JasonC

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  • Citigroup's Derivatives Reduce Bailout to a Non-Event
    The article is nonsense. Read C's actual reports on its book, they disclose far more than anyone else, and the story is their net exposure is on the order of 0.5% of the gross notional numbers the hyperventilating short cites in the article. They hedge is existing risk in cash positions. C is incredibly liquid and a tank in hedging terms. It is also forcing a positive cash flow in its own direction to the tune of $45 billion per quarter - which is its market cap at these ridiculous levels. On any long term, forward basis the present price is going to work out to a PE between 2 and 3. It isn't going to fail, the authorities have made that abundantly clear. But the shark-shorts can't let go of their self-fufilling short-em-to-zero bone, and want to turn those machines back on. It isn't going to happen. Vols are back to half of the elevated levels of October and November. This too shall pass. And when it does, C is going to be an epic buy at these levels.
    Jan 05 15:57 pm |Rating: +1 -2 |Link to Comment |View article
  • How Will We Finance the MBS Fix?

    It is a fairer question than the comments realize. But here is the right way to do it --- not saying it is how they will...

    First, the unmarketable tranche structure of existing MBSs needs to be wiped out. They lower tiers are not marketable in less than perfect conditions, ergo that whole model is dead. The way to fix this is to buy up all the subordinate tranches of existing mortgage pools and then combine them with ownership of the top tier, to recreate whole loans. An owner of all tranches is free to move what he likes among his various pockets, so all the subordination issues and cash flow ownership issues can simply be eliminated. The whole loan pool belongs to the entity that bought up the whole original lissue.

    Second, simplest triage of the loans within the now-owned pool. First, all the performing loans become a full quality MBS, get an underwriting guarantee from GMNA, Fannie et al, and out the door they go. This brings in some cash from the investing community early in the process, to repay what was spent on the tranche buy-up. Since they now own a (1) transparent (2) whole loan consisting entirely of (3) performing loans with (4) a government guarantee underwriting it, this portion of the pool will be valued at a 5% cap rate or thereabouts. Which is much better than the secondary market for these things right now. The gain on that revaluation of the stable portion of the cash flows will fund a lot of the rest of it, though not all.

    Then you have a big remainder left of non-performing loans. The remainder of the triage is to refinance loans that can remain performing on recent bailout terms, which need to "season" against re-default for up to a year before they can be added to an investment grade loan pool. And the third category, property already owned as a result of foreclosures plus additional loans that will foreclose. The best thing, if there were enough capital working this market, would be to auction off the latter two rapidly, but at the moment there isn't. Instead, use an auction procedure for bundles of the properties in the last category only.

    The model for the auctions is the 1990s RTC and its handling of the assets of failed savings and loans. Announce pools of properties in the financial press and take bids on them. Yes, some will buy up a lot of property cheaply that way. Better to get it into hands of speculators making profits, than leave it zombifying banks treating it all as dead weight loss. The speculator-buyer has every incentive to turn the things he bought back into money as rapidly as he can, and to fix up things, and to hire efficient servicers, etc.

    That is the way to get it to work.

    And it is a problem, I can tell you. In real estate markets I actively track and bid within, the biggest remaining issue is no longer financing stuff. Rates at 5% for prime buyers plus most of the price adjustment already having happened, can deal with getting bidders, though low ball bids. No, the issue is getting anyone at a bank to even look at all their short sale offers and approve them. It can take months, and the entire time, the properties are sitting on the market at low asking prices without actually moving. They have to move. The issue it to restore liquidity, above all, and that can only happen if banks stop sitting on their short sale offers and just sell them all, instead.

    Is there a need to police that pretty closely? Certainly. Otherwise sharpers will just stick banks with losses and keep properties they failed to pay for, by using cut-outs and the like. It will be work, a lot of it. And the original writer is correct, with tens of thousands of people in the industry let go in the last year or so as profits disappeared, the experience base to handle it all isn't working the problem yet. They need to end up rehired by loan-pool bidders and government contract servicers, etc.
    Dec 23 10:44 am |Rating: +4 0 |Link to Comment |View article
  • The Battle of the 'Flations
    Never lose sight of the fact that the braintrust telling you the Fed is stupid just lost $20 trillion betting on a hyperinflation that isn't happening, while the Fed correctly saw coming the deflation that is happening.

    The Fed isn't stupid. But a lot of traders fighting it are stone cold morons.
    Dec 19 11:01 am |Rating: +3 -2 |Link to Comment |View article
  • Great Depression Not Imminent, But Inevitable

    Simply dumb. What covers real risks is spreads, spreads are at epic levels, ergo even epic levels of risk can be objectively handled now. The silly and dangerous bit was the low spread world we just exited --- exiting it has destroyed so much capital taking credit risk for a living (which used to be known as "banking", duh) that spreads have reacted to the opposite, silly extreme. Someone will realize these epic spreads are buys when the narrow ones were sells, and be profitable as a banker again. Those who believed that it was possible to be a banker at spreads of zero were wrong, those who now believe it is impossible to be a banker at spreads of 10% over risk free rates are just as wrong.

    Both are trend following idiots and not bankers.
    Dec 17 15:37 pm |Rating: +8 -1 |Link to Comment |View article
  • Deflation Is Just Around the Corner
    "can someone tell me which prices are lower"

    Housing, silly, a third of consumer costs. Plus energy, a tenth or so, direct and indirect. That is 40% of costs that have been cut in half. We've only seen the headline CPI number drop 3%.
    Dec 17 12:15 pm |Rating: +4 0 |Link to Comment |View article
  • Fed's Latest Move Means Low Profit, High Risk for Banks
    "a tsunami-sized squeeze on bank interest margins"

    You've got to be kidding. Banks can buy corporate bonds yielding 10-20%. Spreads are at record levels. They are *not* going to get killed by absence of interest margin. Their net interest margins were running 3% before the last quarter's crash, short rate falls, and further widening of credit spreads. There isn't a single category of loans outside of the original subprime mortgage area (already written off to zero, long since) where rates on the loans don't cover the loan losses and to spare.

    Banks were sells at full prices and narrow spreads a year or two ago, but they are screaming buys at low prices and wide spreads now. The forward PE of major money center banks, not on one year out earnings but likely long run averages, is about 2 right now. Yes you read that correctly.
    Dec 16 17:50 pm |Rating: +5 -4 |Link to Comment |View article
  • Corporate Bonds Haven’t Been This Cheap Since 1932

    The original article writer has it right, all the comments are worthless noise in comparison.
    Dec 16 12:18 pm |Rating: +2 0 |Link to Comment |View article
  • To Understand Inflation, Follow the Money

    I call financially illiterate BS.

    Maiden Lane LLC assets are lower by $2 B (with a quarter billion interest received), not 9-10B. JPM takes the first B and change of hit on those. Maiden Lane III, lower by 0.5 billion, Fed share 3/4 of it.

    The article writer apparently confused the amount outstanding for the AIG loan in the latter, with the older Bear Stearns figure for the former. For comparison, in a typical recent year the Fed had profits of $30 billion and paid $29 billion back to the Treasury.

    There is no inflation. Prices are in fact dropping, and treasury auctions are four times oversubscribed at yields of zero.

    As for what treasury rates can do, from 1934 to 1954 the average rate on 3 month T-bills was 61 basis points. For 20 years. There was some inflation in that period, coming out of WW II and during Korea - the price level doubled, and the average rate of inflation works out to 3.6% a year, taking years of flat or lower prices early, with years of increases later in the series.

    The T-bill rate was under 1% continually for those 20 years. It didn't move above 2% and stay above it until the late 1950s.

    Over their entire history since 1934, T-bills have averaged 4.4%, exactly equal to average CPI inflation over that period. But the relationship is *not* one to one each year, only overall and on average.

    As for the illiterate comments at the end, hyperinflation without transactions is a round square and a misunderstanding.

    For the millionth time, the *demand* for money is *not* a constant, it can and does fluctuate violently, the price of any commodity, including money, depends on the demand as well as the supply, and deflations can and do last decades.

    All your inflationary brainstorms, are belong to us.
    Dec 15 17:10 pm |Rating: +4 -4 |Link to Comment |View article
  • Credit-card delinquencies jumped in November, Capital One (COF) says in a regulatory filing (8-K). The net charge-off rate - loans that a lender does not expect to be repaid - increased to 6.98% from 6.54%.
    Anyone think banks charge less than 7% on the CC receivables outstanding, blended rate over all dollars out?

    Lend at 13 and lose 7, funding cost 3, means 2% net interest margin.
    Dec 15 14:46 pm |Rating: 0 0 |Link to Comment |View news story
  • What If the Great Depression Analogy Is Wrong?

    All the world's ideologues think they can make their hyperinflation bets come right in the end after all, if they just screech loud enough that it is all some con. Well, boys and girls, they are epicly wrong and busted. Fact.

    As a Brazilian whether 2.5% in dollars sounds like a good return.

    The US economy bottomed in *May*, measured in Euros.

    The personal savings rate has already risen to over 5%. It might go as far again in a single quarter. Companies are reporting losses, many of them non-cash, while forcing an epic cash flow in their favor from loan runoffs and stimulus actions received.

    The balance sheet of all US sectors other than government are improving dramatically and nothing can stop that process from completing itself and having its natural effect.

    Final demand hasn't dropped at all yet, in nominal terms. In 6-9 months when all the balance sheet repair has happened and the stimulus fuel remains lying around, it will pop upward.

    And it will be real. Not a mere currency adjustment.

    Until everyone gets the inflationary brainstorm out of their system, they will continue to be ground to atoms. Lots of money will be made in corporate loans and in equities, none of it by betting that the dollar goes to zero.

    The Fed held M1 *constant* for 3 straight years, spring 2005 to spring 2008. Currencies willing to do that, and take this kind of epic asset-smash pain, do *not* go to zero, they are *not* soft currencies.
    Dec 15 14:43 pm |Rating: +7 -3 |Link to Comment |View article
  • David Gaffen: The 'six months from now' fallacy

    Not a fallacy, the article has nothing to say.

    Money center banks can be bought this instant at 2 times their likely average future earnings, not one year out but all time. Those are epic buys.

    Lower quality loans can be made at 20-40% rates. Yes you read that correctly. Higher quality ones, 10-15% rates with attractive features.

    Chasing headlines is trend following with a lag, and idiotic no matter how many times financial journalists pretend it is what everyone must do.
    Dec 15 14:27 pm |Rating: 0 0 |Link to Comment |View news story
  • Apparently consumer deleveraging did not begin in Q3, as the Fed's debt service ratio (ratio of debt payments to disposable personal income) and financial obligations ratio (includes auto payments, rentals, and other data) both rose from Q2. (release)
    Nonsense, purely an artifact of the stimulus checks raising 2Q personal income. See the immediately prior terms in the series - debt service cost is below 1Q 2008.

    Total household debt fell in 3Q for the first time since 1945. The personal savings rate soared - disposable income is running at a rate $650 billion above consumption expenditure, for the household sector.

    That is perhaps half the total adjustment needed to get back to a sustainable savings rate, and it occurred in record time.
    Dec 15 14:23 pm |Rating: +1 0 |Link to Comment |View news story
  • Inflation on 'Sale' as Deflation Dominates Markets
    You can buy a 30 year TIP today for 0.7% per year over the yield you can sell short the 30 year bond future. This locks in 30 years of CPI as your upside, and a maximum downside if there is no inflation whatever over 30 years, of about 20%. You can readily leverage that to 5 times with perfect confidence. If inflation averages its 1945 to 2008 behavior over the next 30 years, you will make 17% per year nominal and 12.5% per year real, compounding to 33 times your initial investment in real terms.

    The market isn't making you this offer because it is expecting a hyperinflation tomorrow. It expected that as recently as 6 months ago, but everyone betting that way lost everything and is dead broke as a direct result.
    Dec 10 17:40 pm |Rating: +3 0 |Link to Comment |View article
  • When Should the Government Step Back from All This?

    Lots of raving ideological idiocy from the permanent loser class, mostly.

    To answer the article's question "when will it ever be politically astute to let that rate rise to a level determined by actual market forces", as soon as the low rates result in all such loans being made exclusively by the government, and it then discovering it is running the program at a loss.

    Doesn't take long. In student loans, it has pretty much already happened.

    But for private enterprise to replace government, there has to be some private enterprise. Right now there is a lot of screeching by losers, but no actual enterprise. Proof - spreads. Anyone who thinks he can tell sound from unsound credits or who thinks the government set rates are too low, can step up where the bankers haven't and lend to the sound credits.

    If private bankers were doing so, there wouldn't be any call for the government to jump in, instead. They aren't. They are all looking in a rear view mirror and herding into overcrowded treasuries, trying to front-run the Fed, but not being bankers at all.

    As for how American is all is, the raving ideologues simply don't know American history. They know Cato press releases and the Heritage Foundation line from the Reagan era and think that is American history.

    America was founded by private corporations. The state governments were corporations before they were states. But it took an act of a legislature to create a company, down to 1850. Public and corporate business were so in bed with each other, you couldn't pry them apart or sometimes even tell them apart. The first treasury secretary created the banking system. The first manias in the country were for investment in canals after the success of the Erie canal, and were usually funded by local governments through bond issues. In the second half of the 19th century, the private in private enterprise consisted of the government giving half of the land of many western states to railroad companies, frequently in return for private payoffs, but for the public purpose of opening and developing the land.

    The idea that the state had nothing to do with business is a late ideological idea with its historical origins in continental European centrist liberalism, which wasn't in power there incidentally. It was not the practical reality in the US or any other English-speaking country. (East India Company ring any bells? How about Cecil Rhodes?)

    Enlisting private business and its energy, organizing power and efficiency, is simply our characteristic way of getting things done. What needs to get done has always involved a large say on the part of the government --- which has in turn often been quite heavily influenced, not to say bought outright lock stock and barrel, by large scale private enterprise.

    That is reality. Your loser ideologies simply aren't.
    Dec 05 21:28 pm |Rating: +2 -1 |Link to Comment |View article
  • The Economic Unwind: Speed Kills

    Idiotic article. 25% unemployment and a 41% fall in disposable income is not 6.7% unemployment and a mere 4% rise in disposable income, when you were used to 5 and 7 respectively.

    You never had it so good. Financial markets, that isn't true, certainly, but much of it was funny money let's pretend to begin with. Real economy, incomes in other words, there is not much damage out there. Asset values can fly all over creation without real incomes moving much at all. Hint, that means asset values present trading opportunities but shouldn't be taken too seriously.
    Dec 05 19:46 pm |Rating: +3 -6 |Link to Comment |View article

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