New blog address

June 24, 2009 – 1:04 pm

Hi all,

So my new blog is up.  Here’s the link.

In long form:

BUT, this URL also works with the new blog:  The URL with “ml-implode” will still bring you here, to the old blog.  But the one without it now redirects to my Reuters blog.

The best bookmark (in case the Reuters folks shift things around) may be the last.  I own that one.  It will always follow me.

We’re still in the process of porting my old posts from OA to the new blog.  But I’m up and running and will be posting new ones.

If you have thoughts on the layout or on usability, please leave comments with detailed suggestions.  Everyone on the team sees all comments so know that you’ll be heard.

I am planning to keep posting links.  Started with a post tonight.

Press Release

June 23, 2009 – 8:32 am

For those interested, here’s a link to the press release announcing my move to Reuters.

The new blog should be live today or tomorrow.  Will follow up with that URL.

OA Goes to Reuters

June 22, 2009 – 3:37 pm

Sorry to keep everyone hanging for OA’s big news; I was hoping to have a link to the press release, but it’s still not available.

Anyway, after a great year blogging for the Implode-O-Meter, OA is headed to Reuters.  They’ve started a commentary team and, starting today, I’m their newest columnist. 

This is great news.  I’ll continue to have wide latitude to write what I want to write, but now that I work for a major media company, it will be easier to do more original reporting.  Sources not inclined to return calls from OptionARMageddon, for instance, will no doubt be more responsive with Reuters….

There’s lots of plumbing involved with the move, much of which is incomplete.  First off, my blog will be moving.  It will now be hosted on  They haven’t completed switching it over, so I don’t have a new URL to share just yet.  When it goes live, I’ll let everyone know, hopefully in the next couple days.  Just check back occasionally.

I want to say a special thanks to Aaron Krowne, Justin Owings and the entire staff at the Implode-o-Meter.  They do great work and have been wonderfully supportive over the past year.

OA News…

June 22, 2009 – 8:43 am

Just a heads up for readers: OA will be announcing some big news later today.  (which will also explain why posting has been light the last couple weeks…)

#38 & #39

June 19, 2009 – 6:34 pm

Wouldn’t you know it, another one in Georgia…

Southern Community Bank, Fayetteville GA

As of May 29, 2009, Southern Community Bank had total assets of $377 million and total deposits of approximately $307 million. United Community Bank paid a premium of 1 percent to acquire all of the deposits of the failed bank. In addition to assuming all of the deposits of the failed bank, United Community Bank agreed to purchase approximately $364 million of assets. The FDIC will retain the remaining assets for later disposition….

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $114 million. United Community Bank’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to alternatives. Southern Community Bank is the 38th FDIC-insured institution to fail in the nation this year, and the seventh in Georgia.

Cooperative Bank, Wilmington NC

As of May 31, 2009, Cooperative Bank had total assets of $970 million and total deposits of approximately $774 million. In addition to assuming all of the deposits of the failed bank, First Bank [of Troy, NC] agreed to purchase approximately $942 million of assets. The FDIC will retain the remaining assets for later disposition.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $217 million. First Bank’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to alternatives. Cooperative Bank is the 39th FDIC-insured institution to fail in the nation this year, and the second in North Carolina.

A: The national debt threshold we just passed

June 19, 2009 – 9:13 am

Q: What is $11.4 trillion?

(Click image to enlarge in new window)

And today Treasury announced it will sell $104 billion of debt next week, a new record.  CNBC:

The Treasury announced Thursday a record $104 billion worth of bond auctions for next week, part of its herculean efforts to finance a rescue of the world’s largest economy.

The sales will exceed the previous record of $101 billion set in auctions that took place in the last week of April and consist of two-year, five-year and seven-year securities. That record was matched by another $101 billion week in May.

Though next week’s total was broadly in line with expectations, worries about supply have weighed on the U.S. government bond market, which will see a mammoth $2 trillion worth of new debt issued this year.

By the way, the Fed’s balance sheet ticked up again this week, by $29.4 billion.  The increase was due to more quantitative easing.  In particular, Treasury holdings increased $10.9 billion, agency debt holdings increased $4.0 billion and MBS holdings increased $27.9 billion.  (These increases were offset by Central Bank Swap Lines, which fell $15.6 billion).

Lunchtime Links 6-18

June 18, 2009 – 9:49 am

by Rolfe Winkler, CFA

(Send links, videos, pics to optionarmageddon at gmail with subject “link”)

The Herbivore’s Dilemma (Slate)  For better of for worse, twenty years of economic stagnation appears to have neutered many Japanese men.  Their “animal spirits” have shriveled and died.  As may ours now that we’ve decidedly put ourselves on the Japanese course.

They’re Fake! (Bloomberg)  According to the Treasury Dept., the $134 billion of purported Treasury securities found on two Japanese nationals trying to leave Italy are forgeries.

10 Banks Repay TARP Funds (Bloomberg)  Yes, banks are healthier than they were but only because they remain on government life support.  (FDIC’s TLG Program allows them to borrow at rates way below market)  Some can raise their own capital in private markets, yes, but only because there’s now an implicit government guarantee that none will fail.  And one is left to wonder what the banking system would look like if, for instance, the government (via Fannie, Freddie, FHA) wasn’t standing behind virtually ALL new mortgages.  With no credit available to buy houses, you can bet prices would have fallen much more.  And that bank assets would be valued at a fraction of their liabilities.

Actually, Krugman Did (Help) Cause The Housing Bubble (Mises)  Yesterday on his blog, PK offered a non-denial denial that he advocated blowing a housing bubble to replace the tech bubble.  He didn’t outright deny it because he knows he forcefully advocated aggressive monetary policy during that period.  The writer at this link culled his archives to find all the damning evidence.  Some would defend him by noting there’s no evidence he advocated lower interest rates in 2004, when the bubble really got going.  But of course he wasn’t arguing for tightening either, and monetary policy operates with a lag anyway.  (BTW, hat tip to the moderators at NYT:  dozens of commenters on Krugman’s blog post don’t let him get away with this.  We like #69…)

Eddie Bauer Files Bankruptcy, Gets $202 Million Offer (Reuters)

Black Swan Trader Bets Reputation on Inflation (WSJ)  Very risky.  Despite the Fed’s aggressive moves, deflation appears to be the bigger long-term threat.  See again: Japan.  The real risk is that the Fed/Treasury apply so much monetary/fiscal stimulus that they destroy confidence in the dollar.

Not buying the China Miracle (Zero Hedge)  We agree that enthusiasm for the Chinese economy is probably overdone.  Their banking system is far messier than our own, for instance.  But we still believe that, over the next 50-75 years, China is poised to replace the U.S. as the world’s largest consumer market.

Report: State Personal Income Tax Cliff-Diving (CR)  More bad news for states running deficits.  Projections understate the scope of shortfalls because the revenue side of the ledger is under siege.  Two very good charts, and a link to an article with details from WSJ.

Our intern starts today.  We thought we’d start her off with a little prank (Flickr)

Obama Swats Fly, PETA Criticizes (Star-Telegram)  You’re thinking this headline has to be out of The Onion, right?  Nope.  Here’s video of the fly-swatting incident.  Readers of OA know that I’ve been rather critical of our President.  Here I have to give him credit, “no-drama-Obama” even manages to look uber-cool swatting a fly.

Craigslist Gold Mine (

Blast from the Past….Jim Henson’s (Sorta Violent) Coffee Commercials…last one is my favorite.

If Credit Markets Are Healing…

June 17, 2009 – 3:45 pm

by Rolfe Winkler, CFA

…then why is issuance again increasing under FDIC’s “Temporary” Liquidity Guarantee Program?  FDIC published May data today.

Below I’ve pasted each monthly summary since the program began late last year.

Click each image to enlarge in new window.

100 Questionable Stimulus Projects

June 16, 2009 – 6:54 pm

Senator Coburn of Oklahoma produced the following report about wasteful stimulus projects.  Worth flipping through.  The top 10 are rather funny/aggravating…

FDIC goes after Ally

June 16, 2009 – 5:18 pm

by Rolfe Winkler, CFA

OA is way late to this.  Turns out that the 2.35% rate GMAC/Ally was advertising last week was already a significant cut from 2.8%, made at the behest of the FDIC, which had written a letter instructing them to lower deposit costs.  [Even so, as of today, the 2.35% APY offer still ranks them tops for 1 yr CDs.]

Ron Lieber has the full story at the first link above.  And his conclusion properly alludes to the key issue:  Going after individual banks that are both weak and offering high rates will always be a whack-a-mole exercise.  As long as we have (ridiculously underpriced) public deposit insurance, free-riding weak banks will keep offering high rates to fund risky projects.

Speaking of which, WSJ has a great story on New Frontier Bank in Greeley, CO, which FDIC shuttered earlier this year.  There are hilarious characters in the article.

  • A borrower who is angry with the bank for lending her too much (the loan officer raves about her business plan, saying she’ll make a profit, “which is why I went forward.”)
  • A competing bank exec who says other bankers in town urged borrowers who fell behind on payments to get second loans with New Frontier in order to pay off first loans with their own banks.
  • New Frontier’s founder who insists he didn’t do anything wrong because his loans “helped the community.”  For perspective, 35% of New Frontier’s loan portfolio was delinquent at the end of March, compared to less than 4% at CO’s other state-chartered banks.

It’s guys like this who provide “ponzi finance ” at the end of a credit bubble.  Put another way, they are the greatest fool in the market.  Taxpayer-backing via FDIC insurance enables them.

MySpace to cut 30% of staff

June 16, 2009 – 2:59 pm

by Rolfe Winkler, CFA

That sound you hear is the social media bubble popping.  From PC World:  MySpace Staff Slashed Almost 30%

The restructuring continues at MySpace, whose staff will get cut by almost 30 percent, the News Corp. division announced Tuesday.

MySpace’s staff is “bloated” considering the “realities of today’s marketplace,” which prevents it from operating with efficiency and innovation, MySpace said in a statement.

The layoffs will affect all U.S. divisions and will leave MySpace with about 1,000 employees in the country.

Once the undisputed champion of social networks, MySpace has seen its growth stagnate over the past year, while Facebook surpassed it to become the most popular social-networking site in the world….

Facebook, MySpace and other advertising-supported social-networking sites have found it more challenging than originally thought to generate revenue that is consistent with their massive user bases. Conventional online ads, like pay-per-click text ads and graphical banner ads, don’t work as effectively in social networks. Consequently, social-networking sites are busy trying to design new ad formats that will yield better results for marketers.

If the Twitter or Facebook guys get a decent offer, our advice would be to take it.

Lunchtime Links 6-16

June 16, 2009 – 12:12 pm

by Rolfe Winkler, CFA

(Send links, videos, pics to optionarmageddon at gmail with subject “link”)

Credit Bailout: Issuers Slashing Balances (NYT)  “Mr. McClelland’s credit card company was calling yet again, wondering when it could expect the next installment on his delinquent account. He proposed paying half of his $5,486 balance and calling the matter even.  It’s a deal, the account representative immediately said, not even bothering to check with a supervisor.”

Insurers Take Bailout Funds (DealBook)  Hartford Group and Lincoln National just received billions from TARP.  A knowledgeable reader weighs in on Lincoln:  “If they are hurting this bad with credit spreads having come in as much as they have, then they were really on the verge of failure. It is surprising in a way that they are only the second to take TARP funds, because there are insurers with much worse mortgage books, and this is where the real pain is concentrated.”

New Security Shifts Risk to Borrower (WSJ)  Auction-rate securities—the gimmicky securities that enabled municipalities to borrow long-term at short-term rates while exposing lenders to huge, opaque liquidity risk—have made a comeback as “Windows.”  The idea now is that if an auction fails, borrowers themselves would have to buy back the securities.  Of course they won’t have the money to do so and investors will again be left holding the bag.  So why would investors get suckered again?  Because they have to chase returns: “The money funds are being forced into being more aggressive,” said Municipal Market Advisors managing director Matt Fabian.  With short-term interest rates at historical lows, funds are reaching to riskier products for higher yields. “They’ve become increasingly liberal in the structures they will accept because they’re sitting on so much cash.” Of course reaching for yield in risky products is what spawned subprime lending.

Obama Rejects California’s Bailout Request…for now (WaPo)  The State’s Treasurer says CA is too big to be allowed to fail.  Luckily, the administration has so far rejected its appeals for aid.  But the article notes that if the situation continues to deteriorate, Obama may yet ride to the rescue.

Fisher Says Fed Can’t Offset Treasury Borrowing Flood (Bloomberg)  The President of the Dallas Fed is among a small group of open market committee members worried about runaway deficits.

113 Madoff Victims Tell Stories (WSJ)  Includes links to 3 PDF files of Madoff victim e-mails.

Technician: U.S. to lose AAA rating by end of 2010 (Reuters)  A rather bearish view.

FDA Says Zicam Can Cause Loss of Smell (Kansas City Star)

Dandelion in the Sun…

Once an Inflationist, Always an Inflationist

June 16, 2009 – 9:53 am

by Rolfe Winkler, CFA

OA has noted P Krugman’s insistence that the Fed/Treasury use all the tools at their disposal to keep us from falling into another Depression.  We’ve yet to see any thorough discussion, however, of the consequences of such action.  He admits deficits are a “long-term” problem, that we need a plan to address them eventually.  In the meantime, policy-makers shouldn’t be afraid to spend and print to their hearts’ content.

Here are some excerpts from a ’98 column in which he made a similar argument.  Central banks should actively inflate, he argues, in order to arrest the incipient global recession spawned by the Asia Crisis:

Even if financial markets do continue to tumble, Alan Greenspan and his counterparts in other advanced countries have the tools they need to prevent paper losses from turning into a slump in real output. Mr. Greenspan turned a stock market crash into a real-economy non-event in 1987; he can do it again.

But will he? That’s where I start to worry. The real risk to the world economy comes not from bad fundamentals but from rigid ideologies—ideologies that might make policy makers fail to respond, or even move the wrong way, if a global slump starts to develop.

[Of course the rigid ideology responsible for our latest brush with economic disaster is, in fact, Krugman’s.  Back in 2002, like so many economists he was panicked about a fall in consumer spending.  So he favored using inflation to create a housing bubble in the first place.  Oops.]

One of those ideologies is the belief that a strong currency means a strong economy, that stable prices insure prosperity. Notice that my scenario had the Bank of Japan actually raising interest rates in a recession in order to defend the yen, and the Bundesbank refusing to cut rates because it doesn’t want to encourage laxity in its successors.

[The point of having a “strong, stable” currency isn’t to “insure prosperity,” it’s to get rid of artificial, Fed-induced booms and busts.  Already, Bernanke’s zero-interest rate policy is driving money managers to repeat the mistakes of the recent past.  Again they are chasing returns in risky securities because risk is underpriced.]

Both actions would be deeply foolish. Alas, given the strong-yen rhetoric of Japan and the stable-price rhetoric of Germany, both are also quite plausible. In his classic book ”Golden Fetters,” Barry Eichengreen, an economist at the University of California at Berkeley, showed that the spread of the Great Depression was, more than anything else, caused by the dogged determination of many nations to remain on the gold standard at all costs. Nobody is on the gold standard these days, but the urge to defend monetary purity, never mind the real economy, remains.

The other ideology might be summarized as ”blaming the victim.” Just listen to what one now hears about Asia: that it shouldn’t even attempt a quick recovery through monetary and fiscal expansion, because it will only delay the correction of deeper structural problems. This admonition sounds like an eerie echo of the famous advice that Herbert Hoover received from Andrew Mellon: ”Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate . . . purge the rottenness out of the system.”

It is easy to imagine that effective action against a slump might come too little, too late, because the initial stages of that slump are regarded not as danger signs but as just punishment for economic sins.

In the age of central banking, economists like PK have convinced us they have the power to fight off the business cycle.  Like a 19th century street mountebank hawking snake oil, they peddle a miracle elixir that can reverse the symptoms of any recession.  Its two magic ingredients—government spending and central bank money-printing—are available in different proportions, depending on the particular recessionary symptoms with which the “victim” is stricken.

The economists show us charts and regressions and other complicated arguments that no one unfamiliar with their argot can follow.  Deep down, we all know it’s bullshit.  We know at a gut level that more debt and more inflation won’t actually cure what ails us, that it will just mask the symptoms for a time.  Until, well, the next time we face economic difficulties.  At which point the economists will come back to sell us a new (better!) variety of snake oil.

We believe them because it’s easier to ignore the truth than to face it.

For instance, American families can’t afford two cars.  We don’t need the productive capacity to manufacture 16 million per year.  10 million will do just fine.  But this is unacceptable because there are too many “victims”—auto workers, dealers, parts makers, et al—created by the reduction in capacity.

[Smith and Corona somewhere are wondering why they weren’t bailed out when they fell “victim” to the PC]

Too easily forgotten is that the excess capacity was created by central bankers in the first place.  They encouraged the financial sector to operate with razor thin capital, to offer easy financing terms via the shadow banking system.  All of it protected by a charlatan’s potion, blessed by Krugman, called “The Greenspan Put.”

Lunchtime Links 6-15

June 15, 2009 – 11:51 am

by Rolfe Winkler, CFA

Federal Intervention Pits ‘Gets’ vs. ‘Get-Nots’ (WSJ)  “Increasingly, companies big and small are competing on the basis of their ability to tap government money.”

A “Time-Bomb” for the World Wheat Crop (LA Times)

$8000 Tax Credit Can Be Used for FHA Downpayments (Bible Money Matters)  If true, this is monumentally foolish policy.  Downpayment assistance means marginal buyers can “buy” a home without putting down a dollar.  The default rate on such mortgages is huge: with no equity at stake, buyers have few incentives not to walk away when prices fall.

Ecuador Buys Back 91% of 2012, 2030 Bonds in Default (Bloomberg)  A great trade for Ecuador’s president Rafael Correa.  First he defaults on the debt, its value crashes, and then he retires it for pennies on the dollar.  This is so common in Latin America now, it’s hard to have any sympathy for bond investors that fall victim.

Extended Stay Hotels Files Bankruptcy (CR)

Fraudsters Eye Hug Stimulus Pie (Marketwatch)  The stimulus bill will bail out con-artists too.

Checkmate at the Yellowstone Club (NYT)  “In one of the signature, fin de siècle moments of our passing Gilded Age, the Yellowstone Club [–the only member’s-only ski resort in the U.S.–] filed for Chapter 11 protection last November; four months later, Ms. Blixseth followed suit — a club and its doyenne, sucked into a financial downdraft that has wounded even once-untouchable elites.” The place has a ski-run called “Ebitda.”  One wonders…is it a black diamond?

Details Set for Remake of Financial Regulations (WSJ)  The Fed will get even more powerful.

The biggest bill in history (Economist)

Fox Business Fail

Coming Soon: Michael Moore on Bailouts

June 14, 2009 – 11:28 pm

Obama Embraces Demolition?

June 13, 2009 – 11:31 am

by Rolfe Winkler, CFA

OA has long argued that the only real solution to the economic crisis is for America to get smaller.  Our lifestyles need to be downsized, our debts paid off, our government shrunk.  With that in mind, a must-read from the Telegraph—U.S. Cities May Have to be Bulldozed to Survive

The government is looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature.

Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area.

The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint.

Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country.

Mr Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes….

Mr Kildee, who has lived [in Flint] nearly all his life, said he had first to overcome a deeply ingrained American cultural mindset that “big is good” and that cities should sprawl – Flint covers 34 square miles.

He said: “The obsession with growth is sadly a very American thing. Across the US, there’s an assumption that all development is good, that if communities are growing they are successful. If they’re shrinking, they’re failing.”

But some Flint dustcarts are collecting just one rubbish bag a week, roads are decaying, police are very understaffed and there were simply too few people to pay for services, he said.

If the city didn’t downsize it will eventually go bankrupt, he added….

Mr Kildee acknowledged that some fellow Americans considered his solution “defeatist” but he insisted it was “no more defeatist than pruning an overgrown tree so it can bear fruit again”.

BlogArt: GMAC (now “Ally”) Still Promising Highest Rates

June 12, 2009 – 1:30 pm

by Rolfe Winkler, CFA

After repeated bailouts, GMAC Bank last month changed its name to Ally Bank.  A great branding move—why wouldn’t you want to deposit your money in a bank that’s your ally, especially when it pays the highest interest rate in the nation on a 12-month CD?

To the right is the bank’s ad in today’s WSJ.  Page A5.

Where’s Sheila Bair and the FDIC with its new interest rate restrictions for weak banks?  Surely GMAC/Ally fits the criteria.  Heck, even the American Bankers Association is unhappy.  They’ve complained to FDIC that GMAC/Ally is unfairly exploiting its privileged position as a “too-big-to-fail” lender.*

Actually a better solution than regulating interest rates offered by banks would be to abolish public deposit insurance entirely.


*”too-important-to-fail” is probably more accurate.  GMAC is a primary source of credit to buy cars.  As such, it’s become one of the administration’s slush funds to pump bailout dollars to a favored constituency…in this case the auto sector and its union workers…

Fed Slows Printing Press….For Now

June 12, 2009 – 11:30 am

by Rolfe Winkler, CFA

Good news in money printing land.  The presses, for the moment, have slowed.  Despite the spike in Treasury rates (and consequently mortgages), the Fed has resisted the temptation to beef up asset purchases.  [Recall that the basic idea of quantitative easing is to print money to buy bonds in order to hold interest rates artificially low].

And Jon Hilsenrath reports in today’s WSJ that, for the moment, the Fed plans to Keep a Lid on Bond Buys

Federal Reserve officials are unlikely to significantly boost purchases of U.S. Treasurys and mortgage-backed securities when they meet in late June, but could make other adjustments in the face of rising bond yields and fresh signs of an improving economy.

Fed officials have become more confident recently that they have stabilized the economy and set the stage for recovery. But divisions are brewing within the Fed over whether it should do more to speed the healing, pause, or start pulling back to avoid an outbreak of inflation….

Interest rates on everything from business loans to home mortgages tend to move in tandem with Treasury rates [which have spiked in recent weeks]. If government-bond rates rise too much too fast, they could short-circuit a recovery by choking off consumer and business borrowing and spending.

Fed officials aren’t convinced that is happening yet, so they aren’t inclined to use their muscle to restrain bond yields any more than they have already set out to do. That could change if their views of markets and the economy change. Fed officials say much needs to be hashed out at the next meeting.

Last week we thought it was weird when NY Fed President Bill Dudley said rising interest rates were a sign of recovery.  We’ve long made the argument here on OA that any “recovery” would be short-circuited by higher rates, which would drive asset prices lower and decimate debtors’ balance sheets.

Whether he’s drinking the recovery kool-aid or just afraid of sparking inflation, Bernanke has slowed the Fed’s purchase of assets.  Take a look at its most recent balance sheet, published yesterday.

(Click chart to enlarge in new window)

Over the last two weeks, while purchases of Treasurys have continued ($16 billion this week, $9 billion last week), purchases of agency debt have been small ($4 billion total) and in MBS the Fed has been a seller (-$3.5 billion).

One reason asset purchases may have slowed is that the Fed doesn’t want to waste the $1.75 trillion worth of ammunition it has.  Besides $200 billion of Fan/Fred debt, they’ve committed to buying $1.25 trillion of MBS by the end of this year and $300 billion of Treasurys by August.  They’ve already bought $157 billion of Treasurys, according to WSJ, and $556 billion of mortgage securities.  There’s no reason the Fed needs to limit itself to $1.75 trillion, of course.  It can print as much cash as it wants.  But if central bankers spend too much too soon, they may have to increase their purchase commitments later.

Remember when Hank Paulson said his “bazooka” would save Fan and Fred?  Bondholders called his bluff and forced the government to take the two into conservatorship.

My point is that the bond market is bigger than the Fed.  If the Fed makes an open commitment to print money, inflation expectations may get out of hand quickly.  That’s unlikely to be sure.  Given the massive pile of debt under which we’re suffocating, deflation remains the biggest risk.  (As debtors default, “wealth” is destroyed hence “debt deflation.”)

Lunchtime Links 6-11

June 11, 2009 – 3:26 pm

by Rolfe Winkler, CFA

(Send links, videos, pics to optionarmageddon at gmail with subject “link”)

A Daring Trade Has Wall Street Seeting (WSJ)  Oh this is just delicious.  Big banks thought they had an easy mark.  Turns out the mark was a hustler.  The trade in question is a little complicated, but WSJ includes a very helpful chart at the bottom of the article that explains it graphically.

Mortgage Market Remains Solidly Frozen (Mish)  Spiking mortgage rates (in response to higher Treasury rates) will have that effect….

Paying $98 a month on a $350k mortgage (Calculated Risk)  Another issue not mentioned by CR or the Bloomberg article he cites is that banks continue to treat loans like this as “performing.”  Borrowers are permitted to make minimum payments on option ARMs that allow the loan balance to grow.  Just like a credit card you end up paying interest on interest.  All the while the bank recognizes non-cash interest income: the interest you’re obliged to pay but have chosen to defer until later.  Of course, when “later” arrives, you’re monthly payment explodes and you default instantly.  And all that deferred interest income has to be written off.

Bondholders Face Losses From Commercial Mortgages (Bloomberg)  Lots of good details in this article.  Briefly, monthly payments on interest-only commercial real estate loans are set to increase over the next few years.  With rents still falling, many borrowers are likely to default.

Zipcar plans IPO (NY Post)

Long-Bond Auction Goes Well (AP)  Today’s U.S. Treasury auction found higher demand for U.S. paper than yesterday’s.  Bond prices rose and yields fell from their recent highs.

America’s Sea of Red Ink Was Years in the Making (NYT)  A very interesting piece, with a choice quote: “Alan Auerbach, an economist at UC Berkeley, describes the situation like so: “Bush behaved incredibly irresponsibly for eight years. On the one hand, it might seem unfair for people to blame Obama for not fixing it. On the other hand, he’s not fixing it.  And not fixing it is, in a sense, making it worse.”

Bringing the Hammer Down on Derivatives (NPR)  A good interview with NYT’s Gretchen Morgenson.

Two Japanese Carrying $134 Billion of U.S. Treasury Bonds Detained in Italy (Cyprotgon)  Wait, $134 billion?!  WTF?!?  No way this is legit.  Hopefully other news orgs will try to confirm, and figure out who these two guys are.

What De-Leveraging?

June 11, 2009 – 1:35 pm

by Rolfe Winkler, CFA

So much for de-leveraging.

The Fed published its latest Flow of Funds report today.  One key takeaway: While total debt is growing more slowly, it is still growing.  Since Q3 ’08 households have cut their debt (slightly), but the federal government is borrowing so rapidly, overall debt continues to expand.

(Click chart for larger image in new window)

By the way, the Fed only includes publicly held debt when calculating total federal government borrowings, $6.7 trillion at the end of Q1.  This excludes over $4 trillion owed to the Social Security “trust fund.”  More importantly, it excludes $60 trillion of unfunded future liabilities for Medicare and Social Security.  (see the debt clock to the right)

The second chart puts the data into perspective.  As a percentage of GDP, debt continues to expand, from 368% at the end of Q4 to 375% at the end of Q1.

(Click chart for larger image in new window)

It’s been said that the income statement is the past, but the balance sheet is the future.  Our balance sheet is getting worse.  Those who see “green shoots” believe the crisis is abating.  But they don’t understand its origin: a credit bubble that, in the aggregate, continues to inflate. The equity value of our economy is going down—think the stock market and housing equity (see below).  At the same time our debt is going up.  In other words, America’s leverage continues to expand.

The only way to climb out of a debt-induced depression is to pay down debt or to write it off.  Levering up only delays the inevitable.

Unfortunately Americans, and lately the Obama administration, have shown absolutely no political will to do this.  Republicans decry growing deficits, but do you ever hear them enumerate cuts they would make?  Clearly our plan is to keep borrowing until our lenders cut us off.

Speaking of crashing equity…

(Click chart for larger image in new window)

The last chart plots the amount of equity Americans have in their homes.  This figure has been crashing as house prices fall while mortgage debt stays roughly constant.  At the end of 2007 the figure was 49%, at the end of last year 43%.  It now stands at 41.4%.

And as CR notes: “approximately 31% of households do not have a mortgage. So the 50+ million households with mortgages have far less than 41.4% equity.”

Deflation: Thy Name is Cheaper NYC Rent

June 11, 2009 – 12:24 pm

by Rolfe Winkler, CFA

Thought I’d share a rental anecdote.  I just renegotiated my rent on a 1BR here in Manhattan’s Midtown West area.  My savings compared to last year: 18%.  Had I been willing to move, similarly sized apartments in the neighborhood could have been had for as much as 25% off last year’s price.

Rents in this neighborhood have stabilized since Winter, but concessions that landlords had planned to lift by now remain in place.  Every building I visited in the city is offering some version of a month’s free rent.  First month on a 12 month; last month on a 13 month.  Some higher-priced newer buildings are offering 2 months free, which brings their pricing in-line with the market.

According to a broker I spoke with yesterday, summer months are typically much busier as NYC receives its annual quota of new residents.  This year not so much.  Most of the rentals she’s seeing are New Yorkers moving within the city, looking to take advantage of better deals.

The lack of new residents is likely due to the weak job market.  Plenty of buildings planned during the boom continue to go up.  From my window I can see 5 new buildings.  One completed in January, two beginning move-ins next month, and two more set to open some time next year.  That’s a lot of new inventory coming on the market, which means rents should remain under pressure for some time.

And falling rents are bad news for the housing market.

Jim Grant on CNBC: If Fed Audited Self, It Would Be Shut Down

June 10, 2009 – 3:38 pm

by Rolfe Winkler, CFA

The long-time publisher of Grant’s Interest Rate Observer notes, among other things, that

“If the Fed examiners were set upon the Fed’s own documents—unlabeled documents—to pass judgment on the Fed’s capacity to survive the difficulties it faces in credit, it would shut this institution down,” he said. “The Fed is undercapitalized in a way that Citicorp is undercapitalized.”

He also questions the common wisdom that you can’t have inflation when there is excess capacity in the economy.

If the video below doesn’t load in your browser, you can see it here.

Lunchtime Links 6-10

June 10, 2009 – 1:36 pm

by Rolfe Winkler, CFA

(Send links, videos, pics to optionarmageddon at gmail with subject “link”)

Treasurys Decline as Russia May Pare Holdings of U.S. Debt (Bloomberg)  The Russians want to move reserves out of Treasurys and into….IMF bonds.  OA admits to not understanding the concept of IMF bonds.  What is the IMF’s source of revenue to pay back those bonds?  Interst payments from busted countries who’ve received IMF loans?  As bad as the U.S. credit profile looks over the next 30 years, it still feels superior to Latvia, Pakistan and Argentina.

Fiat Closes Deal to Take Over Chrysler (WSJ)  As quickly as it got in the way, the Supreme Court stepped aside.

“Cash for Clunkers” Car Sale Plan Approved in House (Bloomberg)  The legislation would provide a $3500 government voucher for car owners to buy a new car that gets an extra 4 MPG.  $4500 for +10 MPG.  This is a backdoor bailout for automakers cloaked as “environmentalism.”  Never mind the massive waste and energy consumption of producing cars that no one would otherwise buy….

Health-Care Change Won’t Swell Deficit, Orszag Says (Bloomberg)  This is just so much bullshit.  Increased efficiency doesn’t reduce costs, it increases consumption.  Cars today get, what, 2x-3x MPG versus cars built in the 70s?  And yet our total oil consumption is significantly higher today.  The only way we’re going to save money is by saying “no” to people who want expensive care.  Under a nationalized health system, that would have to come through rationing.  But Senators crafting legislation say there won’t be any rationing: “We’ll be able to get [comparative effectiveness research] included in health reform as long as we make clear there’s no cost-benefit analysis,” [said Senator Max] Baucus. Patients and their doctors will make decisions based on costs, Baucus said.  “That’s up to them to look at cost, but it’s not up to the agent to look at what should be prescribed or not.” Huh?  So the guy paying, a government bureaucrat, won’t have any say on costs?  He’ll just be the guy that signs the checks?

Revenue at Craigslist is said to top $100 million (NYT)  The company has just 30 employees and charges for postings in certain categories in major cities.  The bigger story is all the postings that remain free.  This is an example of the internet making a particular market far more efficient.  Why should consumers spend $75 for a four days worth of classified ads in a newspaper when they can get it free (or for a huge discount) on Craigslist?  This is bad for newspapers; classified revenue once supported a big chunk of their content creation.  But it’s great for consumers.  OA certainly laments the fall of good local reporting, but we love “creative destruction.”  The challenge for newspapers is to create content that folks want to read and are willing to pay for.

U.S. Commercial Loan Servicers Seek Longer Extensions (Reuters)  Servicers working on commercial real estate are modifying loans to give borrowers more time to pay.  Lenders don’t want to take a loss on upside down mortgages, so they give upside down borrowers more time hoping that in the interim, Bernanke will have successfully reflated the economy.  In other words, instead of actually de-leveraging by paying down and/or writing off debt, lenders are increasing leverage to kick loss recognition down the road.  Think about the insanity of this:  the only way to reflate is to blow another credit bubble, to lend more to artificially increase asset prices.  But that’s just more debt to be paid down later too.

Green Shoots or Yellow Weeds (Roubini)  Dr. Doom sees nine reasons to remain pessimistic.

Revenge of the Nerd (Newsweek)  Paul Wilmott is out to save Wall Street’s soul—one dork at a time.

House Subpoenas Fed Re: Merrill Sale to BofA (NakedCapitalism)

HR 1207 Now Has 200 Cosponsors (  That’s the official number so far.  In the last few days, the number has ticked up to 207, including House Minority Leader John Boehner.  This is Ron Paul’s bill to audit the Fed, by the way.  And Ben Bernanke recently hired a former Enron lobbyist to fight it.  While everyone’s excited about momentum in the House, the bad news is that the companion bill in the Senate sponsored by Bernie Sanders still has zero cosponsors.  There’s a call-o-thon going on, if folks are interested.

FedEx launches pseudo blog to fight UPS Bailout (  This site is designed to have a grass roots feel.  But take a look at the tiny type at the bottom:  “Copyright, 2009: FedEx.”  BTW, OA isn’t saying we disagree with the message.

Now….Go Break the Windows (Smoking Gun) Crank caller wreaks havoc on Arkansas hotel, duping employees, guests

Peter Schiff on The Daily Show

June 10, 2009 – 10:13 am

by Rolfe Winkler, CFA

(ht Karina M.)

At the end Peter says he’s considering a run for Senate against Chris Dodd….

Lunchtime Links 6-9

June 9, 2009 – 1:57 pm

by Rolfe Winkler, CFA

(Send links, videos, pics to optionarmageddon at gmail with subject “link”)

WSJ Editorial Calls for Breakup of Citigroup (WSJ)  The WSJ editorial page is generally as useless as the NYT editorial page, both are predictably partisan….always.  This opinion is well-considered, though.

10 Big Firms Get Approval to Leave TARP (Bloomberg)  Not on the list were Citi, BofA and Wells Fargo.  A big unanswered question remains the terms of repayment.  Taxpayers were given warrants in order to participate in “upside.”  Banks are trying to weasel their way out of buying back those warrants at a fair price.  Will Treasury let them?  Our guess is yes.  [By the way, the Economist points out that even after they pay back TARP money, the big banks are still very much wards of the state…ht Steve L]

Michael Lewis Interview (CNN)  The Liar’s Poker author speaks to CNN’s Fareed Zakaria.  “There is a great tradition on Wall Street of making a fortune, creating a mess, and then making a fortune cleaning it up. But to do it on this scale is breathtaking to me.”

Beware False Bottoms in Real Estate (Mark Hanson)

Apple Halves Price of iPhone (Reuters)  Steve Jobs, recovering form pancreatic cancer, was going to make an appearance.  He didn’t.

Plug Pulled on Trust Fund Babies (NYT)  OA lived in Williamsburg, Brooklyn for a year not long ago.  It was a rather remarkable juxtaposition of high rents and tattered/tatooed people.

U.S. to Press Europe for Tougher Bank Stress Tests (WSJ)  The blind leading the blind?  Actually, as pathetic as our stress tests were (and Elizabeth Warren is already pressing to rerun ’em) it appears they were far superior to Europe’s.

Top Chinese Banker Calls for Wider Use of Yuan (Telegraph)  Some Japanese commentators had previously floated the idea of yen-denominated U.S. debt.  Here a top Chinese banker calls for yuan-denominated debt.  Issuing debt in dollars gives us the advantage of being able to print whatever currency we need to pay off our obligations.  Foreign bond buyers now see this as a threat, so they want to lend in their own currencies.

Father’s Surprise: Call-Girl Daughter (BBC) This story was just an urban legend.  Thanks to reader Laura.

“Manualist” Plays Bohemian Rhapsody….