Econ 2009

[ewmayer]

Random end-of-week thoughts...

Nice graphical explanation of "how Wall Street works" - appearing soon next to the definition of "kleptocracy" in an encyclopedia near you:

Golden Parachute


Ugly (but sadly predictable) day for holders of Shiti Citi shares today ... but anybody holding longer than a few months is already out enough money that few % more probably don`t count for much, and anyone who piled in during the same period is day-trading gambling fool undeserving of any pity.

One of Barry Ritholz` readers had this amusing comment to offer - talk about your proverbial fall from grace:

"at $8.5 billion, Citi’s market cap is now smaller than 5 of Canada’s top banks."


At the end of January, Wells Fargo had a big rally which pushed its share price above $20. At the time I commented - to abuse multiple 3-letter-acronyms, or TLAs - something to the effect of "WTF is this POS that is WFC doing above $20", in light of of the massive wad of toxic mortgage-based "assets" on WFC`s books, much of it from last year`s acquisition of distressed bank/mortgage-lender Wachovia. So I promised to revisit WFC`s share price at end of February ... closed today at $12.10. I fully expect it to be in single digits within the next few months, and to be a prime candidate for Citigroup-style "don`t call it 'nationalization'" quasi-nationalization by year`s end.

[Fusion_power]

On a side note, it helps to understand some of the signs and signals over the last 10 years. Bad odors were prevalent at some institutions like IndyMac.

http://www.latimes.com/business/la-f...,4269053.story

Federal regulators ignored repeated warning signs about Pasadena's IndyMac Bancorp., and their failure to prevent the mortgage lender's collapse last year cost the Federal Deposit Insurance Corp. $10.7 billion -- nearly $2 billion more than previous estimates, according to a new report.

The Treasury Department's inspector general blasts banking regulators for missing key signals that IndyMac was growing too quickly on the basis of loans that were poorly underwritten.

The inspector general says that the Office of Thrift Supervision should have taken enforcement action against IndyMac more than two years before the bank was finally seized by the FDIC on July 11, 2008.

At $32 billion in assets, it was the third largest bank failure in U.S. history and the largest failure ever to be investigated by the inspector general.

"OTS waited until June 2008 to issue its first informal enforcement action against IndyMac," said Marla Freedman, the assistant inspector general for audit. "That was much too late. They had a very risky business model, and the OTS should have been making recommendations much earlier about how IndyMac could manage its risk."

John M. Reich, director of OTS, said in a letter to the inspector general that he agreed with the agency's filings.

The long and short of it is that every single one of the banks that is now in trouble got there either by making alt-a mortgages themselves, or by buying the garbage others wrote, or else by acquiring a business that did. IndyMac made their own, Wachovia bought theirs for examples.

I'm just thinking through the possible long term effects of this depression. We have not yet seen the crest of personal credit defaults. The credit card crisis is upon us but it is just now starting to have serious effects. Before you pull out your credit card these days, you might ask yourself if you are willing to pay ~25% interest. That is what a lot of cards are being upped to by major providers. Another shoe that has yet to fall is the return to the trough of the porkers who need more money. We are getting hints about what they want but there is no solid information available yet. The long and short of it is that it will take about $2 Trillion more than has been allocated so far. I'm just wondering when the next big bailout package will go to congress for approval? Please keep in mind that actual bailout dollars is only a fraction of the dollars at risk. Citi represents $300 billion in 'guarantees' that taxpayers are on the hook for. We didn't actually spend that money, but if Citi defaults, then we have to pay. I've tried to estimate this effect as a combination of Treasury and Fed liabilities considering the bailout dollars allocated so far and it looks like they have a combined liability of about $4 trilion at this point. In other words, Congress allocated $1.5 trillion and through the magic of extended guarantees and other means, the total package is about 3 or 4 times that much.

One thing that hasn't hit yet is the Search for the Guilty. This is where we have a hue and cry to tar and feather the dirty dastards that did this to us. Do we start with the bankers who went out on a limb? or the politicians who put us out on that limb?

The bad part is that we still have the dirty dozen zombie banks.

DarJones

[MooooMoo]

Originally Posted by ewmayer

My Comment: I would amend the advice about never adding to a losing position with "...unless you have really, really, really good reason to believe the long-term prospects of the company or sector are far better than current valuations reflect, and you can average down safely, i.e. without going `all in'."

You can also add to a losing position if it's a valuable commodity that's undervalued. Oil and gold can't go to zero, right?

[AES]

Originally Posted by Fusion_power

/begin rant/ AES, There is no excuse for ignorance in this thread. Read the previous discussions and answer your own question. /end rant/.

Please pardon my ignorance and questions.

I was not blaming the current financial situation on the CRA or anything else for that matter.

I admit that I have poor linguistics. The intended subject was "bankers" in the subject-verb-object sentence.

To clarify, when I “bastardize” a process or procedure, it usually means that I apply a process or procedure to something that the said process or procedure was not designed for. It’s usually given another name once it’s sufficiently “bastardized”.

[__HRB__]

Originally Posted by MooooMoo

You can also add to a losing position if it's a valuable commodity that's undervalued. Oil and gold can't go to zero, right?

Problem #1: You can stll lose 50%. And another 50%. And another 50%. And another...all the while missing massive potential by not going short.

Problem #2: Are you storing the gold in your safe at home. No? Oops, the bank only gives you an IOU for your gold and there is NO deposit insurance for gold.

Originally Posted by ewmayer

My Comment: I would amend the advice about never adding to a losing position with "...unless you have really, really, really good reason to believe the long-term prospects of the company or sector are far better than current valuations reflect, and you can average down safely, i.e. without going `all in'."

No, not even then.

Reason #1: If you're expecting the price to go down, why not buy later?
Reason #2: If you're expecting the price not to go down, but it goes down, your analysis was wrong. Maybe you went wrong somewhere else.
Reason #3: It can take a very long time for you to break even. You miss out on better possibilities, if you're not willing to take the first loss.

There is one - and ONLY one - possible exception to the rule: You're so big that you're moving markets and you are practically forced to scale in, because prices will otherwise run away from you.

If the public knows someone is going to make a takeover bid, but prices are STILL falling, it means that something is very wrong with the company and the prosective buyer has sh*t for brains.

[cheesehead]

Originally Posted by ewmayer

See my link to Barry Ritholz` article about the government`s increased stake in Citi below, just underneath the GDP report link.

< snip >

Citigroup: World’s Worst Investment to Get Even Worse

There seems to be a typo in Ritholz's article. Its sentence

Rather than do what is the FDIC-mandated-by-law thing, we will instead convert the nearly worthless common into preferred shares.

... should have interchanged "nearly worthless common" and "preferred". As shown by the NYT quote, the direction of government conversion is from preferred shares to common shares.

- - -

I know basic stock-and-bond fundamentals, but am no expert on preferred stock. Following are some points I heard in a radio commentary. I post them here to solicit comment on them, not to express my opinion about Treasury's recent actions:

1. Preferred stock is more akin to bonds than to common stock. It is more accurate to consider preferred stock as a loan that needs to be repaid (in regard to the guaranteed dividend to preferred stock owners, for example) rather than an ownership share in a corporation.

2. Potential investors don't count the proceeds from sale of preferred stock as part of a bank's assets for certain purposes (calculating the maximum amount that bank has available for lending is one of those purposes, if I understood correctly).

3. Treasury's move was intended to raise the asset value of Citibank, as calculated for the certain purposes in #2, for the sake of encouraging private investors to invest in Citibank. In return for that, it gains a potential for greater appreciation of the common stock (if the bank survives, natch) than of the preferred stock.

Does that sound reasonable to those of you who are more familiar with the characteristics of preferred stock?

I'm not asking whether this Treasury action is, or is not, equivalent to throwing more cash into a losing investment. I'm just asking whether the statements in #1-3 above are factually correct as far as they go.

[Fusion_power]

Essentially correct Cheesehead. You can boil it down to Risk and Volatility. Preferred shares are usually less volatile because there is less risk and guaranteed dividend. For Citi, the govt is converting a more secure position into a much less secure position. They are also giving up a guaranteed dividend. The advantage for Citi is a major increase in accounting equity which makes their balance sheet look better in the auditing farce they are currently undergoing. There is no advantage for the govt and taxpayers except that it preserves Citi a little longer.

DarJones

[MooooMoo]

Originally Posted by __HRB__

Problem #1: You can stll lose 50%. And another 50%. And another 50%. And another...all the while missing massive potential by not going short.

It all comes down to how much risk you're willing to take. If you go long on an undervalued commodity (oil at $40/barrel, for example), prices will eventually rebound to above $40/barrel even though oil prices might drop to $20/barrel in the near term.

But if you short the commodity and the price goes up, you'll be forced to cover, and there's no guarantee that prices will go that low again. Worse yet, there might be a lot of other people who've also shorted that commodity, and you'll have to deal with a massive short squeeze.

[__HRB__]

Originally Posted by MooooMoo

It all comes down to how much risk you're willing to take. If you go long on an undervalued commodity (oil at $40/barrel, for example), prices will eventually rebound to above $40/barrel even though oil prices might drop to $20/barrel in the near term.

Assuming you are not using financial leverage, but if you know that oil will NEVER go below $20/barrel, it's rational to leverage your account to make $20 the point where they give you a magin call...

I remember the Metallgesellschaft getting wiped out when they were long and oil was at unprecedented record lows 'and couldn't go lower' in the early 1990s.

Originally Posted by Jesse Livermore

"Remember that stocks are never too high for you to begin buying or too low to begin selling."

Probably the same applies to commodities.

Originally Posted by MooooMoo

But if you short the commodity and the price goes up, you'll be forced to cover, and there's no guarantee that prices will go that low again. Worse yet, there might be a lot of other people who've also shorted that commodity, and you'll have to deal with a massive short squeeze.

But just as oil cannot go to zero, oil cannot go to infinity either. So again, your risk depends on the amount of leverage you are using. Oil is probably not going to hit $100 any time soon, so if you keep $100 in your account/barrel short, you'll never be forced to cover. So, if oil eventually goes from $40 to $20, you've made 33% on your $60 risk (asuming that you sold short at $40). Presumably, you'll put the $60 (or $100) into a money market fund, so you're inflation neutral.

[Fusion_power]

AIG is back at the trough today.

http://news.yahoo.com/s/ap/20090301/..._ge/aig_rescue

Under the new deal, the U.S. Treasury and the Federal Reserve would provide about $30 billion in fresh capital to the insurer, lower the interest rate on a $60 billion loan and ease the terms of a $40 billion preferred share investment.

The $30 billion would not be injected immediately but would be provided as a standby line of equity that AIG could tap as its losses mount, the Wall Street Journal reported, citing people familiar with the matter.

AIG will repay much of the $40 billion it owes the Federal Reserve with equity stakes in two AIG overseas units — Asia-based American International Assurance Co. and American Life Insurance Co., which operates in 50 countries. Repayment was originally supposed to be made in cash with interest, the Journal reported.

Long and short of it is that the taxpayer is now majority owner of two subsidiaries of AIG. Do you get the impression that we are nationalizing a major insurer?

Someone is finally getting a clue that this is a serious economic problem that will last a very long time. I wonder if they will ever get to the point of acknowledging that this is much much more than just a 'recession'?

http://news.yahoo.com/s/bloomberg/20...g/agsg69muihwy

DarJones

[cheesehead]

Originally Posted by Fusion_power

I wonder if they will ever get to the point of acknowledging that this is much much more than just a 'recession'?

I checked back with the National Bureau of Economic Research (http://www.nber.org/) to see whether they declare depressions as well as recessions.

Nope.

From the FAQs section at http://www.nber.org/cycles/dec2008.html:

Q: Does the NBER identify depressions as well as recessions in its chronology?

A: The NBER does not separately identify depressions. The NBER business cycle chronology identifies the dates of peaks and troughs in economic activity. We refer to the period between a peak and a trough as a contraction or a recession, and the period between the trough and the peak as an expansion. The term depression is often used to refer to a particularly severe period of economic weakness. Some economists use it to refer only to the portion of these periods when economic activity is declining. The more common use, however, also encompasses the time until economic activity has returned to close to normal levels. The most recent episode in the United States that is generally regarded as a depression occurred in the 1930s. The NBER determined that the peak in economic activity occurred in August 1929, and the trough in March 1933. The NBER identified a second peak in May 1937 and a trough in June 1938. Both the contraction starting in 1929 and that starting in 1937 were very severe; the one starting in 1929 is widely acknowledged to have been the worst in U.S. history. According to the Bureau of Economic Analysis, real GDP declined 27 percent between 1929 and 1933, roughly ten times as much as in the worst postwar recession. If the term Great Depression is used to mean the period of exceptional decline in economic activity, it refers to the period from August 1929 to March 1933. If it is used to also include the period until economic activity had returned to approximately normal levels, most economists would judge that it ended sometime in 1940 or 1941. However, just as the NBER does not define the term depression or identify depressions, there is no formal NBER definition or dating of the Great Depression.