Global Financial Crisis (Was: Subprime Meltdown)

[xilman]

Originally Posted by ewmayer

In the other side of the pond - specifically the UK - things are no better on the retail sales front, as The Independent reports:

Seven days that shook the British high street

Indeed, Bradford and Bungle are in a bad way over here. A number of commentators are wondering whether the ultimate value of the stock is going to be zero, 1p or 10p. It's around the 50p level at the moment.

To declare an interest: I have a small amount of B&B stock from when they went public and have had a savings account with them even longer. The latter is the reason for the former. The amount of money I've tied up in the bank is rather insignificant in the great scheme of things, or even in my portfolio. I've very little idea how much of my pension funds was invested in B&B.

Paul

[cheesehead]

Originally Posted by ewmayer

Job outlook continues to worsen: The Employment Trends Index points to continued and steeper job losses and rising unemployment ahead.

The last sentence in the above snippet is ambiguous - have they in fact been computing it for decades and only started releasing it, or have they only recently started computing it, and done so retroactively?

Going to The Conference Board web site (http://www.conference-board.org/) and looking up the news release (http://www.conference-board.org/pdf_.../ETI070708.pdf), I find that it is CNN's paraphrase that is the cause of ambiguity. The Conference Board's own words were:

Originally Posted by The Conference Board news release

The Employment Trends Index (ETI)^TM joins The Conference Board's other respected indexes of economic indicators such as ...

The Employment Trends Index (ETI)^TM aggregates eight labor-market indicators, each of which has proven accurate in its own area. Aggregating individual indicators into a composite index filters out so-called "noise", to show underlying trends more clearly.

Plotted back to 1973, the Employment Trends Index (ETI)^TM has accurately signaled every rise and fall in employment over the last 35 years. ...

My interpretation is that T.C.B. has computed it retroactively, and found a good enough correlation to publish it on its own from now on. The news release includes a graph overlaying ETI and total nonfarm employment back to 1973.

[only_human]

Originally Posted by ewmayer

U.S. Government Economic Statistics Funny-Numbering Update: Interesting article on e-commerce stats from Business Week:

Businessweek: How Strong Is the U.S. Consumer?: The way America measures Web commerce may be painting an overly rosy picture of the economy

Good catch. I wonder what other funny or conflated numbers we are relying upon.

[ewmayer]

Cheer Up! Hedge Funds Had a Lousy First Half Too: Hedge funds turned in their worst first-half performance in almost two decades amid the credit crunch and the onset of a bear market.

Damn ... if I had a higher personal tolerance for ethical sliminess, I should get into this business ... just tout my "stellar track record" first-half returns this year, start a $10B-plus hedge fund, collect a fat 20% cut on any gains [and a hefty management fee regardless of performance], then retire and buy a yacht rivaling the one recently purchased by Legg Mason Value Trust fund manager Bill "The Bull Market King" Miller.


Naked Capitalism | "When the going gets tough, economists go very quiet" - Interesting commentary on a Guardian piece by Simon Jenkins which takes economists to task. The Jonk Kenneth Galbraith quote in the reader comments section is priceless: "The only function of economic forecasting is to make astrology look respectable."

Some dude named Binky says stocks are a "Buy! Buy! Buy!"

Hope springs eternal for some on the Street: Strategists at Deutsche Bank, Lehman Brothers and UBS are the most bullish and expect the benchmark for American equities to climb to a record in the second half. Binky Chadha, Deutsche Bank’s New York-based chief strategist, says the S&P 500 will end the year at 1,650, up 29 percent from June 30.

You just need to ask yourself one question: Would you invest based on a recommendation by someone named "Binky"? Heck, even the "Kings of Pump" on CNBC are starting to hedge their bets these days, as this next piece details:

The Larry Kudlow Variety Show is Getting Interesting

Now that perma-bull, glass 99.9% full, king pumper extraordinaire Larry Kudlow has finally realized he has sent countless millions to their financial ruin who actually listened to him and his regular cast of zombies over the past year pump everything but the microphone attached to their lapels, his show is getting interesting.

Kudlow is now hedging his career by putting on more and more economic realists like Joe Battipaglia of Stifel Nicolaus. Then, when everything turns out to be the exact opposite of what he and his goon squad have preached he can pull a ‘Cramer’ and say ’see, I told you this all along’.

The link below is the first 15 minutes of Larry show on Monday, July 7th when Joe lets everyone have it. It’s too bad Dennis Kneale wasn’t there or Joe could have probably had he and Donald Luskin holding hands and making out by the end of the show. He was so right on the money, he brought tears to my eyes. Hat-tip to Joe. There is a picture of you on my desk now right next to Rick Santelli.

The Feckless Fed: A Pair of Updates

Fed to crack down on shady lending: Fed chair Ben Bernanke says central bank will unveil new rules to protect homebuyers and give Wall Street more time to borrow emergency loans.

Y'all only thought of this *now*? But, but, "maestro" Greenspan said the Fed lacked the authority to do this sort of thing - so was he lying, or is this some kind of illegal power grab?

AP | U.S. Federal Reserve eyes extending emergency loans for Wall Street: The U.S. Federal Reserve is considering giving squeezed Wall Street firms more time to draw emergency loans directly from the central bank to help them overcome credit problems, chairman Ben Bernanke said Tuesday.

Of coooouuuuuuuurse they are - picture Bernanke standing on the deck of an aircraft carrier back in March, shortly after the Bear Stearns crisis, giving a Bushian massively-premature "mission accomplished" speech, and you pretty much get the idea.


Fannie, Freddie Downgraded by Derivatives Traders on Concerns Over Capital : Fannie Mae and Freddie Mac, ranked Aaa by the world's largest credit-rating companies, are being treated by derivatives traders as if they are rated five levels lower.

Interesting - one more sign that people with real money at stake are simply choosing to ignore the ever-more-obviously-bogus ratings from S&P, Moody's and Fitch. Even more interesting is this next snippet from the same Bloomberg piece:

Traders are overlooking the government's implied guarantee of the debt as credit losses grow and concern rises that the companies don't have enough capital to weather the biggest housing slump since the Great Depression. Washington-based Fannie Mae fell 73 percent in the past year on the New York Stock Exchange and McLean, Virginia-based Freddie Mac lost 60 percent.

``Investors are viewing even an implicit guarantee from the government as potentially troublesome,'' said Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California. Fannie Mae and Freddie Mac, which reported combined losses of more than $11 billion, have raised more than $20 billion since December.

[BTW, cheesehead, it seems your legion of clones has begun to invade the Yahoo Finance message boards.]


Siemens Plans to Cut 16,750 Jobs to Boost Margins

The company reported a 68 percent drop in earnings for the three months through March because of charges for project delays and rising raw-material costs at the power, transportation and technology units.

Economic Clouds

``We see clouds in the economic sky, so we're taking cost measures,'' the CEO said. ``This is a further step to position the company globally.''

Oooh ... do you see any shaped like horses? Maybe a camel, or a giraffe? Do you have your fiscal Regenschirm ready in case there's an economic Thundersturm-und-Drang period on the way?

Loescher, who has held the top job for a year, cut management layers and pooled nine operating units into three. The 51-year-old Austrian, who joined Siemens from U.S. drugmaker Merck & Co., was chosen to head the company after a bribery scandal led to the departures of predecessor Klaus Kleinfeld and supervisory board chairman Heinrich von Pierer last year.

To contact the reporters on this story: Eva von Schaper in Munich at evonschaper@bloomberg.net; Sheenagh Matthews in Frankfurt at smatthews6@bloomberg.net

Sorry, just had to add the last bit because of its deliciously rampant "teutonicity" - try saying "Peter Löscher und Klaus Kleinfeld und Heinrich von Pierer und Eva von Schaper" ten times sehr schnell and tell me you don't feel like running out to buy some Lederhosen or a CD of Tannhäuser "live at Bayreuth". Of course the extremely gaelic "Sheenagh Matthews" rather spoils the Oompah-band name party - oh well, it was fun while it lasted. I've always had a soft spot for feisty Irish lasses, anyway. Wagner himself would surely understand:

Frisch weht der Wind der Heimat zu -
mein Irisches Kind, wo weilest du?

[ewmayer]

Already posted on Fannie/Freddie's woes earlier today and yesterday, but the news I'm reading about these two is setting off the mental alarm bells in a serious way - this article from CNN/Money tackles the "doomsday scenario", which is alas looking all-too-possible, given the two companies' massive leverage and the continued deterioration in the U.S. housing market:

CNN/Money | The Fannie and Freddie doomsday scenario: It's time to wonder what would happen if Fannie Mae and Freddie Mac failed.

At the end of last year, Fannie alone had packaged and guaranteed about $2.8 trillion worth of mortgages, approximately 23% of all outstanding US mortgage debt. And these securities are highly rated and sold to investors all over the world.

"If Fannie or Freddie failed, it would be far worse than the fall of [investment bank] Bear Stearns," says Sean Egan, head of credit ratings firm Egan Jones. "It could throw the economy into depression or something close to it."

Clearly, investors remain concerned. Credit default swaps - a kind of insurance against the possibility of Fannie (FNM) and Freddie (FRE) defaulting on their corporate bonds, are at their most expensive levels in 14 weeks; both companies are expected to report steep losses for the second quarter; and their main business, mortgage securitization, is under pressure as home price values decline and foreclosure numbers rise.

"The major issue is that these are very leveraged financial institutions, leveraged much more than any other bank, and they have lots of mortgage assets. As real estate values decline every day, the value of [the mortgages that it bundles, guarantees, and sells] are called into question," says Dalton Investments co-founder Steve Persky, who has been focused on distressed mortgage assets.

The possibility of government aid looms because it's hard to see how the private market can help the companies. Their stock market values have dropped so low that it would be difficult for them to raise money. For example, Egan estimates that Freddie alone will need to raise $7 billion over the next two quarters due to writedowns and losses. But the company's market capitalization - the number of outstanding shares times the share price - stands at $8.7 billion.

"An investment banker would be hard pressed to raise an amount of money nearly equal to the value of the entire company," Egan says.

What's more, both companies have already raised a total of $13 billion by issuing preferred stock at the end of 2007; and they reduced their dividend payments to conserve cash.

The disaster scenarios

The Federal Reserve and the Treasury have taken great pains to point out that the government is not obligated to bail out either Fannie or Freddie if they face insolvency. It's debatable where the legal obligations lie, but as a practical matter, the government can't let these institutions fail because they are being counted up on to help fix the mortgage mess. If Fannie and Freddie were unable to buy and back loans, banks would stop originating them and the pool of homebuyers would shrink, causing home prices to fall even further.

"If the government believes the companies serve an essential role in the market, which they do, they cannot let them fail," says Joseph Mason, an economics professor with the University of Louisiana who focuses on the mortgage markets.

So what would force the Treasury and Fed to step in?

Fannie and Freddie are among the most highly-leveraged companies around, meaning the amount of capital they have on hand is nowhere close to the level of assets they control.

Fannie and Freddie must constantly borrow money in order to operate; if for any reason borrowing costs rose sharply they would not be able to make good on their guarantees or even fund their day to day operations. This is when the government would feel intense pressure to step in and, at the very least, pay contracts in a timely manner.

In an April report, Standard & Poor's said an Armageddon scenario whereby Fannie and Freddie are insolvent is unlikely, but that the mere possibility of failure at either is a greater threat to the economy than the actual collapse of any investment bank.

The bailout scenarios

So what might it look like if the government had to lend a hand? Outright nationalization is an unlikely option given that neither the current administration nor the presidential candidates could afford to support such a move in an election year.

More likely, the Treasury Department or the Federal Reserve would come in and provide a liquidity backstop, in the form of a loan or guarantee to bondholders that they will be paid. Fannie and Freddie could even do a preferred stock deal with the government, much like the deal forged by Citigroup with the Abu Dhabi Investment Authority, says Egan.

That would allow give officials the ability to argue that they weren't bailing out the companies, but rather making an investment that would pay off in the long run.

Mason has a different twist on a possible intervention. If either were to face insolvency, he says the government should purchase a large voting block of equity in the institution and use that as a tool to eliminate any dividends, replace officers and manage the firms back to solvency.

"But [a rescue] would be a political situation, so it would be messy," says Mason. "Fannie and Freddie would fight against having officers replaced. They would want to keep the dividend."

The doomsday scenario could cost taxpayers more than $1 trillion, says the S&P report. The report went so far as to say that a government bailout of Fannie or Freddie could force the agency to lower its rating on the creditworthiness of the United States.

[cheesehead]

Originally Posted by only_human

Good catch. I wonder what other funny or conflated numbers we are relying upon.

Have you noticed that I've been pointing out that some numbers considered "funny" or "conflated" by some folks are actually sound measures that are misunderstood by the detractors? Please read my post #318, about the Businessweek article to which you refer, for an explanation of how it is the sloppy-thinking journalist, not the numbers, at fault there. (Ernst usually catches these cases; he just happened to miss on this one out of multiple others he got right.)

I recommend going back to original sources, when possible, to see whether a particular detractor has actually understood, and accurately portrayed, the numbers in question, or at least trying to find an independent second opinion, before echoing a "funny" or "conflated" claim.

[only_human]

Originally Posted by cheesehead

Have you noticed that I've been pointing out that some numbers considered "funny" or "conflated" by some folks (not just Ernst!) are actually sound measures that are misunderstood by the detractors? Please read my post #318, about the Businessweek article to which you refer, for an explanation of how it is the sloppy-thinking journalist, not the numbers, at fault there.

I recommend going back to original sources, when possible, to see whether a particular detractor has actually understood, and accurately portrayed, the numbers in question, or at least trying to find an independent second opinion, before echoing a "funny" or "conflated" claim.

I will strive to do so. One concern of mine is the statistics that are, for example, "worst in 20 years," and then when you look closer find that tracking has only occurred for 20 years, so they could be worst in a century etc. I don't have any examples at hand but there are a couple of real estate ones that give me pause every time I see them.

[cheesehead]

Originally Posted by only_human

One concern of mine is the statistics that are, for example, "worst in 20 years," and then when you look closer find that tracking has only occurred for 20 years

So, what's needed here is to keep in mind the actual span (20 years), and avoid thinking that it implies anything, either way, about previous times (before 20 years ago).

so they could be worst in a century etc.

... or they might not be -- so one needs to refrain from drawing any conclusions about the unmeasured times until one has data covering them.

Sometimes, someone will deliberately emphasize a certain subset of the time span over which measurements exist, while not mentioning other times, in order to try to fool readers into drawing an unsubstantiated conclusion about the times other than those specifically mentioned.

[ewmayer]

Originally Posted by cheesehead

Have you noticed that I've been pointing out that some numbers considered "funny" or "conflated" by some folks are actually sound measures that are misunderstood by the detractors? Please read my post #318, about the Businessweek article to which you refer, for an explanation of how it is the sloppy-thinking journalist, not the numbers, at fault there. (Ernst usually catches these cases; he just happened to miss on this one out of multiple others he got right.)

I would argue, however, that it is not just whether the published measure is sound, but how the financial and major print and e-media interpret and publicize it. In the case of consumer spending numbers, perhaps I'm biased, but my recollection is that for much of the Spring the major media were tempering dire reports on housing and the financial sector with stuff along the lines of "...but consumer spending remains surprisingly robust/resilient/high/strong." And I don't remember any of the government agencies publishing these numbers making an effort to temper the enthusiasm with highly-visible notes in the comments sections of their releases to the effect of "...now take these numbers with a grain of salt because...". I also vividly recall many mornings reading the latest economic news, shaking my head in disbelief at all the reports of better-than-feared spending numbers, which completely ignored the fact that an ever-increasing chunk of that consumer spending was a direct result of rising food and energy prices. And it's been established beyond any reasonable doubt that the employment numbers published by the BLS are utter rubbish, because the statistical fudge factory known as their "birth/death model" [BDM] is highly optimistic even in roaring economic times, and yields "correction" not only of a grossly wrong magnitude but likely even of the wrong sign in a contracting economy, which is what we have now, in spades. I saw nothing in any of this year's BLS jobs-numbers releases which questioned the plausibility of the BDM yielding tens of thousands of "magic" new jobs in the imploding construction sector, with the upward adjustments there this year being even higher than in 2007. Patently ridiculous stuff, right up there with the Aaa ratings bestowed by the credit-rating agencies on hundreds of billions of dollars' worth [at least when initially issued and sold to investors] various packages of soon-to-be-worthless-mortgage-backed-securities.

Also, we are talking here about a federal government which has fostered a nearly unprecedented culture of blatant lying and obfuscation on important issues where the prevailing data don't fit their party line, and corrupted the functioning of nearly every government agency worth mentioning. Why would you believe that the rot has somehow not spread to the BLS and the Census Bureau? You think those agencies - though most of their rank and file employees are surely dedicated, honest career types - are somehow magically immune to the cronyism and hand-picking of political stooges to fill their administrative ranks that characterizes the modus operandi of the Bush administration everywhere else one looks?

[only_human]

Originally Posted by ewmayer

Also, we are talking here about a federal government which has fostered a nearly unprecedented culture of blatant lying and obfuscation on important issues where the prevailing data don't fit their party line, and corrupted the functioning of nearly every government agency worth mentioning. Why would you believe that the rot has somehow not spread to the BLS and the Census Bureau? You think those agencies - though most of their rank and file employees are surely dedicated, honest career types - are somehow magically immune to the cronyism and hand-picking of political stooges to fill their administrative ranks that characterizes the modus operandi of the Bush administration everywhere else one looks?

I was so smug as a child when I would hear about things like this in China and so confident it would never occur here.

[cheesehead]

Originally Posted by ewmayer

I would argue, however, that it is not just whether the published measure is sound, but how the financial and major print and e-media interpret and publicize it.

Well, then I'd call it "funny interpretation" rather than "funny numbers".

(Maybe I just hate to see numbers slandered, this being a math-oriented forum and all ...)

In the case of consumer spending numbers, perhaps I'm biased, but my recollection is that for much of the Spring the major media were tempering dire reports on housing and the financial sector with stuff along the lines of "...but consumer spending remains surprisingly robust/resilient/high/strong." And I don't remember any of the government agencies publishing these numbers making an effort to temper the enthusiasm with highly-visible notes in the comments sections of their releases to the effect of "...now take these numbers with a grain of salt because...".

So again it was the interpretation at fault, not the numbers themselves.

Also, we are talking here about a federal government which has fostered a nearly unprecedented culture of blatant lying and obfuscation on important issues where the prevailing data don't fit their party line, and corrupted the functioning of nearly every government agency worth mentioning. Why would you believe that the rot has somehow not spread to the BLS and the Census Bureau? You think those agencies - though most of their rank and file employees are surely dedicated, honest career types - are somehow magically immune to the cronyism and hand-picking of political stooges to fill their administrative ranks that characterizes the modus operandi of the Bush administration everywhere else one looks?

I have been defending only a selected few numbers I think are unneccessarily deprecated.

I dislike being (* sigh *) cynical, but I guess it won't shock me to discover Bush-rot^* in the numbers departments when someone shows me evidence rather than mere allegation.

- - -

^* - Hey, do we have a neologism here? Google search on "Bush-rot" shows no hyphenated occurrences on the first two pages. Wait ... #22 (http://servercc.oakton.edu/~billtong...redibility.htm), in song lyrics. Then at #26 (http://www.victoriataft.com/2007/03/...utrageous.html) one comment clearly uses nonhyphenated "Bush rot" as a noun-ish phrase.

We are, of course, skipping over the genealogical references to the family first known as Bushrod, and over both horticultural diseases and STDs.