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How Citi Blew Itself Up By Cleverly Avoiding AIG
Short intro to the Michael Lewis article in Vanity Fair about the AIG implosion:
http://www.vanityfair.com/politics/features/2009/08/aig200908?currentPage=1
excerpt: While nearly every other Wall Street firm had AIG's Financial Products group in Wilton, Connecticut on speed dial, Citigroup reportedly avoided doing business with them. Instead of off-loading risk onto the insurance giant by taking out credit default swap contracts, Citigroup prefered to keep one-hundred percent of the risk themselves, an AIG trader tells Michael Lewis in Vanity Fair.
Lewis has a long article in this month's Vanity Fair that describes how AIG FP blew up. It's finally online and makes for an entertaining read. In case you are pressed for time, here's the short version: they sold lots of credit default swaps on subprime mortgage backed paper while no one internally had a clue what was going on.
Obama's Mortgage Modification: Just More Predatory Lending in Disguise
The best evidence that Obama's new mortgage scheme won't end well: look at the people who are the most excited about it. It's the same, smarmy mortgage guys that profited handsomely from the subprime crisis. In a great bit of deep dive reporting over at Salon -- hardly an outfit you'd expect to be critical of Obama -- Alyssa Katz, with help from The Nation Institute (also very liberal), shows how modifications are hardly the paragon of progressive idealism:
Karl Rove Says Barack Obama's Speeches Address Positions Republicans Don't Hold - WSJ.com
Rove explains Obama's deceitfully clever use of the "strawman" argument. Excellent discussion of how a dangerous demagogue manages to position his extreme and radical views as "reasonable". Just paint your opponent as evil and uncaring without having to actually describe the who, what, where, when facts.
...."President Barack Obama reveres Abraham Lincoln. But among the glaring differences between the two men is that Lincoln offered careful, rigorous, sustained arguments to advance his aims and, when disagreeing with political opponents, rarely relied on the lazy rhetorical device of "straw men." ...... Mr. Obama, on the other hand, routinely ascribes to others views they don't espouse and says opposition to his policies is grounded in views no one really advocates.
The Obama Depression: Holman Jenkins Says Barack Obama's Ideas on the Environment, Social Security and Taxes Are Democratic Indulgences - WSJ.com
"Mr. Obama came to office without a conspicuous vision other than "bipartisanship" and a belief in the beneficent influence on America and the world of seeing a black man exercising the powers of the presidency. He wields his party's shibboleths like one who sees them mainly as levers for delivering the goods. His ideas about the exercise of politics, in fact, may be accurately reflected in the recent stimulus bill -- in office you supply the wish lists of those who put you there.
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His will be a fascinating presidency to watch, not least because of his inexperience, his intellectual agility, and the crisis in which he finds himself. But his presidency will get really interesting in a year or two, or six months -- whenever he finally realizes that everything he thought he wanted to do is irrelevant. He'll then have to adapt an agenda for the world as it is, in which many childish things no longer have a place.
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And, by the way, he kids himself if he believes he will be allowed, like FDR, to preside over a depression without being politically blamed for it. The public is different now -- the world is different -- and he will own the "Obama depression" sooner than he thinks.
Volcker: A "Little Inflation" Is A Terrible Idea
Henry Blodgett picks up Paul Volkers comments on inflation ".....The government would quietly but desperately love to inflate our way out of this mess--destroying the dollar so the real burden of our mountain of debt shrivels to a molehill. This remedy, of course, would punish everyone who has saved up a nest egg or lives on a fixed-income, but they're likely to be considered an expendable minority...."
There is also a link on this page to the Aron Task interview with Peter Schiff, "The stimulous bill will lead to unmitigated disaster."
http://www.businessinsider.com/2009/2/peter-schiff-stimulus-bill-will-lead-to-unmitigated-disaster
Peter compares Bush to Hoover and Obama to Roosevelt, predicting an unmitigated disaster; a depression with hyperinflation. He argues that the great depression was tempered by the fact that government spending and intervention was limited by the godl standard. Today, the Federal Reserve has no such limitation!
Nationalize the Banks! We're all Swedes Now - washingtonpost.com: Nouriel Roubini
Dr. Doom: The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s -- or the United States in the 1930s -- the only way to save it is to nationalize it.
The Housing Chart That's Worth 1000 Words : Clusterstock's Henry Blodgett
"Here's the big problem with almost all the current rhetoric about the housing crisis: It presumes that the goal should be to get house prices rising again. The problem with that idea is that, even after a 25% decline, house prices are still way too high. "
Even if there is a government mechanism that could stop house prices from plummeting and artificially pump them up again, therefore, it would just postpone the inevitable....."
Henry covers the infamous Robert Schiller Housing Graph tracking home prices since 1890 to the present. He also includes an excerpt from James Quinn's acerbic but highly informed article. Mr. Quinn spares nothing in his loathing of congress, Barney Frank and Obama.
Bradley Schiller Says Barack Obama Should Stop Comparing Our Financial Crisis With the Great Depression - WSJ.com
This out of control Obama fearmongering may be good politics, but it is bad history and bad economics. It is bad history because our current economic woes don't come close to those of the 1930s. At worst, a comparison to the 1981-82 recession might be appropriate. Consider the job losses that Mr. Obama always cites. In the last year, the U.S. economy shed 3.4 million jobs. That's a grim statistic for sure, but represents just 2.2% of the labor force. From November 1981 to October 1982, 2.4 million jobs were lost -- fewer in number than today, but the labor force was smaller. So 1981-82 job losses totaled 2.2% of the labor force, the same as now.
Good stats comparing the Roosevelt great depression years, the Carter recession years and the Obama recession years.
XBRL Becomes Mandatory - This Should Be Interesting - O'Reilly Broadcast
Excellent discussion of the financial crisis, the role of recessions, banking excesses and insolvency, and the need to quietly ride it out and let the recession do what is necessary - clean out the excess. good stuff! Thanx marbux
Barack Obama's Stimulus Plan Will Get Little Value for Money - WSJ.com
The stage was thus set for the popular President to forge a bipartisan consensus that combined ideas from both parties. A major cut in the corporate tax favored by Republicans could have been added to Democratic public works spending for a quick political triumph that might have done at least some economic good.
Instead, Mr. Obama chose to let House Democrats write the bill, and they did what comes naturally: They cleaned out their intellectual cupboards and wrote a bill that is 90% social policy, and 10% economic policy. (See here for a case study.) It is designed to support incomes with transfer payments, rather than grow incomes through job creation.
This is the reason the bill has run into political trouble, despite a new President with 65% job approval. The 11 Democrats who opposed it in the House didn't do so because they want to hand Mr. Obama a defeat. The same is true of the Senate moderates of both parties working to trim their $900 billion version. They've acted because they can't justify a vote for so much spending for so little economic effect.
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This is so manifestly false that we doubt Mr. Obama really believes it. He has to know that it matters what the government spends the money on, as well as how it is financed. A dollar doled out in jobless benefits may well be spent by the worker who receives it. That $1 of spending will count as economic activity and add to GDP.
But that same dollar can't be conjured out of thin air. The government has to take that dollar away from someone else -- either in higher taxes, or by issuing new debt in the form of a bond. The person who is taxed or buys the bond will have $1 less to spend. If the beneficiary of that $1 spends it on something less productive than the taxed American or the lender would have, then the net impact on growth will be negative.
- The whole enchilada in a nutshell. - on 2009-02-09
michael.lewis | The Big Money
List of Michael Lewis articles that appeared in "The Big Money".
WSJ Rips The Stimulus, er "Porkulous" bill
If you only read one critique of the stimulus plan today, check out the Journal's editorial, which concludes that of the $825 billion that's being spent, only 12%, or $90 billion, could legitimately be considered stimulative. In their opinion, which is presented quite well, the rest is just more spending on inefficient programs that have already seen plenty of money thrown at them.
Why Are We So Afraid To Fix Banks The Right Way?* | Clusterstock Henry Blodgett
You don't have to subsidize banks and their stakeholders at taxpayer expense to avoid another Lehman. You just have to fix the banks the right way.
What's the right way?
* Temporarily seize the banks
* Write their assets down to nuclear-winter levels (or, if desired, put them in a big bad bank, as Sheila Bair wants to do.)
* Convert enough of their debt to equity to put them in a strong capital position.
That's it. No taxpayer money. No citizen outrage. No comical "Yes, we're lending" assurances when what the banks are really doing is, sensibly, hoarding everything.
We could do this to Citigroup and Bank of America tomorrow afternoon, and on Wednesday morning, two of our biggest banks would be rock solid (they could also still be publicly traded, under the same ticker symbols, with different shareholders).
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a debt-equity swap
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MY PLAN
1. Mandate a 12-1 leverage cap for all financial institutions to take effect within 180 days. This 12-1 leverage cap has to be calculated using real market prices, not mark-to-model prices.
2. Temporary ban on capital raising by banks – water can’t dilute poison. You eliminate the poison first then add more water.
3. Force banks, etc to reach this 12-1 leverage cap by selling their toxic assets within 180 days via a US Govt Auction. The US Govt will be the Auctioneer but will NOT bid for assets
4. Any bank that is unable to sell sufficient assets to bring it under the 12-1 leverage cap will automatically nationalized by the US Govt at a price of $1. All shareholdrers and bond holders forfeit their assets. This will provide an incentive to the banks/financial institutions to sell these assets.
5. The US Govt will now hold all the toxic assets to maturity - this will prevent private market bidders from low-bidding in (3) above. Private market bidders in essence are being told, you buy the assets during the auction or you will not have another opportunity to buy the assets, as the US Govt will sieze them at an effective rate of ZERO and then hold them to maturity.
6. Any bank that falls under nationalization will also have its CEO, Board of Directors and members of the Management committee for the past 5-10 years disgorge all compensation earned during the past 5-10 years.
7. Create standardized CDS products that traded on an electronic exchange. All non-standard CDS products should be liquidated in the OTC market or swapped into standardized CDS products prior to the commencement of the new CDS exchange. The exchange will commence within180 days.
8. New Mortgage Financing Rules: 20-30% minimum govt mandated down payments. Strict Debt to Income limits, etc. These rules must be codified into federal law.
9. New Credit Card/Auto Finance rules: strict rules on the amount of credit card/Auto finance debt available to consumers.- Incredible plan presented by LIF. I would also consider adding to this proposal Martin Feldstein's refinance plan. MF's plan would put a floor in under falling real estate values by offering homeowners a chance to hang onto their homes - even if the property value decline most likely would never recover the original purchase (speculative) value. - on 2009-01-21
Opinion: TheTalented Mr. Paulson's Clever Exit | Opinion | Financial Articles & Investing News | TheStreet.com
The sickening feeling of the average investor and taxpayer being "had" by the economic crisis continues, and continues to come from disappointing quarters.
My latest jolt came from a throwaway line from exiting Treasury Secretary Henry Paulson in an interview with Maria Bartiromo that aired on CNBC this week.
Yikes! This is a frightening look at Goldman Sachs and the foreknowledge Henry Paulson had of financial-crisis to come.
Troubled Assets Explained | Silicon Valley Insider - ClusterStock John Carney
Troubled assets are just stuff that banks paid too much for. Mostly, that stuff is loans made to people who cannot afford to pay them off, secured by collateral that is worth less than the loan value. Those loans were made so people could buy everything from homes and cars to shopping malls and construction companies.
The reason they are financially crippling is that banks don't want to admit how badly they overpaid, so they keep carrying worthless junk at inflated values on their balance sheets. The "systemic" problems arise because everyone knows the banks are holding junk that they are pretending are jewels. Investors and lenders don't believe the assets are worth what the banks say they are, so they won't lend or invest against the phoney valuations.
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Add Sticky NoteWhen the government guarantees the value of a troubled asset, what it is really doing is promising to pay anyone who ends up owning it the difference between the phony, inflated value and the actual value it fetches on the market. Buying troubled assets, if that actually ever happens, works pretty much the same way: the government pays more than the asset is worth, exchanging something really valuable--dollars--for something that has a lot of, well, sentimental value for the bank.
- Great Quote! - on 2009-01-17
How to Repair a Broken Financial World - Michael lewis and David Einhorn - NYTimes.com
Continued from "The End of the Financial World As We Know It"
The End of the Financial World as We Know It | Michael Lewis and David Eihhorn The End of the Financial World as We Know It - NYTimes.com
Full Article in NYT: AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.
Michael Lewis And David Einhorn: Bonfire Of The Absurdities
Two of the sharpest minds in the Wall Street analysis and commentary business--Michael Lewis and David Einhorn--team up in the NYT to provide a recap of our historic charge off the financial cliff.
The main message: Sure, greed played a role, as it always does, but the ridiculous conflicts, self-interest, and short-termism in our system made the current mess inevitable.
The Bailout So Far - WSJ.com Holman W. Jenkins Jr.:
Washington a few months ago might have bought the entire stock of subprime mortgages for about half the money committed by the Fed and Treasury last week to prop up Citigroup and spur consumer and mortgage lending. Buying up bad mortgages would at least have left the private sector in charge of issuing new credit, which -- however bad its performance during the housing bubble -- would likely produce better results than government directing credit allocation in the economy.
They (Federal Reserve-Treasury-FDIC-Congress) failed to douse the confidence/systemic-risk fire and now have moved on to fighting recession by turning credit allocation into a public utility. Vikram Pandit of Citigroup says: "We have gone from arm's length, free market, just-in-time availability" of funding to a system where big credit-reliant businesses now have only one place to turn, government.
The Four Scenarios: Debt Deflation, Hyperinflation, Quadrillion Play and Muddle Through.Are These The Four Horsemen Of The Financial Apocalypse?
From the vantage point of November 15th, 2008, whilst the Washington, DC, summit is underway amongst the leaders of the G20 nations, it would appear that there are four distinct global economic scenarios that may unfold towards the tail end of this year, 2009 and 2010:
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