Lunchtime Links 2-2

Feb 2, 2010 19:13 UTC

Homeownership rate falls to 2000 level (CR) At 67.2% it’s still way overstated. Home “ownership” is a misnomer in cases when the owner has withdrawn mortgage equity or when the price of the home has fallen below the principal value of the mortgage. A better measure of homeownership, I think, is just to look at total owner’s equity as a % of household real estate. The most recent Fed Flow of Funds report (page 104, line 50) puts the figure at just 37.6%

U.S. could extend bank fee beyond 10 years, Geithner says (Di Leo/Crittenden, WSJ) The proposed tax on non-deposit liabilities should be permanent, and should target ALL liabilities, including repos. Deposits are guaranteed via FDIC. While that insurance is dramatically underpriced (witness the cash-strapped state of the DIF) at least banks pay something for it. Non-deposit liabilities are also effectively guaranteed, for the biggest banks anyway, via the promise that none which is too big will be allowed to fail. To counter moral hazard, this implicit guarantee must be taxed in order to offset any benefit derived from lower funding costs.

Must-Read: What’s a college degree really worth? (Pilon, WSJ) A lot less than you think, as argued here before. This piece is well-written with lots of good data!

AIG derivatives staff said to forgo $20 million in retention bonuses (Katz/Son, Bloomberg) They’re still well-paid, but this is better than nothing I suppose.

Deficits as a national security issueSanger NYT & Seib WSJ — Good to see prominent columnists picking up the thread. A refresher on the Suez Crisis of 1956 offers helpful background.

Rising FHA default rate foreshadows foreclosure crush (ElBoghdady/Keating, WaPo) Key line: “the FHA projects that it will pay out claims to lenders on one out of every four loans made in 2007 — the worst rate in at least three decades. The claim rate should be nearly the same on the vastly larger volume of loans made in 2008.”

Goldman spokesman’s most withering rebuttals (Daily Intel) Methinks he doth protest too much…

North Korea propaganda, with translations (nikopop)

VIDEO — Reporter filing report on the blindfold half court shot, makes own impossible shot (fox4)

Trader caught taking a break…


A better way to state the point you are trying to make would be to exclude from the “homeownership rate”, the percentage of homeowners who have mortgages that exclude the value of their homes. That is not the same as total owners equity as a percentage of household real estate that you cite from the Flow of Funds Data (e.g., some real estate has no mortgage against it).

However, not every homeowner that is underwater will necessarily ‘walk away’ so even that statistic must be haircut in order to arrive at the appropriate figure for the percentage of american households who have a desire to “own” versus “rent” their dwelling.

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Lunchtime Links 1-29

Jan 29, 2010 18:12 UTC

Kohn, Bair warn banks about interest rate risk at FDIC symposium (Wutkowski, Reuters) The Fed says rates will stay low for an “extended period.” But that doesn’t mean “forever” so the Fed, along with other bank regulators, have warned bankers to prepare their balance sheets for higher rates. The populist line that banks need to “lend more” to get the economy going is just foolish. Regulators know the score: banks that lend too much at these low rates, or are using too much cheap short-term funding, will be caught out when rates head back up. Text of Kohn’s speech here. PDF of Sheila Bair’s here. (Bair’s speech is shorter and less wonkish)

MS looking into legal action against ZeroHedge (Teri Buhl) Will they actually sue? Probably not. Still, ZH’s emphasis on quantity over quality means they too often lift the work of others. Blogs link to content all the time of course, but proper attribution is important. And ZH most certainly DOES NOT have permission to reprint research coming from Wall St. analysts.

Wall St. tries to put price on Volcker rule (Sanati, Dealbook) Goldman is said to be in the most trouble, since a larger piece of its business is driven by proprietary trading. But can’t they just give up the bank charter they got last year in order to avoid any new Volcker-rule regs?

Simon Johnson joins HuffPo (Felix) As part-time biz editor.

GDP grows 5.7% (Mutikani, Reuters) The guys at Variant Perception have been saying to expect blowout growth this year coming off a low number, but they warn that it’s all dependent on government largess, which is not sustainable. The market knows this. Stocks are flat on this news.


Bank sues victim to avoid replacing stolen funds (Consumerist) Hackers got away with $800,000, but the bank can’t make it all up. So it’s pre-emptively suing the victim…

Are they AIG conspiracy theories really so nutty? (Reilly, Bloomberg) Geithner, Paulson and Bernanke have all said they had nothing to do with the decision to make a full pay out to AIG’s CDS counterparties. So who was in charge??

Bin Laden rebukes U.S. on climate change (Healy, NYT) No, really.

Bunch of phonies mourn JD Salinger (The Onion)

Dog saved after floating away on Baltic sea ice (Guardian)

Baby platypi…

baby platipy

Geithner’s faulty apologia

Jan 28, 2010 00:16 UTC

Tim Geithner’s appearance in front of Congress today was another embarrassment, perhaps more for the people’s representatives than the Treasury Secretary. Still, Geithner offered a clumsy defense for paying out 100¢ on the dollar to AIG’s counterparties, which included more than Goldman Sachs.

What they lacked in knowledge and nuance, Congress made up for in volume and OUTRAGE. The worst moment I saw was the utterly bogus comparison by Rep. Stephen Lynch between AIG’s payout to Goldman (100¢ on the dollar!) and the bailout offer for Bear Stearns shareholders (only $2 per share). 100 is a bigger number than 2, you see.

Geithner was lucky to be doing battle with such an unprepared, unimpressive group.

His defense, such as it was, amounted to the following:

Had the Fed imposed haircuts on AIG counterparties, it would have led to AIG’s credit rating being downgraded and the company (and consequently the economy) would have collapsed.

But AIG had already been downgraded, that’s why the government stepped in with a bailout. At that point the firm’s liabilities were taxpayer backed, so it strains credulity to say that extinguishing certain CDS it had written would cause systemic fallout in and of itself. Essentially what was happening here was unused insurance contracts were being extinguished. (Imagine a pro-rata refund from your insurer for a homeowner’s policy it wants to cancel…)

And there was precedent for this kind of negotiation. Eric Dinallo, former Commissioner of the NYS Dept. of Insurance and current candidate for Eliot Spitzer’s old job, had previously negotiated haircuts on CDS written by the monoline bond insurers. They were never forced into a taxpayer bailout. Did anyone at the Fed pick up the phone to consult Dinallo? Why not?

At the hearing, Geithner said he took “great pride” in his judgment to pay out 100¢ on the dollar to AIG counterparties because, he claims, it saved us from economic catastrophe.

No doubt the system was on the verge of collapse. But the biggest threat was undercapitalized banks. The payout to AIG counterparties was just a backdoor bailout for them. As Dan Alpert of Westwood Capital points out:

Every dollar of [haircut] would…amount to a dollar less of capital on bank balance sheets today (actually more, because in the interim the affected banks made money with that capital). If the discount was more than a little, some of the institutions would have required “front door” bailouts, or would have failed.

That’s why everyone is still so angry about this, and Goldman’s ridiculous claims that it would have been fine even absent the $12.9 billion it received from taxpayers via AIG. Sure, they’ve paid back TARP. But here’s another $12.9 billion of your money that’s helping to fund their bonus pool.

Jim Rickards offers a good closing thought on the matter:

What was actually done [in the AIG bailout] shows a breathtaking lack of imagination and legal skill on the part of the people involved.  The Fed and Treasury do have an obligation to save the system, but they have no obligation to save each and every member of the system.  That’s a big difference.  You may need to build a firewall but it’s important to build it in the right place.  Makes sense to protect the little guy but where was the national security interest in protecting Goldman? This is why I am just speechless when I hear Geithner testify that though he was utterly surrounded by ex-Goldman people they somehow had NO IMPACT on his judgment to save Goldman.  How blind and unaware can you be?

Not so blind that you can’t be Treasury Secretary…


It’s one thing to make a boneheaded decision. It’s another to repeatedly lie about it under oath. Time for Beavis to resign.

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Morning Links 1-25

Jan 25, 2010 14:25 UTC

Tishman gives up Stuyvesant Town (Wei/Spector, WSJ) Way underwater was this deal: the price tag was $5.4 billion, but the property is thought to be worth only $1.8 billion now. Tishman put up only $112 million of equity. Lenders and investors get wiped out. Good. By the way, if underwater investors can walk away, there’s little reason underwater homeowners should feel a moral obligation to keep paying their own overpriced mortgages….

SEC mulled national security status for AIG details (Goldstein, Reuters) “U.S. securities regulators originally treated the New York Federal Reserve’s bid to keep secret many of the details of the American International Group bailout like a request to protect matters of national security…”

Avatar to surpass Titanic as top box office draw of all time (Box Office Mojo) Inflation in the price of movie tickets plus the fact that many are paying $16 to watch Avatar in 3D, mean the comparison isn’t totally fair. But whatever. James Cameron has directed the two best grossing movies of all time. And Avatar is poised to go well over $2 billion…in less than two months!

BOJ open to extending loans, bond buying (Hidaka/Otsuma, Bloomberg) The Japanese central bank has engaged in various rounds of quantitative easing since the late ’90s I believe. Yet they’re still unable to keep deflation at bay. There are those that say this is proof that QE doesn’t necessarily lead to inflation. The bet being made by guys like David Einhorn is that eventually the debt load overwhelms the Japanese economy causing the yen to collapse. Indeed, the inflation that people fear here in the U.S. isn’t so much the old wage-push variety. Rather it’s a sudden loss of confidence in the dollar when it becomes clear the U.S. can’t pay its bills.

Bernanke confirmation looks set (Gelsi, Marketwatch) When Barbara Boxer and Russ Feingold pulled their support last Friday, it appeared Ben Bernanke might not get Senate confirmation for a second term. Now he look safe.

Fannie, Freddie should be eliminated, Frank says (Timiraos/Crittenden, WSJ) Unlikely this means Barney Frank will stop rolling the dice to subsidize housing with the public purse.

Leviathan stirs again (Economist) The return of big government the world over. This is not a good thing. Federal government is probably the least efficient allocator of resources in the economy. Not that we need smaller government overall, we just need smaller federal government. States and localities govern more efficiently. The federal government should be shrunk dramatically and the power/tax base of state and local gov’ts should expand.

Right-wing flame war (Dee, NYT) The story of Charles Johnson and his blog Little Green Footballs.

Newspapers are failing because their articles are too long (Kinsley, Atlantic) Shameless self-promotion: Reuters BreakingViews tells you what you need to know about financial news in 350 words or less!

2010: The year of the renter? (Toy, NYT) This story is NY specific. But I must say it’s good to live in the Hudson Yards area of Manhattan. Some of the best deals on apts in NYC at the moment as there’s way too much inventory around here….

Will NY soda tax drive some to drink? (CityRoom) This is a pretty stupid argument from soda bottlers who are opposed to new taxes on their product. Beer and soda aren’t exactly perfect substitutes…

Cat vs. Bear

Grist for Goldman conspiracy theorists

Nov 24, 2009 13:33 UTC

From Yves over at NakedCapitalism:

A former managing director at monolines Ambac and FGIC wonders why AIG was bailed out but the monolines weren’t. (He admits to bias, so take this with a grain of salt.)

…the [AIG] bailout was prompted by fear mongering and deliberate strategies and manipulation on the part of Goldman and a few select others, to make sure that AIG would be bailed out to protect their trades in shorting ABS CDOs.

I believe that John Paulson benefited from this bailout, on his $5 billon or so of ABS CDOs with AIG. But not as much as Goldman benefited themselves, via Abacus and, perhaps, other deals.

AIG, Goldman and ABS CDOs were tied together at the center of the crisis. From Goldman’s perspective, all of the other participants were secondary – they had no exposure to the monolines and they were probably hedged against the other banks. The only loose end was the collateral posted by AIG.

The final question that this raises for me: would it have been cheaper for the government and the taxpayer to have bailed out the bond insurers instead of AIG? The total amount of CDOs and credit default swaps that would have needed to be guaranteed would have been smaller. In the number of investors across the market that would have benefited would probably have been larger. The auction rate securities market, the muni market, the investors that held bond insurer exposure to MBS and ABS would have all benefited. None of these markets were aided by AIG’s bailout.

But a bond insurer bailout would not have helped Goldman much and the AIG bailout did.

There’s much more in the post. As chairman of the NY Fed, former Goldman CEO Stephen Friedman was in an opportune place to scare Tim Geithner into bailing out AIG to benefit Goldman.

The Paulson connection is intriguing. I’ve always wondered who, ultimately, was on the other side of his “trade of the century.” He bought CDS and the banks he traded with had to lay off that risk to someone. That someone was AIG, which couldn’t have paid up if not for the bailout….. (admittedely, this is supposition on my part, would be interested to hear reader thoughts…)


The average pay (including bonus and benefits) for GS staff is approximately $770,000 – almost doubles the salary of US President.

“There were no discussions on AIG”

Jun 26, 2009 16:16 UTC

I’m sorry I missed this CNBC interview last week with Robert Wolf, chief of UBS Investment Bank in the U.S.  There’s a remarkably eye-opening sound bite.   (hat tip M. Mayer)

…there were no discussions on AIG during that three day period [the weekend Lehman failed].

Wait, really?  Does this mean the Fed had no idea AIG was about to collapse when it was working to resolve Lehman?  Two days later it threw $85 billion at them with completely insufficient security, a package that later expanded to $150 billion.

Clearly there needs to be some mechanism to receive the assets of failed systemically-important companies.  FDIC has its hands full with insured depository institutions.  It has no mandate, much less the capability to handle a behemoth like AIG.

But should we be giving more authority to the Fed to handle this?  There is a singular explanation for the financial bubble and ensuing collapse: leverage.  The Fed has ultimate control over leverage via the reserve requirements it is supposed to impose on banks.  Taken in by mathematicians whose models explained that leverage could be made riskless via complicated hedges, Greenspan/Bernanke/et al totally abdicated their responsibility to enforce sensible reserve requirements.

Yet Obama thinks they can handle a bigger book of business?


Thanks MarkJ….good to know that Wolf is misinformed. Nevertheless, the Fed clearly can’t handle its existing mandate. Doesn’t makes sense to expand it. There’s got to be a better way.

What we really need is a Fed chair who’s willing to let deleveraging happen.

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