios at a rate of 10 percent a year. Now, they will be required to keep the value of their portfolios below a maximum limit, currently $900 billion, that will go down by 10 percent a year.

This means they will not need to take immediate action to trim their holdings and could allow them to rise. Fannie Mae’s portfolio ended October at $771.5 billion and Freddie Mac’s holdings at the end of November were $761.8 billion, according to the latest figures released by the companies.

Obama needs a slush fund to prop up housing, especially after Ben Bernanke stops printing money to buy mortgage-backed securities at the end of March. Fan and Fred will continue to serve nicely.

One other thing you probably didn’t know. Treasury has its own MBS purchase program running parallel to the Fed’s. It has accumulated quite a bit of paper…

The Treasury said today that it is ending its mortgage- backed security purchase program as of Dec. 31, after about $220 billion in purchases.

That’s in addition to the $1.25 trillion and $175 billion the Fed is spending on MBS and Fannie/Freddie debt respectively.

We may be getting paid back part of one bailout — TARP — but the only reason banks have the capital to pay that back is because of balance sheet protection they get from other bailouts, not to mention general taxpayer support for asset prices.


Reply To “What Do I Know”
Re: Purchase Reporting on Treasury Statement

GSE MBS purchases by Treasury are reported only on the Monthly Treasury Statement; see Schedule E (Net Activity, Guaranteed and Direct Loan Financing), under Dept of Treasury. Page 27 if you are looking at Nov, 2009.

These purchases accounted for 80% of all non-TARP Schedule E activities in fiscal 2009, and 50% in first two months of fiscal 2010

Posted by Scott Schaefer | Report as abusive

Evening Links 12-23

Dec 23, 2009 21:36 UTC

(Reader note 1: posting will be light through the weekend….taking a few days off)

(Reader note 2: Just saw Avatar, the IMAX 3D version. I highly recommend it.)

Food stamps altering how retailers do business (Maestri/Baertlein, Reuters) “At 11 p.m. on the last day of the month, shoppers flock to the nearest Walmart. They load their carts with food and household items and wait for the midnight hour. That’s when food stamp credits are loaded on their electronic benefits transfer cards.”

The Protocol Society (Brooks, NYT) “When the economy was about stuff, economics resembled physics. When it’s about ideas, economics comes to resemble psychology.”

Treasury to seek easing of bailout fund rules (Somerville, Reuters)

One cheer for Barney Frank (WSJ editorial) WSJ editorials tend not to be very useful, but I thought the last line of this one was notable: “Perhaps the House and Senate should simply … start over with a new mission for [financial] regulatory reform: break up the too big to fail racket.More evidence that all sides of the political spectrum agree on this. I wonder how they would propose we do it.

New home sales decrease sharply in November (Calculated Risk) Yesterday’s existing home sales report had everyone exited, but new home sales are far more important for economic growth, and those are still terrible. Bill has dubbed this “the distressing gap.”

Gross’s Total Return Fund now biggest in history (Bhaktavatsalam, Bloomberg) The main reason Gross screamed for government to “support asset prices!” during the crisis….because he and his investors have a ton of paper wealth at stake.

Everyone’s defaulting, why don’t you? (Gross, Slate) I have a short column running later this week in the biz section of NYT on this topic. I’m sympathetic to McArdle’s view that folks who strategically default are gaming the system and leaving the rest of us to pick up the pieces. Yet savers themselves were part of the arrangement. Our savings were intermediated by the banking sector into more home loans. When guys like me say banks messed up and have to eat losses, we mean the shareholders and creditors of banks. That includes depositors. I’m speaking very generally of course, but de-levering the economy means writing down debts on one side of the ledger and paper wealth on the other side.

“Youth Depression” hard on retailers (Stoddard/Sage, Reuters) The authors are referring to the inordinate impact of the economy on youth employment, not youth mental health.

Malcolm Gladwell’s stickiness problem (Wise, Psychology Today) “[Malcolm] Gladwell [is] masterful at brewing up memes so potent that they travel far beyond the realm of where the mere modest truth would go. They spread. And they stick. And having stuck, they proceed to affect the decisions that people make, the policies they implement, the laws that they pass. A normal person, when he is wrong, adds a little drop of erroneousness in the great sea of human conversation. Gladwell, when he is wrong, creates a tsunami of wrong.

View of space shuttle launch from a commercial flight (better muted)

Lunchtime Links 12-22

Dec 22, 2009 17:05 UTC

Furlough alert 1Yahoo imposes week long shut down (Vascellaro, WSJ)

Furlough alert 2City of Chicago to shut down Xmas Eve to save cash (CBS2)

TARP deadbeat list grows to 55 (Applebaum, WaPo) Up from 33 banks + AIG last quarter.

Mega-savant Kim Peek dies (Collins, Deseret News) Peek was the inspiration for “Rain Man.” What a fascinating brain: “Scientists [recently] learned that Kim could hold a book within eight inches of his face and read the left page with his left eye, the right with his right eye at the same time. He devoured books that way.” Much more in the article.

GDP revision suprisingly large (Evans, Real Time Econ) Q3 GDP growth was originally reported at 3.5%. The first revision put it at 2.8%. The second, released today, says it was really 2.2%.

Serious delinquencies rise for prime mortgages (Dixon, Reuters) The delinquency rate is far lower than for subprime and Alt A, but prime mortgages are much larger and there are many more of them. So total dollar volume of prime delinquencies is much larger than for subprime/Alt A.

More on existing home sales (CalculatedRisk) CR offers a number of contrarian thoughts regarding today’s surprising existing home sales report.

Her glass if half empty ( Read the photo caption.

Relative prices of different liquids (imgur) This feels about right to me…

How a bone disease grew to fit a prescription (NPR) Inventing a “disease” so a drug can be sold to correct it…

Tolerant cat…

Rich Dad fears Dec 2010

Dec 22, 2009 14:28 UTC

The tax code has a particularly odd quirk next year. The estate tax, which has decreased steadily from 50% to 45 % over the past few years, will drop to zero in 2010. To get the repeal passed, however, Bush 43 agreed to a sunset provision that brings the tax right back in 2011.

Heirs face 45% tax on estates over $3.5 million today. On January 1, the amount goes to 0%. But on January 1, 2011, the tax ratchets back to 55% on amounts over $1 million.

If Congress does nothing, I suspect we could see a spike in millionaire patricides this time next year.

Estates won’t be free of all tax next year. They’ll face much bigger capital gains taxes than they do today.

Under current law there’s something called “step-up.” You may have to pay 45% on the amount you inherit over $3.5 million, but the cost basis is “stepped up” to today’s prices. Step-up will go away for the very largest estates.

This will cause lots of headaches.

If Grandpa bought a bunch of shares of IBM back in 1955 and held them all these years, the cost basis is probably close to $0. If he sold the stock, he’d face a cap gain liability against pretty much the whole amount. But when inherited, the cost basis gets “stepped up” to the current price, wiping out any embedded cap gains liability.

Heirs may not face estate tax next year, but they will inherit shares and property at their original cost basis. So when they sell, they’ll have a large cap gains liability. Therein lies another big problem…

Imagine how difficult it is to determine, for example, the cost basis on shares of AT&T that were acquired decades ago?  Besides factoring in dividend payments, what about divestitures and acquisitions that have happened since then? Today’s AT&T is really SBC, which was once AT&T. And what about all the spin-offs the bells did over time? Verizon punted its yellow-pages business as Idearc, for instance. Lucent and Avaya were also spun off from the original Ma Bell. How are those factored in?

It won’t be easy to figure the capital gains liability on estates next year. Accountants and tax lawyers will be running up the billable hours.

Meanwhile, Rich Dad better watch his back…


You lose 100% stepped-up basis only if decedent dies in 2010. Even if decedent dies in 2010, the surviving spouse can step-up basis in $3M of assets, and the basis in up to $1.3M of other assets to anyone can be stepped-up. That is potential $4.3M step-up of assets.

Lunchtime Links 12-21

Dec 21, 2009 17:00 UTC

Hedgie Tepper on pace to make $2.5 billion this year (WSJ) The moral hazard trade has a new face. Tepper bet big that government would rescue bank shareholders and creditors. He was right. Can we blame him? He didn’t make the rules; he just played the game better than the rest once they were made.

Why can’t Americans make things? Two words: Business school (Scheiber, New Republic) For 30 years we’ve been focused on teaching finance, not manufacturing…

At top subprime lender, policies were invitation to fraud (Heath, HuffPo)

Fannie/Freddie suspend foreclosures for holidays (AP) Citi, JP Morgan and BofA have followed suit.

Goldman threatens to move some London staff to Spain (Evans, Independent)

Citadel files for bankruptcy (Spector/McBride, WSJ) The syndicator of Don Imus’ morning show is the latest radio company to struggle with debt. See also Clear Channel, Emmis and Regent….

GE uses UK libel law to gag doctor (Gerth, ProPublica) Ironic: GE wants to shut up a doctor for saying GE suppressed information. (ht, NG)

Trader Joe’s does something awesome (Reddit) Reminds me of all the guys out on bicycles Saturday night delivering food in NYC. I’m from Chicago so am not intimidated by windy Winter weather. Still, Saturday night’s storm was impressive. Wind so bad in the building canyons that you couldn’t walk more than a block or two. So everyone ordered in. No one was on the street besides food delivery guys. I wish Lou Dobbs could have seen it….

Anonymous dry cleaner also in holiday spirit (imgur)

Snoop Dogg invests in inner-city football (AP) Snoop Dogg, 38, launched the [youth] league in 2005 with $1 million of his own money after noticing that much of urban Los Angeles had no football for boys ages 5 to 13. He’s since invested about $300,000…The league now has 2,500 kids enrolled.

For anyone else who’s ever sung Handel’s Messiah….(ht CSQT)


“Tepper bet big that government would rescue bank shareholders and creditors. He was right. Can we blame him? He didn’t make the rules; he just played the game better than the rest once they were made.”

did Tepper LOBBY for the bailouts? did Gross?