WSJ has a riff about a club of people helped by Countrywide's Angelo Mozilo.
I'm not against government involvement/ownership/warrants in principle.
It's just experience that leads me to want ... separate boxes for politicians and businessmen.
The temptations are just ... too strong.
Friday, October 10, 2008
Friends of Angelo
McCain's Exit Strategy
I remarked a long while ago that today's Conservatism was not going to go quietly into the night, but would go kicking and screaming. (I think it was in reference to a particularly virulent Hewitt comment).
Krugman notices it too, now.
My question is, consciously or not, is this part of McCain's exit strategy?
Is he appeasing "the base", by throwing flaming arrows and his Willie-Horton worst, because that is what they want, what they are comfortable with and want to do, so that the Party doesn't lose them and so that he, himself, has ... a future, of some kind?
Financial Crisis - Producing More Heat Than Light
The number and volume of freakish ideas about what to do have been multiplying. It's to the point where I'm getting more afraid of the solutions than the house we've pulled down over our heads (pun intended).
What's missing?
Why doesn't someone do a roundtable with a handful of people who value and trade the securities in question, instead of all these peripheral people, who couldn't price an option to save their firm, literally.
Heavy sigh - The morning Joe
Friday morning, to-do list:
- -It's really okay to rely on foreign capital. However, to do so, you have to act like you understand that it means keeping the confidence going. Volker overdid it a little, last night, on Charlie Rose; but you cannot fault him. He's been warning of our unsustainable ways for a long while, now ... Nevertheless, today is not the day that that piper will be paid, if he is going to be.
- -The bottom-up approach, rather than the Paulson slush-fund approach, is not just Keyensian "welfare". It's a sensible approach to putting a floor under valuations of mortgage securities, by offering up what only the government can in these circumstances, something very, very valuable to Wall Street: certainty / guarantees.
Yes, it costs something, maybe something "un-recoverable". Better to pay, than to guess that there is enough capital to "solve" the problems that the banks are in (especially when we have no true accounting of their problems, currently or prospectively!).
Dishing out breaks to flunky mortgage holders is no more outrageous than dishing out massive amounts of capital to Wall Street screw-ups.
No, it won't take a lot of time to do. Once the terms are known about what the Government will do, valuations will move immediately, even before the Government has actually done it. - -Over-interpreting market moves is a pitfall when markets are 'moving fast'. When buyers and sellers compete for price at such times, it's seldom wise to take cues from that about what the 'market is saying' about long-term fundamentals, etc.
- It was okay to let Lehman go. We are learning how to restructure the system to avoid "too big to fail" in the future. In other words, the workout from Lehman's failure is pointing the way toward how to re-regulate the industry (IMHO). Watch and learn. (Or, think of it as Ben Bernanke's very clever clinical trial...).
Bush to Talk to Deregulation's Unemployed, Today
ENRON GEORGE, THE BUDDY OF KEN LAY, TO CHAT TODAY ABOUT ...
Why we are better off for having the GOP to no-tax and spend, with a dose of wild-world deregulation. At least, he'll say that we have to come together to clean up this mess (he'll imagine that he's showing "leadership", to play the crowd this way, one would guess).
Polling estimates of likely voters show that 45% of Americans will, nevertheless, vote for the GOP this fall. Astounding, isn't it?
Bush and pal, Ken Lay.
Reminder
Based on my figures, points below 850 on the S&P 500 are ... looney territory.
During the property crisis in Hong Kong and associated attacks on that market, the authorities essentially monetized the equity market for a time...
Ben could buy some time for Paulson, that way. He might not have enough powder, but if he uses it in the right ways, he could get pretty far.
For instance, I've always thought that buying up 700 billion in sub-prime securities was an option for him and a place to start, if other approaches didn't ... it'd shock the hell out of everyone and the dollar might wobble, but it would be a blowtorch on 'the freeze', no doubt.
Thursday, October 9, 2008
Fireside Chatting Stock Market Investors
Let's try to pull a Feynman (that I should be so good) and do the current crisis in three parts.
1. The end of the era of easy credit and fraudulent lending has brought about a crisis in banking, that has as its backdrop shoddy credit underwriting of mortgages and the multiplication of those risks, through the use of derivatives. The fall in housing prices is also affecting the prime market and the commercial market. All these things are putting enormous strain on banks.
This may "cost" the market 15-30%, from the market's recent highs. I'm guesstimating that about 15%-18% of that has already occurred, with the rest ... justifiably likely only in the event of collapse of the US's financial sector.
2. The normal credit creation process has been interrupted, because of a lack of confidence that financial partners are sound and because of a massive financial sector deleveraging that is going to, as people seek safety.
This may cost the market only a small amount, but a spike in energy and food prices has further crimped the outlook. That crimping means even less confidence, to the point that people start to think that a global recession is on the way.
A recession discount might run to 15-20%, from pre-recession highs. The discount for a super-severe recession would be more, but it's too facile to imagine that the whole world is going to melt, even though you can certainly scare yourself to death, if you want (it's always the scariest when the roller coaster rounds the top, and you feel like you are looking into the abyss, right?).
3. Last, the markets always revalue to the 'worst case' scenario, when bottoming out. The equity risk premium has shot up to its very long-run value of somewhere around 9.5% (measured at S&P500 @ 900). This is the prospective return on equities that is demanded for investors to assume the extra risk of them.
Most of this amount is already caught up in the discount for part two. It might be another 10%++, depending on how things go. Despite being very open ended, this part is not completely unbounded, however. Still, you don't want to see rampant pessimism or free-fall. It's important that fundamentals 'take over' at some point on the way down (or up).
When you add those three up, you start to see why we are where we are, in terms of market revaluation, and think that the bottom is coming, soon. We've discounted a crisis and a global recession and now we are fiddling around with how much people are going to panic as the market finds a bottom and whether there is a lot more of the banking crisis still to come, i.e. whether we are closer to to the high-side of the estimate or the lowside.
Paging Joe Lieberman
So, Joe, now that the McCain campaign is in full smear mode, how do you feel about having thrown your lot in with the GOP strategists running the McCain campaign?
Sticking by the tactics of your bff?
Who cares about Conservatism?
AS has all this hand-wringing about Conservatism, going on, related to what's going to happen after the Conservatives sacrifice McCain to their Moloch (assuming Obama wins).
Who cares?
First, the idea of a resurgent Democratic party a la FDR is ridiculous. FDR commanded the Party, even gave it a new song. There is little or no indication that Obama can, wants to, could learn to, or will. (And that could be a good thing. Maybe Barack can be more like Ike...who knows. He could usher-in and define a new mode of politics, if he doesn't get too insulated in 'the pocket', too soon. We'll see. He seems pretty deep in the pocket to me, already - and the military have yet to give him their full shock-and-awe treatment).
Second, believe me, progressivism in America is weak, not strong.
Here's a case in point. During the primary debates, everyone was falling all over themselves about voting for the GOP's bankruptcy bill. I think this is the one in which interest rates weren't capped, but allowed to wander up to 30%, if credit-card companies felt the need to put the screws to someone.
So, did the unwind of that provision make its way into the recent bank-rescue plan?
I'm not even sure it was on anyone's mind, frankly, even though Hillary Clinton deeply embarrassed herself on national television over the issue ... ("I voted for the Bill, but was glad it didn't pass.").
There are 1,000 little examples and a slew of people tracking and targeting Bush's "blue-dog" Democrats.
Third, and last, don't forget that 45% of the nation is still willing to vote ... GOP. That's almost one in two, who are so headlocked that they are willing to put a political party that has failed on almost every metric imaginable over the past eight years, in spades, back in a leadership role!
The best thing that could happen to Conservatism is that it could fracture, putting pressure on Liberalism to do the same. The worst thing going in America is the two-party system. It's turned inimical to accountability and excellence, and, despite increased transparency in governance, is still smothering what little democracy there is left in America.
No more than words ...
Heard this on Colbert while flipping, late last night. AS finds the words, written by John Cleese.
Ode to Sean Hannity
Aping urbanity
Oozing with vanity
Plump as a manatee
Faking humanity
Journalistic calamity
Intellectual inanity
Fox Noise insanity
You’re a profanity
Hannity
Aping urbanity
Oozing with vanity
Plump as a manatee
Faking humanity
Journalistic calamity
Intellectual inanity
Fox Noise insanity
You’re a profanity
Hannity
I assume this was written after Hannity's train-wreck with Gibbs over Ayers.
Cash Dividends on Stocks -- Now Better than Yield on Bonds
WHEN NOT TO BE RISK-AVERSE - FINDING THE RIGHT PRICE
The cash dividend yield on stocks in the S&P500 is fast closing in on the yield of the five-year treasury note, which is a mere 2.8%.
That means, if you don't need to use the money for five years, you can get paid in cash a yield more than you would get from a five-year treasury note.
The "buy" signals are starting to flash brighter and brighter for those with "strong hands".
Even allowing for some really steep cuts in dividends, adjusting for a 30% fall in cash dividends that lasts for three years, one still does better than the three-year treasury, which is yielding today just 1.94%.
Right now, no one expects the upcoming global slowdown to be a grinding three-year process that would require cuts to be that steep for that long. Meanwhile, every Central Banker in the world is working overtime to reflate your equity investments, so it's a rational deal, if you can shoulder the risk(s).
Why Not Call On John McCain to Fire Rick Davis for ... Lies
McCain went on national television and affirmed one thing, when he was just wrong and his campaign manager was on the dole as a lobbyist.
Either McCain should come clean about his error and indicate that he knew about the relationship and it is okay, or he should ask his campaign manager, Rick Davis, to leave.
I don't see the middle ground.
As long as the far-right is running ...and running ... and running with Ayers, I don't see any reason not to press the issue, "as a matter of truthfulness", "straight talk", and trust in government officials.
Outside the Box
EVERYONE CANNOT BE RIGHT
In other words, the entire value of the financial sector (not just banks) in the S&P 500 is around just 15%. If all banks went to zero tomorrow, the index would only fall 15% further ...
There are some prominent economists who believe that equity stakes in large banks are ... valuable. The market, interpreted one way, is saying something else, perhaps.The VIX, the volatility measure on the S&P500 broad stock index, is around 55%, today. That says that the standard deviation of the S&P500 is 55%, annualized.
Assuming a distribution, you reasonably interpret that to mean that the S&P could drop 55%, without 'extraordinary' circumstances.Now, I'll tell you, that price is so high, it is higher than if the value of all the equity of all the banks in the index was worth nothing. In other words, the entire value of the financial sector (not just banks) in the S&P 500 is just 15%. If all banks went to zero tomorrow, the index would only fall 15% further ... that's way less than 55%, right? Both cannot be right.
What to do?
BSDs UNITE
Sell covered calls, as big as you can, outside the financial sector ... If you are even more brave, sell puts. If you are just normal, just go long technology (or a diversified set of high-quality names). If you are creative, buy some high yield bonds. If you are a professional, pick some winners and buy them against the broad indexes. In other words, there are a lot of things to do.
The risk if you are wrong? As I see it, the stock market is already discounting a normal sized recession, plus or minus 4%. Your risk is really that the U.S. Economy collapses. Yes, there are extraordinary pressures on over-leveraged consumers and national finances are out-of-whack in a world that is contracting, but U.S. business balance sheets are in really good shape (as best I can tell). The chance that the financial system's equity is worth nothing is non-zero, but the chance that the entire financial complex ceases to function is slim, judged at this juncture.
The Real Action
Guarantee for the Interbank Market?
REMOVING COUNTER-PARTY RISK TO CALIBRATE THE 'CREDIT CRUNCH'
Yes, good idea. But, as we've been (smugly) pointing out, think about what will happen if you are "wrong".
The implementation of the Treasury's new authority under TARP is weeks away, and rightly so. This means that, in the interim, the Fed could step up and say, "we'll carry the bag, paper over the problem, until the big medicine man comes", we'll guarantee the inter-bank market for these types of paper ... for a short, indefinite term, not less than 90 days.
Now, suppose the Fed did this, yet the inter-bank lending rates did not come down. Since credit / counter-party risk has been removed from the equation, the observed rates will be a measure of the true unwillingness to lend, a true measure of the "credit crunch".
Knowing that might help policy makers calibrate their next response(s), but such an outcome would not immediately reassure the markets (it might even spook them, given how some economists wing-flap). Together, that implies that the confidence-building benefits of such a clever move ought not to be oversold.
The "It will take time" Fallacy
How are we to assess Bush-Paulson's appeal that it will take time for their plans to work?
I'm not sure why that would be true, apart from logistics. Either you have confidence or you don't, right?
The only time you need to "rebuild" confidence is when you don't trust the figures you have and you require a new record of sound performance be built, to gather six months or a year of data that your counterparties ... haven't failed today, to put it bluntly.
If The Plan requires a re-set of that kind (empirical, rather than de facto), it's probably not the best one available. Markets typically turn on a dime, when confidence is properly restored...
McCain's Desperately-Late-on-Arrival Mortgage Buy-Up Plan
CONCERN OR DESPERATION?
McCain's new strategy, his latest "erratic-ca", apparently, is to flank Obama ... from the Left.
McCain's campaign wants to buy up / refinance mortgages (McCain himself has probably never paid a mortgage, I'd guess). This isn't unlike what some non-hold-your-nose liberals wanted from the outset, something akin to the Depression era Home Owner's Loan Corporation.
"More capital" is on the list of things-to-do, but it may not be the first or the best thing.
Yes, it could be overkill, but I rather support this approach, albeit in a far more targeted fashion. It would have to be limited to *some* sub-prime and alt-a loans with ridiculous step-up rates and, possibly, defaults on some prime loans.Nothing - nothing - on commercial real-estate, whole loans, and a slew of other securities for which the government has no business or competence, IMHO, to get involved with as a matter of public policy. It was ... misguided to give the Treasury secretary the right to buy anything.
Also, it was misguided to give the Treasury Secretary the right to buy up mortgages at face, rather than offer a discount only for them, to force the Treasury to share the burden with both lenders and borrowers, so to speak.
EQUITY IS THE ANSWER? FINDING OTHER FORCE MULTIPLIERS
There are some who are very, very keen on injecting capital ... as a way to restore confidence?
"More capital" is on the list of things-to-do, but it may not be the first or the best thing.
It really, really depends on the problem one is trying to solve, the root cause of the loss of confidence. People need valuation certainty, liquidity (risk-management), and transparency to risks ... think of these as "force multipliers" that will stretch even a small amount of capital a long way.
What's more, I don't particularly like the government with large amounts of equity for any prolonged period of time. My objections have more to do with the inability of politicians to keep from meddling and the potential for corruption, than any objection in principle to collective ownership.
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