26 April 2009

Considering deleting Twitter, Facebook, and MySpace

Because this post has reified my thoughts about why I'm using these services.

07 April 2009

$4 Trillion - Seriously? This is getting funny...in a sick sort of way

The International Monetary Fund is now said to be projecting $4 trillion in losses on bad assets. Via Calculated Risk.

PPIP, Geithner, and the Great Bail-Out

Why are people so surprised about the PPIP (for those not in the know, this stands for public-private investment program) that Geithner is proposing?

Here is a good article. But it's a little off. Jeff Sachs postulates it will turn into a profit scam that the banks can "game".

Of course it's a scam. We knew that the day the plan was announced. Anytime you get to sell something worth nothing for near face-value it's a scam. The investors get to borrow 85% of the purchase price from the FDIC, Treasury kicks in half of the remaining 15% needed and the investor puts in the rest, a whopping 7.5%.

But it's not a profit scam....it's a loss-reduction scam, er uh, "program".

We will use Jeff Sachs' example from the article cited above. Citi forms a little PPIP, bids the face value, $1 million, on an asset that Citi owns, and only has to put in $75,000. The PPIP defaults on the federally guaranteed FDIC loan and Citi is sitting pretty with $925,000 profit.

The problem is, it really isn't profit. If Citi had originally paid any more than $925,000 for the security that gets sold to the PPIP then they are net zero. They just recouped any potential loss of the security really turns out to be worthless. Profits would only materialize if the PPIP is buying the security for more than what Citi originally paid for it (which is possible and likely to happen if these auctions aren't held in check...but why would they be held in check? the point of this plan is that the federal government doesn't know how to value the assets, so they're going to let the "experts" figure out the value and then bid that value with taxpayer dollars. Adverse selection anyone?).

The whole PPIP program is really just an indirect bail-out. The government is buying assets for more than what they're worth. Period. End of story. The Geithner plan is merely creating the illusion of price discovery through market transactions. People aren't cool with the government just writing a check to the banks. To circumvent public scorn and discipline they have to make it look like an "investment program". But really, we're just giving the banks money for assets with unknown and likely inflated values.

Don't get irate. If the plan goes through and this actually happens then we will have achieved what we wanted to: saving the banks. Nobody wanted to let them fail. Well, that's fine and dandy, but if you don't want them to fail then this is the only option--reimbursing them the lost value of bad assets. There's now way around it. So don't think Geithner is pulling the wool over our eyes. He's doing what he's been charged to do, and just making it seem less like what it actually is.

UPDATE - APRIL 7, 2009 - 7:00PM:
Via Calculated Risk.

The FDIC thinks there will be no losses on the loans it insures to investors participating in the PPIP. Seriously. This is no joke.

So my question is, if the FDIC is so confident that there will be zero losses on loans made to purchase assets of questionable value, then why do the loans need to be guaranteed? There's obviously no risk in purchasing these assets if the investors who choose to buy them are able to make the loan payments. So if they're so safe, how come nobody wants them?

Oh, and the FDIC has some stipulations on the loans it insures. It says it will carefully vet each loan and require borrower's to pay loan fees and post collateral. No risk loans, but they are to be collateralized and vetted carefully? Something smells fishy.

Aside from that, who the hell is going to post collateral that actually has value for a loan to make a gamble on some obscure and mysterious asset of unknown value? Some investors might be pretty risk tolerant, but this ain't the craps table on the strip--these are businessmen looking for a handout. They're not going to post good collateral. The point of PPIP is to encourage investors to buy these "toxic assets" (I hate that term) by minimizing the risk of loss, ie giving you 92.5% of the money, no strings attached, to purchase them, with no recourse and no collateral needed. The strings are going to discourage anybody from borrowing to buy the damn things, leaving us in the same situation that we are in now.

Our Greatest Legacy

"We are all culpable for this mess. Almost all of us have been acting irresponsibly and self-indulgently, in varying degrees, for a long time."

I like his analogy comparing drugs to debt. Many of us were indeed getting high on consumption. Now the withdrawal comes, and withdrawal, for those of you who have never experienced it, is very tough. One of the things that sucks the most about this mess is the huge negative externalities. For those who didn't choose to play, this calamity will extol its wrath on them just as equally as those who borrowed irresponsibly and percipitated the whole debacle. Is your employment situation as stable as it was a few years ago? In addition to the short term consequences that will be born by all, we will all also deal with much longer term consequences like the GARGANTUAN national debt. For teens and twenty-somethings our lives will never be what they once could have been. Most of us will remain in the lower or middle class, but instead of paying a 15% to 20% tax on our moderate incomes, we will likely be paying taxes somewhere in the 30% to 40% range in order to payoff this massive debt incurred to bail-out banks, financial institutions, auto companies, and home-owners. The array of opportunities once available to us are no longer possibilities. Our future budget constraints just shifted left, big time. We now have the honor of paying for the previous generations' excesses. A legacy of rapacious appetite for ever more.

02 April 2009

It's social science!

“Look, economics is not rocket science.  Think of the US Government as like McDonalds, a bank and a toxic asset are just like a franchisee and a Big Mac.  Once you see it that way, its simple.”

An interesting sentence from Steven Levitt.  It can be seen in context here.

01 April 2009

Rockefeller-Snowe Measure Proposes Government Regulation of Private Cyber Security

The idea is that private networks, which control the country's infrastructre systems for things like water and electricity, are vulnerable to malicious attacks from foreigners, and therefore are a national security concern.  The measure suggests a central government agency to establish security standards and regulations for both private and military networks in order to safeguard against possible cyber-attacks.  The full story is here.

I understand the need for securing these types of networks, but one of the may costs of allowing the government to control private network security is the privacy issue, which is brought up in the last paragraph of the article.

Blair acknowledged there will be privacy concerns about centralizing cybersecurity, and he said the program should be designed in a way that gives Americans confidence that it is "not being used to gather private information."

I don't like it.  It's another encroachment on private property and privacy for the "national security."  Besides, don't the entity's that own and operate these networks have incentive to protect their investment?  Why would the government be any better at developing cyber-security than the private sector?

Union Owned Companies - Corporate Suicide?

From the Washington Post this morning:

Under the government's proposed reorganization for General Motors, the union health plan and the company's bondholders would give up much or most of those claims in exchange for an equity stake in the reformed GM.

This is interesting.  What would be the implications of a union having a massive ownership stake in the very company that its members are employed by?  Hoepfully they'd gain control of the board, modify operations in a way that we might think a union would, and end up killing the zombie on their own.  The government doesn't seem to want to kill it; they're content with pouring billions of dollars into it.