Monday, March 23, 2009

Geithner's plan: Self-dealing will solve the banking crisis.

Secretary Geithner has put forth yet another version of the bad bank plan. Several pundits have already pointed out shortcomings in the bidding process.

So far, none of the discussions that I have seen are including the possibility that both the buyer and seller might have related interests. For instance: Citi will invest $1B with a fund that bids on the assets. The gov't will provide another (say) $9B to match Citi's $1B as a nonrecourse loan.

Citi will then provide personal incentives for the fund managers to bid 100 cents on the dollar for an BBB MBS tranche that is currently trading for 1 cent on the dollar. Naturally, the market is valuing this tranche at 1 cent because there is no hope of being paid back, and the tranche will eventually be a total loss.

But when that total loss occurs, Citi now only loses 10 cents on the dollar because the gov't just put up the other 90 cents.

This plan is in fact relying on disguised interests to bid the prices up to absurd levels and have the taxpayer foot the bill.

Wednesday, March 4, 2009

Size of the Mortgage Problem

Bloomberg's chart of the day on Feb 12th showed the size of the mortgage problem quite nicely (click for bigger version):

U.S. home loans exceeded the total cash available in the country by $3 trillion at their peak, showing the size of the mortgage problem to be fixed," said Michael Shaoul, chief executive officer of Oscar Gruss & Son Inc.

While M2 might not be the best measure of money for this purpose, it certainly puts it into perspective.

HatTip: Alybaba in the comments of CalculatedRisk.

Tuesday, March 3, 2009

Arithmetic Requirement at the Treasury?

The government has responded to cries that its "stress testing" is not considering the worst case. I have not digested the whole of the document, but one part stuck out at me:
But, a key fact is that recessions are followed by rebounds. Indeed, if periods of lower-than-normal growth were not followed by periods of higher-than-normal growth, the unemployment rate would never return to normal.
Really Mr Treasury? Never return to normal?

It turns out that with an old fashioned pad and paper, you can convince yourself that constant positive real growth, however slow, will cause even 100% unemployment to ultimately return to normal.

The statement above is supposed to convince me that your previous documents are well-thought through? Precise? Prudent?

These people are managing our national treasury, they sure aren't Einstein.

Monday, March 2, 2009

Einstein is not at the Treasury

Insanity is doing the same thing over and over again and expecting different results.

-- Albert Einstein
Sadly, it seems that the above quote qualifies as profound wisdom to our folks in government. In the past week, we have seen the re-bailout of Citi, the re-bailout of AIG, and the re-birth of the bad bank.

Do we really need someone of Einstein's intelligence to realize that the same-old bailout is just not working?

Saturday, February 21, 2009

Four Bad Bears and a Crystal Ball

Doug Short has a plot of The Four Bad Bears on his website that has made the rounds among the finance blogs. But this version from my inbox includes the all-important crystal ball projection of the future of the current bad bear. (Click for bigger version.)

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Friday, February 20, 2009

Sugar-coating unemployment

Former president Jimmy Carter comparing the unemployment now to the Great Depression:
In announcing the renovation of the Carter Center, former President Jimmy Carter went off topic for a minute to answer a question comparing the current economic climate to the Great Depression of his childhood.

”There is no comparison to the Great Depression and where we are now,” he said. “The Great Depression was much more severe. Right now, we have 7 percent unemployment. In the Great Depression, it was four times that. Back then, there was no money.”

Why is this so hard? As we commented previously, there are six different measurements that the BLS puts out. Carter's 7% value neglects large swaths of the unemployed. Right now, the government's unemployment rate is 14% if you want the closest apples-to-apples comparison that can be made.

Public Service Announcement:

It's just shaping up to be one of those days. What are the NYSE circuit-breaker levels? As of first quarter:

In the event of a 850-POINT decline in the DJIA (10 percent):

Before 2 p.m.

2-2:30 p.m.

After 2:30 p.m.

In the event of a 1700-POINTdecline in the DJIA (20 percent):

Before 1 p.m.

1-2 p.m.

After 2 p.m.

In the event of a 2600-POINTdecline in the DJIA (30 percent), regardless of the time, MARKET CLOSES for the day.