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March 12, 2009



TM, did little Ezra pull the wrong iron out of your bag one day, or does he keep throwing your paper too close to the lawn sprinkler, or what?

(And shame on me for taking so long to notice the pitch perfect Anglicization of that boy's name.)


I think you will see that healthcare stocks tanked when Hillary started her task force in 1993 as well. Freaking idiots. "Buy on the rumor sell on the news" is as old as Wall Street.


More and more economists and business writers are contradicting Obama's meme that recovery won't come until sweeping changes are made in health care, energy and education. They are pointing out that attention to the banking catastrophe are what is important.

Well, since Obama and Gang seem unable to address the financial wreck, it will simply become more obvious as time goes on that these side efforts are simply distraction. Congress is going to rein him in, but they aren't going to solve the banking mess.

Meanwhile, we sink deeper into Obama's quagmire.


What do you bet he won't speak to the G20 meeting this weekend. What do you bet that's going to be a disaster, further tanking the markets next week.


He is just staying his stupid course. Someone ought to tell him that ice cuts steel and their aren't enough lifeboats on board.


He's spitting into the wind, or barfing over the windward rail, or messing around with Jim.


Hey, thanks for that little trip down sock puppet memory lane.


I'll bet you $20 Ezra, Matt, and Jane H just now discovered banks even have ratings analysts.


Does anyone else think the big run up in the market over the last couple of days is a response to all of the negative press Obama's "lack of focus on the economy." Wall Street seems to be clinging to the hope that Congress will sink Obama's budget, Card Check, and healthcare this year.


Wall Street seems to have noticed that there's no one staffing Treasury and no decisions are being made in the WH (not even whether to put DC Taxation withour Representation tags on the President's car) and deciding that if he just shuts up and does nothing we might survive.


Talk about a slender reed to depend upon, the Congress, but you may have a point. I said on another thread that it may be Congress that puts the slowdown on his crazed schemes re healthcare, energy and education, not to mention card check.


And I think the market run-up was the usual fools being sucked in by Citi and GMAC reporting extraordinary results as profits. A dead cat bounce.


Of course, all my pessimism may well be a buy signal. I'm a contrarian with lousy timing.

Tom Maguire

I think you will see that healthcare stocks tanked when Hillary started her task force in 1993 as well.

I was looking for that but having an Obama scare in health care come up last week was too delicious.

Oh, and this rsally is the real deal. I only know because I sold some calls last week.

And it may never rain again, either, since I just fertilized the lawn...


I just saw an EFCA act saying "Corporate greed caused a melt down on Wall-street, destroying your 401(k)"

Oh, they are so in sync with the Obama administration.


Oh, and this rally is the real deal.

Now that the worst is behind us and we can be more introspective about the housing crisis, I wonder if our housing sages could critique a stream-of-consciousness email I just sent to a friend who was irate that the House is considering suspending mark-to-market. I replied like this:
They're talking about reversing a fairly recent change, or at least suspending it. My understanding is that the banks have these exotic financial derivatives many of which are producing income as the banks had expected as most people are in fact still paying their mortgages. Pre-crisis (like 2006), these derivatives were priced based on the assumption that they would produce these income streams, guaranteed (by the implicit backing of the federal government through Fannie Mae). The banks could then say that since their exotic derivative collection was worth $X, they could loan $8X (the beauty of fractional reserve banking).

Then last summer, some (but by no means all) of these derivatives turned into crap, and sold very poorly. By mark-to-market accounting, the banks had to write down their own derivatives to the very poor price, even though they had no intention of selling, even though the ones they held on to may still have been producing the exact same income stream as always.

Well, with a major asset class in the toilet, the banks had to raise capital. All of them. At the same time. Since that turned out not to be possible, they had to stop lending so they didn't go under the fractional reserve limits. Credit crunch.

Arguably removing mark-to-market is just accounting hocus pocus to make the banks look like they're in better shape than they are, but arguably mark-to-market is itself accounting hocus pocus that makes the banks look like they're in worse shape than they are.

What'd I get wrong? What'd I leave out? Where do CDOs and CDSs fit in there?


bgates, I'd offer a complete critique in full detail but am otherwise engaged at the moment. Perhaps later...


New news on the Treasury staffing front: LUN



It looks reasonable, but your last paragraph overemphasizes appearances compared to the very practical importance of how m2m forces financial institutions to take real actions.

The most sensible proposals (to my mind) keep m2m for informational purposes, but suspend it for regulatory (i.e. capital requirement) purposes. If that approach is adopted, then nothing is being hidden for appearance sake, it's just not triggering all these other forced actions in response.


Thanks, jimmy. I didn't mean to suggest that mtm suspension was strictly cosmetic, only that (AFAIK) there is still some disagreement between those who (I think correctly) triggers actions that wouldn't otherwise really need to be taken, and those who say the change would be papering over a real problem.

Your proposal seems to address both sides of that dispute pretty neatly.


Here's what mensches do when the economy turns down:
http://www.boston.com/news/local/massachusetts/articles/2009/03/12/a_head_with_a_heart/?s_campaign=yahoo>Don't be a pig

Rick Ballard

"Where do CDOs and CDSs fit in there?"

You pretty much covered it with "that the banks have these exotic financial derivatives many of which are producing income"

JimmYk's solution might work if it can be stuffed into the Basel II accords via double reporting. I think of this as a five year problem with a start date of Aug. 1, 2007. That's when the music stopped and people found out that all the chairs had been sold on EBay. We're 18 months in with 42 months to go but the problem will begin to taper down sharply by this August. Unless unemployment goes above 11-12% - in which case this will have become an "old problem".

That doesn't mean that velocity will pick up at that point (8/09) because there is nothing replacing the ABS/CDS paradigm at the moment. That's why GE and BAC are peddling FDIC backed paper. If the Zombies can't get velocity up and can't collect the ABS/CDS fees and commissions to which they have become accustomed, how do they turn a profit? $1X banking won't support the Zombie structure.

Fresh Air

Oh and one other comment about these lefty clowns.

Companies NEVER pay for these unionized wages. Customers pay for EVERYTHING, from insurance to fuel to wages. Do they get the idea that there is some great pot of profits out there available for tapping like maple syrup?

Companies that aren't price competitive wind up like GM and Chrysler. How has that whole union thing worked out for GM? They've lost probably 500,000 unionized jobs in the past 25 years. Great strategy if you want to eliminate jobs and create another pig at the federal trough.


Fresh Air- I think the idea is if every company has to have a union- that is, if Toyota had to deal with the UAW- GM would be competitive again.

Draining the pool lowers all boats, or something.


Draining the pool lowers all boats

Last summer was the moment the waters began to recede, you know.


bgates, you are so right. I blame Zero.

Fresh Air


Got it. That's a great strategy. We all circle the drain together. I have another one: How about we lower costs for everyone in every company, so our dollars go further and our standard of living increases? I know that's a reactionary idea and all. It's just because I don't believe the Guild system of labor has worked all that well since it was invented in the Middle Ages.

Rick Ballard

Jimmyk, Bgates,

It appears that Basel II is being 'tuned' to the exigencies of the moment. (See 'Treatment for illiquid positions') I lack the true fluency in bureaucratese necessary to determine the meaning of 'marking to model' in dollars and cents but it does address the regulatory compliance aspect wrt Basel II. In fact, the language provided may wind up in the coming "solution" to the FAS 157 problem.

The solution won't cure the current problem with velocity = 1 though.



After one of your comments the other night i went and read fsp-fasb157-3. Seemed to me that did away with MTM when there was no market for establishing fair value. Now I know i'm missing or misunderstanding something. I was hoping you could point me in the right direction. Thanks


nice link Clarice...we did something similar at my company.

Offshoring was another reaction to a lot of highly paid jobs where CEO's felt they could pay off debt faster as they went on acquisition sprees. There are many factors involved, of course.

OT, but apparently Obama is already sending signals not to expect much from the USA at the G 20 meeting, while Gorbachev is saying the US is no longer the dominant power and calling on the US to reform itself. Yep, Hope and Change....

Rick Ballard

"Seemed to me that did away with MTM when there was no market for establishing fair value."


It didn't exactly "do away with it". Citi refers to the FAS 157 change on page 17 of the current 10-K. Their note is a marvel of obscurantism:

For some products or in certain market conditions, observable inputs may not be available. For example, during the market dislocations that occurred in the second half of 2007, and continued throughout 2008, certain markets became illiquid, and some key inputs used in valuing certain exposures were unobservable. When and if these markets are liquid, the valuation of these exposures will use the related observable inputs available at that time from these markets.

They don't quite make it to "and these are the assets in question and this is how much we think they are worth" but they do manage this:

The cumulative effect at January 1, 2007 of making these changes was a gain of $250 million after tax ($402 million pretax), or $0.05 per diluted share, which was recorded in the 2007 first quarter earnings within the S&B business.

They conflated two issues within 157 and gave the cumulative answer. It may be that the net for the two issues can be derived from somewhere within the 242 page report but it ain't gonna be me that finds it.



Thanks for the help

Rick Ballard


I don't believe it was much help - the mechanism used to derive the value of illiquid assets seems to be a matter of u-pickem for each company. Citi has $32 billion of marks listed, including $14 billion for sub-prime. I haven't a clue as to whether that's a 'Goldilocks' number. If housing floors, it may well be pessimistic.


That card Warren Buffet during a marathon question and answer session on CNBC the other day said that the toxic assets may be the only thing of value on a banks books.


Going OT for a minute, but Drudge has it flagged up What crisis? Who said there was a crisis?

Some Obama quotes to give "confidence" to the market:

Obama said his health and energy changes would build a foundation for lasting recovery, arguing that the current economic crisis was precipitated by an "illusion of prosperity."

How is more federal control-ie making health care less accessible and more expensive-going to help companies or families bottom lines?

How is an "energy" policy which would be better described as a " radical environmentalist policy" going to increase energy production or make energy less expensive?

"Things two years ago were not as good as we thought because there were a lot of underlying weaknesses in the economy. They're not as bad as we think they are now."

"And my long-term projections are highly optimistic, if we take care of some of these long-term structural problems."

If the run up in the Dow and S&P 500 (among other asset classes) in the last years of the Bush Administration was an "illusion of prosperity" (ie a bubble), from a chartist perspective, doesn't that mean equities markets have further to fall (say the S&P 500 in the 450-550 range, another 20% or so from todays close)? The tech and telecom bubble popping blew off over 70% of NASDAQ's capitalization and its been bumping around down over 3000 points from its all time high for the last 9 years. And all that money sloshing around from the tech and telecom bubble from the late 1990's doesn't seem to have an asset class like real estate to go either.

I'm really puzzled he would go out and say that "the national crisis is 'not as bad as we think'", because if that is the case, then why were the Citi and AIG re-worked deals necessary and why have the FM's drawn down their credit lines? Why did he shovel another $275 billion in the US housing market?

I really hope he doesn't go to the G20 Conference with health care, environment, and education as US policy prescriptions for a global financial crisis.

Rick Ballard


It's all in the magic of the profits and earnings ratio. Zero knows what he's doing. Look at his work as editor of the Harvard Law Review. It's simply stunning.

Buck Zero - To Insolvency.. and Beyond


"illusion of prosperity."

I'm thinking a lot of people would claim they were doing better under that "illusory" prosperity than under today's current reality.


"We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished."
3 weeks later...
"But at this particular moment, with the private sector so weakened by this recession, the federal government is the only entity left with the resources to jolt our economy back into life."

"The situation we face could not be more serious. We have inherited an economic crisis as deep and as dire as any since the Great Depression."
4 weeks later...
"A smidgen of good news and suddenly everything is doing great. A little bit of bad news and ooohh , we're down on the dumps....
I don't think things are ever as good as they say, or ever as bad as they say....Things two years ago were not as good as we thought because there were a lot of underlying weaknesses in the economy. They're not as bad as we think they are now."


The Obama Administration: "The Illusion of Competence". (this might even be too generous)

Obama: The Illusion of a Good President.

Wake up from your false consciousness America.


bgates, lol. But you could have distilled it all down by extracting just these three words from the whole: "I don't think"

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