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Tuesday, January 12, 2010
Sunday, January 10, 2010
Something To Chew On: Fannie & Freddie
Ever since the Treasury department cleverly worded a press release on Christmas Eve, I got to thinking about the enormity of the FannieMae and Freddie Mac situation. The press release entitiled "Update on the Status of Support for Housing Programs" dropped a sentence that made me shudder: The Treasury plans to "increase as necessary to accommodate any cumulative reduction in net worth over the next three years".
We (taxpayers) are already on the hook for $200 billion (oh wait Bloomberg just did some actual math and came up with over $400 billion). And now Fannie and Freddie will receive relief without limits.
Massachusetts Congressman Barney Frank (a man whose math skills and business acumen rival a 4 year old) now considers Fannie and Freddie to be a “public policy instrument of the government,” and that they “have become a kind of public utility".
This "public utility" has implemented Loan Modification Programs and like all good government run entities, their ideas are terrible. Somewhere along the lines of 30,000 of the over 750,000 applicants for loan modifications have been approved and those that aren't are in danger of being forced into short sale (as according to the rules of the program) causing hundreds of thousands of homes to be put on the market. Granted its not as if anyone will actually follow the rules (this is America after all) but more harm that good has been done. The Treasury desperate to prevent another glut of homes going on the market, reacted to the fact that many of those who are trying to get relief are fudging their applications by significantly understating their income in hopes of getting undeservedly low monthly payments by issuing a mid-December directive ordering participating lenders not to penalize applicants for having done so. Associated Press columnist Rachel Beck described this move as “reward(ing) liars.” Expect more liars to apply for “rewards.”
I'm going to give you a little chart that shows the actuarial assumptions for default on debts incurred by borrowers with certain FICO scores.
Fannie and Freddie used to have a conventional mortgage threshold of 670 which meant that the was a less than 15% chance of you getting seriously delinquent on your debts (90 days or more late). This seems a fairly prudent approach to lending. BUT WAIT! Guess what Fannie and Freddie decided to do in the early 2000's....
To summarize, Fannie and Freddie are no longer controlled by independent shareholders. They are completely controlled by the Federal government and are acting as its agents and instrumentalities. Despite the formality of a conservatorship, there is no conceivable state of affairs where they can regain their solvency or independence.
Under any system of accounting rules, where one entity is completely owned and controlled by another, the owner must show the subsidiary’s obligations on the owner’s balance sheet as the owners liabilities.
The US government has not done this with Fannie and Freddie. Their more 2-5+ Trillion of obligations (depending on whether you include the loans securitized and dumped on unknowing investors) must be added to the US Governments outstanding debts of 12 Trillion. The result is a an increase in national debt of about 30-40% of GDP, which kicks us well over 100% of GDP.
Good Luck........
We (taxpayers) are already on the hook for $200 billion (oh wait Bloomberg just did some actual math and came up with over $400 billion). And now Fannie and Freddie will receive relief without limits.
Massachusetts Congressman Barney Frank (a man whose math skills and business acumen rival a 4 year old) now considers Fannie and Freddie to be a “public policy instrument of the government,” and that they “have become a kind of public utility".
This "public utility" has implemented Loan Modification Programs and like all good government run entities, their ideas are terrible. Somewhere along the lines of 30,000 of the over 750,000 applicants for loan modifications have been approved and those that aren't are in danger of being forced into short sale (as according to the rules of the program) causing hundreds of thousands of homes to be put on the market. Granted its not as if anyone will actually follow the rules (this is America after all) but more harm that good has been done. The Treasury desperate to prevent another glut of homes going on the market, reacted to the fact that many of those who are trying to get relief are fudging their applications by significantly understating their income in hopes of getting undeservedly low monthly payments by issuing a mid-December directive ordering participating lenders not to penalize applicants for having done so. Associated Press columnist Rachel Beck described this move as “reward(ing) liars.” Expect more liars to apply for “rewards.”
I'm going to give you a little chart that shows the actuarial assumptions for default on debts incurred by borrowers with certain FICO scores.
Fannie and Freddie used to have a conventional mortgage threshold of 670 which meant that the was a less than 15% chance of you getting seriously delinquent on your debts (90 days or more late). This seems a fairly prudent approach to lending. BUT WAIT! Guess what Fannie and Freddie decided to do in the early 2000's....
The credit score threshold for conventional mortgages, which had generally been 670 or more, dropped to about 630. In the real world, a score of 630 indicates that you’re having trouble with your debt load, paying your bills on time, or a little of both.
More ominously, the credit score threshold for subprime mortgages, which had generally been 630 or more, fell to about 590. A score of 590 is the credit scoring equivalent of barely having a pulse.
To summarize, Fannie and Freddie are no longer controlled by independent shareholders. They are completely controlled by the Federal government and are acting as its agents and instrumentalities. Despite the formality of a conservatorship, there is no conceivable state of affairs where they can regain their solvency or independence.
Under any system of accounting rules, where one entity is completely owned and controlled by another, the owner must show the subsidiary’s obligations on the owner’s balance sheet as the owners liabilities.
The US government has not done this with Fannie and Freddie. Their more 2-5+ Trillion of obligations (depending on whether you include the loans securitized and dumped on unknowing investors) must be added to the US Governments outstanding debts of 12 Trillion. The result is a an increase in national debt of about 30-40% of GDP, which kicks us well over 100% of GDP.
Good Luck........
Friday, January 8, 2010
US Treasury is getting desperate
The US Treasury is Moving to try and allow the conversion of IRA's and 401K's into annuities backed by the US government
I am flat out disgusted. The treasury knows it cannot fund its upcoming issuance's so it is not looking to fleece people out of their retirement by giving them the "option" of a safehaven for their money. Forcing people into Treasuries as an "annuity" is exactly what Social Security allegedly is. Except that Treasury stole the money that was collected in FICA taxes and spent it!
This may be the only way for Treasury to hold down interest rates to something reasonable in the intermediate term, but doing so will instantaneously remove a major source of funding for the stock market - that is, the monthly and quarterly inflows from retirement accounts.
This is not good.....
The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.
I am flat out disgusted. The treasury knows it cannot fund its upcoming issuance's so it is not looking to fleece people out of their retirement by giving them the "option" of a safehaven for their money. Forcing people into Treasuries as an "annuity" is exactly what Social Security allegedly is. Except that Treasury stole the money that was collected in FICA taxes and spent it!
This may be the only way for Treasury to hold down interest rates to something reasonable in the intermediate term, but doing so will instantaneously remove a major source of funding for the stock market - that is, the monthly and quarterly inflows from retirement accounts.
This is not good.....
Simon Johnson 2010 and beyond Outloook
I still can't get over how CNBC anchors treat their guests whose opinions differ from theirs. But Simon Johnson makes some excellent points and explains why we are not out of the woods yet.
Wednesday, January 6, 2010
Goods Producing Jobs Vs Government Jobs
Wish I had known that Goverment jobs exceeded Goods producing jobs in late-2007. Would have dramatically changed my outlook on the Long Term viability of GDP growth and the US economy. Since then it has exploded to a 4 million discrepancy.
The Goods Producing category currently includes less than a million workers in mining and logging, about 6 million in construction, and 11.7 million in manufacturing.
The Government category includes 2.8 million federal employees and almost 20 million state and local workers, just over half of whom work in education.
I don't know whether to laugh or cry.
The Goods Producing category currently includes less than a million workers in mining and logging, about 6 million in construction, and 11.7 million in manufacturing.
The Government category includes 2.8 million federal employees and almost 20 million state and local workers, just over half of whom work in education.
I don't know whether to laugh or cry.
Monday, January 4, 2010
10 Things you must do for 2010
So without further adieu, here's my list of 10 things you need to be doing now:
Stop listening to those who claim that "The Market is telling you the recession is ending/over." Baloney. What was the market telling you in October of 2007 when the SPX hit 1576? That everything was great and "subprime was contained", right? Any more questions on that piece of nonsense?
Get out of debt - NOW. Revolving debt in particular is murderous. If your credit line hasn't been cut back or your interest rate jacked, you're one of the few. It will happen. Going bankrupt due to increasing debt service requirements (with or without job loss) sucks.
Stop spending more than you make - in fact, do the opposite - start saving. NOW. You need to be saving 10% of your gross income. Not net or "excess" - gross. These funds serve two purposes: an emergency fund (which you're likely to need) and if you have one already it will also serve as a fund to buy up assets that will be puked up when things get really bad. You don't get wealthy by selling to some other sucker - you get wealthy by buying when nobody has any money to buy - that is, by driving the hardest bargain you can imagine!
Have the ability to make it even if you lose your job. Most people say three months of reserves are necessary. I've said six months to two years, and I'll reiterate it. And reserves means cash, not credit. Parked in a credit union is ok - but be prepared to make that actual cash in a big honking hurry if you need to. How do you know if you need to? If and when the first Treasury auction fails, the market crashes below the 666 March low and/or a big bank fails, you need to.
Pull ALL of your business from ANY bank that has received federal assistance. The community banks and credit unions have been screwed by the crony government interests in two ways - first, by regulators allowing bankrupt banks to pay overly-large CD rates when they're insolvent (that's fraud on its face) and second by proposing to tax them through FDIC assessments to pay for the sins of the imprudent. Withdraw your consent and assistance - move your funds to a credit union or local community bank, but before doing so ask to see their financials and look specifically for over-leverage in commercial real estate and other development "assets". HIT THE BAD GUYS IN THE WALLET - THE ONLY PLACE THEY UNDERSTAND!
If you have assets in the stock market, and have thus enjoyed the rally off SPX 666, either sell or hedge that exposure RIGHT NOW. The upside risk is what - 10%? What's the downside risk? 50% or more. You can hedge effectively with PUTs which have gotten much cheaper as the VIX has fallen, or simply sell out and go to cash. In my opinion you're insane to play for another 10% gain when you may suffer a 50% loss, but that's my view. Just don't say you weren't warned if you do nothing and the collapse occurs!
Figure out what you're going to do if we suffer a "sudden stop" and be prepared to execute that plan. Consider what a collapse in trucking, for example, does to the food supply into major cities. This is a low-probability risk right now (perhaps 10-20%) but if it happens major cities will become free-fire zones within hours. A gun won't do you a damn bit of good when there's a potential rifle barrel sticking out of every window and the person behind it is interested in the bag of groceries you're carrying. You are not Rambo (and by the way, have you noticed that Rambo always goes after bad guys in some small, flat hellhole? Ever wonder why? With a sniper rifle poking out of every second window even John Rambo doesn't stand a chance.) Those who live on the coasts have hurricane plans. Everyone needs a "sudden stop" plan, and it must not rely on access to credit of any sort, because if "it" happens that access will disappear instantly. For people in rural America, this might not be that big of a deal. For those who live in big cities it is - and its something you probably haven't thought through to the degree you need to.
Don't count on metals. I know, I know, we're going to hyperinflate and gold is going to the moon. I have one question: Can you eat it, drink it, run your car on it, sleep under it, or screw it? No? That's a problem. A "sudden stop" is not a hyperinflationary event - it has good odds of being quite the opposite. God help you if you put your eggs in that basket and are wrong.
Acquire lawful means of self-defense. Your odds of being victimized are roughly 1 in 100 annually under normal conditions. What happens when its 1 in 5? Think it won't be? Ok, if doesn't really get bad then you spent money on something you don't need, but you still have it and can sell it (even if you take somewhat of a loss.) If you wait, and then decide you need it, what are the odds of being able to find a firearm? And by the way, weapons you don't know how to use in a competent and cool fashion if you need to are worthless or worse. This means range time and/or professional instruction, and both take time, effort and money. Again, this is called "hedging" - your life and property, this time (instead of your investment portfolio)
Figure out who your friends are - and aren't. This isn't about who you like. Its about who you can trust with your back - no questions asked. If things get bad the second-to-the-last thing you want to be is alone - right before being around anyone who is less than 100% trustworthy. Think about this point long and hard - this doesn't mean dumping acquaintances now, but it does mean knowing who you group with if you need to - and who you avoid.
(This Post Taken From Denninger last year and has even more merit now than then)
Stop listening to those who claim that "The Market is telling you the recession is ending/over." Baloney. What was the market telling you in October of 2007 when the SPX hit 1576? That everything was great and "subprime was contained", right? Any more questions on that piece of nonsense?
Get out of debt - NOW. Revolving debt in particular is murderous. If your credit line hasn't been cut back or your interest rate jacked, you're one of the few. It will happen. Going bankrupt due to increasing debt service requirements (with or without job loss) sucks.
Stop spending more than you make - in fact, do the opposite - start saving. NOW. You need to be saving 10% of your gross income. Not net or "excess" - gross. These funds serve two purposes: an emergency fund (which you're likely to need) and if you have one already it will also serve as a fund to buy up assets that will be puked up when things get really bad. You don't get wealthy by selling to some other sucker - you get wealthy by buying when nobody has any money to buy - that is, by driving the hardest bargain you can imagine!
Have the ability to make it even if you lose your job. Most people say three months of reserves are necessary. I've said six months to two years, and I'll reiterate it. And reserves means cash, not credit. Parked in a credit union is ok - but be prepared to make that actual cash in a big honking hurry if you need to. How do you know if you need to? If and when the first Treasury auction fails, the market crashes below the 666 March low and/or a big bank fails, you need to.
Pull ALL of your business from ANY bank that has received federal assistance. The community banks and credit unions have been screwed by the crony government interests in two ways - first, by regulators allowing bankrupt banks to pay overly-large CD rates when they're insolvent (that's fraud on its face) and second by proposing to tax them through FDIC assessments to pay for the sins of the imprudent. Withdraw your consent and assistance - move your funds to a credit union or local community bank, but before doing so ask to see their financials and look specifically for over-leverage in commercial real estate and other development "assets". HIT THE BAD GUYS IN THE WALLET - THE ONLY PLACE THEY UNDERSTAND!
If you have assets in the stock market, and have thus enjoyed the rally off SPX 666, either sell or hedge that exposure RIGHT NOW. The upside risk is what - 10%? What's the downside risk? 50% or more. You can hedge effectively with PUTs which have gotten much cheaper as the VIX has fallen, or simply sell out and go to cash. In my opinion you're insane to play for another 10% gain when you may suffer a 50% loss, but that's my view. Just don't say you weren't warned if you do nothing and the collapse occurs!
Figure out what you're going to do if we suffer a "sudden stop" and be prepared to execute that plan. Consider what a collapse in trucking, for example, does to the food supply into major cities. This is a low-probability risk right now (perhaps 10-20%) but if it happens major cities will become free-fire zones within hours. A gun won't do you a damn bit of good when there's a potential rifle barrel sticking out of every window and the person behind it is interested in the bag of groceries you're carrying. You are not Rambo (and by the way, have you noticed that Rambo always goes after bad guys in some small, flat hellhole? Ever wonder why? With a sniper rifle poking out of every second window even John Rambo doesn't stand a chance.) Those who live on the coasts have hurricane plans. Everyone needs a "sudden stop" plan, and it must not rely on access to credit of any sort, because if "it" happens that access will disappear instantly. For people in rural America, this might not be that big of a deal. For those who live in big cities it is - and its something you probably haven't thought through to the degree you need to.
Don't count on metals. I know, I know, we're going to hyperinflate and gold is going to the moon. I have one question: Can you eat it, drink it, run your car on it, sleep under it, or screw it? No? That's a problem. A "sudden stop" is not a hyperinflationary event - it has good odds of being quite the opposite. God help you if you put your eggs in that basket and are wrong.
Acquire lawful means of self-defense. Your odds of being victimized are roughly 1 in 100 annually under normal conditions. What happens when its 1 in 5? Think it won't be? Ok, if doesn't really get bad then you spent money on something you don't need, but you still have it and can sell it (even if you take somewhat of a loss.) If you wait, and then decide you need it, what are the odds of being able to find a firearm? And by the way, weapons you don't know how to use in a competent and cool fashion if you need to are worthless or worse. This means range time and/or professional instruction, and both take time, effort and money. Again, this is called "hedging" - your life and property, this time (instead of your investment portfolio)
Figure out who your friends are - and aren't. This isn't about who you like. Its about who you can trust with your back - no questions asked. If things get bad the second-to-the-last thing you want to be is alone - right before being around anyone who is less than 100% trustworthy. Think about this point long and hard - this doesn't mean dumping acquaintances now, but it does mean knowing who you group with if you need to - and who you avoid.
(This Post Taken From Denninger last year and has even more merit now than then)
Wednesday, December 23, 2009
Copenhagen shows this is China's Century
A Fascinating piece on the closed door talks in Copenhagen from the Guardian UK
He goes on to explain how China expertly played on the desperation of the US and other developing countries to pass legislation.
Their reasons are obvious:
Copenhagen was a disaster. That much is agreed. But the truth about what actually happened is in danger of being lost amid the spin and inevitable mutual recriminations. The truth is this: China wrecked the talks, intentionally humiliated Barack Obama, and insisted on an awful "deal" so western leaders would walk away carrying the blame. How do I know this? Because I was in the room and saw it happen.
China's strategy was simple: block the open negotiations for two weeks, and then ensure that the closed-door deal made it look as if the west had failed the world's poor once again. And sure enough, the aid agencies, civil society movements and environmental groups all took the bait.
He goes on to explain how China expertly played on the desperation of the US and other developing countries to pass legislation.
Here's what actually went on late last Friday night, as heads of state from two dozen countries met behind closed doors. Obama was at the table for several hours, sitting between Gordon Brown and the Ethiopian prime minister, Meles Zenawi. The Danish prime minister chaired, and on his right sat Ban Ki-moon, secretary-general of the UN. Probably only about 50 or 60 people, including the heads of state, were in the room. I was attached to one of the delegations, whose head of state was also present for most of the time.
What I saw was profoundly shocking. The Chinese premier, Wen Jinbao, did not deign to attend the meetings personally, instead sending a second-tier official in the country's foreign ministry to sit opposite Obama himself. The diplomatic snub was obvious and brutal, as was the practical implication: several times during the session, the world's most powerful heads of state were forced to wait around as the Chinese delegate went off to make telephone calls to his "superiors".
Their reasons are obvious:
...China's growth, and growing global political and economic dominance, is based largely on cheap coal. China knows it is becoming an uncontested superpower; indeed its newfound muscular confidence was on striking display in Copenhagen. Its coal-based economy doubles every decade, and its power increases commensurately. Its leadership will not alter this magic formula unless they absolutely have to.
Copenhagen was much worse than just another bad deal, because it illustrated a profound shift in global geopolitics. This is fast becoming China's century, yet its leadership has displayed that multilateral environmental governance is not only not a priority, but is viewed as a hindrance to the new superpower's freedom of action. I left Copenhagen more despondent than I have felt in a long time. After all the hope and all the hype, the mobilisation of thousands, a wave of optimism crashed against the rock of global power politics, fell back, and drained away.
Wednesday, December 16, 2009
Citi Pays Back Tarp for Billions in Tax Savings
This is pathetic
So basically the Government gave Citi a 38 billion dollar tax exemption for paying back tarp money. So all this lip flapping about making profits off tarp is complete and utter crap. I am furious as to how our government is able to get away with doing this.
From Denninger:
Obama was touting the "profits" made by Treasury on the TARP repayments. What he wasn't saying is that not only did we flush the money (from TARP) that went into Chrysler (disclosed last night), we now find out that at the same time he was "touting" the so-called "profits" The President was handing that money straight back to the bailed-out companies via tax breaks!
So no, Mr. President, Treasury (and The American People by extension) did not "make a profit" on TARP, nor "will we recover every penny" that was paid out.
There have been several banks that have failed after receiving TARP money - we will get zero from them. We will get zero from Chrysler and GM. We lost 100% of the money injected into CIT, and now you have handed out billions of tax credits to Citibank.
Where's the so-called "populism" - that is, the protection of "the little guy" while making those who were responsible for this economic mess pay for their sins Mr. President?
If you're a Democrat and believe that you were electing "Hope and Change", you might want to think about what you actually bought with your vote - not what you were sold.
The Internal Revenue Service on Friday issued an exception to long-standing tax rules for the benefit of Citigroup and a few other companies partially owned by the government. As a result, Citigroup will be allowed to retain billions of dollars worth of tax breaks that otherwise would decline in value when the government sells its stake to private investors.
So basically the Government gave Citi a 38 billion dollar tax exemption for paying back tarp money. So all this lip flapping about making profits off tarp is complete and utter crap. I am furious as to how our government is able to get away with doing this.
From Denninger:
Obama was touting the "profits" made by Treasury on the TARP repayments. What he wasn't saying is that not only did we flush the money (from TARP) that went into Chrysler (disclosed last night), we now find out that at the same time he was "touting" the so-called "profits" The President was handing that money straight back to the bailed-out companies via tax breaks!
So no, Mr. President, Treasury (and The American People by extension) did not "make a profit" on TARP, nor "will we recover every penny" that was paid out.
There have been several banks that have failed after receiving TARP money - we will get zero from them. We will get zero from Chrysler and GM. We lost 100% of the money injected into CIT, and now you have handed out billions of tax credits to Citibank.
Where's the so-called "populism" - that is, the protection of "the little guy" while making those who were responsible for this economic mess pay for their sins Mr. President?
If you're a Democrat and believe that you were electing "Hope and Change", you might want to think about what you actually bought with your vote - not what you were sold.
Thursday, December 3, 2009
Anecdote of the Day
“At a party given by a billionaire on Shelter Island, the late Kurt
Vonnegut informs his pal, the author Joseph Heller, that their host, a
hedge fund manager, had made more money in a single day than Heller had
earned from his wildly popular novel, Catch-22, over its whole history. Heller responds, ‘Yes, but I have something he will never have: Enough.’ “
Vonnegut informs his pal, the author Joseph Heller, that their host, a
hedge fund manager, had made more money in a single day than Heller had
earned from his wildly popular novel, Catch-22, over its whole history. Heller responds, ‘Yes, but I have something he will never have: Enough.’ “
Wednesday, December 2, 2009
Scary: North Korea Revalues Currency
From the Washington Post:
Apparently the North Korean Government has punished those who have been saving their cash and running businesses that the government hasn't been able to control. Their solution? To devalue the currency, bankrupting these individuals.
Here's the kicker:
TOKYO -- Chaos reportedly erupted in North Korea on Tuesday after the government of Kim Jong Il revalued the country's currency, sharply restricting the amount of old bills that could be traded for new and wiping out personal savings.
The revaluation and exchange limits triggered panic and anger, particularly among market traders with substantial hoards of old North Korean won -- much of which has apparently become worthless, according to news agency reports from South Korea and China and from groups with contacts in North Korea.
Apparently the North Korean Government has punished those who have been saving their cash and running businesses that the government hasn't been able to control. Their solution? To devalue the currency, bankrupting these individuals.
The revaluation replaces 1,000-won notes with 10-won notes but strictly limits the amount of old currency that can be exchanged, news reports said.
According to two Web-based groups with sources in the North, that limit was set Monday at 100,000 won, which at current black-market rates amounts to $40. All North Korean currency that individuals possess in excess of that amount becomes worthless under the revaluation.
Amid widespread protests, the limit was raised to 150,000 won in cash and 300,000 won in bank savings
Here's the kicker:
the government did not explain why the revaluation had occurred.
Asset Bubbles of the past 10 years and the fed
A really fascinating chart showing Apparently easy money has just led to more and more Asset Bubbles and its looking like gold is turning into another one of them. Hopefully Bernanke isn't just blowing smoke when he makes comments like this.
“The best approach here if at all possible is to use supervisory and regulatory methods to restrain undue risk-taking and to make sure the system is resilient in case an asset price bubble bursts in the future.”
Given his comments on protecting the dollar as a store of wealth, consider me suspect.
Monday, November 30, 2009
Food Stamps up 32% Since 2007
The Number of Americans receiving food stamps has increased by 10 million over the past two years, resulting in a program that now feeds 1 in 8 Americans and nearly 1 in 4 children.
http://www.nytimes.com/interactive/2009/11/28/us/20091128-foodstamps.html
http://www.nytimes.com/interactive/2009/11/28/us/20091128-foodstamps.html
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