The Great Untangling – Capital Markets –

I should stop reading this stuff …

The Great Untangling – Capital Markets –

Some fear that worse may be yet to come. The failure of another big actor in the market would send dealers and other counterparties scurrying to replace trades, almost certainly at a higher cost. Replacing those struck with Lehman, as spreads widened after its bankruptcy filing, is thought to have cost some dealers upwards of $200m each.

That risk remains, judging by CDRâ??s counterparty-risk index, which measures the health of CDS dealers (see chart 1). The next shock could be the failure of a hedge fund with a big swap book, given the spike in redemptions and margin calls many funds face, thinks Pierre Pourquery of the Boston Consulting Group. Hedge funds wrote almost a third of all credit protection last year (see chart 2).

econch1 econch2

Sellers of protection will be watching nervously for a wave of corporate defaults as big economies slip into recession. Standard & Poorâ??s expects the default rate on junk-grade debt to leap to 23% by 2010. Sovereign debt is looking wobbly too, especially but not exclusively in emerging markets. The cost of insuring against a default by the United States has quadrupled since January.

The full article is worth reading and not as dire as this section suggests. It is good to see that the market as well as regulators are looking to resolve the transparency issues with regard to credit default swaps. It seems that until transparency is installed, the financial system will remain on the brink.

Total tax revenue | The Economist

I found this bit from the Economist interesting.

Total tax revenue | The Economist.

Tax revenues have risen as a share of GDP across the OECD over the past 30 years. In 2007 Denmarkâ??s government collected nearly half its GDP as taxes, making it the most heavily taxed among all the rich countries. … France, Norway and Italy also have tax revenues of more than 40% of GDP. At the other end of the spectrum, America and South Korea are relatively lightly taxed, with ratios of under 30%

Regardless of who wins the White House tomorrow, we will all pay higher taxes. How else can we afford two wars, bail outs, the Bush tax cuts, and everything under the sun politicians in all levels of government decide on to satisfy their/our fancies.

I should note that the national debt has risen $500 billion dollars since October 2 when it hit $10 trillion. Today, total outstanding public debt is at: $10,574,094,462,968.23.

Is the Fed Now Losing Control?

I want to share this … found while researching for my tax policy paper. This chart is frightening. There is more on the post.

FT Alphaville » Blog Archive » Losing control.

Bank writedowns

“Itâ??s Bloombergâ??s chart of the day and has been reproduced by Paul Kedrosky on his blog, Infectious Greed. Kedrosky writes:

“The following more or less supports what some have been saying for a while â?? that major banks in the U.S. and the U.K. will end up being entirely nationalized before this crisis is over â?? but itâ??s still a striking way of looking at the data. The gist: Government recapitalization and other fund-raising has largely been in service of banksâ?? prior subprime losses, while corporate and consumer loans are just starting to hit bank balance sheets. It wonâ??t take much to tip banks over into insolvency again.”

This is frightening stuff. Not least because the Fedâ??s own balance sheet is not looking healthy.”

Didn’t we already know the bail out would just see us reamed?

Wall Street bankers in line for $70bn payout | Business | The Guardian.

Financial workers at Wall Street’s top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year – despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.

Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government’s cash has been poured in on the condition that excessive executive pay would be curbed.

I’m sorry, but you did not need to be a clairvoyant to know this would happen. Continued wasteful pay practices were to be expected and could be seen from the other side of the globe. Businesses that can pay this kind of money do not need bail outs. Or, better put, this bail out should not be directed to financial institutions whose pay packages are unreasonable. Leave it to Congress to not put greater controls on our money. I wonder aloud: would this qualify as a moral hazard, or a symptom of the moral hazard that exists with this bail out?

My feeling, if it isn’t already clear, is that it is irresponsible for businesses to pay such big bonuses, particulalry when those same businesses are at such high risk of collapse and losing gobs of money. It is likewise irresponsible for our government to prop companies up that have such irresponsible pay practices.

10 Trillion Reasons

10 Trillion Reasons, originally uploaded by dfb.

In all this talk about bailing out Wall Street (let’s all call a pig a pig; this is a bailout) nobody is really talking about how we will pay for it. Are those assets really worth $700 billion dollars? I don’t think that anyone can say they certainly are worth that, let alone half that much.

The value of those assets is at the heart of the credit crisis. Banks and other financial firms world-wide do not trust lending to each other because nobody knows how much they really are worth. And because nobody knows what they are worth, they are no longer acceptable collateral to use in securing additional debt obligations, even if for the short term. Which brings me back to my initial point. Nobody is really talking about how we will ultimately pay for this bail out. Who, really, will pay? That’s right, regular tax payers.

Fiscal responsibility seems to escape politicians and Wall Street alike.

I do not understand why the Federal Government needs to pay
for toxic securities, or at least pay up front for them. Why can’t the program accept full portfolios of these fancy securities with no known value, and take on all the risk. If that wipes out the capital of an institution, so be it. The Feds will sort everything out, unbundling the securities and re-packaging them into fully transparent securities that can be adequately valued. Those transparent securities will be sold off. Fifty percent (50%) of the value, after factoring in cost of the program, will go to the Federal Government for taking on the risk. The other 50% to the previous holder of the securities or their creditors.

Every bailout must come with some serious revenge, otherwise what is to stop this same issue from happening again. CEO pay caps and small equity stakes in the firms are a good start. But if we really want them to pay for this and to give strong incentive against future, similar behavior, we need to make them pay more. And in the meantime, maybe, just maybe we can pay down the debt a little and not leave it to our children and grandchildren. Oh, that’s right, wishful thinking. The big spenders in both major parties are more interested in waging war, porking it up, and spreading the wealth around, than in responsibly running our government.

Foreclosure Maps

These foreclosure heat maps are very interesting.

Midwest, centered on Michigan

Los Angeles (all red!)

SF Bay area (notice that even the Silicon Valley has a lot of red)

Colorado and parts of the midwest

Areas in red mean at least 1 of 600 homes are in foreclosure. Many areas of California have 1 in 150 homes in foreclosure. LA seems especially hard hit (includes the O.C.)

zoom in, zoom out. look in other areas. enjoy.

Why I love the Internet

Because geeky professors can feel empowered to make videos in which they sound alarms and spread their message virally, while they enjoy their morning coffee.

Very cool, however the message given in the video isn’t. The professor, Brad DeLong, rings the alarm, saying evasive action taken by the Fed may not work and that government needs to start talking about solutions before we get another depression with deflation or the inverse, inflation.

Aging Boomers could further burst housing bubble

The bad credit and housing markets has helped to breath new life into an old story – that boomers retiring (or dying) will lead housing prices down, starting by about 2010. It is worth reading.

Aging Boomers could burst housing bubble – SF Chronicle

“[A]according to a study by two University of Southern California researchers, a bubble of even more monumental proportions lies just ahead. They call it the “generational housing bubble,” and maintain that it will be fueled by the same Baby Boomers who have been bidding up prices since 1970 as they moved higher and higher on the housing ladder.

Now, though, the 78 million Boomers are about to enter the years when people tend to become sellers rather than buyers. And as a result, they expect “many more homes (will be) available for sale than there are buyers for them.”

Myers’ and Ryu’s foreboding prophecies bring to mind a 1989 study by a pair of Harvard economists, who predicted a 47 percent decline in housing prices during the 1990s because Boomers would stop buying as they aged. Housing-industry economists lambasted that forecast as pure poppycock, and it eventually blew up in smoke.

Mankiw and Weil “may have miscalculated the timing of the decline, predicting its beginning 20 years or more prematurely,” the new study says. “But the Baby Boomers will finally start retiring from the housing market.”


Myers and Ryu project that the ratio of those 65 and over to people 25 to 64 will surge 30 percent in the decade between 2010 to 2020 and 29 percent more in the 2020s, altering the delicate balance between buyers to sellers for the foreseeable future.

Historically, seniors don’t become net sellers in Arizona, Florida and Nevada until they reach 75. In 12 other states – Arkansas, Colorado, Delaware, Georgia, Hawaii, Idaho, New Mexico, North Carolina, Oregon, South Carolina, Tennessee and Utah – they become net sellers when they hit 70.

But the opposite is true in 13 other states – Alaska, California, Connecticut, Illinois, Indiana, New Jersey, New York, Maryland, Massachusetts, Michigan, Minnesota, Ohio and Rhode Island. In those states, the crossover point starts at age 55.”