Archive for September, 2008
Some words of wisdom for Sarah Palin
Plus ça change, plus c’est la meme chose:
“I am often made aware of the utter uselessness and folly of seeking to vindicate my character…from the simple fact that although foul aspersions can be bruited far and wide, held to the fluttering breeze by every press and rolled as sweet under every tongue, yet while the vile slander is fairly refuted and truth appears in the most incontestable manner it is permitted to lie quietly upon the shelf in slumber the sleep of death or if by chance it should get published in some obscure nook or corner of this great republic be most religiously suppressed as tho in fear that the truth should be known and believed.”
– Brigham Young writing to (then) U.S. Secretary of War Jefferson Davis, 1855 (quoted in 40 Ways to Look at Brigham Young, Orton & Slaughter, Deseret Book, 2008)
Doesn’t look as though the interwebs have changed things all that much. ..bruce w..
Debtzilla Laughs At $700 Billion…
I know there are plenty of folks (somewhere) who think that throwing $700 Billion down a deep debt hole was going to fix things. Let me help you out.
Consider the graph below from Credit Suisse
What this shows is that the first rate resets for the Subprime loans has mostly passed. So people who were going to default on rate payment shock have largely had their day of doom. If you look at 2009 - 2011, you see that there are 2 more flavors left to sour: Alt-A and Option ARM. These magic bundles of toxic waste are even nastier than subprime.
Alt-A were commonly jumbo loans for your $1 million and up McMansions, frequently purchased with little or no money down using low teaser rate loans. Option ARMs were loans where the borrower could pay less than minimum payment, yes that’s right! Their loans were growing larger month over month.
So if any of you think the credit troubles are behind us, I suggest you re-consider. Worse yet is the fact that what we are seeing now is not really about bad subprime loans, whatever the press may tell you. What this boils down is that the largest financial institutions were caught lying to each other, and now none of them trust each other enough to loan a dime. As a result the free flow of money that powers the economy has slowed or stopped.
You can throw in $700 billion to buy up bad debt, but it won’t erase the fact that many of these brand names are now technically insolvent, and the other banks know it. In the financial world once it gets rough it’s every enterprise for themselves, they would just as soon buy you up at the fire sale as help save you.
The Big Game Disaster Scenario - When The Common Man Opts In
So it seems that the biggest boondoggle of them all is in the pipeline to become law. Crooked high dollar investors are about to be forgiven of all they owe from bad debts, with the cost transfered to the common taxpayer. This is often referred to in economic circles as a “Moral Hazard“. Wikipedia puts it this way:
Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions. For example, an individual with insurance against automobile theft may be less vigilant about locking his or her car, because the negative consequences of automobile theft are (partially) borne by the insurance company.
Moral hazard is related to information asymmetry, a situation in which one party in a transaction has more information than another. The party that is insulated from risk generally has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.
Yes, that means that the big players get the cash, and you get the bill. Now if you are like most middle class Americans, you are coming off a 7 year credit fueled binge, looking at prospects of a declining economy and mounting payments from all that debt. You might think “Hey, the government is going to forgive $700 Billion in debt, how much of that is mine?”.
Ah, and this is the sad part - none of it is yours!
In a bygone age, common people might think that because they are honest hard working folks, their station in life is to toil to pay back every cent of what they owe. In today’s entitlement society, there is a strong chance that the common folks might choose to “opt in” to the $700 billion dollar ultra credit give away, a scenario that I am certain the treasury fears above all.
Middle class Americans might be forgiven if they think that if the big fish on Wall Street can walk away from debts they created by mistake, then maybe they should too. And there lies one of the weaknesses in the plan - it more or less assumes that all of the bad debt is out in the open right now. Unfortunately for them that is not the case.
The entire credit based system that has become our economy revolves around trust and the promise to repay. The Government has just publically declared that no longer applies to everyone; if you are big enough, the government will take care of it. By taking this action they have mainstreamed and normalized irresponsible behavior.
I fully expect for a large number of average folks to decide to “opt in” to this bail out program, by nominating their credit card, boat, car or house payments to be “bailed out” - simply by no longer paying. When this happens, it will become clear that $700 Billion (actually 1.2 Trillion) was not even close to enough to paper over the problem.
Scenes from a marriage
Not many marriages last 50 years, particulary not in Hollywood, and especially not when both parties are well-known actors. But Paul Newman and Joanne Woodward managed that on a very public stage, and the montage of clips below gives you an idea of the fire in the dance:
Hat tip to American Digest. ..bruce w..
The Big Game - Congress Plays Let’s Make a Deal
Sadly, there is no surprise that the current government is stalking it’s way towards the largest block grant to the wealthy ever. Word from the press that the congress has come up with a $700B plan to save the bank accounts of people who make more money in a day than many folks will see in a lifetime.
Secretary Paulson has been beating the drum for a few weeks that this giveaway was crucial to avoid a financial disaster, and now it seems congress is going to give him his prize. The entire premise of this though is insane; why should we the people shield these wealthiest of companies from the mistakes they have made? Because we fear the stock market might go down? Where is it written that Wall Street’s indexes must be maintained at all cost?
The current problems were created by more than a decade of run away greed and mismanagement. These very companies that we are going to use our future earnings to save have made hundreds of billions of dollars from their shady deals that we now have to make whole. The talking points around this massive mother of all boondoggles look a bit like this:
The Credit Markets Are Vital To Our Economy - We Must Save Them At All Costs!
Like much of the populace, many many companies have become addicted to easy credit. 30 years ago it was possible to run a good profitable company without eternal access to revolving credit. If these credit markets were to fail, many companies would be hurt badly, some fatally. While this may sound harsh - in the long run it would be a good thing. Companies are in trouble because they made some bad business decisions, and have been progressively moving further from reality. This would cause reality to re-assert itself in the hard and cold fashion that only math and physics can. It would be a lesson that would stand for a generation and help lay the foundation for a much more sound economy.
Only The Paulson Plan Can Save Us - $700B (actually $1.2T) Or Else We All Get It
As I outlined prior, $1.2 Trillion dollars is a huge amount of money, but in fact given the total derivative exposure to bad debt that it outstanding right now, it is a drop in the bucket. In fact, there is not enough money available right now to stop what was set in motion last year. Their best hope is to delay the day of settlement in hopes their positions will improve. As we have seen in headlines, the contagion is already raging in England and the EU. Once China, India and Russia go, we will see things move very quickly. The longer we put that off, the more it is going to cost.
The Taxpayer Is Going To Make Money From This!
Here is how it works. Some bank made a loan for a California McMansion with $0 down to someone who waits tables (this did in fact happen). Total cost at $1.2 Million. That person never made a single payment, and now the bank owns that house. No one wants to pay that much money for a home, and the bank is unwilling to take what the market will pay. So they have now asked you and I to become joint owners at $1.2 Million in order to cover their mistake. The bright geniuses in DC, who somehow did not see this coming, think that some day, some fool is going to pay even more than that, and as a result (say 20 years later) we the people will make money from that sale. So how will these profits be distributed? Direct Deposit? Rebate Check? Oh no, they will go straight into the federal coffers to be handed out as pork and kickbacks. In the mean time, anyone who was prudent, frugal or wise enough to stay out of the real estate nonsense now gets to pay for it.
I am so angry I could spit at the moment. Clearly the money I have been saving for decades is under threat by these actions, what possible motivation is there to invest when the game is rigged?
So let it come down to this. Someone needs to start a legal fund to attack this thing on a constitutional basis - it would seem to violate the equal protection clause.
Oh, the weather outside is frightful…
Like Phil at Bad Astronomy, I’ve always been intrigued by Antarctica and have wanted to visit there. But this video clip gives a brief — but sufficient — glimpse into the cold, dark, windy hell that Antarctica can be:
http://view.break.com/487339 - Watch more free videos
Wowza. That looks like “ten steps and die” weather. ..bruce w..
A good man is gone
I’m sure Paul Newman had his flaws — we all do — but for someone to be successful in at least three different endeavors — acting, racing, and raising $175 million for charity — and to always keep a normal-sized head (Newman refused to sign autographs, not out of ego but because signing autographs seemed arrogant) makes for a pretty remarkable life.
Condolences to his family, including his wife, the ever-lovely Joanne Woodward (to whom he was married for 50 years). Hat tip to Ace of Spades.
[UPDATED 1001 MDT] Here’s a better and more thoughtful obituary than the wire service one linked above:
A loving father, faithful husband, World War II veteran and philanthropist who gave away a vast fortune, being one of the all-time great screen legends was only part of who Paul Newman was, and it‘s the rare circumstance where after their passing we mourn the loss of the man more than the star.
..bruce w..
The pain ahead
When I first saw this graph in the sidebar of an article over at CNN Money, I kept looking for the United States and couldn’t find it.
Then I looked a few inches above the rest of the countries.
Ouch.
Here’s what the article has to say:
The dangers of leverage in a market where asset prices are falling have been well established by this month’s collapse of WaMu (WM, Fortune 500) and Lehman Brothers, and the federal rescues of Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and AIG. All five firms had borrowed heavily to support mortgage portfolios whose value is declining by the day as the housing bubble of earlier this decade deflates. In response, firms from Goldman Sachs (GS, Fortune 500) to General Electric have pledged to raise capital and reduce borrowings.
What’s remarkable, however, is the degree to which the U.S. banking system as a whole suffers from the overleverage problem - which helps to explain why banks such as Wachovia (WB, Fortune 500), off 28% in trading Friday, and Morgan Stanley (MS, Fortune 500) continue to come under pressure.
Merrill Lynch commodities strategist Francisco Blanch writes in a report Thursday that the ratio of total loans to deposits in the U.S. hit 3.5 to 1 last year. That’s more than double the ratio found in the second most highly leveraged banking system, Russia’s, and more than triple the ratios in the U.K., Germany and Japan.
Interesting times ahead. ..bruce w..
Video o’ the month (and maybe the year)
OK, I really don’t care about the political preferences of the people how made this — it’s just brilliantly done:
And where’d they get the high-quality capture of The Dark Knight? Hat tip to 2008 Central. ..bruce w..
Cargo of doom
The following news item from the Long War Journal reads like the start of a Tom Clancy novel. It talks about an Iranian cargo ship hijacked by Somali pirates. And then the pirates start dying (emphasis mine):
The MV Iran Deyanat was brought to Eyl, a sleepy fishing village in northeastern Somalia, and was secured by a larger gang of pirates - 50 onboard and 50 onshore. Within days, pirates who had boarded the ship developed strange health complications, skin burns and loss of hair. Independent sources tell The Long War Journal that a number of pirates have also died. “Yes, some of them have died. I do not know exactly how many but the information that I am getting is that some of them have died,” Andrew Mwangura, Director of the East African Seafarers’ Assistance Program, said Friday when reached by phone in Mombasa.
News about the illness and the toxic cargo quickly reached Garowe, seat of the government for the autonomous region of Puntland. Angered over the wave of piracy and suspicious about the Iranian ship, authorities dispatched a delegation led by Minister of Minerals and Oil Hassan Allore Osman to investigate the situation on September 4. Osman also confirmed to The Long War Journal that during the six days he negotiated with the pirates members of the syndicate had become sick and died. “That ship is unusual,” he said. “It is not carrying a normal shipment.”
Go read the whole thing. Hat tip to In From The Cold. ..bruce w..