Real Estate and Mortgages – Page 11

Sorted Weekly Tweets

Posted on 8 September 2012 by David Merkel

Eurozone

ECB Collateral Moves Reopen ?Soup Kitchen? for Struggling Banks http://t.co/CMMkeby9 Euros available in exchange 4 marginal collateral $$ Sep 07, 2012
Jobless Greeks Resolved to Work Clean Toilets in Sweden http://t.co/EqGuottV Really a sad tale; another way of saying EZone has failed $$ Sep 07, 2012
Euro: Looks like a duck, quacks like a duck http://t.co/R3y7uG5J Axel Merk argues that current Eurozone troubles will create US Europe $$ Sep 07, 2012
Draghi Says Officials Agree on ECB Unlimited Bond-Buying http://t.co/Cyn0tu9O The conditionality will eventually render it ineffective $$ Sep 06, 2012
Fears Rising, Spaniards Pull Out Their Cash and Get Out of Spain http://t.co/EMT40EQK When times get tough, people leave. More in Spain $$ Sep 07, 2012
Perhaps the Irish economy is rebounding.? Maybe the banks are next? $$ http://t.co/fN5Cyfj4 Sep 05, 2012
Two Tears for Two-Tiers http://t.co/YuLV0vnN Will Mario Draghi really create an expensive market for <3yr Spanish & Italian debt? $$ Sep 05, 2012
ECB bond-buying would not breach rules-Draghi http://t.co/9iaSdGnn Of course not pooky. Buying the short debt will draw u2 long debt l8r $$ Sep 04, 2012

Politics

California Treasurer Backs Law to Ban Costly Long-Term Bo [sic] http://t.co/P5U2f7DC Capital Appreciation Bonds are expensive 2 issuers $$ Sep 07, 2012
We’re Not Out Of Money http://t.co/FKDSbBAM There may not be an economic limit on printing $$ but a political limit when inflation arrives Sep 05, 2012
Top Bank Lawyer?s EMails Show Washington?s Inside Game http://t.co/4sSYxs4n Former SEC Commissioner Annette Nazareth uses her influence $$ Sep 05, 2012
Suits Challenge Classrooms That Segregate Boys, Girls http://t.co/zHiCmchK My brother ran a school for boys; much better than co-ed $$ Sep 05, 2012
Fed’s unemployment target is unrealistic http://t.co/1edPuBTC Global labor competition will keep unemployment high, until exports get big $$ Sep 05, 2012
The Clinton Administration did not offer as much public debt, Social Security was running its largest… http://t.co/mySuAvk1 Sep 05, 2012
As I said with the Republican Convention, I am very glad that I don’t own a TV. I would rather consider the merits than emotional appeals $$ Sep 05, 2012
They grow so fast, treasure them while you can $$ RT @TheStalwart: The Obama daughters have aged a lot. http://t.co/2IguOJdj Sep 05, 2012
A radical tax plan the left and right can agree on http://t.co/84PA1xpp Cut corporate tax rates & eliminate all special preferences $$ Sep 04, 2012
If You Think Obama?s First Term Was Bad, Imagine a Second http://t.co/4iFeFAfc Same applies to Romney; we will have gridlock either way $$ Sep 04, 2012
Why Bernanke has become irrelevant http://t.co/dN9b6kVP Inflating financial assets also inflates financial liabilities &so it does little $$ Sep 04, 2012
Putin to Raise Government Retirement Age to 70 http://t.co/TtluvkN0 We should also. Y should young ppl subsidize oldsters who could work Sep 04, 2012
The Democrats? Version of Mediscare http://t.co/rRUwEf7s Agreement btw Reps & Dems: cut medicare. The Q is how to do it? $$ Sep 04, 2012
Long term real rates in the US hit record lows http://t.co/WQns2veU Can you say “financial Repression,” boys & girls? I thought you could $$ Sep 04, 2012
Gloria Romero: Trials of a Democratic Reformer http://t.co/Hblx3Plk Unions (SEIU, CTA, the CA school employees) dominate $$ in Sacto $$ Sep 01, 2012
California Lawmakers Send Public-Pension Cutback to Brown http://t.co/pn3uXnjj First, prospective change, next retrospective on actives $$ Sep 01, 2012
The duopoly doesn’t like interlopers playing on their turf $$ RT @LaurenLaCapra: Why Is Gary Johnson Being Ignored? http://t.co/qgXnrC49 Sep 01, 2012

The Markets

Asset Allocation & Portfolio Management: Is the Industry Shifting to a New Paradigm? http://t.co/u69lGilE 2 complex; parameters unstable $$ Sep 08, 2012
Student Loans: Debt for Life http://t.co/sd4aNaDo With student loans not dischargable in bankruptcy many students end up debt-slaves $$ Sep 07, 2012
Commodities Beat Stocks, Bonds for Second Month in August http://t.co/3Ydp0q3t Anticipated inflation (via TIPS) rising over last 2 months $$ Sep 03, 2012
Should You Wade In With a Windfall? http://t.co/lprP4FbX A perpetual debate; best to decide on your asset allocation and invest $$ Sep 03, 2012
Are You Making Too Much Money? http://t.co/5uoVQMTF Cramer points out that when a strategy is working too well -> greater prob of blowup $$ Sep 01, 2012

Lenders, Insurers, and Housing

Hedge funds face autumn uncertainty http://t.co/lbTBS8Rx Hard not to be uncertain when deficits are high, monetary policy loose, & EZone $$ Sep 05, 2012
With Lax Regulation, a Risky Industry Flourishes Offshore http://t.co/C3RUhCQD Bermuda reinsurers r better managed than largest US banks $$ Sep 05, 2012
Assessing Fannie’s Past and Future http://t.co/v5c8Y2QS Sadly, ending the role of the US Govt in lending $$ is not a listed option. Sep 04, 2012
Home Prices Are Not Rebounding as Fast as You Think http://t.co/qrYYciDr Market will have to digest a lot of dark supply, post-bottom $$ Sep 04, 2012
Breaking Up Banks Is Hard With Traders Hooked on Deposits http://t.co/CtcyqaiH WIll b made up reducing diseconomies of scale $$ #breakthem Sep 04, 2012
Bad headline: Nine Insurers Boast Gains On Facebook Positions http://t.co/8rsBZfe1 Read the story: most insurers owning $FB lost $$ Sep 04, 2012
Big Banks Are Hazardous to U.S. Financial Health http://t.co/8CxiiLqb Implicit promise of US rescue allows large banks to finance cheap $$ Sep 03, 2012
Fighting financial complexity with simple rules? http://t.co/nU1ypbgK Limit leverage, interconnectedness, analyze risk-based liquidity $$ Sep 03, 2012
Ranking the Largest U.S. Banks: M&T No. 17 With a Bullet http://t.co/dBLM8EBY Look at how large the top 4 r relative to everyone else $$ Sep 03, 2012
Index points to new dawn for US housing http://t.co/c04HLluw There is a lot of dark supply to clear, but bottom has passed on low end $$ Sep 03, 2012
Melbourne Hasn?t Seen Worst of Housing Drop as Glut Builds http://t.co/wJRlFbeR I’m sure glut is temporary, “Contained” & banks r fine 😉 Sep 01, 2012

Energy

Shale Boom Cuts Gulf Oil Premium to 24-Year Low http://t.co/O738xxOI Whouda thunk oil production would increase in the US? $$ Sep 07, 2012
“Green energy ‘is a big area of unfulfilled promise,'” aka “crazy inefficient dreaming.” Send them to study physics $$ http://t.co/VAsgEdVz Sep 04, 2012
RE: Natural gas prices have fallen; that is most of the new energy produced. Little oil so gasoline prices stay high. http://t.co/XCZBTmSR Sep 03, 2012

Other

Stanford researchers’ cooling glove ‘better than steroids’ & helps solve physiological mystery, too http://t.co/D5CqAU9x Muscles overheat $$ Sep 07, 2012
FBI vs. Google: The Legal Fight to Unlock Phones http://t.co/i2VbdISV Interesting that $GOOG resists requests 4 smartphone passwords $$ Sep 07, 2012
Malware attacks on the rise http://t.co/fzKcSqe8 Now coming to a handheld device near you. Try to decide on a ransom strategy early $$ Sep 04, 2012
Awkward Belly Dance for Groupon http://t.co/sCxGrpKo As if $GRPN doesn’t have enough troubles, two large founders back a competitor $$ Sep 04, 2012
China, Germany plan to settle more trade in yuan, euros http://t.co/DFtNGvxi Settling $$ doesn’t matter, where proceeds r invested matters Sep 03, 2012
The Federal Reserve: From Central Bank to Central Planner http://t.co/YQxbQLq2 The more tasks we give to the Fed, the worse they do $$ Sep 03, 2012
You Can’t Trust Airport Security http://t.co/TWGMUwP1 Security systems must balance risks of false positives vs missing positives $$ Sep 03, 2012

BloombergView Hypocrisy

You Pick: a Strong Recovery or an Accountable Fed? http://t.co/VhxdKBH1 The Fed could b genuinely transparent & the economy prosperous $$ Sep 05, 2012
Republicans Must Choose: Less Debt or More Jobs? http://t.co/qkV2TPAU The 2r not related. Proceeds of debt do not lead2 hiring necessarily Sep 05, 2012
@bloombergview , master of the false dichotomy headline: Republicans Must Choose: Less Debt or More Jobs? http://t.co/qkV2TPAU $$ Sep 05, 2012
@bloombergview , master of the false dichotomy headline: “You Pick: a Strong Recovery or an Accountable Fed?” http://t.co/VhxdKBH1 Sep 05, 2012

Retirement

Big Firms a Drag on Pension Funds http://t.co/Q1hchNbH Returns at larger private equity funds have lagged their smaller brethren $$ Sep 07, 2012
Retirement security is a big problem — especially for the young http://t.co/DxTcvg4O The developed world lives in a fantasy re: retirement Sep 05, 2012
San Jose Cops Rush Disability Retirement Bids as Rules Tighten http://t.co/jSKWSiaQ & I’ll bet the actuary never priced 100% disability $$ Sep 05, 2012

Follow

#FF @cabaum1 @HousingWire @journalistjosh @LizRappaport @CardiffGarcia @simonconstable @agnestcrane @WSJTheSource @maoxian @jsphctrl $$ Sep 07, 2012
#FF @footnoted @LSPollack @MattGoldstein26 @munilass @williamalden @JeffreyMatthews @PragCapitalist @neilbarofsky @MKTWBurton @petereavis $$ Sep 07, 2012
@lv_1 I’m doing 1 of these per day listing my favorite tweeps, some of which are lesser known; last group is mostly economics Sep 06, 2012
It’s not Friday, but please follow: @GonzaloLiraSPG @rajivatbarnard @John_Hempton @SoberLook @groditi @unstructuredfin @historysquared $$ Sep 06, 2012
It’s not Friday but please follow: @finemrespice @prchovanec @vshih2 @BoydRoddy @dpinsen @niubi @manualofideas @wesbury @merrillmatter $$ Sep 03, 2012

Retweets

A permanent problem in a dynamic language $$ RT @BloombergView: These are sad times for grammatical purists | http://t.co/Se0XfLCD Sep 07, 2012
RT @DennisDMZ: Obama thanked Biden for being “the best VP I could have hoped for.” Proof that America really has become the land of dimi … Sep 07, 2012
Their headlines mislead more than most RT @LaurenLaCapra: This Bloomberg headline is not only weird, but questionable. http://t.co/0CKK9ATE Sep 05, 2012
Worth a read $$ RT @TheStalwart: This strikes me as an interesting contribution to the profit margins debate. http://t.co/Bt5S9ZrF Sep 05, 2012
RT @PlanMaestro: Very good takedown of Taibbi’s Bain Capital piece. There is a story in there just not this one http://t.co/he0VaYo4 @da … Sep 05, 2012
Oops $$ RT @SecurityTube: [News] BitCoin Exchange Loses $250,0000 [sic] After Unencrypted Keys Stolen http://t.co/Yt2l7bp3 Sep 05, 2012
How many divisions does Draghi have? MT @TheStalwart: The Most Powerful Man In The World Is Going To Speak Tomorrow. So Is Barack Obama $$ Sep 05, 2012
Also worth a look $$ RT @_TPR: One of my favorite tables: Shadow Banking Depositors. The plumbing. http://t.co/i6UVAJan Sep 05, 2012
Worth a look $$ RT @_TPR: Another: Credit-Maturity Transformation Spectrum http://t.co/F98xEbgP Sep 05, 2012
RT @NickTimiraos: CoreLogic index shows that home prices are now 1.3% above Jan 2009 level. Down 0.7% from June 2010 (tax credit induced … Sep 04, 2012
RT @TheStalwart: RT @conorsen: @TheStalwart @diana_olick You should probably have

an auto-RT app for Diana’s stuff. Sep 04, 2012

RT @ReformedBroker: As the politicians descend on Charlotte, Carolinians come face to face with more pork than they’ve ever pulled. #DNC2012 Sep 04, 2012
Good one, made me smile. $$ RT @pdacosta: This euro crisis thing is really Draghing out. Sep 03, 2012
My but Congress was farsighted to recognize a banking benchmark & celebrate! $$ RT @ReformedBroker: HAPPY LIBOR DAY EVERYONE!!!!!!!!!!!!! Sep 03, 2012
RT @mbusigin: You know what’s going to happen? People going to pile into Risk Parity strategies just in time for yield volatility modera … Sep 01, 2012
RT @simonconstable: ?@Mctaguej: Connaughton is a loyal Democrat–but he pulls no punches in his expose of Obama’s failure to pursue Wall … Sep 01, 2012
RT @Convertbond: Thought we had an aging population Ben Bernanke? How many jobs have been lost because 150 mln baby boomers are earning … Sep 01, 2012

Comments

@BradErvin1 Fair point; we have skills mismatch here as well, & income differences among regions; not as pronounced though, adjusts better Sep 08, 2012
@crampell My son thanks you for that article. He runs and the trainers ice him down after practice; going to show it to his coach Sep 07, 2012
@ToshibaEric Thanks 4 replying. Talked to 10 people @ Toshiba before I got someone to send me a free mailing box for repairs ~ 2 hours $$ Sep 07, 2012
@toshiba also aggravating sitting on hold, getting dropped three times, and representatives hiding behind the legalese Sep 07, 2012
@toshiba Really aggravating dealing with your phone support for a new computer that fails on day one, and you do not offer replacement $$ Sep 07, 2012
‘ @Fullcarry It’s kind of like the “pop” that happens when a distressed credit does an equity offering in order to survive. $$ Sep 07, 2012
@niubi Perhaps because that would be blocked. China does not want people 2know how much diverse information 2which they do not have access Sep 07, 2012
@credittrader The cash he receives will be used to collateralize an account invested in stock index futures $$ 😉 #nevercashonsidelines Sep 05, 2012
@moorehn Could we pass a law that all politicians have to write their own speeches, so that they say is more likely what they really think? Sep 05, 2012
@_TPR Okay, so I have missed something. I trust Bermuda; I do not trust Ireland as a regulator. Who has moved? $$ Sep 05, 2012
@finemrespice Some technological breakthroughs e.g. http://t.co/F4jeyerr, but no 1 mentions costs. Technical efficiency <> Econ progress $$ Sep 04, 2012
I just left a comment in “How Pimco?s Gross beats the average bond fund – Mutual Understanding – MarketWatch” http://t.co/Nfq2s7Un Sep 04, 2012
We need a new misery index that includes the future pain of present borrowing. At least Carter kept… http://t.co/honmBXQ5 Sep 04, 2012
2, 4, and 6 are not myths. The others are. There are limits to what the government can do. They must tax or… http://t.co/JPa4IGqW Sep 04, 2012
Alas, modern worship, odious to God. Bring back a cappella singing of Psalms, like the ancient church.? Also, giving ? http://t.co/OBAwBJnx Sep 04, 2012
It is rational for lower-level German politicians to say Greece must leave the Euro. It is what an average German be? http://t.co/6UUYd6e9 Sep 04, 2012

Book Review: The Crisis of Crowding

Posted on 28 August 2012 by David Merkel

I am going to say something that I rarely say: I am grateful that this book was written.? Why am I grateful?

It highlights the idea that people, even really bright people, do not behave rationally, but imitatively — they follow recent price action — they mimic.
It validates the concept of a “crowded trade,” one that offered high returns in the past, may presently offer low returns to a “buy and hold” investor, but will deliver negative returns in the near future, because the holders of the trade are relying on the trade to deliver positive returns in the short run, and will bail if it doesn’t happen.
It points up the nonlinearity of markets, and invalidates the efficient markets hypothesis; it validates the concept of the boom-bust cycle both in micro and macro.
It teaches us to not take on too much debt, even if we are really, really smart.? We aren’t as smart as we think we are.
In short, it sums up a lot of my philosophy at The Aleph Blog.? Real risk control thinks long term, and considers what will happen if liquidity dries up.? Real risk control knows that large positions in any asset relative to the market must be regarded to be “Buy-and-hold” regardless of what your trading intentions are.? False risk control assumes that markets always function, and that your relative size versus the market does not matter.

The author of the book has led a storied life.? He was a quantitative analyst hired to work in risk control for Long Term Capital Management [LTCM] near its inception, and continued with them through the failure.? After that, he worked for Rydex, built FOLIOfn, and worked for the Bank of International Settlements, and Schroders.? He now works as a professor of finance at the University of San Francisco, after having gotten a PhD from MIT.? He knows the markets both practically and experientially, like me, though he is better than me.

LTCM is a great example of what happens when some really smart guys find clever ways to make money in the markets, and then overplay them.? The trade that has a buy-and-hold yield of 10% is genius.? When it is 8% it is bright.? At 6% it is average, why are you playing?? At 4% it is dopey.? But what happens when your trade gets big relative to the market?? The rules change, much like JP Morgan recently.? When you are big enough that you are moving the market as a normal practice, that indicates danger.? You have become the market, and are distorting it.? It will eventually come back to bite you, as JP Morgan recently learned.

The failure of LTCM may have been the template, but the author goes on to explain other disequilibrium situations such as:

The quantitative equity panic of August 2007
The failure of Bear Stearns.
The failures of Fannie and Freddie (free money brings out the worst in all of us)
The failure of Lehman Brothers.
The failure of the banking system both in the US & Europe
The failure of LTCM progeny in 2008 (no, we don’t learn)
The Flash Crash
The failure of the Eurozone, so far. (It is performance art.? How can we create the biggest failure ever?? We will eclipse the Great Depression! Oui! Ya!)

I’ve written about most of these, and I can tell you the author does a good good job.? Aside from that, he took time to interview primary sources as to their own view of the events that happened, particularly at LTCM and its progeny, and it adds to what we know about the crises that he wrote about.

People need to understand that crises are a normal aspect of markets.? Until you understand that crises are normal, you will always take too much risk.

This is an excellent book; buy it and avoid losses.

Quibbles

In the beginning he got the name of Cramer’s firm wrong.

I would have eliminated the appendices if I were the editor, the audience that can benefit from the math is too narrow to be worth printing it in the book.? Better you should put a PDF out on the web, and put out a slimmer book.

Who would benefit from this book: If you want to understand why crises happen, buy this book.? It is well-written but requires some degree of market knowledge for the reader to benefit.? It is not for beginners.?? If you want to, you can buy it here: The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal (Bloomberg).

Full disclosure: The PR flack asked me if I would like the book and I assented.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

Book Review: Bailout

Posted on 25 August 201225 August 2012 by David Merkel

What does Washington, DC care about more — people or corporations?? Do you have to ask? DC favors corporations, and all three branches of the government support this.? Both parties favor this.? Why is this so?

The corporations, and those that own them are a more effective means of raising funds to maintain their hold on the offices that the occupy.? Beyond that, there is an attitude that economic policy needs to be carried out through laws that address corporations.

So whether you come from the t-party, Occupy, or someplace else, you might harbor resentment against the status quo: big government in league with big corporations, and wealthy people.

I wish it weren’t so, but the Constitution takes a back seat to “pragmatic” concerns, especially when a “crisis” happens. It should not be that way, but that’s the way it is.

So, what if you drop an idealistic guy, the author, Neil Barofsky, into the job of watchdog for the TARP?? [SIGTARP: Special Inspector General of the Troubled Asset Relief Program] He objects to the uncontrolled nature of how money is being handed out to banks, with few checks as to how the money will be used.

Now, the author could have made a stronger argument.? The FDIC, where does it pump in cash to failed institutions? They protect depositors — that’s the lowest level of the capital structure.? But where did the TARP add capital?? At the highest level of the capital structure; they bought stock and warrants.

Constitutionally, the government has no authority to own corporations.? Further, even if the government had that authority, if it was trying to preserve the soundness of the banking system, the proper way to do it would be to make senior secured loans.? That would guarantee the banking system, but let the common and preferred stockholders, and bondholders go broke before the taxpayer coughs up the first dime.

As it was, the author found himself adrift in DC, cleverly fighting to bring some rules to what was a giveaway to the banks, many of which did not need the bailout, and certainly did not want the limits on executive pay.? He found that DC was a place where the bureaucratic government fights itself.? No one wants to look lazy or foolish, so when someone alleges a crime against a party that another branch of the bureaucracy is supposedly investigating, they fight back.? Applying the principles of Peter Drucker, our government could be smaller, and more effective — there would be fewer turf wars.

Were the Bailouts Wrong?? Did they Fail??

The author makes the case that the bailout has failed. When he says that he is not saying that the bailout as a whole lost money. (I would note that the bailouts have lost money on the home if you include Fannie and Freddie, the auto companies, along with all of the financial institutions including AIG.) He is saying that the problem of too big to fail banks has not only not been solved, is actually gotten worse since the crisis. The big five banks now have around 50% of the deposit base in US. “Too big to fail” is a problem unsolved that still threatens our financial system. This problem is solvable; the US government broke up AT&T (then allowed it to recombine again). Interstate branching could be limited, or ended.

The second problem with bailout is that engenders moral hazard. Because you have done it once, it would be expected next time, which when the financial system once again enters a bull cycle, the bankers will know that the federal government has its back and will not be inclined to limit risk to the same degree that they otherwise might.

The third problem with the bailout is that it was uneven. A logical question for any person harmed by the crisis is, “Where’s my bailout?” Even if bailing out the banks in order to preserve financial systemic integrity was needed, there were other ways to do it, such as being lender of last resort at a penalty rate, or giving vouchers good to reduce debts to every household in America. Particularly that last option would have been viewed as fair by the American people. That could have saved some of the pain felt by those with mortgages, and help the creditworthiness of loans at the banks. Instead, the Obama administration created programs like HAMP, which did little good for most, and actually harmed some.

The fourth problem with bailout and monetary policy that accompanied it was that it was a large transfer of wealth savers to banks. It doesn’t do much for the economy, if the banks have zero cost on their deposits, and all they do is invest in ultrasafe securities, clipping a small, but safe profit.

What was it Like to be There?

More often than not, the Treasury Department did not want to have the Special Inspector General interfering with their plans.? There was a lot of stonewalling, and nondisclosure of pertinent data.? It got fairly contentious at times, and often required members of Congress to intervene on behalf of SIGTARP.? The relationship probably got worse over time, because those working at SIGTARP knew that they would have no influence, no changes would be made, unless they convinced the media that something was wrong, and thus prodded Congress to push for change at Treasury.? The worst that that could happen would be that the President would fire the Special Inspector General, and appoint a new one.

Another part of challenge was realizing the need to build a talented team of lawyers, analysts, PR professionals, etc., to do the work analyzing how TARP funds were being spent, and write reports that would grab attention, and change the terms of the political debate.

That challenge was made more difficult by a lack of adequate facilities.? The initial staff was relegated to some pretty poor accommodations at the Treasury building.? I met with the SIGTARP staff over the AIG bailout in June of 2010 over a paper that I wrote that exposed aspects of the weakness at the domestic insurance subsidiaries.? (For Amazon readers, there is a link to my report at my blog.)? The accommodations that they had were some of the poorest I ran into in DC.

I know from personal experience that the US Treasury was sensitive to any criticism of the TARP.? At the first blogger summit at the Treasury, the officials were prickly over any questioning on the topic.? It did not help that GMAC got another dollop of cash that morning.? (links here, and here)

There were some ugly controversies.? One of the SIGTARP reports noted that if every potential program had been fully tapped the US would have expended $23.7 Trillion.? The report caveated that figure heavily, but it was seized upon by Republicans for partisan advantage.? They took a lot of flak for totaling figures that were in some sense apples and oranges.

On page 190, the question from Democrat Stephen Lynch to Tim Geithner, ?Why didn?t he try harder to cut a better bargain for the American people?? was never answered by Geithner.? Truth, Treasury was making it up as they went, with counsel from money managers and banks, which left the US Treasury vulnerable to those more technically proficient at finance who had at least some degree of conflicts of interest.

One more limitation of SIGTARP, they had no ability to bring cases ? they had to convince the Department of Justice or another prosecutor to take action.? That brought another level of negotiation and bureaucratic infighting.

The end came for the author after he realized that the TARP was winding down, and he was tiring of the Washington scene, and the corrosive effect it was having on his own character.

That leaves me with one closing question: What good did the author and his team do?? In one sense, not a lot.? The current financial regulatory environment post-Dodd-Frank continues business as usual with a more complex bureaucracy, with likely more infighting between competing regulators.? My view is when many are responsible, no one is responsible? that is certainly not the fault of SIGTARP, but we are probably in a worse regulatory environment than prior to the crisis.

That said, SIGTARP gathered data on the TARP, which led to a decent number of small and medium-sized fraud cases, and constrained the open-handed nature of the US Treasury toward financial companies, which could have result in a lot more fraud, and/or higher costs to the taxpayer.

Quibbles

Small mistake on page 173, where the author mentions PNC acquiring City National Bank instead of National City Bank.

The book reads a little disjointedly.? It is mostly chronological, but topical by chapter, so sometimes it feels like two steps forward, one step back as far as the time flow goes.

Who would benefit from this book:??This book will benefit anyone who wants a first person account of what it was like to be the Special Inspector General of the TARP.? It is also for those who want to see how dysfunctional politics can be in DC, and how resistant the Treasury Department was to any limits on their autonomy.? Finally, it shows how difficult it is for anyone to change the system in DC.? The author survived in DC for 2+ years as a change agent; that?s difficult enough, but he is gone now, though SIGTARP soldiers on.?? If you want to, you can buy it here: Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street.

Full disclosure:?I asked the author to send me data on his PR flack, who I asked to send the book to me.

What Caused the Crisis?

Posted on 22 August 2012 by David Merkel

I have wanted to write this article for some time, but decided to sit on it in order to consider the matter more closely. What caused the financial crisis of 2008?

In my writings at RealMoney, I anticipated much of the crisis, though not all of it, and certainly not the severity of it. The prime cause of the financial crisis was a buildup of private debt encouraged by the tax code and the Federal Reserve. But let me go through the causes of the financial crisis one by one:

Causes

One) During the Greenspan era, recessions were not allowed to do their job of reducing bad debts. Recessions ended early, and expansions went on too long. This encouraged firms and individuals to borrow too much, and foolishly went under the moniker of the “Great Moderation.”? Monetary policy was too loose 1986-2005.

Two) China wanted to build its industries through exporting. To do that they had to keep their currency cheap. To keep their currency cheap, they had to buy financial claims from the US, so they bought our bonds. This kept our interest rates low, and allowed people to buy houses with low monthly payments, putting them into a larger house than they could afford, should the economy turn down.

Three) Partly because of monetary policy, a risk culture developed for economic actors took more and more risk because they thought that the Fed would rescue them in a crisis. During that era, I saw all manner of unorthodox ways that took a lot of risk to earn excess returns. Examples: leveraged non-prime commercial paper, selling short term at the money volatility, and taking exotic bets on the long side with subprime residential mortgage-backed securities, to name a few.

Four) This probably generates the most controversy, but the crisis was partially driven by total return or yield hogs. Having been a bond manager, I learned that the easiest error to fall into is to always add yield. In the short run, adding yield boosts your performance. The time before the crisis offered many opportunities for bond managers to add yield in structured securities that were rated AAA. Many economic players, especially European banks did so. These yield hogs were the enablers of the investment banks who structured some really crummy deals. Without the yield hogs, those deals could never have been done.

What’s that you say? The yield hogs were duped? I say no. Excluding AIG, most US-based insurance companies avoided those yield hogs securities. Conservative investing kept the insurance industry away from the areas that were going to get killed. If you are an institutional investor, it is incumbent on you to do the due diligence necessary, and not simply trust what the rating agencies say, nor what the underwriters say.

Five) Lenders lent too much against residential real estate. Borrowers borrowed too much. The two go together. Lending terms became too loose as far as underwriting goes. At the same time, loans were made to subprime borrowers who could only afford the “teaser rate,” and not the ultimate rate they would pay.

If you look at graphs that show the amount of equity underlying homes with mortgages, it should have been obvious by 2004 that we were in a bubble. We had never seen this level of indebtedness on housing Italy since the Great Depression or maybe the Panic of 1871.

Six) The GSEs helped facilitate this growth in debt. They charged a low amount to guarantee residential mortgage debt. They did not think it was low, but like the actuary of legend, they were driving looking through the rear view mirror. Past is prologue, and they decided that the future would be like the past, only more so.

Someone with real modeling capability would have developed a dynamic model that would’ve looked at debt service coverage under a variety of real estate pricing scenarios. When I was mortgage bond manager I did that for CMBS, from 1998 through 2001.

The GSEs were under-reserved if housing prices started to fall. We knew that at the hedge fund that I worked for, and waited for housing prices to fall.

Seven) Because banks originated mortgages in order to securitize them, underwriting quality went down. When you originate a loan to hold it, you are far more careful about credit quality.

Eight) Banking regulators were unwilling to regulate. Further, we allowed depository institutions to choose their regulator. Regulators had enough power to shut down sloppy underwriting if they had wanted to. The new laws that have been put into place are superfluous. If regulators will not use the powers granted to them, how will granting them greater powers make them do their job?

Allowing depository institutions to choose their regulator enabled them to choose weak regulators. What could be dumber policy? Far better that a depository institution is assigned a regulator by the government.

Nine) Though deposit insurance avoids runs on the bank, the repo market allowed for new sort of run on bank. By financing securities short term through the repo market, those financing securities left themselves open to the risk that lending terms change against them. As the crisis progressed, those financing in the repo market were forced to put up more capital against their positions, until they ran out of capital, and defaulted. The same was true for portfolio margining requirements. As financial companies were downgraded by the rating agencies, it created a “cliff” for the financial companies, which made their decline more precipitous.? As more capital was needed for margin requirements, less free capital was available, leading to further ratings downgrades, and eventual insolvency.

Ten) In general, capital regulations for banks were too loose. Banks probably needed to have twice the level of capital going into the crisis than they did. Also, rather than trusting banks? internal models of risk for regulatory purposes, it would have been better to have a series of dumb rules that would limit the ability of banks to deal in areas where risk exposures are unclear.

Eleven) Derivatives are regulated wrong. They should be regulated like insurance. They should be regulated by the states. The doctrine of insurable interest should be enforced. In short, those who need to hedge may initiate trades; speculators may not initiate trades.

If rules like this had been in place, the derivative market would never have gotten so big, and only economically necessary trades would’ve been done.

Twelve) We need to move investment banks back to what they used to be: partnerships. That will reduce the amount of risk they take, as senior partners see their retirements in jeopardy if too much risk is taken. The same is true of commercial banks, where the doctrine of double liability should be reinstituted, and managers of banks could lose their personal wealth if the bank takes significant losses.

Thirteen) If we want to end ?too big to fail,? we need to end interstate branching of banks. Make it uneconomic for banks to be big. And, let the states regulate banks. State regulation is good regulation. It is far harder to co-opt 50 state regulators than a single federal regulator, much less several federal regulators that the banks can choose.

Let me put it this way, echoing Francois Mitterand on Germany: ?Don?t get me wrong, I like Bank of America.? In fact, I like Bank of America so much; I think there should be 50 of them, one for each state.?? That will end ?too big to fail.?

This is a bigger factor in the crisis than the repeal of Glass-Steagall, which was a small factor in the crisis.? But if you make the commercial banks smaller, they will not be able to have large investment banks attached to them.

Fourteen) Securitization, aside from warping loan origination incentives, created opaque assets that were difficult to rate and price.? This hindered the recognition of losses as conditions deteriorated, and led to securities that were either ?money good? or a ?zonk? in the midst of the crisis, with a thin tipping point in-between.

Fifteen) The crisis would have happened regardless of what the government would have done with Lehman.? Note that all of the major institutions that were bailed out, bought out, or failed had large exposures to residential mortgages: Bear, Fannie, Freddie, AIG, Merrill, Washington Mutual, Wachovia and Lehman.

What was not part of the Crisis

One) The rating agencies, much as they profited from it, were forced to rate structured finance, because the regulators needed the ratings to calculate capital charges.? They didn?t do well at it, because the rating agencies always do badly with a new asset class ? they don?t have any data to work with.? Don?t blame the rating agencies, blame the regulators that allow their firms to invest in unseasoned securities.

Two) The net capital rule was not a part of the crisis, as I documented here.

Three) Money market funds were not a part of the crisis, as I documented here.

Attitudes

I have often said that ?free money brings out the worst in people.? (Please send the memo to Ben Bernanke, who creates free money.)? Everyone in the crisis points the finger at others, but not at themselves.

The sad truth is that the financial crisis resulted from people speculating on increases in housing prices, and commercial and investment banks that did the same thing, and ignored common sense, which sadly, is not common.

Book Review: Moods and Markets

Posted on 11 August 201213 August 2012 by David Merkel

To my readers: this is the second time I have written this review. When I pushed the “publish” button earlier this evening, WordPress ate the document. That’s never happened before, so I did not have a backup. As a result, this review is entirely different than the prior one, and I did it using DragonDictate, so it may sound a little more colloquial than other reviews of mine. Let me know what you think, and if you like my reviews please vote them up at Amazon. As always, whether you agree or not, thanks for being a reader of mine.

This book is about the questions every investor wants answers to:

Why do I tend to get into and out of the market at the wrong times?
Why are professionals prone to the exact same problems?
Why do financial crises happen?
Is there a way to approximately measure where we are in the overall market cycle?

The author has a theory that he calls “Horizon Preference.” Think of it this way: when the market is near bottom, market players have very short time horizons for investment. They hide in cash. More than that, they choose very generic investments; they stay close to home and keep things simple. Fear drives them back to what they know always works in the very short run, which means any opportunity for gain is lost.

At such a time, only the most risk tolerant and experienced remain holding risky assets. Valuations are low. The party is over, the young have left, and the old guys are cleaning up the room. If you look in a financial newspaper, or out on the web, the headlines you read are pervasively negative. But at a true bottom, you’ll see that things have stopped getting worse.

Then optimism begins. It’s a fitful at first. It is two steps forward and one step back, before it becomes three steps forward and one step back, before it becomes an unrelentingly good trend. But as this happens, moods, headlines, move from disbelief, to doubt, to wonder, to optimism, and to greed. As this happens, market players expand their horizons. They are willing to take on new risks, with new instruments, and in new places. They are willing to pay remarkably higher prices for risky assets. This happens with individual investors, professional investors, bankers make loans, regulators, accountants who have to make the numbers for management, etc.

At the top everything is wondrous. Nothing can go wrong. At the top, the attitude is “We are going to make a lot of money.??It?s as if money is free, and anyone can make it in the markets now. Everyone can be rich, just invest in the market. All of the neophytes are playing in the market. The experienced professionals who have seen a few market cycles have begun to edge out of the market, if not raise significant cash. Risk control is derided as a way of losing money. Real heavy hitters don’t need risk control.

All of the discretionary cash is applied to the markets. Various forms of leverage are applied to personal investments, real estate, and business investments. Because everyone knows things are going to go well, they figure they may as well play it to the hilt.

But at the top, things stop getting better. Then pessimism begins.? It’s a fitful at first. It is two steps back and one step forward, before it becomes three steps back and one step forward, before it becomes an unrelentingly bad trend.? Sadly, during the phase of pessimism, things move down about twice as fast as they went up. It’s frightening, and it should be. Bear markets tend to persist until the bad ideas and investments of the up cycle are liquidated, unless the government steps in to arrest the fall.

The planning horizons of businessmen and investors shrink, as do valuations, until we hit the bottom, and the cycle starts again.

What I have described to you is the basic framework of the book. The author then applies that framework to the housing bubble, the possible higher education bubble, changes to accounting frameworks as rising preferences change, and where we are today in the markets. He gives a tour of the various phenomena inside corporations that take place at different points in the cycle. Optimism breeds complexity, lack of risk management, concept stocks, big projects, and a lot of credit. Pessimism breeds simplicity, renewed risk management, and bankruptcies.

This book will give you a feel for what part of the market cycle we’re in, and how you can profit from it. It is not math intensive; the book has no equations. There are a lot of graphs, but they are simple to understand.

Quibbles

In one sense, this book is about the credit cycle, and how it affects all risky assets. But it is couched in the language of how moods change of market participants, which then drives the market. My view of the matter is slightly different. I see market players making estimates of their future well-being, and as that estimate changes, so do their moods change, and the prices of risky assets. I don’t think this is a big difference from what the author is saying, so I heartily endorse this book.

Who would benefit from this book:?? Inexperienced investors would definitely benefit from this book. Experienced investors who are having a hard time with the unpredictability of the market of late would also benefit.? If you want to, you can buy it here: Moods and Markets: A New Way to Invest in Good Times and in Bad (Minyanville Media).

Full disclosure:?I got this book in a weird way. I don’t know the author, but we have a mutual friend, and he suggested to the publisher that he send me a copy of the book. That’s how I got it.

Sorted Weekly Tweets

Posted on 10 August 2012 by David Merkel

Life Insurance Secondary Guarantees

Hartford Mulls Client Buyouts to Cut Risk Buffett Called Ungodly http://t.co/Nv4jRlUC Advice: don’t take the Variable Annuity buyouts $$ Aug 10, 2012
The original: Buffett Says Insurers Took ‘Ungodly Amount of Risk’ http://t.co/pXfXv8ME Warren Buffett again is prescient cc: @PlanMaestro $$ Aug 10, 2012
@PlanMaestro Thanks4 flagging this. Together w/companies scaling back gtees 4 new prods, the buyout offers show the probs in the life biz $$ Aug 10, 2012
@PlanMaestro I am not in favor of peer review. Actuaries call themselves a “profession,” but they really technicians. Aug 09, 2012
@PlanMaestro Regulators not crazy for this, because they can’t understand it, & almost makes the companies self-regulating. Peer Review? $$ Aug 09, 2012
@PlanMaestro But actuaries are trying to get regulators to cmove to a Canadian-style principle based approach. In Actuaries we Trust! $$ + Aug 09, 2012
@PlanMaestro But the devil is in the details, and GAAP reserving does not always reflect antiselection. Stat tries to do that, but + $$ Aug 09, 2012
@PlanMaestro But you’re right, the 10Ks do contain approximate partial sensitivity data on economic value for most important variables $$ Aug 09, 2012
@PlanMaestro In 1999, I saw a VA that guaranteed 7% minimum return if held till death or annuitization $$ Aug 09, 2012
@PlanMaestro I said “Wow, how do you guarantee the better of 5%/yr and performance of the underlying 4 just 2.25%?” $$ Aug 09, 2012
@PlanMaestro I have a friend who is a $PRU agent. One day he showed me his hottest-selling VA product, and ask me how I liked it. $$ + Aug 09, 2012
@PlanMaestro Acctg can get really screwy if you hedge NPV or FMV; gets really noisy because the results pile up in the current year $$ Aug 09, 2012
@PlanMaestro hedging long-dated options, w/complex contingencies built into them. Do you hedge next few years, or NPV sensitivity? $$ + Aug 09, 2012
@PlanMaestro I was an ALM actuary for many years, typically we hedged partial durations; fixed income hedging is easy, what’s hard is $$ + Aug 09, 2012
@PlanMaestro many exposures are impossible to hedge b/c the contracts r long-term, and hedge instruments r usually far shorter $$ Aug 09, 2012
@PlanMaestro That’s one of my concerns about the life industry; secondary guarantees r virtually impossible to reserve, getting big now $$ Aug 09, 2012

Insurance Industry

@ReformedBroker Good post, same thing happens with young life insurance agents to a degree http://t.co/LbMyo48G $$ Aug 10, 2012
@Bonfire_Sherman P&C – P/TB vs ROTE, adjusted 4 business mix, reserve life & conservatism, mgmt quality, U/W cycle, never premiums $$ Aug 09, 2012
@Bonfire_Sherman Most of it is change in required capital. Life actuaries typically calculate “distibutable earnings” reflting stat & RBC $$ Aug 09, 2012
Anytime anyone talks about Financial Cos & tells u about Free Cash Flow, ask how they did the calc. C if they mention chg in req capital $$ Aug 09, 2012
Wrong: 3 Life Insurance Stocks Undervalued By Levered Free Cash Flows http://t.co/gF5HYRZb GAAP financials don’t have data4 FCF calcs $$ Aug 09, 2012
Aviva profits fall as it cuts the value of its US unit http://t.co/t816IjAZ Amerus IR was annoyed @ me 4saying the orignal deal expensive $$ Aug 09, 2012
@PlanMaestro HIG is next on my list Aug 09, 2012
@PlanMaestro Thanks, I know where to get them, but I have enough GNW on my plate for now, I took me two weeks to write my AIG piece. $$ Aug 09, 2012
@PlanMaestro Have not looked at HIG, after I am done with GNW may take a look. If u r looking at stat acctg, look @ pg 5 indiv annuities $$ Aug 09, 2012
@PlanMaestro That’s the thing, like AIG prior to the crisis, and Scottish Re, they are capital constrained; things have 2go right 4 them $$ Aug 09, 2012
@PlanMaestro & not so sure about the rest if investing for more than five years. $$ Aug 09, 2012
@PlanMaestro Aye, agreed. Oddly, my interest stemmed from a reader who asked me if I would invest in GNW bonds. Yes 4 GIC-MTNs + Aug 09, 2012
@PlanMaestro I’m going to write a broad piece about it, but follow it up, with a narrow piece focusing on the specific problems. $$ Aug 09, 2012
@PlanMaestro Intercompany surplus notes and preferred stock too. Aug 09, 2012
@PlanMaestro There’s a ton. Underreserving, capital stacking, capital interlacing, intercompany reinsurance, & I’ve ony been looking 2 hours Aug 09, 2012
@Bonfire_Sherman Good guess, I need to look at the life co stmts someday, esp. page 5 for Indiv annuities Aug 09, 2012
Ding! We have a winner! RT @RennieScinto: @AlephBlog gnw? Aug 09, 2012
I’m a fun guy, looking @ statutory statements of a major US insurer, though AIG in 2008 looked worse, this company doesn’t look good $$ Who? Aug 09, 2012
Online Dating for Homes Stumps Insurers http://t.co/R2fmztPa Y not have both deposit $$ w/the insurer plus a premium payment? #wouldwork Aug 08, 2012
Regulators Probe ‘Captives’ http://t.co/xbXQ5aYO How to bend life insurance reserves. Catch my comment: http://t.co/9WQWYZ3W $$ Aug 06, 2012
Berkshire Trims Municipal-Debt Bet http://t.co/9zhhbdtD Meredith Whitney, no. Buffett, yes. But even he is only selectively reducing $$ Aug 05, 2012

Poway School District

Article near issuance of Poway School District CAB http://t.co/kxAWCNxT Letter from CA AG: http://t.co/UiZM0j3K cc: @munilass @jamessaft $$ Aug 06, 2012
@jamessaft I’m not a muni expert like @munilass, but no, I would try to find another way to refinance prior debts. $$ Aug 06, 2012
Ideal buyer4the preceding bond would b Buffett, or a P&C company w/long-tail liabilities. Prospectus 4 wonks only http://t.co/nIKJvJje $$ Aug 06, 2012
Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools http://t.co/IPaABoXY Paying 7.6% IRR at a duration of 25. Astounding! $$ Aug 06, 2012
@munilass Also, I found the prospectus here: http://t.co/nIKJvJje Last Q: Do county tax levies into a sinking fund ever fail to work? $$ Aug 06, 2012
@munilass I get the holder taxes now. Poway was structured as a series of zero coupon notes, followed by 2 series of long lottery bonds $$ Aug 06, 2012
@munilass Used to be an asset-liability manager, so I look for that. 1 question: do you know how holders are taxed on a deal like that? Aug 06, 2012
@munilass This is just a crude estimate, but the IRR on the Poway deal is around 7.7%, and is nonrefinancable. Duration estimate 25 years $$ Aug 06, 2012

Rest of the World

China Export Growth Slides as World Recovery Slows http://t.co/u4YEUPQB China sneezes & the world catches a cold? no, important anyway $$ Aug 10, 2012
India?s Biggest Corporate Loss Shows Singh?s Dilemma on Deficit http://t.co/6xl7lsZD Force oil company to lose $$, eventually lose oil co. Aug 10, 2012
Housewives With Frying Pans Protest Japan Tax Hike as Debt Soars http://t.co/z3aeqjEv Taxes to double; can’t keep borrowing 4ever $$ Aug 10, 2012
Virus found in Mideast can spy on finance transactions http://t.co/V2GgyjpV Can spy on financial transactions, email & social networking $$ Aug 09, 2012
Toronto Condo ?Roller Coaster? Peaks as Flaherty Acts http://t.co/c6sJ0CqE Is Canadian housing a basketball (sss) or a bubble (pop)? $$ Aug 08, 2012
Iran?s Big Crisis: The Price of Chicken http://t.co/WXlUIIdL Describes some the economic difficulties of Iran under sanctions $$ Aug 08, 2012
Article makes a good point. The industries where China has overcapacity are power-intensive & are shrinking. Simple. http://t.co/IzyV0Bxe Aug 08, 2012
China’s answer to subprime bets: the “Golden Elephant” http://t.co/MP7LviwT Illiquid investments touting high returns w/lousy business $$ Aug 07, 2012
RE: Things are getting less equal in the US, because we allow more freedom here.? Globally, things are getting more e? http://t.co/WeGEEJF9 Aug 07, 2012
Presidential candidate up by 15%+ in August will win. If merely ahead, 9 times out of 12 he will win the Presidency http://t.co/soCj7Kf9 Aug 08, 2012
Swiss Banks Face Slow Death as Taxman Chases Assets http://t.co/13I9NkiQ Life’s tough when u can no longer help people cheat the taxman $$ Aug 06, 2012
Germany has the most to lose from a meltdown http://t.co/9JTwRfii Basically encourages an inflationary “solution.” Prob won’t work $$ Aug 06, 2012
If policymakers are worried about this, they are worried about the wrong thing. EU does not have that big… http://t.co/eCBlZg5I Aug 06, 2012
Summary: greater structural unity, mutualization of sovereign debts and a weak euro $$ Tough order for the… http://t.co/KN9pc0Pt Aug 06, 2012
Rogoff Sees World Wishing It?s America Year After S&P Downgrade http://t.co/MpStm7ww Relative flexibility pays off $$ Aug 06, 2012

Fixed Income

Lending in the offshore markets developed because of bad regulations here. It is outside US control & we should not m? http://t.co/C8y9rVFw Aug 10, 2012
In hunt for yield, hybrids flourish anew http://t.co/GCugG6A6 Credit rally revsup ppl grab yield in exchange 4 higher poss loss severity $$ Aug 09, 2012
Please, no $$ RT @CapitalCityIFR: In hunt for yield, hybrids flourish anew http://t.co/ZWbdRRl5 Aug 09, 2012
For a bad 30-yr Tsy auction, nice rally since then $$ Aug 09, 2012
A Greek banker, the Shah and the birth of Libor http://t.co/ibvVs9mE ht: @alea_ Started w/a loan 2 the Shah. Inauspicious start 4a big # $$ Aug 09, 2012
Definitely a weak auction, surprised long end not selling off $$ RT @ritholtz: 30 yr bond auction weak as well http://t.co/1gU89HMb $$ Aug 09, 2012
“Credit default swaps are easily manipulated. Rather, watch the bond market; it’s much bigger. $$” ? David_Merkel http://t.co/tESmTJsK Aug 09, 2012

Politics

The Neocon War Against Robert Zoellick http://t.co/vZreHf1n If Romney wins, pragmatic Zoellick could be influential on foreign policy $$ Aug 11, 2012
Christie Does Tenure http://t.co/J8krPlim Tenure is one of those sacred cows that hides the intellectually weak from consequences $$ Aug 10, 2012
In New York City, Microsoft Really Is Watching You http://t.co/trNOkU2d Interesting partnership w/NYC & $MSFT Civil liberties? $$ Aug 09, 2012
Postal Service $1 Million-an-Hour Loss Puts Abyss in View http://t.co/FVXMn5Di Raise stamp prices & costs 2 $FDX & $UPS $$ #simple Aug 09, 2012
Here’s The Real Reason The Feds Are Furious At The NY Regulator Going After Standard Chartered http://t.co/OmpwBILH Made Feds look dumb $$ Aug 08, 2012
RE: @bloombergview Dream, the Republicans will block this because it favors blue states over Red. $$ http://www.bloom? http://t.co/jT7EmSS0 Aug 08, 2012
I think it is a fair tradeoff to lose 2% of GDP in 2013 in order to get the economy growing. I agree with… http://t.co/mwuvnogX Aug 07, 2012
The Numbers Inside a Hot-Button Issue http://t.co/Fwois4YN Something to make everyone unhappy. Me: Don’t focus on rates, but deferral $$ Aug 07, 2012

Pensions & Endowments

State Pensions Get High Fees, Low Profits-Study http://t.co/3LRIL23c Add to that the lack of adequate funding &you have a serious crisis $$ Aug 10, 2012
Cornell, MIT Scale Back Aid Even as Endowments Rise http://t.co/WUoWDLLB Endowments provide less when rates r low, future cashflows smallr Aug 10, 2012
Defined contribution assets hit all-time high despite conservative shift http://t.co/7s9Stabd Amazing 2c bond alloc rising w/low rates $$ Aug 06, 2012
U can say that again $$ RT @e_d_sanders: @AlephBlog now this is an issue I know something about. Public pensions for execs are a nightmare Aug 05, 2012
Police Chief?s $204,000 Pension Shows How Cities Crashed http://t.co/ZorpuSjX Sloppy pension negotiating leads2 L-T cash flow crises. $$ Aug 05, 2012

Energy

Let the market decide.? If people want to pay a lot for gas, let them.? Why is Obama discouraging consumer spending? http://t.co/VT8xCyU0 Aug 10, 2012
Refiners Awash in Shale Oil Offer 10 Times Exxon Returns http://t.co/IIw9xXlb Buy cheap shale oil, ship to coasts, refine, sell & make $$ Aug 10, 2012
Louisiana sinkhole roils local natural gas network http://t.co/IkZxHLAs Now, who could have seen that coming? Risk is pervasive. $$ #sloorp Aug 09, 2012
Coal stocks typically have a lot of debt, beware $$ RT @MKTWBurton: Don?t mine this coal stock – Chuck Jaffe – http://t.co/nCQWfYzQ Aug 09, 2012

Other

Passed 10,000 tweets today. I quit Twitter after my first month, but came back to it after I saw its usefulness. Thanks 4 reading me $$ Aug 10, 2012
Heavy rain in Baltimore w/sleet and sunshine. Really weird weather. Sleet is neat, is hard to beat & will repeat, to make me tweet. $$ #ugh Aug 09, 2012
After Moods & Markets, Bailout is my next book to review. http://t.co/zkioUQ5N Aug 09, 2012
5 Questions Great Job Candidates Ask http://t.co/JpnpVWtu Questions show initiative, intelligence, & give u good jump pts 2 sell yrself $$ Aug 09, 2012
Novel Cure for Ailing Hearts http://t.co/RAiv4FYj Nanotech combines w/vascular endothelial growth factor to grow new heart muscle $$ Aug 09, 2012
Wrong: Business Is Booming in Empirical Economics http://t.co/aTNu4qfu U might get cute papers out of it, but nothing that generalizes $$ Aug 07, 2012

Companies

Yahoo Reviewing Business Strategy, Alibaba Proceeds; Shares Tumble http://t.co/ikk3dpeC Marissa Mayer has plans, & they require $$ Aug 09, 2012
Why Honda?s New Accord Looks Like the Old One http://t.co/6Ez8uL5i FD: + $HMC Designers tire of their designs long b4 users do $$ Aug 09, 2012
The WARN Act dilemma http://t.co/ilbxFsXD Defense, Fiscal cliff, DOL Guidance Letter saying ignore WARN act on 11/1, & elections $$ Aug 09, 2012
Hewlett-Packard?s Whitman Dismantles Hurd-Era Empire http://t.co/ySeeVM9w FD: + $HPQ She seems 2b evaluating each biz separately $$ #good Aug 09, 2012
The New York Times Is About to Say Goodbye to About,com http://t.co/frzrVlUq gives more details on the lossesv$$ Aug 08, 2012
New York Times Shares Rise on Deal to Sell About,com http://t.co/k5GarxXV Amazing how much $NYT lost on it, capital losses, neg income $$ Aug 08, 2012
Judge in Google, Oracle case seeks names of paid reporters, bloggers http://t.co/7vhmK5N3 Fascinating 4bloggers 2b paid $$ by corps quietly Aug 08, 2012
I do not get how http://t.co/ROsNYak3 could be worth $270M. What’s the revenue model? Ads? $$ http://t.co/n1ddWxvU Aug 08, 2012
Wrong: The PC looks like it’s dying http://t.co/IqeVAbi6 Like most tech, when it matures, it finds & stays there. Think of “dead” radio $$ Aug 07, 2012
Amazon Is No Wal-Mart…Yet http://t.co/cmEjPHHu Relatively neutral article on $AMZN by Martin Sosnoff; prob: treats AMZN as retailer $$ Aug 07, 2012
Why FedEx and UPS Want the Postal Service to Survive http://t.co/MAaCfOXQ Solution: raise stamp prices, and prices to $FDX and $UPS $$ #easy Aug 05, 2012

Monetary Policy

Fisher Says More Stimulus May Overburden Central Banks http://t.co/5ZMlKO5G 3-time winner of coveted “FOMC loose cannon award” speaks $$ Aug 08, 2012
Economic Musings – Fed eyeing a new kind of twist? http://t.co/aUezU2XE $$ Extending duration in MBS; creating larger losses later $$ Aug 08, 2012
RE: @bondtrader83 That’s not all that much different than the 1st Twist. It’s duration extension in MBS. Wait till ra? http://t.co/PrMHBSGh Aug 08, 2012
How about quantitative easing for the people? http://t.co/inHK9NF2 Would work better than current QE/Twist etc, but this frightens me. $$ Aug 08, 2012
Wrong: Bernanke to Economists: More Philosophy, Please http://t.co/9638QlHo Been down this road; utility theory doesn’t explain mankind $$ Aug 07, 2012

Housing & Related

Public-Housing Parking Lots Make Everyone Poorer http://t.co/2gensCd8 Set rates to achieve 15% vacancy; Rather than lots, have garages $$ Aug 08, 2012
Home Prices Climb as Supply Dwindles http://t.co/hMoZBsNZ Good news for the low end of the market, high end will take time $$ Aug 08, 2012
Fannie Mae profits rolled into rainy day fund http://t.co/bDWphSuE Good for Fannie & Freddie preferred, not worth anything 4 the common $$ Aug 08, 2012

Financial Companies & Markets

NYSE in talks with SEC to settle data probe http://t.co/FkxBtlbz Wow, faster data feeds 4 some special clients; level the playing field $$ Aug 09, 2012
Are Diamonds an ETF?s Best Friend? http://t.co/RHbSghCw Bad things happen when you take something illiquid and try to make it liquid $$ Aug 08, 2012
Richest Family Offices Seeing Fastest Growth as Firms Oust Banks http://t.co/NqY9650P UberWealthy get $$ talent; tax savings >> costs Aug 07, 2012
4 ETF Lessons From Knight http://t.co/st6wbNgR Lead Market Makers matter, Markets Work, Settlement Works, Illiquid ETFs Need Helpers $$ Aug 06, 2012
Other problem: active etf gives away trading information it might rather not divulge, leading to front-running. $$ http://t.co/q4XXZwRv Aug 06, 2012
A Tale of Two Fund Giants: American Funds vs Vanguard http://t.co/46rFsL9e Key advantage for Vanguard was embracing ETFs early $$ Aug 06, 2012

Repos

Banks? Liquidity Hinges on Risky Assets http://t.co/45Iw5Dz9 Repo lending is subject2runs during credit panics which depress collateral $$ Aug 08, 2012
Good one $$ RT @pdacosta: Watch out for the grim repo-er RT @cate_long Banks? liquidity hinges on risky assets http://t.co/9lk0GjA0 Aug 08, 2012
The danger of repo http://t.co/mZDG9Ocb Repo is weak financing in crisis; 3-mo T-bills would b a better index 4 Tsy floating rate notes $$ Aug 06, 2012

The Equity Premium

That would get the advantage of stocks over high quality bonds down to ~1-2%/year. Outperforms with a *lot* of noise $$ Aug 11, 2012
Bill Gross Is Wrong About Stocks: GMO http://t.co/c6gJwfUB Truth inbetween; have GMO adjust 4 $$ -weighted returns, not time-weighted Aug 11, 2012
Bonds for the Long Run http://t.co/MmkoYk3U @ritholtz nails it. Advantage of stocks over bonds is ~1%/yr over the long haul. Limited data $$ Aug 10, 2012

Comments

@LDrogen After reading this, I have more certainty that airbnb has already worked out some of the bugs http://t.co/Xx3ztVZv $$ Aug 10, 2012
@LDrogen Fine, Leigh, I hope it works. When single party lending gave way to securitization, it was unstoppable, until lending stds died. $$ Aug 10, 2012
RE: @ldrogen Multiple party economic dealings have their issues.? Consider: http://t.co/Z2rRNeTS? http://t.co/gCrEYzX2 Aug 10, 2012
‘ @TheOneDave In a word: depletion. Costs are rising to incremental barrels of oil, and ounces of gold. $$ Aug 09, 2012
@PlanMaestro $CLD LTD/E ~89%, take a look at $HNRG Hallador Energy. I’m not looking @ coal names until I see a few go BK, like steel 2002 $$ Aug 09, 2012
@PragCapitalist Depends on slope of demand curve 4 Tsys. Compare it2the former on-the-run. Jump of 6 bps high for that spot on the curve $$ Aug 08, 2012
@groditi Effective Yield series. Was trying to show that junk yields don’t compress as much when HQ-yields are low. Would have liked OAY $$ Aug 08, 2012
@PragCapitalist If it gets enough assets to survive $$ Aug 08, 2012
@footnoted …and maybe adjs for a year, but large writeoffs mean that prior earnings were overstated; testifies to bad mgmt quality $$ Aug 08, 2012
@footnoted That’s one reason why I tell investors to look at LT growth in BV + Divs rather than op income. I accept adjustments 4 a qtr + $$ Aug 08, 2012
RE: @bloombergview The single period cost to fix might be small, the continuous transfer cost would be considerably l? http://t.co/9gyFVvh4 Aug 08, 2012
RE: @bloombergview When games change from two players to three players, things get messy if no single player has most? http://t.co/TU09OZml Aug 08, 2012
Most pessimistic he’s been on China debts RT @groditi: Wow. I’m used to Pettis’ Euro-pessimism, but he’s not holding back here. U MAD, PROF? Aug 07, 2012
Always a great read RT @groditi: yaaaaaay new Pettis! Aug 07, 2012
@AnaCapMgmt Ain’t true. The foolish models of economists do not take into account political realities, and when inflation runs, no ammo. $$ Aug 05, 2012
@LisaCNBC Ask him how confident he is in India’s power grid. After that, the water supply. $$ Aug 05, 2012
‘ @pvitha Gold moves inversely to real interest rates, a.k.a. cost of carry, that’s all I know. $$ Aug 06, 2012
‘ @WTOP Romney shouldn’t worry about the Fed; they are out of ammo. QE is a joke, as is Operation Twist, and forward fed funds guidance. $$ Aug 05, 2012
+1 I like to say that 🙂 RT @BarbarianCap: “there are more debt claims than resources to pay them at par” Aug 05, 2012

On the Poway School District

Posted on 10 August 201210 August 2012 by David Merkel

I am not an expert on Municipal Bonds, so if an expert reads this, and has corrections for me, please leave corrections in the comments.

In general, I am a conservative guy who avoids situations with a lot of debt.? I am also an actuary and a financial analyst who has a lot of experience with long dated assets.? I know how illiquid they can be, and how violent the price moves can be when they happen.

Most of the discussion here stems from this article: Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools.

There are a few other notable writers who have picked up on this:

But unlike them, I want to give you more data, and less opinion.? For a start, here is the dense prospectus, should you want to review it.

As an aside, I looked at buying a house in Poway back in 1989, when I was considering a job in San Diego with the soon-to-be gone First Capital Holdings.? Poway was what I could afford in such an expensive area.

Financial crises always come at the wrong time.? In 2007, the Poway School District borrowed money to fix up the physical plant of the schools.? They financed it short-term, then in early 2009 issued the “A” notes, financing much of the project, encumbering tax revenues out to 2032, and allowed the rest to float via General Obligation Anticipation Notes.? The “A” series were also capital appreciation bonds, which means they are zero coupon bonds, and the interest comes from buying the bonds at a discount to the face value, and receiving the face value at maturity.? The time period was shorter then the “B” notes, so they were cheaper, and hence less odious.

Given that they had already encumbered tax revenues all the way out to 2032, and had a large amount of debt that they needed to refinance, they needed to issue more permanent debt.? They were already at their maximum level of what they could expect given assumed growth in the property tax base, so what could they do if they wanted to issue more general obligation debt without raising the tax rate?

After getting the assent of the voters in February 2008, to extend tax rates for an estimated additional 11 to 14 years, they issued the “A” notes, and then in 2011, the “B” notes.? The “B” notes picked up where the “A” notes left off.? They would make payments from 2033 through 2051.

Now, anyone who has worked with long duration fixed income (there aren’t many of us) know a few things:

It’s illiquid because there aren’t that many that can fund it for so long.?? It becomes the province of strong balance sheets and speculators.
It’s rare for people to give up current income for capital appreciation over the long haul.? Most people need income over the next 20-30 years.
Slight changes in the interest rate can make a lot of difference to the value of the debt.
When you issue very-long-dated credit-sensitive notes, expect to pay a high yield.? Poway SD is rated Aa2/AA-.? That’s a high rating, but when you say you will pay nothing for 20 years, that injects a lot of uncertainty/risk into the likelihood of payment.

After all, what will the courts be like 20 years from now?? What will the nation be like?? What will we default on or inflate away?? I know that present rules make it difficult for any entity to not repay General Obligation debt, but 20 years from now, things could be different.

The “B” notes, capital appreciatin bonds, that they offered in 2011 refinanced prior debts, and left $21 million to be used as they wished, which raised the hackles of the California Attorney General, though nothing came of that.? Letter from the Attorney General Article on the topic — Second article on the topic

Take a look at the sources an uses of funds:

ESTIMATED SOURCES AND USES OF FUNDS

The proceeds of the Series B Bonds are expected to be applied as follows:

Sources of Funds

Principal Amount of Series B Bonds??? $105,000,149.70
Original Issue Premium?????????????????????????????? 21,360,189.45
Total Sources???????????????????????????????????????????? $126,360,339.15

Uses of Funds

Deposit relating to partial payment of
Lease Revenue Bonds(1)????????????????????? ?? ? $98,707,473.55
Deposit for full payment of 2010 Notes 26,270,000.00
Costs of Issuance(2) ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ??? 569,114.44
Underwriter?s Discount????????????????????????????????????? 813,751.16
Total Uses????????????????????????????????????????????????? $126,360,339.15
____________________
(1) Includes $98,327,473.55 for partial payment of the Lease Revenue Bonds and $380,000 for payment of costs associated with refinancing the Lease Revenue Bonds.
(2) Includes, among other things, the fees and expenses of Bond Counsel, the fees and expenses of Disclosure Counsel, the fees and expenses of District Counsel, the fees and expenses of the Paying Agent, the fees and expenses of School District consultants, rating fees, the cost of printing the preliminary and final Official Statements and other costs associated with issuing, selling and delivering the Series B Bonds, as well as costs associated with refinancing the 2010 Notes.

I would note that the premium was entirely applied to the reduction of existing debts.? They may not be debts of the same class, and that makes me wonder.

Now capital appreciation notes are politically controversial.? Here is a White paper from the LA Treasurer, and here is an article about it.? It’s not that different than what you have heard already.? Borrowing using long zero coupon notes is expensive.

Let me show you the cash flow table for the “A” and “B” bonds.

Year	Series A	?	Compounded	Series B	Total
Ending	Total Annual	Principal	Interest	Total Annual	Combined
August 1st	Debt Service	Payment	Payment	Debt Service	Annual
?	?	?	?	?	Debt Service
2012
2013
2014
2015
2016
2017	$3,720,000	$3,720,000.00
2018	4,580,000	4,580,000.00
2019	5,525,000	5,525,000.00
2020	6,560,000	6,560,000.00
2021	7,690,000	7,690,000.00
2022	8,925,000	8,925,000.00
2023	10,275,000	10,275,000.00
2024	11,745,000	11,745,000.00
2025	13,355,000	13,355,000.00
2026	15,095,000	15,095,000.00
2027	17,005,000	17,005,000.00
2028	19,070,000	19,070,000.00
2029	21,350,000	21,350,000.00
2030	23,800,000	23,800,000.00
2031	26,455,000	26,455,000.00
2032	48,960,000	48,960,000.00
2033	16,615,000	6,570,615.00	23,929,385.00	30,500,000.00	47,115,000.00
2034		9,192,225.60	37,487,774.40	46,680,000.00	46,680,000.00
2035		8,803,904.00	39,516,096.00	48,320,000.00	48,320,000.00
2036		8,305,119.90	41,464,880.10	49,770,000.00	49,770,000.00
2037		7,923,383.30	43,086,616.70	51,010,000.00	51,010,000.00
2038		7,522,497.40	44,507,502.60	52,030,000.00	52,030,000.00
2039		7,107,169.80	45,702,830.20	52,810,000.00	52,810,000.00
2040		6,607,225.80	46,732,774.20	53,340,000.00	53,340,000.00
2041		6,072,404.70	47,537,595.30	53,610,000.00	53,610,000.00
2042		5,268,942.40	48,470,788.40	53,739,730.80	53,739,730.80
2043		4,900,657.60	48,974,867.45	53,875,525.05	53,875,525.05
2044		4,557,796.80	49,449,334.50	54,007,131.30	54,007,131.30
2045		4,239,633.60	49,909,078.80	54,148,712.40	54,148,712.40
2046		3,942,536.00	50,332,464.00	54,275,000.00	54,275,000.00
2047		3,237,210.90	51,177,273.40	54,414,484.30	54,414,484.30
2048		3,000,734.10	51,554,365.20	54,555,099.30	54,555,099.30
2049		2,780,993.25	51,904,836.75	54,685,830.00	54,685,830.00
2050		2,577,771.00	52,248,044.00	54,825,815.00	54,825,815.00
2051		2,389,328.55	52,575,671.45	54,965,000.00	54,965,000.00

The “B” bonds kick in after the “A” bonds give out, which means that if future politicians want to do capital improvement projects in the Poway school district, they will have to wait a while, until debt gets paid down.? The present has stripped flexibility from the future.? Who should be surprised, this is the USA.

Now one should argue over whether the expenditures reflect the life of the bonds.? Poway SD says that structures have a 45 year lifespan, and this fits inside that.

But maybe there was a cheaper way to fund this.? Rather than using Capital Appreciation Bonds, maybe a mortgage-style note could have done it, even over 40 years, and at a much cheaper rate.? Even accepting the premium boosted the combined yield of the “B” notes from around 6.9% to 7.6%.

As it is the deal bets on the appreciation of real estate:

Right now, the district receives about $11 million a year from homeowners towards paying off its bonds.

So, to be able to afford its debt payments 20 years from now, the total assessed value of property within the taxed area would have to quadruple.

That’s about 7%/year, which is not impossible if inflation comes.? It is still a difficult target to manage against.

Personally, I think it would be cheaper to do with out the improvements, or add user fees, or raise taxes.? The benefits are going to those living there in the short run, taxes should be similar.

Finally, I would like to note that the “B” bonds appreciated dramatically from their issue prices.? You can see it here: data for the “B” series.? My view is that it was a period of falling interest rates, but that the rate on the Poway “B” note fell more.? Whoever bought and held has made a lot of money, and at the expense of Poway SD taxpayers, who will have to pay more, because of the lame way that the district borrowed.

That said, if you think your area is in better shape, spend some time digging into the numbers, and prove it.

PS — Who would buy a bond like this?? P&C insurers with long tail liabilities, like asbestos and environmental.? But Buffett is cutting down on his munis.

Sorted Weekly Tweets

Posted on 4 August 2012 by David Merkel

Monetary Policy

Central Banks Can?t Save the World http://t.co/SLzVcZ0r No duh, since printing $$ isn’t productive it can’t do anything to help us. $$ Aug 04, 2012
Another example of how loose monetary policy in the West inflates bubbles in the fringe economies. http://t.co/xA3cKNFh Aug 03, 2012
Central Banks Seek New Crisis Options http://t.co/z3pLZdbw Fed & ECB straining @ the political limits of what they can & should do $$ Aug 02, 2012
SNB-central bank or hedge fund? http://t.co/LFuad30w Policy makers err in thinking they can control markets: task beyond ability of mortals Aug 02, 2012
Ghost of 2008 Haunts Fed as Companies Take Short View on Risk http://t.co/Wl6KgzdS When policy is not sustainable, businessmen cautious $$ Aug 01, 2012
Ben Bernanke Could Lose for Same Reason as Olympic Sailor http://t.co/aPBZLuwN Strong growth resumes when bad debts are liquidated $$ Aug 01, 2012
Deflation Dismissed by Bond Measure Amid QE3 Anticipation http://t.co/pK0cLw5e Link2 5yr inflation 5yrs forward http://t.co/ZVA74EmF $$ Jul 30, 2012

Energy

Tesoro lifts volumes of Bakken rail project http://t.co/eKzsyOu2 Coastal v. central difference in oil prices incent rail delivery of oil $$ Aug 02, 2012
Buffett Railroad Beats Coal Slump With 75% Gain in Oil http://t.co/VK50miRq From coal to crude oil, frack sand, automobiles, pipes &c $$ Aug 02, 2012
Oil Can?t Go Down http://t.co/CV73DUqW Offers long term arguments that we aren’t finding cheaper-to-produce oil, short-run YMMV $$ Jul 30, 2012

Financials

Where Are the Move-up Home Buyers? http://t.co/MDlos0oL Low end of housing in good shape, will take a while for the high end 2 recover $$ Aug 01, 2012
Libor Punishment Could Be Worse Than the Crime http://t.co/jyRCvVtw There’s a lot to unscramble here, and first do no harm should apply $$ Aug 01, 2012
RE: @bloombergview First do no harm. LIBOR dampens volatility during a crisis vs market-derived measures, which are m? http://t.co/q7cLqTpI Aug 01, 2012
“Really doubt getting closer to zero will make banks lend. Fear >> Greed $$” ? David_Merkel http://t.co/ajgZ7K60 http://t.co/M2DtNp4p #fedup Jul 30, 2012
Bank Breakups: Not So Fast http://t.co/CB4TYM4o Think most of TBTF came from allowing interstate branching, not investment banking $$ Jul 30, 2012
10 Things Credit Scores Won’t Say http://t.co/3KIeIqH0 More powerful than most people imagine, & less uniform, customized 4 diff uses $$ Jul 30, 2012

Investing

If I use your framework, that gets me to a 2% real return assumption for stocks. Current dividend yield is… http://t.co/ssMBpc2L Aug 03, 2012
Wrong: Verizon, AT&T, Altria Among Top CDS-Adjusted Dividend Stocks http://t.co/fHEfo9jF This is another misuse of CDS spreads $$ Aug 02, 2012
Fair disclosure for last tweet: Long $HPQ common Aug 01, 2012
Wrong: Debt Markets Aren?t Only Worried About HP, but Dell and Others, Too http://t.co/ho8hqt8R CDS mkt spooked, bigger bond mkt calm $$ Aug 01, 2012
RT @KidDynamiteBlog: hearing NYSE is reviewing trades from this AM. Cancelling them would be the worst thing they could possibly do. @r … Aug 01, 2012
“You need to learn more about bonds & CDS before you write about them.” ? David_Merkel http://t.co/zcTji7O6 $$ Aug 01, 2012
Seeing a weird inverted market in $PSX w/bid $1 > ask. Weird, why doesn’t it clear. FD: long $PSX for myself & clients Aug 01, 2012
Cult Figures http://t.co/7yDHHbqn Bill Gross explains why future equity returns won’t b as high as the past, unless it is due 2 inflation $$ Aug 01, 2012

International

The Crushing Burden of Old Debt http://t.co/SHXhIYbN True of many places; there are more debt claims than resources to pay them at par $$ Aug 04, 2012
Shock, Ore and Chinese Steel http://t.co/j7HBuIHI When you can no longer cover variable costs, time to shutter high cost capacity $$ Aug 02, 2012
RE: Europe hasn’t tried austerity yet. The debts are still growing as a % of GDP. $$ http://t.co/NbaAxKZN Aug 01, 2012
India’s Power Grid Collapses Again http://t.co/BmQKGyJZ “half of India’s population ? reportedly impacted” $$ Jul 31, 2012
Merkel Allies Harden Opposition to Granting Bank License to ESM http://t.co/cgca4EW4 Right hand taking back what left hand gave $$ Jul 31, 2012

TheStreet.com

How to Fix http://t.co/pm2ctIIK http://t.co/vJlqaUbx ?Good thoughts from @reformedbroker. My long comment: http://t.co/D7ZZ8tSE ?$TST $$ Jul 30, 2012
Thanks for writing this, Josh.? Cramer gave me my start in investment writing; I will be really bummed if $TST doesn’? http://t.co/g9QTXIWG Jul 30, 2012
How to Fix http://t.co/pm2ctIIK | The Reformed Broker http://t.co/DyLiX5AP Excellent advice, but it really may be too late for $TST $$ Jul 30, 2012

Politics

The Bad History Behind ?You Didn?t Build That? http://t.co/Yd8vyYlA Obama was deliberately ambiguous; prime motive was 2 dis entrepreneurs Aug 04, 2012
Obama authorizes secret US support for Syrian rebels http://t.co/s0PJ8Hx1 US allies itself w/Turks & Saudis against Alawite dictatorship $$ Aug 02, 2012
California Says Tax Revenue ?at Risk? From Facebook Drop http://t.co/ZLzQuFHE Normal 4 bad surprises 2 happen 2 those w/liberal acctg $$ Aug 02, 2012
Protesters Break Into Nuclear Complex http://t.co/yhn1WRvV Gotta admire the tenacity of a bunch of aged Catholic old-style liberals $$ Aug 02, 2012
Republicans Buoyed by Freshmen Seek Rewrite of Tax System http://t.co/TE8HeV3s SImplify, flatten, elim deductions/credits 4 corp/indiv $$ Aug 02, 2012
Postal Service to Miss $5.5B Payment to US Treasury http://t.co/zcgaQDWa Raid Employee benefits, or raise stamp, $UPS & $FDX prices? $$ Jul 31, 2012
The Man Who Saved Capitalism http://t.co/6qBtGnXI Milton Friedman did many good things, but saying he saved Capitalism is hagiography $$ Jul 31, 2012
Indirectly, tax $$ would fund principal reductions RT @diana_olick: #Obama gets a big NO on slashing #mortgage debt: http://t.co/N1vHNnDj Jul 31, 2012
Punctuation Nerds Stopped by Obama Slogan, ‘Forward.’ http://t.co/uRjpoBdq An ! would have worked better. What state’s motto is Forward? Jul 31, 2012
Why Capitalism Has an Image Problem http://t.co/xQIwll6s We need to save capitalism from capitalists *&* the enemies of capitalism $$ 😉 Jul 30, 2012
US loves cops and firefighters – but not their pensions http://t.co/ioSglMne The pension cost is 2high, and politicians ignore the cost $$ Jul 29, 2012
@MikeImbery Then explain why we support anti-freedom governments that support our political aims. Israel, Egypt, Saudi Arabia, India, etc. Jul 29, 2012
That last tweet was meant to highlight the dual nature of US foreign policy, & while it is not lily white, it is better than alternatives $$ Jul 29, 2012
Charles Hill: The Empire Strikes Back http://t.co/9oY16P9A The US is an anti-empire providing freedom, so long as its aims endure $$ Jul 29, 2012

Other

I also don’t do #FF often but I ask my followers to follow @japhychron Aug 04, 2012
Just spent a fun 90 minutes discussing economics, banking, etc. w/ @japhychron in beautiful Ellicott City. It was a great time $$ Aug 03, 2012
WSJ home page is causing Firefox to lock up as it absorbs more and more memory until the system dies. Anyone else experiencing that? $$ Aug 03, 2012
This article reinforces the notion that the mainstream media does not understand conservative evangelicals. Chick-Fi? http://t.co/WoANS3bi Aug 03, 2012
Will Publishers Perish? http://t.co/2qveRV4I Arends: As self-publishing gets easier, the book business faces a major shake-out $$ #yup Aug 02, 2012
WSJ Olympic Medal Tracker http://t.co/P4kKLdcb #WSJLondon2012 Interesting graphical depiction of the Olympic Medal Standings $$ Aug 01, 2012
My Education in Home Schooling http://t.co/jXFF2BTT She makes more fuss than most homeschoolers do; it is easy to beat public schools $$ Jul 29, 2012

Comments

RE: @bloombergview Simplify: “Customer account segregation should never be compromised.” Fits in a tweet. $$ http://t.co/e6TnFVbT Aug 02, 2012
@kaylatausche Buffett doesn’t believe in the Sabbath, but likes high-margin focused entrepreneurs w/ethics. Many Christians buy there $$ Aug 01, 2012
@kaylatausche 1 logical buyer for those wanting 2 preserve corporate culture: Buffett. Has 1-2 retail businesses closed on the Sabbath $$ Aug 01, 2012
@izakaminska I though the same when I looked at the moon this evening over Ellicott City, MD. $$ Aug 01, 2012
@izakaminska I hear you, and think similarly. If nothing else, the “terms of Service” will become tighter. Love your work, Izabella. $$ Aug 01, 2012
@izakaminska Okay, it’s not a perfect solution, but it is good enough that 10% of the time, the account has been suspended when I try it $$ Aug 01, 2012
@izakaminska I regularly use the “block & report spam” feature of twitter to get rid of trolls and spammers, shouldn’t that solve it? $$ Aug 01, 2012
@sandbergadvisor Ding, you were the first to get Wisconsin’s motto, “Forward” $$ Jul 31, 2012
@felixsalmon On medals, original link: http://t.co/h8cEhIHo ultimately coming from story here: http://t.co/8C2vQR3P Jul 31, 2012
@felixsalmon “The value of the materials in the gold medal is about $644, silver about $330, and bronze about $4.71” http://t.co/6MWND6Mz $$ Jul 31, 2012
@felixsalmon The silver medal is 92.5% silver, the rest copper. Bronze medal is 97% copper, 2.5% zinc & 0.5% tin. S/b “Copper medal” $$ Jul 31, 2012
@felixsalmon oops, here’s the metallic composition: http://t.co/SP3zXzs9 The 2012 gold medal is 92.5% silver, 1.34% gold, rest copper. $$ Jul 31, 2012
@felixsalmon At the relative prices, that’s a gold medals table, assuming the medals are the same size and are purely that metal $$ Jul 31, 2012
“The solution is simple. Raise stamp prices, and the fees they charge UPS & Fedex for “going the?” ? David_Merkel http://t.co/0zaUbegb $$ Jul 31, 2012
@munilass I’ve reviewed enough crisis books that I can’t read them anymore; I scan 2c what they observe & ignore $$ http://t.co/Zy8nfeZh Jul 31, 2012
@TFMkts I agree; I’ve written about the problems w/levered ETFs. Kass is big enough, he can short bonds directly if he wants. Not hard $$ Jul 30, 2012
I know and agree; I’ve written about it. Suspect he shorts bonds directly RT @tradingpoints: you can’t hold $TBT on that time-frame – wow – Jul 30, 2012
“Small cap Japan: low valuations, low leverage, low expectations.” ? David_Merkel http://t.co/LfuLH8WD Jul 30, 2012
RE: @CharlesSizemore I think you gave a good summary.? Here’s my more bearish take: http://t.co/1gW2Js52? http://t.co/LVwWQEJj Jul 30, 2012
I disagree w/Kass here, though he is generally a clever investor. He is also more of a trader than most… http://t.co/BpynxRQR Jul 30, 2012

Redacted Version of the August 2012 FOMC Statement

Posted on 1 August 2012 by David Merkel

Comments

This was a nothing-burger.? Shades down GDP and household spending.? No change in policy, except that the FOMC might act ahead of the next meeting in September.
In my opinion, I don?t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself.
Also, the reinvestment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.? As a result, the FOMC ain?t moving rates up, absent increases in employment, or a US Dollar crisis.? Labor employment is the key metric.
Do they want the yield on 30 year TIPS to go negative?? Only 0.30% of real yield there, and the 20-year real yield in negative.
GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.? Inflation has moderated, but whether it will stay that way is another question.

Questions for Dr. Bernanke:

Is it possible that you don?t really know what would have worked to solve the Great Depression, and you are just committing an entirely new error that will result in a larger problem for us later?
Why do think extending the period of accommodation by a little more than two years will have any significant effect on the economy, aside from stock and bond prices?
Discouraged workers are a large factor in the falling unemployment rate. Why do you think the economy is doing well?
Couldn?t increased unemployment be structural, after all, there is a lot more competition from labor in emerging markets?
Why do you think that holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself?
Why will reinvestment in Agency MBS help the economy significantly?? Doesn?t that only help solvent borrowers on the low end of housing, who don?t really need the help?
Isn?t stagflation a possibility here?? I mean, no one expected it in the ?70s either.
If the Fed ever does shrink its balance sheet, what effect will it have on the banks?

Book Review: Visual Guide to Financial Markets

Posted on 28 July 201228 July 2012 by David Merkel

This is a good book and I recommend it to certain people.? Thus when you see the number of stars I give it at Amazon, know that for those whom the book is good, it is really good.? But there are some who will get less out of the book.

The author, David Wilson, is an excellent explainer of markets to those who are just learning.? He frequently does “The Chart of the Day” at Bloomberg, giving considerable insight to neophytes and professionals as he boils down complex topics into one graph.

As I began to read the book, I noted to myself, “Oh, in a number of places, they are using Bloomberg Terminal formats without mentioning it.? At the end of the book, they give a list of Bloomberg Terminal codes that would be useful to those who subscribe to the ~$2,000/month service. (Yeh, it costs that much, and it is worth it if you can afford/use it.)

I say this partly because I was a rare Bloomberg user that had expertise with all of the “yellow keys” of Bloomberg.? I’m intellectually curious, so when I first used a Bloomberg terminal back in late 1992, I played around with it to see what it could deliver.? It could deliver a lot, and it has expanded exponentially since then.? It is one amazing system.

But what if you could cobble together the most important 50% of what you get on a Bloomberg terminal, ad pay nothing?? That’s me.? It takes extra work, but you can do it.? I miss my Bloomberg terminal, because I can’t afford it now, but for those that can afford it, it is a wealth of information.

Thus, back to the book.? The book reads like one who imbibes both Bloomberg’s editorial ideals: “keep it simple. explain, give them the facts,” and teaching beginner users of a Bloomberg terminal on how to think about the markets.? Note that the terminal never gets mentioned until an appendix at the end.? But those that use a Bloomberg terminal to a high degree understand how the market is segmented.? We don’t ask the same questions with municipal bonds as we do with stocks.

This book is a very good book for beginners in the markets.? It explains a lot of things well, with reasonable detail.? It is not a good book for experts — you know all this, but if you want to get an introduction to some tangential areas you might not know, this could still help you.? This book brings you up to an intelligent beginner level in a wide number of areas.

What areas does it cover:

Stocks
Bonds (of many sorts — corporate, government, municipal, mortgage, etc.)
Money markets
Indexes
Commodities
Derivatives (options, swaps, futures, forwards)
Mutual Funds (open-end and ETFs)

The book highlights at the edges of its pages the main ideas, processes for using the information described, and definitions of financial terms.

Quibbles

When the book gives definitions, it is white on a vivid green background, and is hard to read.? The text should have been black against the vivid green.

The book implicitly assumes that people get quotes from a Bloomberg terminal.? Aside from professionals, few people do.? Until Bloomberg markets a retail service for individuals, offering the basics for 5% of the cost, there is little utility from explaining the nuances of a Bloomberg quote.

The title is slightly misleading, because the the book is no more “visual” than most.? There are a decent amount of graphs, but for a book that calls itself visual, I would have expected more.

Who would benefit from this book:?? This book is best for those that have access to a Bloomberg terminal, but are not expert in using it. Second best, it could help those without a Bloomberg terminal, but want to learn the basics of investing.? Dave is a good teacher.? Finally, for those with experience, this book is redundant.? If you want to, you can buy it here: Visual Guide to Financial Markets (Bloomberg Financial).

Full disclosure: The publisher asked if I wanted the book.? I said ?yes? and he sent it to me.