Morning Links 1-7

Jan 7, 2010 14:48 UTC

Tim Geithner covered up AIG’s payments to counterparties (DealBook) Timmy G. knew it looked bad for AIG to pay out 100¢ on the dollar to counterparties like Goldman. So he told AIG to shut up.

Obama buget will raise “carried interest” tax (Comstock, Business Insider) Awesome proposal from the Prez. Recall that hedge-funders and PE guys can treat their partnership income as capital gains. As a result they’re only taxed at 15% instead of normal income tax rates of 35%. Last time this came up, Chuck Schumer killed it. This time it’s likely to happen.

Obama OKs taxing high-end health plans (Werner, AP) Another good move. It’s Republicans who’ve argued that such health plans should be taxed so this will get bipartisan support if Dems get on board. Unions oppose it so this demonstrates some backbone from Obama.

New Japanese finance minister calls for more stimulus, weaker yen (Kajomoto/White, Reuters) Debt surpassing 200% of GDP doesn’t faze the new guy…

Redrado fight roils Argentina’s markets (Cowley, WSJ) Argentina’s president wants to fire the central bank chief for refusing to release reserves to pay down debt. He says he won’t go. He has the backing of Congress too. RBS says it’s an opportunity to buy Argie debt.

Banks favorite Dem set to replace Dodd (Grim, HuffPo) Tim Johnson is from SD, the home of credit card processors. He’s the only Dem who voted against credit card reform. He also opposes cramdowns and is a supporter of pay-day lenders…

Fed conflicted on MBS purchase program (Aversa, AP) The Fed has promised to stop printing money to buy mortgage-backed securities this March, after buying $1.25 trillion total. There are many who think the Fed is trapped and can’t step away. Not only will they never sell what they bought (effectively monetizing mortgage debt) but they’ll continue buying to support the housing market. Minutes from the latest Fed meeting suggest that some officials indeed think the program will have to keep going…

Schwarzenegger seeks U.S. funds (Woo/Carlton, WSJ) He says the nation’s taxpayers owe California money…

H&M says it will no longer destroy unworn garments (Dwyer, NYT) Jim put a good article in yesterday’s Times criticizing H&M for this practice. They responded quickly.

Lucky climbers (YouTube) Watch all 29 seconds…

Puppy glasses…



It’s not securities fraud, quite. It’s just very bad politics.

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Mosler vs. Rickards on fixing the economy

Jan 6, 2010 22:18 UTC

I have a treat to share with readers. Warren Mosler and Jim Rickards have agreed to an op-ed debate here on my blog. Over the course of a couple weeks, they’ll engage in intellectual fisticuffs about how to fix the economy.

Who are these two and why do you care what they have to say?

First, they’re both very smart and well-informed.

Mosler, who moved to St. Croix in 2003 to run for Congress in’04, ran a fixed-income arbitrage fund for 15 years without, he claims, a single losing trade. He turned it over to his partners in 1998 with over $3 billion of capital. He’s the progenitor of some of the derivative products traded today and even has his own ultra-cool car company.

Rickards, once upon a time, was LTCM‘s general counsel and the principal negotiator of the hedge fund’s NYFed-sponsored rescue. So when he talks about the dangers of leverage, he knows from where he speaks. Today he’s the economics expert for national security consulting firm Omnis and applies concepts from physics to his analysis of the economy.

Also they’re both very provocative. Mosler’s Law is that “there is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.” Rickards sees a “high degree of probability that gold goes to $2,000 by the end of this year.”

I wanted to give these two a forum because grappling with provocative, well-informed opinions helps keep us all honest.

Look for the first pieces tomorrow or Friday.


And I think most of these comments are from lazy, ignorant, intellectually dishonest bums, who haven’t taken the trouble to actually examine and think through any of the positions in depth. Have any of you fools bothered to actually read and study Keynes? Are you even capable of it? Do you really understand the chartalist position that Mosler, Randall Wray and Bill Mitchell and James Galbraith and Scott Fullwiler and Marshall Auerback represent? I don’t think so. Why not listen and learn?

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Is the output gap smaller than we think?

Jan 6, 2010 19:01 UTC

Economist Kevin Kliesen at the St. Louis Fed asks that question in an article he published today.

In its 2009 Annual Report, the Bank for International Settlements discussed these “bubble-induced distortions” to current estimates of trend output growth and, hence, potential real GDP. Thus, it is conceivable that estimates of potential real GDP at the start of the recession were too large and that … structural adjustments … may have subsequently reduced potential real GDP from its artificially high level.While it is probably unlikely that the fall in actual real GDP during the recession has been matched by the fall in potential real GDP, the size of the output gap might be smaller than conventional wisdom might believe. If so, those who foresee little risk to the near-term inflation outlook because of a large, persistent output gap may be too optimistic.

Krugman Keynesians argue that the output gap restrains wage-push inflation and therefore the Fed and Treasury can stimulate without fear of sparking inflation so long as the unemployment rate is high.

But what is a high unemployment rate? Just as output was goosed by the credit bubble, so too was employment.

Kliesen argues that Bernanke has less room to maneuver than he thinks.


To Dan,

“Meanwhile, debt-financed government spending will be putting a lot of money in peoples’ pockets.”

Unfortunately the government will fill the pockets of special interest groups first, since all our representatives seem to owe them their souls. Alas, even if we all got a huge shot of money inflation would render it futile.

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Lunchtime Links 1-6

Jan 6, 2010 18:30 UTC

Let them eat lobster! (Yves, Naked Capitalism)

The weather according to economists: sunny! (Kedrosky) Group think…

How to combat the natural tendency to procrastinate (Economist)

Let’s get fisical (Bill Gross, PIMCO) In his latest investor letter, Bill Gross paradoxically laments the influence of special interests. Of course he was one of the chief special interests — representing the investor class — lobbying for government to support asset prices. He also questions how the market will perform when our government “sugar daddy” disappears, especially in light of the disappearance of foreign buyers of Treasuries.

Snowed-in Brits boost adultery website (Casciato, Reuters)

Create your own solar system ( Click “Run Now” and then play with the variables bottom left.

Dubai starbucks (imgur)

Three-toed sloth on ride of his life…


Dodd to quit

Jan 6, 2010 14:12 UTC

The big news today comes out of Washington where Senator Chris Dodd, Chairman of the Senate Banking Committee, is expected to announce he won’t seek re-election in November. (Ferraro, Reuters)

The news, coupled with another Democrat’s retirement announcement [Byron Dorgan of North Dakota], underscored the fragility of the Democrats’ Senate majority, which is just enough to push President Barack Obama’s agenda past Republican procedural obstacles.

Dodd’s retirement doesn’t mean Dems will lose the seat. Richard Blumenthal, CT’s very popular attorney general, will likely win it.

The aides offered no reason for Dodd’s decision, but it had been clear for months the Democratic lawmaker from Connecticut, dogged by questions over his financial industry connections, had faced the prospect of being voted out of office.

His participation in the Friends of Tangelo program is the issue here.

It remains to be seen how Dodd’s withdrawal from the race will influence how he handles two major jobs in the Senate this year — one as chief steward of financial reform and the other in the healthcare debate.

The House has passed its version of financial reform, but the Senate version is still in Dodd’s committee.


He’s planning on following Geithner’s “deeply unpopular” model of dictatorial governance. He knows he won’t get reelected after we see the gory details of his banker-friendly “reform” bill. So why not make it official.

Ugly CRE charts

Jan 6, 2010 04:21 UTC

From the Mortgage Bankers Association’s Quarterly Data Book:

Screen shot 2010-01-05 at 11.12.41 PM

Screen shot 2010-01-05 at 11.12.57 PM

Screen shot 2010-01-05 at 11.13.11 PM

Screen shot 2010-01-05 at 11.13.19 PM


If many of the people moving out are moving back in with Mum and Dad, that can leave vacancies increasing.

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Alvin the Franchise

Jan 6, 2010 00:05 UTC

Rolfe Winkler2.jpgAvatar’s $1 billion in ticket sales is getting all the headlines, but Fox’s other holiday film, “Alvin and the Chipmunks: The Squeakquel”, may be more valuable to Rupert Murdoch  over the long run.

While Avatar packed them in, the latest Chipmunk offering surpassed the quarter-billion dollar mark despite poor reviews and heavy competition. Indeed the Chipmunks demonstrate the importance of franchise value to the movie business.

Alvin, Simon and Theodore have been around since 1958, inspiring TV shows, hit songs and two feature films. The first film grossed $361 million at the worldwide box office while the second is already up to $255 million after just 12 days in wide release. Ancillary revenues like DVD and lunchbox sales could add millions more.

For investors, who prefer recurring profits and low risk to big bold bets on potential blockbusters, this is pay dirt. Like Spider-Man, Harry Potter or Batman, there is a long-term revenue stream attached to the Chipmunks. It’s partly why Disney – with its focus on princesses, pirates and now, with Marvel, superheroes – commands a higher multiple of earnings than many rivals.

Avatar has great franchise potential as James Cameron says he’s thinking of making it a trilogy. But the 55-year old director has yet to write a second script. And with the first film such a success, he may command an even larger ownership stake in any sequels.

If Avatar is a one-off, its value to Fox may not be much beyond $100 million (and counting) of additional operating profit according to JPMorgan estimates. But multiply by five the $40 million the Squeakquel will squirrel away, to reflect the likelihood the franchise will endure, and three 50-year old Chipmunks trump Mr. Cameron’s Na’vi.


I saw Avatar and to judge from that, coming up with similar scripts should take no more than 15 or 20 minutes with Notepad. True, the film has cutting edge animation but listening to what the characters had to say, I think making the next “chapter” a silent film (retro!) would be a good idea.

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Afternoon Links 1-5

Jan 5, 2010 21:08 UTC

Must ReadGlobal bear rally will deflate as Japan leads sovereign bond crisis (Evans-Pritchard, Telegraph) Points to Ambrose for making lots of predictions in a single column! (ht Yves)

How Visa, using card fees, dominates a market (Martin, NYT) A good, detailed article. Merchant processing fees aren’t the terrible thing merchants claim them to be. The trade-off, at least with credit cards, is that the merchant doesn’t carry a receivable on his balance sheet. There’s no credit risk that customers won’t pay. This article is about debit cards, however. There the issue appears to be much more complicated…

Iceland president vetoes compensation for depositors (Forelle, WSJ) Great article with lots of nuggets of information. On the one hand Icelanders don’t want to be put into debt slavery to pay off obligations of their failed banks. On the other hand, they need foreign currency to support international trade. They can’t get it while they’re an international financial pariah. Tricky. But walking away may be the best option…

Politico crushing it on revs (Ali, PaidContent) A $1 million operating profit for a news property is solid performance in this environment. Good piece, but hopefully Rafat can design more legible spreadsheets in future…

Net national savings rate still negative (Mike Mandel, ht Felix) This chart effectively shows the decline in America’s balance of trade over time. It will take a far deeper correction to change the trade dynamic of the West sending paper currency to the East in exchange for its goods. That’s great for us as long as it lasts. But it won’t last forever and the correction will likely be very painful.

Pending home sales crater (NAR) The title of the press release is interesting: NAR tries to spin as good news the fact that pending home sales dropped sharply after being inflated by folks rushing to capitalize on the first time homebuyers credit (which they didn’t know would be extended).

ESPN, Discovery launching 3D networks (Szalai/Hibberd, therfeed)

Refreshing beverage (imgur)

The man who is good at everything…

Gerry Levin’s mea culpa

Jan 5, 2010 19:45 UTC

Finally got around to watching this video. Kudos to Gerry Levin for taking responsibility for the worst merger in history. His comments about banks being malls instead of supermarkets is very true, but it’s not his, it’s Chris Whalen’s, who provided a helpful counterpoint in NYT’s non-mea-culpa from Sandy Weill. Their point is that the synergy Sandy Weill claimed for Citigroup — combining insurance with commercial banking with investing banking with retail brokerage, etc. — was bogus from the start.

Of course Sandy doesn’t have it in him to admit he was wrong. Instead he blames his successor Chuck Prince. Another CEO who got away with blowing up a company was Merrill’s Stan O’Neal. John Thain has taken heat for his time there, much of it he probably deserves for his ridiculous office redesign and for extracting bailout money to fund Merrill’s bonus pool. But O’Neal is the guy that deserves the blame for Merrill’s collapse. He got his golden parachute and disappeared.



some very good points raised including the lead and lag time between disaster and management at the helm. Weil, and O’Neal are both probably responsible for a lot of the structuring that lead to the problems. It was like a game of hot potato. Honesty and the ability to apologize and admit mistakes are the hallmarks true leadership.

Those who cultivate the image of Infallibility are merely dishonest people wrongly in positions of authority.

Buffett: Shareholder activist

Jan 5, 2010 15:48 UTC

Shareholder activism is a tactic typical of Carl Icahn, not the Oracle of Omaha. Yet Warren Buffett has issued a press release asking other Kraft shareholders to reject Kraft’s proposal to use up to 370 million shares of stock to buy Cadbury.

To state the matter simply, a shareholder voting “yes” today is authorizing a huge transaction without knowing its cost or the means of payment.

What we know with certainty, however, is that Kraft stock, at its current price of $27, is a very expensive “currency” to be used in an acquisition. In 2007, in fact, Kraft spent $3.6 billion to repurchase shares at about $33 per share, presumably because the directors and management thought the shares to be worth more….

Rolfe here. Buffett argues that KFT stock is an “expensive” acquisition currency because he thinks the shares are worth more than $27. He has a special history on this, as I get to below…

Would the directors use stock as merger currency if the price were, say, $20 per share? Surely the true business value of what is given is as important as the true business value of what is received when an acquisition is being evaluated….

At this time…we believe no shareholder should vote “yes” when he can’t possibly know what he is voting for.

Buffett is famous for his hands off approach to management. He invests in companies as much for the franchise value as for the folks running the business. That’s because management is often the crucial variable to generating value over the course of the business cycle.

But Buffett REALLY hates to use stock to pay for acquisitions. Here’s an instructive passage from his ’07 shareholder letter:

Finally, I made an even worse mistake when I said “yes” to Dexter, a shoe business I bought in 1993 for $433 million in Berkshire stock (25,203 shares of A). What I had assessed as durable competitive advantage vanished within a few years. But that’s just the beginning: By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion – to buy a worthless business.

For those that don’t follow: 25,203 shares of Class A Berkshire stock are today worth far more than the $433 million they fetched in 1993. In the fullness of time, as BRK stock has risen, the Dexter purchase price has ballooned 10x.

Buying a business with stock that’s going up gives the seller more value over time. It’s tantamount to selling the stock yourself, which doesn’t make sense if you think it’s worth more.

Conversely you have an example like Steve Case, who brilliantly sold all of AOL’s overvalued stock to Gerry Levin in exchange for Time Warner’s great media assets.

On another note: Is Buffett getting sloppy in the credit bubble age? He paid up for Burlington Northern (28x FCF!), even admitting that the price paid was pretty high.  His purchase of Kraft shares also at a high valuation similarly left him with little margin of safety.*

He got lucky on BUD, finding greater fool InBev to pay a premium to the high price he paid for the shares.

Appears that in the age of low rates and overinflated valuations, Buffett has no choice but to chase risk with the rest of us.

By the way, this is not to argue with the fact that Buffett was the 20th century’s best investor. I believe firmly that he was. To me, his value methodology, when properly applied, is the dictionary definition of “investing.”

Trouble is, it seems to me he’s no longer able to apply it in the age of overinflated assets…


*Buffett bought his KFT shares near the end of 2007 for an average price of about $33.40. Today the stock is near $28. $33 per share implies a $67 billion enterprise value for KFT today. Forward unlevered FCF when Buffett bought his KFT shares (that is, for 2008) ended up at about $3.8 billion, implying a valuation of 18x EV/UFCF. Cheaper than the Burlington deal, but a rich multiple nonetheless.

Afternoon Links 1-4

Jan 4, 2010 20:46 UTC

Living on nothing but food stamps (Deparle/Gebeloff, NYT) The safety net of last resort: 2% of U.S. households report zero income other than a food stamp card.

Twenty years on Japan is still paying its bubble era bills (Economist) Heard on the Street also writes today that Japan is looking at its third consecutive lost decade. Copious amounts of deficit spending and money printing hasn’t worked for Japan. It won’t work for us.

Petition halts Iceland’s repayment plan (UPI) Icelanders want bank creditors — in this case foreign depositors — to eat the loss of bank failures. Probably sensible. Depositors were foolish to chase returns in Iceland to begin with. Putting Icelanders into debt slavery to pay them off does little good.

Lessons learned but not applied (Simon Johnson) Summers/Geithner know the right prescription to handle bank failures. They just aren’t willing to follow it themselves… (ht Walker Todd)

Real estate in Cape Coral is far from recovery (Goodman, NYT) Another foreclosure tour. Notes that busted homeborrowers often leave lots behind when ditching their house. See again: trash-outs.

The year in Review (Doug Noland) Skip to the last section at the bottom. Reader Paul M. points to Doug’s comment that healthy corporate leverage ratios are misleading because their customers (and the system in general) are still leveraged to the hilt.

Australian lotto winner keeping it real (Paddenburg, Couriermail) axes holiday weight gain members (BBC) Quotable from the founder: “Letting fatties roam the site is a direct threat to our business model…” Wow.

10 sci-fi weapons that actually exist (Wired)



Buffett not only paid a premium and what appears to be a pretty rich price for BNI but a portion of the deal is with Berkshire Hathaway stock. Apparently he thinks BNI, even at $100/share, and Kraft are cheaper than his own stock.

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TARP deadbeats, update

Jan 4, 2010 16:44 UTC

Last month Treasury released the latest data on banks that missed their payment obligations under TARP. The number increased to 56 in November from 33 in August. Here’s a chart summarizing the problem:

TARP deadbeats update

And that’s just for banks. AIG — recipient of $69.8 billion of TARP money — has also failed to make its contractual payments to taxpayers.

Hat tips to Linus Wilson of the University of Louisiana Lafayette for the data and Stephen Culp for the chart.

Wilson also has an interesting paper on the topic. He points out that 3 banks that received TARP money were seized this year, wiping out taxpayers’ $2.6 billion “investment.”


I admit I only came up with 50 names, but I could easily have missed some.

Of the 50 I found (which added up to $5B in investments):

1 was CIT @ $2.3B

37 names had $50 million or less in gov’t money.

4 more had between 50 and $100 million.

So support your local banks: they’re safe and responsible.

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The Swiss banking whistleblower

Jan 4, 2010 02:07 UTC

This feels like a report that deserves a full hour. Who are some of the tax cheats that have been uncovered? Who are the UBS executives that knew about and condoned the illegal behavior? Interesting nonetheless.

See also the web extras.


First off, I find it funny that this video was sponsored by Pfizer, who just got caught in a whistleblown scandal a few years ago. Should he go to jail? No, absolutely not. Where does the justice come in? This company should be shut down and the CEOs thrown in jail! But whatever, he’ll have plenty of money to make up for the three and a half years in prison.

BlogArt: Maxing out deposit insurance

Jan 2, 2010 19:18 UTC

Two weeks without any bank failures so I thought folks might be interested in some deposit insurance trivia.

How much more than $250,000 can be insured in a single bank? For a husband and wife with kids, a lot more…


(ht FDIC spokesman Greg Hernandez)


Actually if our hypothetical couple has a business/es they could be insured for even more under the FDIC’s corporation, partnership and non profit agency limits.

While each account is limited to $250,000 I do not believe there is any limit on how many corporations, partnerships or non profit agencies a single individual
can control.

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Unemployed Japanese living in 30sqft “capsules”

Jan 2, 2010 03:10 UTC

Sad/fascinating piece from Hiroko Tabuchi in NYT: For some in Japan, Home is a tiny plastic bunk

For Atsushi Nakanishi, jobless since Christmas, home is a cubicle barely bigger than a coffin — one of dozens of berths stacked two units high in one of central Tokyo’s decrepit “capsule” hotels….

Now, Hotel Shinjuku 510’s capsules, no larger than 6 1/2 feet long by 5 feet wide, and not tall enough to stand up in, have become an affordable option for some people with nowhere else to go as Japan endures its worst recession since World War II.

Such quarters are surprisingly expensive: $640 per month. About $20 per square foot per month. A 650 square foot one bedroom in a good Manhattan neighborhood — the most expensive rental market in the U.S. I’m sure — probably averages about $2500. Less than $4 per sqft per month.

The comparison is not totally fair. These are technically hotels, not apartments.  Still, I think it’s worth making because the article says many now stay months on end.

Tabuchi doesn’t mention how widespread such hotels are in Japan, though his use of the plural in his opening paragraph suggests this isn’t the only one of its kind. He does mention Japan’s “hidden” homeless, noting that many overnight in internet cafes.

Make sure to see the slideshow attached to the article. The “capsules” may be 6.5 feet long, but sure don’t look 5 feet wide.


… and unemployed Americans live in cars.

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