Thursday, March 20, 2008
The Chart to Watch
As we're all aware of by now, the Fed's propping up the commercial banking sector by monetizing debt, which my brother assures me is how all great powers eventually wane -- I suspect that's true, too. It's why my normally uber-conservative bond-laden 401(k) has a little over a pound of proxy gold in it (StreetTracks Gold Trust, GLD) as an inflation hedge.
I don't know how often it's updated, but the wickedly friendly FRED charting facility that the St. Louis Fed puts out has the following chart available:
The Fed was already allowing the commercial banking sector to debase the currency by explosive creation of monetary equivalents (esp. via the USDJPY carry trade), but this chart shows the amount to which credit is being extended using essentially worthless collateral. Or maybe not worthless; who knows how many of the subprime mortgages will really blow up in the long run, but certainly not the AAA-rated cash-reserve-equivalent collateral that should be used. Right now the Fed has no choice if it's going to fulfill its second mandate of protecting employment. Right now we're so close to Scylla that aiming the prow at Charibdis (sp?) doesn't seem like that bad of an option, but once we're in the jaws of the latter foe, this chart'll help show just how much white-phosphorus we've added down in the boilder room.
I don't know how often it's updated, but the wickedly friendly FRED charting facility that the St. Louis Fed puts out has the following chart available:
The Fed was already allowing the commercial banking sector to debase the currency by explosive creation of monetary equivalents (esp. via the USDJPY carry trade), but this chart shows the amount to which credit is being extended using essentially worthless collateral. Or maybe not worthless; who knows how many of the subprime mortgages will really blow up in the long run, but certainly not the AAA-rated cash-reserve-equivalent collateral that should be used. Right now the Fed has no choice if it's going to fulfill its second mandate of protecting employment. Right now we're so close to Scylla that aiming the prow at Charibdis (sp?) doesn't seem like that bad of an option, but once we're in the jaws of the latter foe, this chart'll help show just how much white-phosphorus we've added down in the boilder room.
Tuesday, March 18, 2008
Helicopter Ben To The Rescue
There's something really weird on the radio tonight: sounds like Holst meets Gershwin....
Anyway, there's obviously a lot of news about the bail-out of Bear Stearns, and I'd like to chime into the chorus with a view that'll be anathema to some and gospel to others -- it wasn't a bail-out.
I repeat: it wasn't a bail-out.
This time last week Bear Stearns's stock price was $75/sh -- today it spiked up to $6. Shareholders and employees of B.S. (my, what an unfortunate set of initials!) have taken it in the shorts -- we're talking about livelihoods lost, retirements ruined, portfolios smashed. No-one with an interest in Bear Stearns's success was helped one iota by the Fed's actions. We'll see if their CEO keeps his shirt when the civil suits are finished with him, but anyway....
The phrase to keep in mind is "counterparty risk". I'll circle back to that in a second, but basically we should regard the derivative markets (literally: where an asset is created that derives its value from the value of some other asset according to fixed rules) as a ticking time-bomb, and Helicopter Ben's trying like mad to cut the right wires. There are all kinds of examples that one could give, like options, futures, options on futures, etc. all the way up to 6th-level arcana like convexity-swaps, but the point can be made via garden-variety short-selling. When you sell a stock short, you borrow the instrument in question and sell it, creating an IOU to the holder of the stock that you have to make good on, hopefully by buying the stock back at a lower price. Nowadays the exchanges make short-sales very easy (depending on which exchange and under what rules, they may not even have to borrow the stock any more, but let's pretend they still do). If we had to enter into these stock-lending arrangements on our own, very few short-sales would happen, because let's face it: good intentions don't count when you're talking about seriously real amounts of moolah. The reason that any short-sales actually happen is because someone takes the role of a "market maker", which they do not only by having a big building and lots of account numbers, but also by assuming the counterparty risk of the market's participants. So if you loan me 5,000 shares of Microsloth so I can sell them short, but it turns out that Vista SP2 is such a rampaging success that Richard Stallman does a public-service TV commercial for them, you don't have to worry that I've just lost my shirt and can't get you your shares back -- the market maker will make you whole and then will send guys with violin cases to collect from me.
Although Bear Stearns was a smaller player among "the big guys" on Wall Street, it held bazillions of financial instruments, all of which had "in case of bozo, see Bear Stearns to be made whole" metaphorically stencilled upon the back of them. We all know how much "bozo" there has been to go around in so far as exposure to the sub-prime lending debacle goes -- it's been sorely straining market-makers to the point that the Fed has had to reinvent its product-line to keep banks upright. But Bear Stearns was not only a market-maker for a lot of those instruments, but also took highly-leveraged positions in this toxic-waste market itself! In its greed it nuked itself ... and their shareholders have gotten creamed for it; wham-bam-thank-you-ma'am, they're outta there.
What Bernanke just engineered was not merely a face-saving gesture so that the Wall Street Journal didn't have "BEAR STEARNS BANKRUPT!" plastered across its front page; Bernanke in fact just saved the commercial banking system from a run on it that would have made Black Monday (which was when Russia said "you know all those pesky bond-things y'all are holding that you think we're going to pay back, uh, I wouldn't go using them as collateral for any assets you care about") look like a walk in the park by comparison. All of those we-owe-you's that Bear Stearns has floating around would have had their status's changed from "it's Bear Stearns, of course they're good" to "I wonder how much I'll have left once the bankruptcy judge's finished with 'em". You and I don't normally pay too much attention to the solvency of our local banks, because unless we've got an account with over $100,000 in it (Mother May I?), the FDIC will make us whole in case our bank goes bozo. But most of the modern banking system isn't part of the FDIC, so if Bear Stearns had been allowed to go toes-up, there would have been tens of thousands of people with big smoking craters where there wallets had just been, and the rest of the already-skiddish commercial-banking customers would have gone "holy fucking shit on a horseshoe, Jack, I'm cashing out my account like mucho-pronto". This would have not only have led to the complete destruction of what reserves the banking system has left, but would have killed the extension of credit to anyone, no matter how good their FICO score. Imagine most of the world trying to cash out their dollar-based derivatives -- most of them being highly leveraged affairs. Next to "bloodbath" in the OED would be the phrase "300 trillion notional dollars in assets cutting their prices in competition for 1.4 trillion dollars of hard currency". Total nightmare -- you'd be able to buy a Lexus for a thousand dollars, but you'd be too shit-scared to take anyone up on the deal. Normally a bank won't call (demand immediate repayment) a mortgage with a loan-to-value ration less than 80%, but under that kind of scenario, what do you think your house would be worth? With all of its creditors suddenly turned into jackals, how long would your employer keep the lights on? Bad. Bad bad bad.
Instead, J.P. Morgan has "bought" Bear Stearns for a price so ridiculously low that you might as well consider it an administration-fee, and the Federal Reserve has guaranteed all $30B of Bear Stearns's outstanding obligations.
Bailout? Nah, I call it salvation.
Anyway, there's obviously a lot of news about the bail-out of Bear Stearns, and I'd like to chime into the chorus with a view that'll be anathema to some and gospel to others -- it wasn't a bail-out.
I repeat: it wasn't a bail-out.
This time last week Bear Stearns's stock price was $75/sh -- today it spiked up to $6. Shareholders and employees of B.S. (my, what an unfortunate set of initials!) have taken it in the shorts -- we're talking about livelihoods lost, retirements ruined, portfolios smashed. No-one with an interest in Bear Stearns's success was helped one iota by the Fed's actions. We'll see if their CEO keeps his shirt when the civil suits are finished with him, but anyway....
The phrase to keep in mind is "counterparty risk". I'll circle back to that in a second, but basically we should regard the derivative markets (literally: where an asset is created that derives its value from the value of some other asset according to fixed rules) as a ticking time-bomb, and Helicopter Ben's trying like mad to cut the right wires. There are all kinds of examples that one could give, like options, futures, options on futures, etc. all the way up to 6th-level arcana like convexity-swaps, but the point can be made via garden-variety short-selling. When you sell a stock short, you borrow the instrument in question and sell it, creating an IOU to the holder of the stock that you have to make good on, hopefully by buying the stock back at a lower price. Nowadays the exchanges make short-sales very easy (depending on which exchange and under what rules, they may not even have to borrow the stock any more, but let's pretend they still do). If we had to enter into these stock-lending arrangements on our own, very few short-sales would happen, because let's face it: good intentions don't count when you're talking about seriously real amounts of moolah. The reason that any short-sales actually happen is because someone takes the role of a "market maker", which they do not only by having a big building and lots of account numbers, but also by assuming the counterparty risk of the market's participants. So if you loan me 5,000 shares of Microsloth so I can sell them short, but it turns out that Vista SP2 is such a rampaging success that Richard Stallman does a public-service TV commercial for them, you don't have to worry that I've just lost my shirt and can't get you your shares back -- the market maker will make you whole and then will send guys with violin cases to collect from me.
Although Bear Stearns was a smaller player among "the big guys" on Wall Street, it held bazillions of financial instruments, all of which had "in case of bozo, see Bear Stearns to be made whole" metaphorically stencilled upon the back of them. We all know how much "bozo" there has been to go around in so far as exposure to the sub-prime lending debacle goes -- it's been sorely straining market-makers to the point that the Fed has had to reinvent its product-line to keep banks upright. But Bear Stearns was not only a market-maker for a lot of those instruments, but also took highly-leveraged positions in this toxic-waste market itself! In its greed it nuked itself ... and their shareholders have gotten creamed for it; wham-bam-thank-you-ma'am, they're outta there.
What Bernanke just engineered was not merely a face-saving gesture so that the Wall Street Journal didn't have "BEAR STEARNS BANKRUPT!" plastered across its front page; Bernanke in fact just saved the commercial banking system from a run on it that would have made Black Monday (which was when Russia said "you know all those pesky bond-things y'all are holding that you think we're going to pay back, uh, I wouldn't go using them as collateral for any assets you care about") look like a walk in the park by comparison. All of those we-owe-you's that Bear Stearns has floating around would have had their status's changed from "it's Bear Stearns, of course they're good" to "I wonder how much I'll have left once the bankruptcy judge's finished with 'em". You and I don't normally pay too much attention to the solvency of our local banks, because unless we've got an account with over $100,000 in it (Mother May I?), the FDIC will make us whole in case our bank goes bozo. But most of the modern banking system isn't part of the FDIC, so if Bear Stearns had been allowed to go toes-up, there would have been tens of thousands of people with big smoking craters where there wallets had just been, and the rest of the already-skiddish commercial-banking customers would have gone "holy fucking shit on a horseshoe, Jack, I'm cashing out my account like mucho-pronto". This would have not only have led to the complete destruction of what reserves the banking system has left, but would have killed the extension of credit to anyone, no matter how good their FICO score. Imagine most of the world trying to cash out their dollar-based derivatives -- most of them being highly leveraged affairs. Next to "bloodbath" in the OED would be the phrase "300 trillion notional dollars in assets cutting their prices in competition for 1.4 trillion dollars of hard currency". Total nightmare -- you'd be able to buy a Lexus for a thousand dollars, but you'd be too shit-scared to take anyone up on the deal. Normally a bank won't call (demand immediate repayment) a mortgage with a loan-to-value ration less than 80%, but under that kind of scenario, what do you think your house would be worth? With all of its creditors suddenly turned into jackals, how long would your employer keep the lights on? Bad. Bad bad bad.
Instead, J.P. Morgan has "bought" Bear Stearns for a price so ridiculously low that you might as well consider it an administration-fee, and the Federal Reserve has guaranteed all $30B of Bear Stearns's outstanding obligations.
Bailout? Nah, I call it salvation.
Monday, March 17, 2008
Deep Kim Chee
Holy Fuck!
It's no wonder that Bernanke is rushing to nationalize so much of our debt. I just don't have words to describe how bad this is, but I rescind all criticism of "Helicopter Ben". Tank the currency, inflate our way outta dept, whatever it takes....
This, sports fans, is bad.
Wednesday, March 12, 2008
Quiet Lately
Just in case anyone's wondering, I haven't fallen off of the planet; I've just been really busy after the last re-org -- we're drinking from the firehose over here trying to get up to speed on what everything is, how everything works, etc., with a baptism-by-fire "Welcome to the NFL" preliminary task to get us all started....
Will resume more postings when I understand SCA, SOA, SDOs, EJBs and several other TLAs.
Will resume more postings when I understand SCA, SOA, SDOs, EJBs and several other TLAs.
David Mamut becomes a Libertarian
That bastion of right-wing conservative authoritarianism The Village Voice has an excellent article about famed neo-Con playwright David Mamet's fall to Libertarianism. Mamut's betrayal of the political principles this country was founded upon will surely reverberate for months as the mainstream right-wing intelligencia of our nation's universities cope.
Yes, I'm being satirical, but the piece is real, and well articulated.
An Excerpt:
In entirely other news, somebody knows me....
Yes, I'm being satirical, but the piece is real, and well articulated.
An Excerpt:
|
In entirely other news, somebody knows me....
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