Global Financial Crisis (Was: Subprime Meltdown)

[R.D. Silverman]

Originally Posted by R.D. Silverman

Yep!



We can be sure that the ones who get fired are not the decision makers
who were responsible for the mess in the first place. They will get to
keep their cushy jobs, no matter how badly they do it.

The ones laid off will be middle level staff and analysts.

A followup. This in in regard to Countrywide.

Last week, a federal judge ruled that a shareholder lawsuit against Mozilo and other Countrywide executives and directors should go to trial. The plaintiffs claim the top officials failed to provide enough oversight of the lender and misled shareholders about the company's true financial state.

According to congressional figures, Countrywide lost $1.2 billion in the third quarter of 2007 and another $422 million in the fourth quarter as the subprime mortgage crisis hit. The company's stock fell 80 percent between February and the end of the year.

During the same period, Mozilo received a $1.9 million salary. He also received $20 million in performance-based stock awards and sold $121 million in stock.

Yep. Countrywide is losing billions, but its sub-human piece of shit
CEO [Mozilo] is still raking in the dough... $20M in performance based awards?
What the fuck is going on here?

This is typical of U.S. corporations today. No matter how poorly they are
managed, the top executives still manage to steal money from the owners
[the stockholders] by awarding themselves ridiculous salaries and bonuses.

[KriZp]

Originally Posted by xilman

In that case, why has the price of candle-wax not gone through the roof?

The world has a much higher population these days than 50 years ago, economic activity (total and per capita) is much higher than it used to be, the global rise in living standards has brought a much greater demand for domestic lighting and candle-wax production has certainly not increased in proportion.

Even so, candle-wax is much the same price in inflation-weighted terms as it was 50 years ago.


Paul

Candles nowadays are AFAIK mostly made from paraffin wax, a refined petroleum product. If you were to purchase candle-wax in bulk I think you would find that it has indeed increased in price over the last five or so years, as the oil price has gone up 6-fold. For finished candles the price increase may not be all that great, except for the cheapest kinds ofcourse, where the price of the raw materials is a greater fraction of the sale price compared to the handmade luxury brands sold in certain stores.

[xilman]

Originally Posted by KriZp

Candles nowadays are AFAIK mostly made from paraffin wax, a refined petroleum product. If you were to purchase candle-wax in bulk I think you would find that it has indeed increased in price over the last five or so years, as the oil price has gone up 6-fold. For finished candles the price increase may not be all that great, except for the cheapest kinds ofcourse, where the price of the raw materials is a greater fraction of the sale price compared to the handmade luxury brands sold in certain stores.

Sigh. You completely missed the point. I'm sure others here spotted what I'm getting at instantly and will go on to enlighten you.

If you want another hint, consider the impact the scarcity of silver has had on the consumer photography market.


Paul

[KriZp]

Originally Posted by xilman

Sigh. You completely missed the point.
Paul

Are you saying oil isn't essential for economic activity today, and that something else is ready to take it's place in much the same way electricicity has taken over for candles and kerosene lamps for lighting?

[Nelson]

Originally Posted by KriZp

Are you saying oil isn't essential for economic activity today, and that something else is ready to take it's place in much the same way electricicity has taken over for candles and kerosene lamps for lighting?

No I think he might be referring to the fact that there are no fuel/road taxes attached.

nelson

[ewmayer]

Fed Releases Sharply More-Pessimistic Growth Forecsat: Ben Bernanke & Co. lower 2008 economic growth forecast and raise their projections for inflation and unemployment

Dude, where's my second-half-of-2008 magical mystery recovery? The whole $150B stimulus thingie which was gonna induce Americans to go running to the nearest mall and go on a shopping spree - what happened to that? And the housing bailout which was gonna reflate home prices to bubble-ific levels - what up with that? And the massive liquidity injections which were going to make the banks lending-happy once again and lower interest and mortgage rates for everyone - did I miss that?
And trading hundreds of billions in U.S. Treasuries for all kinds of stinky-poo debt from the banks which was going to revive the bond markets? I guess I must have slept through that, as well. According to the "tis but a brief rough patch" permabulls [including Bernanke and Paulson at the forefront], we should be just about on the road to the imminent economic recovery in the 2nd half of 2008 all the experts and politicos have been promising. Say it ain`t so, Uncle Bennie!

[xilman]

Originally Posted by Nelson

No I think he might be referring to the fact that there are no fuel/road taxes attached.

nelson

Ok, I give in.

The original claim was:

Since global oil production has been more or less flat the last couple of years, and economic growth has continued, It seems reasonable that the price will need to keep going up untill either production starts increasing, or a global or at least US economic recession reduces demand.

You completely fail to include another and extremely important reason why the price may not keep going up and to which my subsequent postings gave hints which you failed to interpret.

When a commodity becomes too expensive, alternatives become cost-effective. The price doesn't rise indefinitely but only to the point where its price is comparable to the alternatives.

Indeed, oil itself is a classic example of this phenomenon. Back in the good old days whale oil was used for lighting and lubricants. Even 150 years ago the whales were running out. It became cost-effective to extract petroleum (literally "rock-oil") and use it as an alternative.

A a different way of looking at the same phenomenon is that an alternative may become much cheaper for other, barely related reasons. My candle-wax and silver examples illustrate this. Candles were replaced by coal for lighting the UK because coal became very inexpensive due, largely, to the demands of the iron industry and the scarcity of wood for domestic heating. Initially, around 150 years ago, coal was gasified and the gas used for lighting. Around a century ago, coal-fired electricity generators were introduced. Since those times candle-wax has not been an important commercial commodity and its price is essentially independent of recessions and resource depletion. Silver, likewise. The demand for colour photography drove the development of dye-based photographic film. The development of microelectronics, for reasons entirely independent of photography, resulted in CCD and similar detectors. The cost of photography is now essentially independent of the price of silver.

Exercise: think about what the oil market is really about, then consider alternatives. Based on that analysis, attempt to put a plausible upper-limit on oil prices.

Paul

[KriZp]

Originally Posted by xilman

Exercise: think about what the oil market is really about, then consider alternatives. Based on that analysis, attempt to put a plausible upper-limit on oil prices.

Paul

I thought that might be what you were alluding to. I don't know what you consider alternatives to oil, my point is that there hardly are any alternatives for transportation. I'd be interested to know what alternatives you consider viable.

[xilman]

Originally Posted by KriZp

I thought that might be what you were alluding to. I don't know what you consider alternatives to oil, my point is that there hardly are any alternatives for transportation. I'd be interested to know what alternatives you consider viable.

In my lifetime, trains went from being powered by coal-fueled steam engines, to diesel infernal combustion engines to electric motors.

I commute three days a week. Two days a week, including today, I work from home. The development of cheap microelectronics and cheap high-speed telecommunications makes that possible. There's no particularly good reason why I need go into the office as often as three days a week.

I have weekly video-conferences with colleagues in Indiana and Harvard. These have been so successful over the last couple of years that we've decided to abandon one of our two annual meetings for which the IU and Cambridge people would fly to Boston.

Many countries in Europe have half-way decent public transportation provision which is rather more fuel-efficient than personal cars. The UK doesn't have particularly good long-distance public transport but a number of cities have very good park&ride schemes. Commuters and shoppers drive to the periphery of the city and catch the bus into town. The reduction in congestion and the multiple occupancy of the bus greatly increases the number of passenger miles per gallon. Some buses are fueled natural gas or electrically powered.

I suggest that you start thinking about the problem yourself. You will rapidly discover that the examples given above are only a small sample of the ways in which petroleum products can be reduced or removed from forms of transportation. When you start to think about the subject more widely, you'll realise that transportation itself is only one facet, albeit an important one.


Paul

[ewmayer]

Ford's trouble: $4 gas is here to stay: Ford Execs Now See "Fundamental Shift" Away From SUVs and Full-Sized Pickups


U.S. Home Resales Drop, Inventories Rise to Record as Housing Woes Persist: Sales of previously owned homes in the U.S. fell in April and the supply of unsold properties reached a record, signaling no let-up in the 27-month housing slump.

``There is no indication that things are improving,'' said Christopher Low, chief economist at FTN Financial in New York, who forecast sales would drop to a 4.9 million pace. ``Inventories will stay out of balance at least until the end of 2009 and prices will keep falling.''

Defaults on subprime mortgages have prompted lenders to restrict credit, while falling property values have given buyers who are still able to get financing reason to delay purchases. The slide in home values may hurt consumer spending, which accounts for more than two-thirds of the economy.

On the "pot calling the kettle black" front (or was it the "you just can`t make stuff like this up" front?), we have the various scamHouse ratings agencies preparing to downgrade each other:

S&P May Cut Rating of Rival Moody's

May 22 (Bloomberg) - Moody’s Corp., owner of the second- largest credit-rating company, may have its commercial paper ranking cut by its bigger competitor Standard & Poor’s. S&P today placed Moody’s A-1 short-term debt rating on CreditWatch negative, citing reports that a computer error may have caused Moody’s to give Aaa ratings to debt that didn’t deserve them.

Recall that in an exclusive, we gave the shocking details behind the Moody's ratings software bug several days ago in this thread. Expect Moody's to retaliate in "Well, S&P hyenas, this is what *your* rating looks like when we re-run the bugfixed software" fashion. This is better than a TV soap opera - all we need are a hair-gelled [fake] business mogul with a black pencil mustache trying to keep his pair of long-fingernailed-and-short-skirted novias from clawing each other's eyes out, maybe throw in an aging wealthy upper-class Mexican matron and a lusty open-shirted gardener name Julio, and you'd have all the makings of a great Telenovela - En breve, en Telemundo ... "El Cazador de Corazones y los Diablos de Moody's Ratings Service...".

And they really are diablos, that bunch of crooks running the ratings services:

WSJ: Moody's switched ratings analysts at Banks' request

(Reuters) - Moody's Corp's (MCO.N: Quote, Profile, Research) credit rating unit Moody's Investors Service switched analysts from covering deals of particular investment banks after the banks requested changes, the Wall Street Journal said on Friday, citing people familiar with the matter.

An analyst in a group that rated collateralized debt obligations was moved off an investment bank's deals after bankers requested an analyst who raised fewer questions about their deals, the newspaper said.

And speaking of crooks, thieves and liars, Lehman Brothers just got taken to the woodshed by a prominent investor about a particularly outrageous scam they pulled with fictitious-valuation-of-hard-to-value-assets in their last fictional-earnings report:

A Shorter Slams Lehman

With Lehman Brothers Holdings' second quarter set to close next week, the Wall Street firm can't seem to put questions about its fiscal first quarter behind it.

Back in mid-March when the bank reported, Bear Stearns had collapsed the day before and Lehman was in the market's cross hairs. Lehman posted a $489 million profit, calming investors. But ever since then, investors have questioned those numbers, asking whether the profit was due to some one-time, unrealized gains.

Those questions became more intense on Wednesday when David Einhorn, manager of hedge fund Greenlight Capital gave a critique of the earnings in a speech to a room packed with high-profile investors. Lehman's shares fell 2.7% Thursday as word of Mr. Einhorn's speech spread around Wall Street.

Mr. Einhorn, who is well respected for his detailed research, is short, or betting against, Lehman's stock.

In his comments, Mr. Einhorn squared off in particular against Erin Callan, Lehman's chief financial officer and the executive who has led the public charge against the firm's critics. Mr. Einhorn met with Ms. Callan last week to discuss his research.

In a statement, a Lehman spokeswoman said: "We will not continue to refute Mr. Einhorn's allegations and accusations. Mr. Einhorn cherry-picks certain specific items from our quarterly filing and takes them out of context and distorts them to relay a false impression of the firm's financial condition which suits him because of his short position in our stock. He also makes allegations that have no basis in fact with the same hope of achieving personal gain."

In attacking Lehman, Mr. Einhorn took issue with large, unrealized gains the firm booked in the first quarter from marking up equity positions that don't trade in public markets. Like other brokers, Lehman has large amounts of illiquid assets that it values using management-driven financial models.

In the quarter, Lehman said it had a pretax gain of $695 million related to hard-to-value equities. In the previous four quarters, the average, unrealized gain from such holdings was $69 million.

The $695 million is a net number made up of roughly $1 billion of gross gains and offsetting losses, according to Lehman. The $1 billion included an unrealized gain from writing up the value of an equity investment in an Asian power company, which the firm declined to name.

In his speech, Mr. Einhorn said the company was India-based KSK Energy Ventures and that Lehman told him it booked a $400 million to $600 million gain on KSK in the first quarter. The manager said Ms. Callan told him Lehman marked up its holding because a new investor had taken a stake in KSK at a valuation above Lehman's.

Ms. Callan said this other investment was part of a financing round in anticipation of an initial public offering, according to Mr. Einhorn. After Mr. Einhorn further questioned the valuation process, he says Lehman changed its story.

Lehman emailed him, he said, saying the firm had revalued its KSK stake based on an "expected" pre-IPO financing as well as other factors.

In his speech, Mr. Einhorn also questioned the values Lehman put on many other financial assets. In particular, he said Lehman hadn't sufficiently written down $6.5 billion of complex debt securities called collateralized debt obligations, or CDOs.

He added that these holdings were only recently disclosed, even though other banks and Wall Street firms disclosed similar holdings months ago and took massive write-downs on them.

Mr. Einhorn noted that write-downs taken by Lehman in the first quarter on the $6.5 billion of CDOs were only about $200 million. Yet, in an April filing about the first quarter, Lehman disclosed that about 25% of the CDOs were rated BB+ or lower, which is a junk rating.

"I asked them how they could justify only a $200 million write-down on any $6.5 billion pool of CDOs that included $1.6 billion of below-investment-grade pieces," he said. He added that Ms. Callan declined to explain the size of the write-down, but she added that "Lehman 'would expect to recognize further losses' in its second quarter."

Interesting how Lehman spokestool Callan slams Einhorn with the usual "just another shorter trying to bash Lehman", without addressing any of the specific issues Einhorn raises. Here is Fortune.com's take on the matter.

[KriZp]

yes, there are many ways of reducing oil consumption. Your examples all increase the energy efficiency of an economy, and lets more work be done with less fuel. However, there are diminishing returns. Alot of people actually need to go somewhere and often they need to use alot of energy to get any work done, people who work in manufacturing, farming and other more physical industries for example. People who work directly with other people must to a large extent go somewhere to do their job.

Substitution can work for such things as public transportation, but the fact remains, liquid fuel is superior for many applications. It contains approximately 10 kWh per liter, and you could pump several liters per second through a thin hose as seen at a gas station. It can be safely stored in simple containers. An engine running on gasoline can be made smaller and lighter than a comparable electric engine. You can bring a tool powered by gasoline with you anywhere in the world and use it for as long as you can provide it with fuel, and you don't have to rely on local infrastructure like a struggling powergrid.

I suppose the point I'm trying to make is that oil as an energy carrier is so useful to us and has so many advantages that we will be willing to pay alot more than we currently are paying to get it.