Sunday, August 9, 2009

Link Bonanza

Quote of the day:

Hat tip to Zero Hedge for finding this piece in the Guardian regarding CNBC. I believe the gentleman’s characterization of the ultimate goal of CNBC could not be more on point. It goes along perfectly with Jon Stewart’s criticism of Jim Cramer in which he accuses Cramer of trying to turn finance into a game.

"Tom Rosenstiel, director of the Pew Research Centre's Project for Excellence in Journalism, says many of its shows are built around "punditry and personality" rather than any genuine attempt to report business news."

Couldn’t have said it better myself!

Stiglitz demands more stimulus!: I found this recent commentary from Columbia economics professor Stiglitz on Seeking Alpha. According to Mr. Stiglitz, the $780B stimulus package that was passed by Congress was not sizable enough. In fact, throwing such a trivial amount of money into the system does not even constitute Keynesian economic intervention in his opinion. Since close to 1/3rd of the stimulus was devoted to tax cuts (the dreaded supply side solution; the inclusion of which was likely the only way for Obama to get the package passed as quickly as the administration felt it was needed) that Keynesians see as universally ineffective, it is his view that we now need more stimulus. While I agree with him that deflation is the more near term problem, the following passage is what scares me:

Some worry about America's increasing national debt. But if a new stimulus is well designed, with much of the money spent on assets, the fiscal position and future growth can actually be made stronger.

To me this is equivalent to the idea that the Fed will be able to withdraw money from the system when the time is right with such precision that there will be no long term threat of inflation. Betting on perfect legislation or faultless navigation of treacherous markets, especially with the ever-present special interests and lobbyists having their say, seems negligently naïve. Maybe he is right that we need more stimulus. But the idea that there is “little downside risk” if the money is used for automatic stabilizers seems to understate the threat of the US taking on so much debt that future generations are unduly burdened by the repayment of such liabilities.

What in the world is going on with AIG? I know the markets have been crazy. But the recent run up in shares of AIG takes the cake. Look at the 5 day chart on the company. It opened at around $13.22 last Monday and closed at $27.14 on Friday. That’s a 105% gain in a single week. Of course, as Karl Denninger pointed out, the majority of the run up in shares occurred BEFORE the company reported an unexpectedly profitable Q2. Every time I think that the SEC has taken down that “Gone Fishing” sign that hung in its offices from 2005 to 2008, I see what looks to be insider trading and get discouraged that nothing has changed. Please Mary Shapiro, prove me wrong!

If you are wondering if the increase in share price is justified in the slightest, take a look at the following piece from the Wall Street Journal. As of March 31st, S&P analyst Catherine Seifert estimated AIG’s tangible common equity per share to be -$336.62. Apparently as of Q2 AIG’s tangible book value has climbed above zero, but does that mean that the company should have a $3.65B market cap? I’m not so sure.

But it’s important to note that AIG’s jump to profitability wasn’t driven by any improvement in, say, the core businesses of the company, which remained weak, Seifert said. Rather, earnings got goosed by a few strokes of an accountant’s pen in the form of write-ups of battered assets. “What mark-to-market taketh away, mark-to-market gave back this quarter,” Seifert said.

Good luck getting your home loan modified: Hat tip to James Kwak of the Baseline Scenario for finding this disturbing article from Propublica on the housing markets. The mainstream media has been all over the initial failure of the Obama administration to stem the tide of foreclosures through the Making Home Affordable program that was supposed to give banks and servicers incentives to modify delinquent loans. The Harris family highlighted in this piece has been unable to convince Wells Fargo to modify its loan that was eventually sold to Goldman Sachs, was packaged into an MBS dubiously named GSAMP Trust 2004-WF, and is now serviced by Deustche Bank. As seems to have been the case way too often, the Harrises were steered into an adjustable rate mortgage even though they qualified for a fixed-rate VA loan. Even though both husband and wife were living on a fixed income, they were duped into a loan that had the potential to reset in the mid-teens by a very nice female mortgage broker who they apparently trusted.

So, what’s the problem now? Well, apparently Wells Fargo has told the Harrises that “the investors” need their money and won’t get it if the loan is modified. So, is that argument credible?

Wells Fargo refused to provide additional information about the investor or how it works with investors. Experts say investors rarely are involved in an individual loan modification decision. "The investors are a convenient scapegoat," says Guy Cecala, publisher of Inside Mortgage Finance. "There's no way for investors to veto a loan mod."

Wait, it gets even worse:

In reality, however, the contracts themselves generally don’t limit modifications. In a study due out this month, researchers at UC Berkeley’s law school [8] looked at the contracts covering three-quarters of the subprime loans that were securitized in 2006. The researchers found that only 8 percent prohibited modifications outright. About a third of the loans were in contracts that said nothing about modification, and the rest set some limits but generally gave the servicers a lot to leeway to modify, particularly for homeowners that had defaulted or would likely default soon.

So, the answer appears to be that the banks are refusing to modify loans for reasons that do not have anything to do with servicers or investors. Maybe, as the NY Times recently pointed out, it is more valuable to collect the fees associated with delinquent loans or eventually foreclose rather than modify a loan that was made in obvious bad faith by the broker.

I know it is hard, but my advice to everyone (including investors) is not to lose sight of the damage this crisis has done to human beings. It is easy to get lost in worrying about the economy and our individual portfolios, but at the end of the day this country won’t prosper again if individual people are unable to recover from the crisis.

Bulls have outrun the bears: According to this piece from The Pragmatic Capitalist in Seeking Alpha, the latest sentiment readings indicate that bullishness on the US stock market has run wild. In fact :

The market has not been at such psychological extremes since major market tops were last put in place. The latest reading from trade-futures Daily Sentiment Index reported 88% bulls among S&P 500 traders. The last time a reading this high was reported was on October 9, 2007 - a top in the Dow.

You know the old refrain: when everyone believes something is going to happen you better be ready for the opposite to occur. I’m just saying…

Anybody want to run the post office? Joe Nocera’s article on the US postal service in this weekend’s NY Times is absolutely fascinating. For those of you who do not know how the post office functions and why it has so much trouble being profitable, I think Nocera does a very nice job in summarizing the pertinent issues. It is the classic story of an business crippled by legacy and future (yes, every year between now and 2016 the post office has to set aside $5B for the health benefits of FUTURE employees; and you thought GM’s health care liabilities were bad) liabilities and inflexibility in terms of firing. Also, something that I had forgotten (this shows my bias due to my age) is that people actually used to mail each other letters and that was apparently a huge revenue source for the USPS. Now that the internet and text messaging have absolutely killed that revenue stream, the USPS continues to lose money at a rate that would make even Fannie and Freddie do a double take.

A few weeks ago, the Government Accountability Office added the Postal Service to its list of “high risk” federal agencies, meaning that it is in such dire straits that it needs “to restructure to address its current and long-term financial viability.” Indeed, if something doesn’t change by the fall, the Postal Service will have to renege on those health benefit prepayments — despite its legal obligation to pay them — or start missing payroll.

Great. Not only is California in such dire straits that I’m not even sure I am going to have professors when I start school next month, but now maybe the USPS will go the way of Lehman Brothers. The hope is that the post office will be able to use this crisis as an opportunity to renegotiate some union contracts and force people to accept only 5 days a week of mail delivery. But, based on the inability of the administration to capitalize on the opportunity to re-make the financial industry, I have my concerns that no meaningful reforms are going to come about.

John Mauldin part deux: In this second conversation between King and Mauldin, John discusses his views on the US dollar, gold and inflation. Also, he further describes the new normal world he believes we will live in. Definitely worth listening to.

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