Lunchtime Links 2-18

Feb 18, 2010 15:58 UTC

Reader note: off on vacation the next few days so posting will be light. But LOTS of great links today….2 days of reading here!

Must Read – Volcker’s rules: DOA (Pethokoukis, Reuters) It appears the administration was never seriously considering a big push to get the “Volcker Rules” limiting bank size and proprietary trading added to financial reform legislation. My colleague Jimmy P. has a pithy, incisive analysis of what’s happening.

Must ReadHow JP Morgan treats its clients, scandalously and in bad faith (Felix) Great find from Felix. Judge Rakoff is at it again, this time ruling against JP Morgan, which Rakoff says acted in bad faith. “The gist is that JP Morgan took one of its longest-standing clients in Mexico — Grupo Televisa — and tried to hand all of its secrets over to its biggest rival, Carlos Slim. And the way it tried to do that was by selling Slim a loan larded up with covenants which would essentially force Televisa to reveal any and all information to the holder of the debt.”

China sells Treasurys….or did they? (EconompicData) Great post. The WSJ follows their lead today.

Stripping away the disguise of derivatives (Das, FT) Explaining how derivatives can be used to mask debt. Not a long piece, but read slowly if you’re not familiar with the terms.

Treasury Secretary would lead new systemic risk council (Chan, NYT) The idea that a systemic risk council will help avert crises is foolish when you think about it. None of the regulators that will be on the council has done a very good job “leaning against the wind” in the past.  Yet together they are going to be able to not only reach consensus about systemically risk firms, but actually take corrective action?

IMF to sell 191 tons of gold on open market (Pardomuan/Wroughton, Reuters) It sold 400 tons not long ago, half of which was scooped up by India. Gold still makes sense in the long-run as insurance against a dollar crisis, but with the dollar likely to get stronger in the short run on the back of continued debt problems in Europe, it may be possible to add to gold positions below $1,000…

Ackman may make $170 million on grand-slam General Growth bet (Taub/Burton, Bloomberg) And he could make much more if Simon ups its bid or another bidder emerges at a price higher than Simon’s offer of $9. The market expects a higher price in the end, what with the shares trading near $13. Ackman bought his for 46¢! He’s said the shares are worth at least $24, but with the cash component of Simon’s offer just $6, it would make sense to take some profits…

Goldman’s Rococo PR prince (Abelson, NY Observer)

States sink in benefits hole (Merrick, WSJ) As of June 30, 2008 the 50 states collectively faced a $1 trillion funding deficit between what they’ve promised to public sector retirees and the funds they’ve actually set aside. And the data were collected before the bottom fell out of the market, so the gap is likely worse. Keep this in mind when liberal economists try to explain away the federal debt as manageable. If banks got bailouts, you can bet public sector employees will, so consider these funding gaps as obligations of the federal government…

Muni threat: Cities weigh Chapter 9 (Dugan/Maher, WSJ) It isn’t just states facing budget trouble.

Feather starfish swimming (Youtube) Wow.

Gadget Noir…



We already know that Obama was really born in Iran, or Indonesia or India…wherever. But what I want to know – is it true that at one time he worked for Goldman?

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Evening Links 2-17

Feb 17, 2010 22:43 UTC

Worldwide cumulative current account (Wikipedia) Interesting chart…

Fed officials debated shrinking balance sheet (Bloomberg) The latest FOMC minutes were released. The Fed is ever so slowly moving towards shrinking its balance sheet. Most likely it will happen without outright asset sales. Bernanke can let the balance sheet shrink slowly as mortgages underlying MBS are prepaid.

The Fed’s real exit strategy (Hussman) While the Fed exits, Treasury will pick up the slack.

The $550k student loan burden (Pilon, WSJ) This is not a typical amount of debt, but even much smaller levels can be so burdensome as to make higher education not so valuable. Again, if you define the benefit of higher education as the extra income you’ll earn over your lifetime as a result of getting a degree, then you have to compare that against the cost of the debt incurred to pay for it. Student debt can be so oppressive as to cancel out much of the extra income. If you could strategically default on student loans there might be a way out. But student debt can’t discharged easily. (at all?)

SEC: BofA fired counsel to keep Moynihan, not for advice (Stempel, Reuters) So, uh, this is weird. Did the SEC just undermine Andrew Cuomo’s case against Ken Lewis? In his complaint accusing Lewis of securities fraud, Cuomo alleges that BofA had fired its general counsel, Timothy Mayopolous because he said the bank should disclose Merrill’s growing losses. But the SEC, which doesn’t want to bring charges against Lewis individually, said Mayopolous was fired to keep now-CEO Brian Moynihan from leaving the bank. Hmmm.

Tiger to apologize, discuss future on Friday (Lamport-Stokes, Reuters)

Tea party lights fuse for rebellion on right (Barstow, NYT) Interesting and detailed piece. ht CB

Job-years (Felix)

Lunchtime Links 2-16

Feb 16, 2010 20:00 UTC

New flower for North Korea may be succession ploy (Lim, Bloomberg)

Greece’s Goldman Sachs swaps spawn EU dispute on disclosure (Martinuzzi/Finch, Bloomberg) Greece was rebuked as early as 2004 by the EU for “deficit inaccuracies,” and again last month for under-reporting deficit figures for the past decade. The latest disclosure about swaps used to hide debt may make a bailout more distasteful, but won’t stop it. Too much is at stake.

The Greek derivatives aren’t Goldman’s fault (Felix, Reuters) Risk magazine was talking about this long before the NYT…

Why Greece should default (Kemp, Reuters)

Investors recruit terminally ill to outwit insurance cos on annuities (Maremont/Scism, WSJ) An underhanded variant of the life settlement business…

Japan eclipses China as top holder of Treasurys (AFP) China’s holdings dropped while Japan’s grew.

Leaving Ireland (Capell, BusinessWeek) Unemployment is driving a generation away.

Roger Ebert: The essential man (Jones, Esquire) “It has been nearly four years since Roger Ebert lost his lower jaw and his ability to speak. Now television’s most famous movie critic is rarely seen and never heard, but his words have never stopped.”

Tortoise vs. cat (pogpog)

Rubik’s cube solver (built entirely from “Lego elements”)

No MSG Please

Feb 15, 2010 13:25 UTC

Cross-posted from today’s Times.

The formidable skills of LeBron James probably won’t reach the stock market. Speculation is rampant he could soon be headed to the New York Knicks basketball team, whose owner is now trading on the Nasdaq.

The listing followed a spinoff of Madison Square Garden Inc. from the cable operator Cablevision to its shareholders last week. MSG is a collection of trophy assets but doesn’t seem to be a gold-plated investment.

In addition to the Knicks, MSG owns the New York Rangers hockey team, the Madison Square Garden arena, Radio City Music Hall and some lesser-known teams and theaters. But the teams lose money, and the entertainment division, home to the Rockettes Christmas show, only broke even last year. The real value is in MSG’s two regional sports networks, where the Knicks and Rangers are the primary draw.

The shares look fully priced already, after rising to $19.76, or 8.5 percent, in their first days of trading. Analysts expect MSG to generate about $95 million in earnings before interest, tax, depreciation and amortization, or Ebitda, for 2009. Add $30 million from a new broadcast deal with Cablevision, a better year for the Rockettes, other television-contract renewals and narrower losses for the teams, and MSG might just have EBITDA of $160 million in 2010, as some analysts forecast. Put that on a multiple of 10, the same as its closest peers, and you get an optimistic enterprise value of $1.6 billion.

Forget the cash on MSG’s books — it will be chewed up in an estimated $800 million renovation of the Garden. All in that equates to $21 a share.

That price overlooks fresh competition and potential corporate governance costs. The Barclays Center in Brooklyn, where the New Jersey Nets are expected to play, is to open in 2012. And the Dolan family, which controls Cablevision, still controls MSG via super-voting shares. Conflicts are already apparent: The Dolans won’t let Cablevision rivals AT&T and Verizon carry the MSG network’s high-definition feed.

And then there’s the LeBron factor. His presence will benefit fans more than investors. More wins for the Knicks probably will not be enough to offset the cost of his contract. So by all means buy a courtside seat at the Garden — but sell MSG shares.

Evening Links 2-14

Feb 15, 2010 12:50 UTC

Wall St. helped Greece to mask debt, fueling Europe’s crisis (Story/Thomas Jr./Schwartz) When an addict is hooked on a drugs, whose fault is it? The guy selling him the junk? Or his own for getting hooked in the first place? It’s convenient (and not entirely wrong) to blame bankers, mortgage brokers, real estate agents and others who sell us debt to finance more lavish lifestyles than we can afford. They do so to generate income via transaction fees. But at the end of the day, the Greek government knew what it was doing. As do most folks piling on leverage…

For some firms, a case of “Quadrophobia” (Thrum, WSJ) Public companies fear the digit “4.” Earnings per share, when calculated down to tenths of a cent, suggest companies use accounting gimmickry to make sure they can round UP to the nearest cent.

Pirate boss to make web pay (BBC) I’m skeptical. A micropayments product that relies on the generosity of users will be about as successful as a PBS funding drive. But I’ll support anyone who wants to help users pay directly for good content creation. Personally, I think the future of micropayments could be via cellphone. Carriers already have a billing relationship with everyone, all that’s needed is someone to facilitate the flow of payments from buyers to sellers via your phone. (Full disclosure: I previously worked for a company, Fotolog, whose parent company was also in this business)

Edwards: Collapse of euro “inevitable” (Fleming/Shipman, Mail) SocGen’s Albert Edwards as bearish as ever.

Magic Johnson in talks to buy publisher of Ebony/Jet (Pulley, Bloomberg)

How Christian were the Founders? (Shorto, NYT) Long, but worth reading to the end.

Dubai CDS spreads jump (Connaghan/Brown, WSJ) The cost of insuring Dubai debt against default is back near levels from December, before Abu Dhabi offered assistance.

Harrisburg moves a step closer to default (Hurdle, Reuters) Pennsylvania’s capital city excludes debt payments in its 2010 budget. It has a scheduled interest payment of $2.1 million on March 1.

“4-foot-nothing mother goose” … epic voice mail.

VIDEO: “Hurt Locker” in Cambodia (YouTube) Guy clears land mines in Cambodia with stick and pocket knife. FF to 0:50 mark.

Bing Maps are cool….(but it appears that there’s no support for Firefox…)

No bank failures this Friday

Feb 13, 2010 04:50 UTC

With the problem bank list 552 names long, and the unofficial list even longer, one might expect FDIC to pick up the pace of bank closures. Yet here we are, six Fridays into the new year, and only 16 banks have been put into receivership, with none this week and only one last week. At that rate, we’ll see 136 closures in 2010, short of the 140 that were closed last year.

That leaves lots of zombie institutions hobbling along, sucking up deposits and capital to service busted loan portfolios.

A key lesson from the S&L debacle is that delays in closing insolvent banks increases the resolution costs for FDIC and, ultimately, taxpayers. That’s why the Prompt Corrective Action law was passed, to mandate that regulators close banks sooner rather than later, and while there’s still some capital left in them to absorb losses.

With that in mind, it’s hard to see why FDIC is moving so slowly. FDIC’s not short of cash right now. It just got $45 billion of fresh cash from banks on January 1st.

Nor should the President’s Day holiday be slowing them down. FDIC used July 4th weekend last year as an opportunity to close seven banks.

Bad weather in DC? Probably not. FDIC is a large operation and it’s unlikely folks in the field can’t do their job because the Washington office is taking a few snow days.

President Obama says he wants to jump start lending. Closing zombie institutions more quickly would be a much more effective way to achieve that than, for instance, throwing $30 billion  of TARP money at community banks…


The FDIC has been stepping in when losses are ~ 30%, and sometimes up to 40%. Shows the degree of regulatory forbearance that is operative, in violation of statute.

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Lunchtime Links 2-12

Feb 12, 2010 18:34 UTC

China tightens rules on bank lending to curb inflation (Bradsher, NYT) Banks in China are chock full o’ excess reserves. Because their economy is growing, loan demand is healthy, so excess reserves are being lent out….multiplying the money supply and causing inflation. U.S. stocks are taking it on the chin because China is the world’s main economic driver at the moment…moves to cool it down, while totally prudent, are bad for stocks.

Georgia gives lenders more rope (Fitzpatrick, WSJ) Not such a good idea for the state topping the charts on bank failures…

BofA forecloses on home for which couple had paid cash (Marrero, St. Pete Times)

NJ Governor declares fiscal emergency, freezes spending (Sloan, CBS2) Wow, a Republican is  actually cutting spending instead of talking about cutting spending.

Me writing about the First Energy/Allegheny deal in the Times (Winkler, NYT) Scroll down the page to “Electric Synergy.”

Volcker rule gives Goldman stark choice (FT) This interview with Paul Volcker puts the lie to press arguments that Goldman will be the firm most impacted by his new “Volcker Rules” because it has the largest prop trading operation. All Goldman has to do is give up its bank charter, which it got in November ’08. The bank doesn’t have much in the way of deposits funding its business. The bank charter was just a gimmick to get access to cheap funding via the FDIC and to get access to the Fed as lender of last resort. And if the crisis comes roaring back, Goldman needn’t worry about failing. They’re still so big and interconnected, regulators wouldn’t let them go down…

Subpenny trading (CFA Institute letter) The latest abuse of the equity market?

Small banks hit snag as they try to raise cash (Sidel, WSJ) Trust preferreds remain a problem…


Good article on sov debt Rolfe.

Sentiment these days almost reminds me of summer 2008, when we knew some bad stuff was in the pipeline, but nobody acknowledged the extent of it all.

Stock prices didn’t reflect the risk then, and definitely don’t reflect much, if any risk now. They assume uber growth for 5+ years.

Congrats on the NYT byline, btw. That’s pretty cool.

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Bank capital buffers increase, still not high enough

Feb 11, 2010 21:45 UTC

Q4 TCE graphic

(To enlarge the chart above in a new window, click here.)

The superstructure of financial reform may be stalled in Congress, but at least regulators are forcing banks to raise capital. Since the nadir of the financial crisis in the fourth quarter of 2008, the Big Four have more than doubled their common equity, raising another $55 billion just in the fourth quarter.

The question is whether they’ve raised enough. With capital only a bit above early ’08 levels, especially among regional banks, the answer is most likely no.

Stepping back for a minute, it’s helpful to remember why capital is so crucial. The most important reason is that it provides a buffer to absorb losses from the asset side of the balance sheet. As assets are written down, a too-thin equity capital cushion leads to a run among creditors who race to get out before taking a loss.  Bank runs — whether the run-of-the-mill type among depositors or the high finance equivalent among short-term creditors — can quickly bring a financial system to its knees.

Luckily, regulators appear to be laser-focused on capital. Documents published in December by the Basel Committee — an international collection of bank regulators — would redefine capital in a number of productive ways.

More stringent capital requirements are also a back door way to accomplish other regulatory goals. For instance, the “size” component of the recently proposed “Volcker Rules” is designed to limit reliance on non-deposit liabilities. The more capital banks are required to hold, the smaller these liabilities.

In a recent note to clients, Jason Goldberg of Barclays Capital said the Basel proposals will…

…present onerous requirements on banks, especially the capital and leverage ratio calculations. If this ratio were to be implemented, we believe that the impact would be substantial on those banks with large derivative books, as well as those who participate in the short-term funding markets and those banks who maintain large off balance sheet commitments…

To anyone other than a banker or bank shareholder, that all sounds fantastic. But celebrations would be premature. Some proposals could get watered down or thrown out, for one.

And while the definition of capital would change for the better, Basel has yet to outline what levels of capital will be required. (It may leave this to national regulators.) If required levels are set too low, banks will continue to be vulnerable to runs.

True, the asset side of the balance sheet doesn’t look as vulnerable as it did a year ago, what with many assets written down already. But banks still seem to be sitting on big losses.

Take, for instance, second-lien mortgages. The Big Four U.S. commercial banks carried $442 billion worth as of Q3 ’09. That’s about equal to their total tangible common equity.

Second-liens like home equity loans are subordinate to first mortgages, theoretically worthless if  the value of the home falls below the balance on the first mortgage.* With a huge chunk of U.S. real estate under water, the embedded losses here are huge.

So it’s good news that banks are raising capital, and that regulators are redefining it in a way that will make it more robust. But it’s too early to claim victory. Much more capital is needed before the financial system can stand on its own.

Lunchtime Links 2-11

Feb 11, 2010 18:29 UTC

EU seals deal to help Greece, details murky (Grajewski/Toyer, Reuters) We need to know more about what help is being offered and what strings will be attached to it.

A Greek crisis is coming to America (Niall Ferguson, FT)

Google plans experiment to offer superfast web (Sherr, Reuters)

Buffett takes on Chicago chokepoint with Burlington (Lippert, Bloomberg) This article is 500 words too long, but it’s still interesting!

Immelt disagrees with Paulson’s recollection of Sept ’08 (Layne, Bloomberg) Immelt is lucky that companies like AIG and Goldman have absorbed much of the public’s bad feelings about the bailout. It doesn’t sound like Immelt is really disagreeing with Paulson, he just doesn’t remember discussing GE’s funding problems in the commercial paper market. Uh, really? The Fed created the Commercial Paper Funding Facility in large measure for GE. And GE sold $60 billion of government guaranteed paper through FDIC’s Temporary Liquidity Guarantee Program.

Fed in talks with money market funds to help drain $1 trillion (Torres/Condon, Bloomberg) Interesting….

New black hole simulator uses real star data (Muir, New Scientist)

Driving behind a hearse… (imgur)

Sausage fingers (clusterflock) iPhone users in cold places will appreciate this…

A brief history…

Lunchtime Links 2-10

Feb 10, 2010 16:26 UTC

How a new jobless era will transform America (Peck, Atlantic)

Bernanke testimony (Fed) Key line: “Also, before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate.” That’s not the same as raising the Fed Funds rate or the rate paid on excess reserves, but it’s the first time Bernanke has indicated policy may be tightened. Also, the balance sheet will be allowed to shrink on its own as mortgagees prepay.

For $110, godless will adopt pets of blessed after Judgment Day (DiPaolo, Bloomberg) Great story. And a great way to clear $10 grand! One of many money quotes: “With the economic downturn we’re in, I’m trying to figure out how to cash in on this hysteria to supplement my income … Given the intellectual capacity of believers this could be a gold mine!”

Chinese military officers urge economic punch at U.S. (Buckley, Reuters) Their economic nuclear option….

Eurozone holds intensive talks about Greek rescue (Sobolewski/Maltezou, Reuters) Some combination of #1 and #2 is indeed the way Europe and Greece appear to be attacking this problem. Here is an update of sovereign CDS:


How Brussels is trying to prevent a collapse of the Euro (Der Spiegel)

Google tweaks Gmail to challenge Facebook, Twitter (Oreskovic, Reuters) Should Zuckerberg fear Larry Page and Sergey Brin? Or will Buzz impact Facebook as weakly as Docs impacted Microsoft Office?

Mervyn King leaves his options open (Brereton/Hannon, WSJ) The head of the Bank of England won’t rule out more money printing to buy assets (“quantitative easing”). Not that this shouldn’t be expected.

Blast off (imgur)

Slow motion lightning….more here


The Peck article in the Atlantic on the unemployment situation that you recommend is a very good, read but it ends with two questionable statements:

“…solutions (to high unemployment) …must include…ensuring that we are creating the kinds of jobs…that can allow for a more broadly shared prosperity in the future.”

Who is the “we” and how are jobs of a certain type created? Isn’t employment the result of employers providing a service or product that is wanted and for the lowest possible production cost? Doesn’t unemployment in itself drive down labor cost? The author implies government stepping in, further reinforced by this…

“Concerns over deficits are understandable…but our bias should be toward doing too much rather than too little. That implies some small risk to the government’s ability to borrow in the future…”

Rolfe, I think all that you have been saying indicates such risk is far from small. It worries me, as I think it does you, that the bottomless government borrowing we are seeing appears to have no immediate consequences. It makes me think that a very unpleasant surprise may be coming, just as a rubber band remains intact as it is stretched, until it snaps. I think there is more faith that government can exert control over the economy in this article than is warranted.

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Evening Links 2-8

Feb 8, 2010 23:34 UTC

Housing rebound in Canada spurs talk of new bubble (Dvorak, WSJ) Last week Paul Krugman toasted the sobriety of Canadian banks. Among other things, he said that low rates aren’t enough to cause a bubble since Canadian rates are low and, well, they don’t have a bubble. If this article is to be believed, Krugman didn’t look closely enough. Banks may use less leverage in Canada, but low rates are encouraging households to borrow big — debt to disposable income is a bubbly 1.42x. Key quote in this piece is near the bottom, where a real estate agent notes that rising prices mean rents are only barely covering mortgage payments for real estate investments. The best definition of a bubble is when debt service payments finally eclipse rents. Then buyers/lenders are betting on continued appreciation, which can only be driven by still-easier credit. Canadian real estate appears to be headed in that direction.

Fed’s Bullard: Housing should be key in reg reform (Daly, Reuters) A good point. And the Fed should use its authority under HOEPA to make sure all mortgages are underwritten so that borrowers can make a full payment.

Fed group eyes insurance fund for repo market (Cooke/Comlay, Reuters) Insurance funds are dangerous. They have a habit of increasing moral hazard.

Fed to bare tightening plan (Hilsenrath, WSJ) Wouldn’t it be better to increase reserve requirements than to increase interest rates paid on excess reserves? The second plan pays banks to do something the Fed could simply require if it wanted to…

Hedge-funder sues to keep rent at $380 (Dealbook)

Red Mist: Who matters in China’s financial system is barely understood (Economist)

Madison WI bus driver highest paid city employee (Mosiman, WIStJournal) $159k….thanks to a great union contract.

The world capital of killing (Kritsof, NYT)

WW1 camoflauge to defeat Uboats (Twistedsifter) Fascinating.

Worst airline ad ever?

worst airline ad


“Wouldn’t it be better to increase reserve requirements than to increase interest rates paid on excess reserves?”

Yup, but that wouldn’t stealthily recapitalize banks still stuffed with toxic assets. I think they’re counting on the complexity of the issue, and “exit strategy” headline to paper over the stealth handout.

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MBA dumps 1331 L

Feb 8, 2010 17:03 UTC

Readers of this blog dating back to its days on ML-Implode, may remember our exposé about former MBA CEO Jonathan Kempner’s misadventures at 1331 L St., NW, in Washington DC. The final chapter was written on Friday when…

CoStar Group Inc., a provider of commercial real estate data, announced that it had agreed to buy the MBA’s 10-story headquarters building in Washington, D.C., for $41.3 million. The price is far below the $79 million the trade group says it paid for the glass-walled building in 2007, while it was still under construction. The price also is far below the $75 million financing that the MBA received from a group of banks led by PNC Financial Services Group Inc. to finance the purchase.

The 48% loss is a bit worse than average for commercial estate, which has declined 43% from the peak according to the Moody’s/REAL commercial real estate index.

Kempner announced the plans for the new building near the top of the market in January 2007. It quickly proved an albatross. At the time we wrote about it in 2008, MBA hadn’t found any tenants to occupy the 60% of the building it wasn’t using. To date, they’ve filled just a sixth of that space according to the Wall Street Journal.

A few days after our story, Kempner said he would resign.

Though it must have been clear towards the end of 2007 that the building would prove a costly financial mistake, MBA still paid Kempner handsomely.

According to Forms 990 filed by MBA with the IRS, Kempner made $1.4 million in the year ending 9/30/08, down only $50k from the prior year and still $250k above what he made in fiscal 2006.

Just happen to be in DC today — yes, there is A LOT of snow — and 1331L was on my walk to work…


…still lots of space available for anyone interested.


I remember that call, Rolfe well done.

Posted by Nick_Gogerty | Report as abusive

Spiking Greek CDS

Feb 5, 2010 23:15 UTC

Funny how the market is just waking up to the Euro debt problem. Many have argued that debt levels are unsustainable, yet the IMF has adopted the neo-Keynesian line that governments can spend with impunity so long as unemployment is high. If there are unemployed workers in the economy, then conventional wage-push inflation — i.e. workers negotiating higher wages, which in turn drives up consumer prices — can’t happen. Or so the argument goes.

But this ignores bond market realities. The PIIGS on Europe’s periphery — Portugal, Ireland, Italy, Greece and Spain — have huge budget deficits as a percent of GDP, but don’t have the power to print money to pay it back. So bond markets are bidding up the cost to insure their debt:

kyd77hReaders should offer their own view, but seems to me there are three options here, two bad and one nuclear.

1) The PIIGS cut their budgets to pay back debt. Such austerity programs are typically very difficult to get done in democracies. Deficit spending stays high long past the point that it’s possible to work off debt over any reasonable period. To successfully dig out of the hole requires cuts so deep, voters never agree to them.

2) Europe bails them out, which is the easiest solution in the short-run. Richer European countries certainly have the wherewithal to bail out a small country like Greece or Portugal. But it’s a dangerous precedent to set. What about Spain? It’s 14% of the Euro economy compared to 6% for Portugal/Ireland/Greece combined. If economies keep spending with an eye towards a bailout from the ECB, eventually you get #3.

3) The monetary union breaks apart. The customary way out of a debt crisis is to devalue one’s currency, see Argentina in 2001. It couldn’t maintain it’s dollar peg and still service its debt, so it devalued its currency and defaulted on debt. But this locked the country out of the international capital markets and drove them into a deep, though brief, Depression. For Greece to devalue, it would have to pull out of the Euro, pass a law that it’s debts are payable in new local currency and then devalue.

Some combination of #2 and #1 is probably the only sustainable solution. And that’s what the market appears to expect, what with Greek 5-yr CDS falling back to $389,000 from $425,000 yesterday.

But any help must come with tough conditions. Cuts must be deep enough that further rounds of bailouts won’t be needed.

UPDATE: Nick Gogerty points out that the IMF is another potential source of rescue funds. But whether bailout cash originates from the Germans or the IMF doesn’t change the fundamental problem, which is that Greek state is living well beyond its means…


Maybe the crisis will be resolved with siginificant shifts in the relationship withe public unions, a Thatcher type moment. regardless of the 3 outcomes that is realized it seems historical inflection points are in the making for many developed economies who are over leveraged, over budgeted and running out of time.

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Bank failure Friday

Feb 5, 2010 22:57 UTC

Just one small bank this week it appears…


  • Failed bank: First American State Bank of Minnesota, Hancock MN
  • Acquiring bank: Community Development Bank, Ogema MN
  • Vitals: at 12/31/09, assets of $18.2 million, deposits of $16.3 million
  • Estimated DIF damage: $3.1 million

…it isn’t 5:00 on the West Coast yet. Patience, Grasshopper…

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Lunchtime Links 2-5

Feb 5, 2010 17:18 UTC

Euro debt fears roil global markets (Shah, WSJ) The U.S. is less worse than Euro economies, so Euro trouble causes flight to the dollar. Funny that we’re viewed as quality: When you factor in the debt of state and local governments, we’re in similar trouble….never mind unfunded liabilities for Medicare and SS.

Moody’s warns about U.S. credit rating (FT) These warnings have been fairly frequent.

Bernanke’s exit strategy: tighter reserve requirements (Kessler, WSJ) A good op-ed from yesterday. Another way of sequestering excess reserves, besides paying banks not to lend them out, is to just require them not to.

Unemployment rate falls despite declining payrolls (Mutikani, Reuters) The hard data, for those interested, is here.

How banks can win despite being second (Eavis, WSJ) Modifying the first mortgage frees up homeowner income to service their home equity lines of credit and other second lien mortgages…

Why we keep getting poorer: housing costs rising as % of income (Charles Hugh Smith)

Biggest bubble in history is growing every day (Pesak, Bloomberg) He’s referring to China’s reserves.

13-year-old QB commits to USC (Carrosquillo, FoxNY)

Toyota… (imgur)

New ski warnings (CollegeHumor)

Global air traffic volume (note how it varies with the sun)…


It funny that Canada still gives development aid to China when you read the article “Biggest bubble in history is growing every day”.

This would be better spent at home.

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