Discourse.net

April 15 Approaches

I’ve been doing my taxes today. And undoubtedly tomorrow.

I believe that taxes are the price of civilization, but did they have to make TurboTax even less fun to use than it was last year?

I suppose I could offload the hassle to an accountant, but given that I’m fairly careful about claiming what I can claim — but don’t believe in pushing the envelope — I can’t believe one would save me enough money to justify the expense unless they went too far.

Recession: The Movie

Recession: The Movie

JP Morgan/Bear Stearns -- The Legal (Malpractice?) Angle

This is seriously weird:

JPMorgan in Negotiations to Raise Bear Stearns Bid - New York Times

No, not that they’re upping the price of the deal — it looked like a possible steal for JPM, and the market had already anticipated a tripling of the offer price, albeit not the quintupling that the NYT thinks is on the table.

The weird part is this:

JPMorgan and Bear were prompted to renegotiate after shareholders began threatening to block the deal and it emerged that several “mistakes” were included in the original, hastily written contract, according to people involved in the talks.

One sentence was “inadvertently included,” according to a person briefed on the talks, which requires JPMorgan to guarantee Bear’s trades even if shareholders voted down the deal. That provision could allow Bear’s shareholders to seek a higher bid while still forcing JPMorgan to honor its guarantee, these people said.

When the error was discovered, James Dimon, JPMorgan’s chief executive, who was described by one participant as “apoplectic,” began calling his lawyers at Wachtell, Lipton, Rosen & Katz to seek a way to have the sentence modified, these people said. Finger pointing over the mistakes in the contracts began as bankers blamed the lawyers and vice versa.

Is it possible that management didn’t know about this at the time? I remember reading about it online, where it was described as something the Fed demanded as a condition of its guaranteeing such a large share of the most toxic securities.

I’d like to hear a lot more about this.

Good Reading

Calculated Risk, A Tale of Real Estate Predation deconstructs the Washington Post's My House. My Dream. It Was All an Illusion.

Liquidty Trap Watch

Two days ago, Krugman said, “the one-month Treasury rate was 0.57; the three-month rate was 0.825” and he worried about a liquidity trap.

Then then Fed cut the discount rate 0.75%, to a low low 2.25 %. Would the T-rate crater? Apparently not.

This morning, Krugman says, the one-month T-bill rate is 0.539, the 3-month rate 0.728. Working the math out on my thumbs suggests that the change in the T-rate was a lot smaller than the cut in the discount rate.

I think this is actually sort of good news. It seems that although the Fed is running out of ammo, there’s still a little elbow room left….

Update: for a gloomier view, see Calculated Risk, Financial Crisis: Third Wave Still Growing.

Krugman Is Scaring Me

Back when I studied economics in college, a liquidity trap was something that happened (1) before the New Deal and/or (2) to small economies run by dorks. Of course, that was before the Japanese crisis.

And, almost, it’s our turn. No wonder the Fed is freaking out.

Paul Krugman’s Blog, How close are we to a liquidity trap?:

Here’s one way to think about the liquidity trap — a situation in which conventional monetary policy loses all traction. When short-term interest rates are close to zero, open-market operations in which the central bank prints money and buys government debt don’t do anything, because you’re just swapping one more or less zero-interest rate asset for another. Alternatively, you can say that there’s no incentive to lend out any increase in the monetary base, because the interest rate you get isn’t enough to make it worth bothering.

…

As of 10:38 this morning, the one-month Treasury rate was 0.57; the three-month rate was 0.825.

Are we there yet? Pretty close.

Cf. Krugman, Thinking About the Liquidity Trap (1999).

Although my macro is very rusty — I always liked micro better — it seems to me that the large pre-existing deficit overhang puts some nasty limits on the government’s ability to do stimulative fiscal policy: the expectation that paying it all back will be brutal acts as a nasty brake on the stimulative effects.

The sinking dollar, on the other hand, seems more of the mixed blessing. Foreign investment, good in the short run, not so good in the long run (as they lead to more fiscal outflows). Better would be increases in foreign demand. And how’s that big mac index looking today?

Hedge Fund Humor

Calculated Risk: Hedge Fund Humor

Who is this guy Margin that keeps calling me???

The Return of Lemon Socialsim

Last week it was the British government doing it. Now mainstream US economists are proposing that we respond to the mortgage crisis with some home-grown lemon socialism.

I understand the importance of keeping markets liquid. But I have absolutely no desire at all to bail out the shareholders of the banks that made stupid choices, and actually not so much desire to do income transfers to people who bought bigger houses than mine and can’t pay for them.

Isn’t there some way to do the income transfer from the intermediaries who made all the profits and created the moral hazards?

Note: “lemon socialism” has been defined as the subsidization of weaker firms at the expense of stronger firms, but I believe the better definition to be “a form of market organization in which the private sector is allowed (or encouraged) to take above-average risks and pocket the gains, but the public is required to shoulder the ultimate losses.”

Another example of lemon socialism is when the public is asked to take over ownership of loss-making enterprises which have suffered from under-investment while private profits were being taken. But that was last round.

BankUnited Blacklists 191 Miami Condos

I don't pretend to understand the ins and outs of the Miami real estate market, and especially not the condo market (which seems largely divorced from the single-family housing market), but this looks like a big deal to me: via Eye On Miami, the news that BankUnited blacklists 191 condo projects.

The Ownership Society, version 2.0

Calculated Risk has a graph which shows Homeownership Rate: Cliff Diving.

What this means is that the home ownership rate today is back to where it was in, say, 2001 and still falling.

In other words, most of the million or so families who have been foreclosed on this year are not buying new homes — how could they get the credit? — but renting (if they can pass the credit check for that!) or moving in with family. Or living rough? (Or is that what comes next?)

The Tyranny of Systems Think

It’s a risky thing to do on the day of the NH primary, when in all likelihood the results — whatever they are — will bring forth a flood of bloggy eloquence, but here goes: I nominate the following blog post at Calculated Risk, a post which has nothing to do with politics, only a little to do with the mortgage crisis, and everything to do with the tyranny of corporate (or, really, any) systems and mental blinders, as the best blog post of the day.

Turns Out Judges Don’t Like “Efficient” Servicers

100% Leverage?

Does this mean what I think it does?

Credit Crisis? Just Wait for a Replay: One of the more remarkable facts about the subprime crisis is that total losses to the financial system may be about equal to the amount of subprime loans that were issued. On the face of it, that appears absurd, since many such loans will be paid off, and those that default will not be total losses. But, Mr. Seides said in an interview, “the financial leverage placed on the underlying assets was so high” that the losses multiplied, as the profits did when times were good.

“When there is more leverage” and things go wrong, he said, “there are more losses.”

They resold layered participations in the same underlying loan so many times that it ends up with leverage over 100%? Given that substantial profits are taken out along the way, how does that work even if everyone pays off like they are supposed to?

Update: Krugman is puzzled too.

That Didn't Take Long (Failed Treasury Plan Dept.)

The “super-SIV” bailout fund — which never made much sense, and for which the commitments had been dropping almost daily, is now officially dead before being born: Big Fund to Prop Up Securities Is Scrapped. Its death leaves some egg on the face of the Treasury, which had suggested this was part of the answer to the emerging mortgage crisis.

Note that this is different from the other Treasury scheme to have banks adopt some FICO-score based criteria to allow some fraction of the people who would otherwise default next year to refinance instead (so long as they are up to date on payments, etc. etc.). That band-aid makes some economic sense and may survive, although it’s only a few drops in the leaky bucket.

Calculated Risk on the Paulson-Brokered Voluntary 'Freeze' on (Some) ARMs

Calculated Risk, Ten things to know about the Freeze. Actually it gives you eleven. And they all sound right to me.

Catching Up With the Florida Funds Scandal

Forgot to check in with the Florida funds scandal yesterday.

The local media has finally gotten engaged here, and there are several relevant stories in the Miami Herald, even if they have to get one from the AP rather than reporting it all themselves.

• AP, Governments continue investment withdrawals; managers positive:

  Local governments withdrew about $560 million of their money from Florida’s state-run investment pool Friday, but the beleaguered fund’s managers were pleased that figure was about half the amount from a day before.

• Beatrice Garcia, Citizens assesses its risk: The state-run insurer is the biggest investor in a troubled investment pool, and it wants to reduce its holdings:

  It has about $1.7 billion in Part A of the fund, which has been reopened for withdrawals, and about $260 million in Part B, which remains closed.
  
  In all, Citizens has about $7 billion of the $10 billion it has stockpiled — in cash, credit lines and borrowings to pay future claims — invested with the State Board of Administration, which runs the investment pool and other funds. It began to move funds over to be managed by the SBA last fall because of its good investment results and also to save money on management fees.

• Gary Fineout, The State Board of Administration reported that it has more than $2.5 billion in downgraded investments in several accounts, including the state retirement fund. It’s a little hard to follow, but it seems that the Local Government Investment Pool (LGIP) may not be the only state-managed fund with problems:

  The SBA said Wednesday the state pension fund has $756 million in investments that have fallen below purchase guidelines, as have more than $800 million in investments that it manages on behalf of Citizens Property Insurance and the Hurricane Catastrophe Fund. The SBA manages nearly $200 billion in its various accounts.

• In that same story, the local angle: “Donald Nelson, finance director for the City of Coral Gables, which has $32 million frozen in the pool, has plenty of cash to meet obligations, particularly with tax revenues flowing in. Still, he said the city plans Thursday to withdraw $2 million.”

Earlier items:

• Details on Florida Fund Restructing (Plus Full List of Bag-Holders)
• Citizens Insurance and Other South Florida Public Bodies May Lose Big If State Fund Collapses
• Florida Fund Crisis: The Jeb Bush Connection
• Florida Quarantines the Radioactive Securities

Not irrelevantly, there’s also this amazing piece of news: South Florida homeowners are in trouble, with one in 32 Miami-Dade homes in foreclosure; in Broward, it’s one in 30.

I suppose the silver lining is that for all the aspiring faculty to whom we’ve extended offers this may be a good time to buy. Assuming you plan to hold on to the property for a while….

Someone's Feeling Cheerful

Maybe it’s my weird sense of humor, but I really enjoyed this video from The Richter Scales, YouTube - Here Comes Another Bubble.

(Spotted via Unfogged.)

Certainly more cheerful than their Fine Line: Sub-Prime Decline

SIV Rot Found in Money Funds

WSJ.com, SIV Exposure Seen at Some Money Funds

Liquidity crisis?

Details on Florida Fund Restructing (Plus Full List of Bag-Holders)

Via the Miami Herald, Agency head quits as state fund reels, come links to very useful documents for those trying to follow what’s happening in the Florida Local Government Investment Pool (LGIP) (administered by the State Board of Administration):

• Plan to restructure the fund
• List of cities and counties that withdrew money from the state fund last week
• List of cities and counties that still have money in the account

The Herald also highlights some local winners and losers:

Among those who got their money out before the state froze the fund:

Broward County: $227,534,594.02

Broward County School Board: $274,130,570.93

City of Fort Lauderdale: $277,366,602.43

City of Miami: $49,350,000.00

Miami-Dade School Board: $111,879,297.14

Miami-Dade County government: $514,657,752.68

Among those with money still in the fund:

Miami Dade College: $146,026,551.67

Citizens Property Insurance Corporation: $1,974,709,602.79

City of Coral Gables: $32,009,946.93

City of North Lauderdale: $24,566,106.14

Broward Community College: $39,010,779.35

So at a (maximum — could be significantly less if they don’t rush to liquidate) 14% haircut, my hometown, Coral Gables, stands to lose up to $4.5 million, and Miami-Dade Community College could lose up to $20 million? Those are big numbers, but I suppose it could have been even worse. The hapless Citizens Insurance remains the biggest potential loser, at up to almost a quarter billion.

Earlier items:

• Citizens Insurance and Other South Florida Public Bodies May Lose Big If State Fund Collapses
• Florida Fund Crisis: The Jeb Bush Connection
• Florida Quarantines the Radioactive Securities

Florida Quarantines the Radioactive Securities

Florida Moves to Guard Assets:

… the pool, whose assets were hit by mass withdrawals after reports it had about $2 billion of holdings tied to wobbly subprime mortgages, could be reopened on a restricted basis as early as Thursday. … about 86 percent of the pool’s assets would be placed in one fund. A second fund would be walled off and would contain worrisome assets, totaling about 14 percent of the total. The restructuring places limits on withdrawals.

Oh, and they found the first candidate for scapegoat:

Immediately before the vote, the board’s executive director, Coleman Stipanovich, resigned after seven years in the post.

Earlier posts:

• Citizens Insurance and Other South Florida Public Bodies May Lose Big If State Fund Collapses
• Florida Fund Crisis: The Jeb Bush Connection

Another Two

Add Montana and Connecticut to the list of states with funds holding dubious mortgage-backed paper.

Florida Fund Crisis: The Jeb Bush Connection

A money scandal with a Bush connection — who would have thought it? Forbes did. Where Was Jeb?:

A government money market debacle unfolding in Florida is raising questions about former governor and presidential brother Jeb Bush’s possible involvement in the mess.

Florida froze withdrawals from a state investment fund earlier this week when local governments withdrew billions of dollars out of concern for the fund’s financial stability.

In the past few days, municipalities have withdrawn roughly $9 billion, nearly a third of the $28 billion fund (which is similar to a money market fund) controlled by the Florida’s State Board of Administration (SBA). The run on the fund was triggered by worries that a percentage of the portfolio contained debt that had defaulted.

A majority of this paper was sold to SBA by Lehman Brothers. Bush, as the state’s top elected official, served on a three-member board that oversaw the SBA until he retired as governor in January. In August, Bush was hired as a consultant to the bank. Lehman spokesperson Kerrie Cohen, speaking on behalf of Bush, said they had no comment and would not say when the bank had sold Florida the paper. SBA did not return calls.

Let’s not jump to conclusions just because it looks bad. But it doesn’t look good.

Update: Does this sound like the time Jeb’s state pension fund held on to Enron despite warnings to sell?

Citizens Insurance and Other South Florida Public Bodies May Lose Big If State Fund Collapses

I’m not reading much about it in the local newspaper, but I gather from the Tallahassee Democrat that we here in South Florida are at risk of bearing a large share of the losses coming from the collapse and likely fire-sale liquidation of Florida’s Local Government Investment Pool (LGIP). And this even though the local county government pulled out its money before the fund temporarily (?) closed redemptions.

The LGIP is a 25-year-old fund that was designed to let local governments, especially smaller ones without investment advisers, to make some short-term returns on tax revenues. The money is supposed to be readily available for payments of bills and payroll, so it’s basically a money-market fund for local government. One that has fancy financial advisers, and still ended up holding some dodgy mortgage-backed securities and being long in Countrywide Financial Corp.

Calculated Risk is all over this story. The basic facts of the run on what amounts to a non-bank bank fund are at Bloomberg, Florida Schools Struggle to Pay Teachers Amid Freeze (Update4): The smarter investors pulled out somewhere between $8-$13 billion during the past month. The slower dumber ones are stuck with an illiquid investment of uncertain value — and many of them need the cash for operating expenses.

Add in the unintentionally darkly funny Florida Governments Reject Idea of Accepting Losses on Pool, in which politicians acted as if bluster could replace economic reality,

A newly formed advisory panel composed of Florida school and local government officials with money frozen in a state-run investment pool said they won’t accept a return of less than 100 percent of their investment.

Slow-moving parties are left holding the bag, which still has $14 billion invested in it, but much less if you try to take it out. And who are among the top 20 investors in this decaying fund? Why lots of people around here. Of the (nominal) $14 billion left in the fund, a full seventh, $2 billion, was left there by my insurance company, the state insurer of last resort, Citizens Insurance Co. Depending on the size of the losses, I can imagine much higher premiums next year.

Number seven on the top-20 list is the Southwest Florida Water Management District, which has $285.4 million at risk. Miami-Dade Community College, with $146 million, is number 20. Several near-by counties are also on the list, but not it seems Miami-Dade itself, which pulled out its money before the fund stopped permitting withdrawals.

The strangest part of this story is that it does seem like panic is the worst thing that could happen here. From what I can figure out, originally the mortgage-backed paper was only a small percentage of the fund’s holdings. As it has been liquidating assets to pay the governments pulling out, the fund has been selling more quality paper than the illiquid stuff. But as a result, the mortgage-backed paper becomes a larger percentage of the remaining holdings, making remaining investors ever-more nervous. Which is why the fund called a halt to redemptions.

At present, it may be that the ‘bad’ paper (not all of which is necessarily bad — the problem is no one knows so no one wants to buy it at anywhere near face value) is still only 10% of total assets. But it’s a bank run: no one is going to put money in here, and everyone has a rational fear of coming at the tail end, when the mortgage-backed securities might be all that is left.

Actually, it’s not even all mortgage-backed structured investment vehicles (SIVs):

The fund’s $900 million of asset-backed commercial paper that was downgraded to default amounts to 6 percent of its assets. Another $650 million, or 4 percent, is invested in certificates of deposit at Countrywide Bank FSB, a unit of Countrywide Financial Corp. The bank’s rating was cut to Baa1, three levels above junk status, by Moody’s Investors Service on Aug. 16.

The pool owns $168 million of debt from KKR Atlantic Funding Trust cut to D from B by Fitch Ratings on Oct. 8. It also has $356 million issued by KKR Pacific Funding Trust, cut to D from B by Fitch Ratings on Oct. 2. Fitch said the cut to default on the debt reflected non-payment under the original terms. The debt was restructured to extend the maturities to February and March, and interest payments are continuing.

…Florida’s pool has $180 million of paper from Ottimo Funding, cut to D from C by S&P on Nov. 9. S&P said an auction of Ottimo’s collateral “did not generate cash proceeds” to repay the asset-backed commercial paper.

The pool also holds $175 million of short-term debt issued by Axon Financial Funding, the SIV also held by Montana. It was cut to D from C by S&P this week. S&P said Axon failed to pay liabilities maturing Nov. 26, causing an “automatic liquidation event.”

Florida isn’t alone here: there are similar problems in many other states.

Oh yes, and PayPal too: PayPal customers’ cash exposed to illiquid assets.

Update: And Norway, U.S. Credit Crisis Adds to Gloom in Arctic Norway. Norway?