The economist Hyman Minsky divided financing techniques into three categories: Ponzi finance - where principal and interest on debt cannot be paid out of earnings but only ever more borrowing; Speculative finance - where interest on debt can be paid out of earnings but principal must be rolled over; and Hedge finance where both principal and interest on debt can be paid out of earnings.
From 1952 to 2007 the ratio of debt to income for US households rose from about .35 (hedge financing) to about 1.3 (speculative financing). Even two years into the Depression, the ratio has only declined a bit.
In times of economic contraction - especially when a major asset bubble bursts (i.e., housing), speculative financing units run into two significant problems. Routine debt service becomes more burdensome, and more critically, the ability to refinance becomes often impossibly difficult.
Consider the case of otherwise solvent households with exotic interest-only mortgages with impending punitive resets. The reset payments are unsupportable, and yet there is typically no way to roll the mortgage into a conventional mortgage as the value of the collateral is typically less than the mortgage balance. The underwater position also almost always prevents a sale to terminate the mortgage since that will require bringing too much money to the table.
Barring a sudden and extremely improbable surge in house values, these households will be ruined by the trap. Even many households with fixed rate mortgages will find those unsupportable in the face of income loss, and have no non-bankrupting exit strategy due to their underwater position. Another trap is facing households with sudden rate hikes on large credit card balances.
The distribution of the pain of the speculative unwind will not fall evenly on US households. A substantial number - perhaps 1/4 - have little to no debt and at least adequate resources. Another substantial number - also perhaps 1/4 - have no debt because of too-low income and too-few resources.
This puts the burden of the pain squarely on the roughly 1/2 who have substantial debts. We suspect that most of these households' net worth will be wiped out, creating ever more cascading failure throughout the economy. The end state will be a poorer USA, but one where debt revulsion is so strong, households will once again be Hedge financial units.
Showing posts with label bankruptcy. Show all posts
Showing posts with label bankruptcy. Show all posts
Saturday, December 12, 2009
Tuesday, July 7, 2009
Mass Unemployment + Heavy Debts = Ruin
In the USA, household debt as a percentage of household income is at an all-time high. At the same time, for most households, income is falling - making the debts more onerous. For a significant minority, long-term unemployment or underemployment means income has collapsed and the debt burden is overwhelming - usually resulting in default and bankruptcy.
We have been reading many 'horror stories' about people who had good jobs, but lost them and were unable to replace them, and then drowned in their debts. These people are no longer at the fringes of society, but just another form of 'normal'.
We are beginning to see the human side of this Depression as a series of millions of little catastrophes. Lives that were until recently lived more or less conforming to the typical American Consumer Lifestyle: House, Car, Stuff - complete with mortgage, car loan, and credit card balances. Then income loss leads to wipe out: getting behind on bills, letting them go, and then the repo men take it all away.
It's hard to guess how many will follow this path, but we suspect about half the population. It's going to create a very different America. Luckily for the powers-that-be, most will probably just blame themselves.
We have been reading many 'horror stories' about people who had good jobs, but lost them and were unable to replace them, and then drowned in their debts. These people are no longer at the fringes of society, but just another form of 'normal'.
We are beginning to see the human side of this Depression as a series of millions of little catastrophes. Lives that were until recently lived more or less conforming to the typical American Consumer Lifestyle: House, Car, Stuff - complete with mortgage, car loan, and credit card balances. Then income loss leads to wipe out: getting behind on bills, letting them go, and then the repo men take it all away.
It's hard to guess how many will follow this path, but we suspect about half the population. It's going to create a very different America. Luckily for the powers-that-be, most will probably just blame themselves.
Saturday, June 13, 2009
What the Average American Knows that We Don't
Consumer confidence as measured by the University of Michigan rose for the fourth month in a row in May. Historically, a marked rise in this measure signals the end of economic contraction. Perhaps happy days are here again indeed and the Frugal Scotsman and his loyal assistant - yours truly - will have to find other ways to occupy our time instead of reporting on a Depression that never quite materialised.
Perhaps Mr. and Mrs. Average, seeing the big banks pass their 'stress tests' with flying colours, know that the worst of the credit crisis is in the past. Never mind that bankruptcies in May are up 37 percent from last year, or foreclosures up 18 percent.
Perhaps our high school-educated economists sense immanent job recovery in spite of the chain of record continuing unemployment claims.
We really do wonder where they are getting their information. As far as we can tell, the economic scene is pretty horrid with little hope of anything better than further crashing ahead. But somehow the masses are optimistic. Why? How?
As best as we can reckon it, the recovery story runs something like this: Sure, the economy is contracting - but not as fast as it was at the end of 2008. So, since the contraction is decelerating, pretty soon the contraction will stop and turn into growth.
Perhaps this story will come true. Time will tell, of course. The key thing to watch for is if contraction rates continue moderating, or if the compounding of bankruptcy, delinquency, foreclosure, unemployment, and so forth will re-accelerate the collapse in production.
If the masses are right (and we certainly wouldn't mind if the are - we could use some prosperity ourselves!), then all will be well. If they are misjudging the situation, then the letdown, disillusionment, anger and psychological depression will be extreme. To us though, the recovery story looks like the Bargaining Stage of the grieving process.
Perhaps Mr. and Mrs. Average, seeing the big banks pass their 'stress tests' with flying colours, know that the worst of the credit crisis is in the past. Never mind that bankruptcies in May are up 37 percent from last year, or foreclosures up 18 percent.
Perhaps our high school-educated economists sense immanent job recovery in spite of the chain of record continuing unemployment claims.
We really do wonder where they are getting their information. As far as we can tell, the economic scene is pretty horrid with little hope of anything better than further crashing ahead. But somehow the masses are optimistic. Why? How?
As best as we can reckon it, the recovery story runs something like this: Sure, the economy is contracting - but not as fast as it was at the end of 2008. So, since the contraction is decelerating, pretty soon the contraction will stop and turn into growth.
Perhaps this story will come true. Time will tell, of course. The key thing to watch for is if contraction rates continue moderating, or if the compounding of bankruptcy, delinquency, foreclosure, unemployment, and so forth will re-accelerate the collapse in production.
If the masses are right (and we certainly wouldn't mind if the are - we could use some prosperity ourselves!), then all will be well. If they are misjudging the situation, then the letdown, disillusionment, anger and psychological depression will be extreme. To us though, the recovery story looks like the Bargaining Stage of the grieving process.
Monday, June 1, 2009
GM: The Next Part of AmeriCar
With Chrysler firmly in the morass of bankruptcy restructuring, GMAC under the financial control of the U.S. Federal Government, and General Motors on course with its own bankruptcy court, we feel confident saying that the foundations of AmeriCar - our pet name for a Soviet-esque national car manufacturer - are almost complete. GM, according to the Obama Administration, will be 60% owned by the Federal Government, effectively making it a national auto-manufacturer. Please do not believe the Administration's promise to 'exit' the car business when GM is "bank on its feet;" that would shrink the size of the United States Government, and would run counter to the trend of increasingly large Government ever since President Andrew Jackson.
At the same time, the TARP programme will likely be made permanent, as expected; it will turn into a revolving loan facility for the Government, to nationalise - oh, pardon, "invest in" - various enterprises throughout the U.S. With various banks itching to pay back their TARP loans, the Government will have money to blow on other ventures. We suggest that Ford start watching its back: it's the last independent American auto-maker, which makes it the last major piece of AmeriCar. After Ford is nationalised, we posit that various car parts manufacturers and service providers will be next on the menu. The Obama Administration has already implied this, as it has put a Federal guarantee on all GM and Chrysler warranties... and one cannot fulfil a warranty without the expensive parts!
Eventually, we expect that GM, Chrysler, Ford, and a slew of parts manufacturers will be eventually consolidated into our concept of "AmeriCar." This will be an abomination of mis-managed, corrupt, resource-wasting 'manufacturing' not seen since the fall of the Soviet Union... and it will end just as badly. Simply put, the Obama Administration is betting the farm on a near-term recovery in the U.S. and world economies. There are problems with this attitude.
The Administration pinning its hopes, reputation, and trillions of dollars on a quick end to this 'recession' is asking for disaster. The Government seems to be unaware that this economic calamity is something altogether more potent. Nevertheless, we wouldn't be surprised if the Administration indeed orders its pet car manufacturer(s) to produce around 10 million cars a year, but we would like to ask the President from whence he thinks the citizenry will have the money to buy these spiffy new vehicles.
Because this Depression is destroying the citizenry's ability to produce income, the last things they will want to do is spend their dwindling resources on additional un-needed automobiles. If anything, people will: keep their cars longer; own fewer cars (say, one); share cars, either informally or through farsighted corporations like ZipCar; or, totally discard automobiles altogether and use public transportation, bicycles, or their own two legs.
We can't think of any reason why AmeriCar should outlast the Obama Administration; it just doesn't seem feasible to keep up such extraordinary waste on such a colossal scale, but it will probably happen anyway. In all honesty, we are putting the AmeriCar fiasco as one of an increasing number for which President Barack Obama will leave office in disgrace... as well as lay the foundation for a new Franklin Roosevelt to seize the presidency.
P.S. To the Government: in order to have a successful car maker, reference Tesla Motors. Their $100,000+ Roadster has a fifteen-month waiting list.
At the same time, the TARP programme will likely be made permanent, as expected; it will turn into a revolving loan facility for the Government, to nationalise - oh, pardon, "invest in" - various enterprises throughout the U.S. With various banks itching to pay back their TARP loans, the Government will have money to blow on other ventures. We suggest that Ford start watching its back: it's the last independent American auto-maker, which makes it the last major piece of AmeriCar. After Ford is nationalised, we posit that various car parts manufacturers and service providers will be next on the menu. The Obama Administration has already implied this, as it has put a Federal guarantee on all GM and Chrysler warranties... and one cannot fulfil a warranty without the expensive parts!
Eventually, we expect that GM, Chrysler, Ford, and a slew of parts manufacturers will be eventually consolidated into our concept of "AmeriCar." This will be an abomination of mis-managed, corrupt, resource-wasting 'manufacturing' not seen since the fall of the Soviet Union... and it will end just as badly. Simply put, the Obama Administration is betting the farm on a near-term recovery in the U.S. and world economies. There are problems with this attitude.
The Administration pinning its hopes, reputation, and trillions of dollars on a quick end to this 'recession' is asking for disaster. The Government seems to be unaware that this economic calamity is something altogether more potent. Nevertheless, we wouldn't be surprised if the Administration indeed orders its pet car manufacturer(s) to produce around 10 million cars a year, but we would like to ask the President from whence he thinks the citizenry will have the money to buy these spiffy new vehicles.
Because this Depression is destroying the citizenry's ability to produce income, the last things they will want to do is spend their dwindling resources on additional un-needed automobiles. If anything, people will: keep their cars longer; own fewer cars (say, one); share cars, either informally or through farsighted corporations like ZipCar; or, totally discard automobiles altogether and use public transportation, bicycles, or their own two legs.
We can't think of any reason why AmeriCar should outlast the Obama Administration; it just doesn't seem feasible to keep up such extraordinary waste on such a colossal scale, but it will probably happen anyway. In all honesty, we are putting the AmeriCar fiasco as one of an increasing number for which President Barack Obama will leave office in disgrace... as well as lay the foundation for a new Franklin Roosevelt to seize the presidency.
P.S. To the Government: in order to have a successful car maker, reference Tesla Motors. Their $100,000+ Roadster has a fifteen-month waiting list.
Tuesday, May 26, 2009
Synthetic CDO's are Beginning to Bloom
One of our many interests in the unfolding calamity in the financial world are the hell-spawn known as Synthetic Collateralised Debt Obligation, or SCDO. For an indepth refresher on exactly what these monsters are, please read our first post on the nature of SCDOs. We'll include a brief definition here, but we recommend brushing up on your SCDOs... we needed to do so, as well, since they're impressively complicated.
Put simply, SCDOs are issued by American super-huge banks, and are composed of credit default swaps taken out against a list of about 100 or so major companies, called the reference entities. The investors who buy these SCDOs (under the impression that the instruments are 'bonds') become, in effect, a pool of 'names' - the people who pony up the money when insurance needs to be paid out. In this case, the credit default swap is the insurance for the issuing bank against the reference entities going bankrupt. When a small number of the reference entities - about seven or so - go bankrupt, the SCDO is triggered and the investors' money is immediately and irreversibly transferred to the issuing bank.
As an aside, reference entities typically include such fine companies as: AIG, Fannie Mae, Freddie Mac, Bear Stearns, Merrill Lynch, Chrysler, General Motors, et cetera. All are, as we are sure you noticed, not in the best of shape.
When that slew of reference entities bit the dust, we wondered when the SCDOs' 'trigger' would be tripped; which company or companies were going to start the flood of wealth? Ever heard of Syncora Guarantee Inc? According to Asia One, the Pinnacle Series 1 notes out of Morgan Stanley have wiped out every last cent of those who invested in the notes. Pinnacle Series 1 is a SCDOs, and it has been triggered by a Syncora default. The article also reports that Pinnacle Series 2, 3, 4, 5, 6, and 7 are careening toward being triggered.
As the 2007 Depression puts the screws to the world's economy, Morgan Stanley has tasted some of the first blood in the SCDO arena. When General Motors enters bankruptcy, we strongly suspect that many more SCDOs will be triggered, and thus what will likely be the single greatest transfer of wealth in world history will continue. As the action on the SCDO front is heating up, we will be reporting much more regularly on the topic. You can likely expect another update soon after GM enters bankruptcy.
Put simply, SCDOs are issued by American super-huge banks, and are composed of credit default swaps taken out against a list of about 100 or so major companies, called the reference entities. The investors who buy these SCDOs (under the impression that the instruments are 'bonds') become, in effect, a pool of 'names' - the people who pony up the money when insurance needs to be paid out. In this case, the credit default swap is the insurance for the issuing bank against the reference entities going bankrupt. When a small number of the reference entities - about seven or so - go bankrupt, the SCDO is triggered and the investors' money is immediately and irreversibly transferred to the issuing bank.
As an aside, reference entities typically include such fine companies as: AIG, Fannie Mae, Freddie Mac, Bear Stearns, Merrill Lynch, Chrysler, General Motors, et cetera. All are, as we are sure you noticed, not in the best of shape.
When that slew of reference entities bit the dust, we wondered when the SCDOs' 'trigger' would be tripped; which company or companies were going to start the flood of wealth? Ever heard of Syncora Guarantee Inc? According to Asia One, the Pinnacle Series 1 notes out of Morgan Stanley have wiped out every last cent of those who invested in the notes. Pinnacle Series 1 is a SCDOs, and it has been triggered by a Syncora default. The article also reports that Pinnacle Series 2, 3, 4, 5, 6, and 7 are careening toward being triggered.
As the 2007 Depression puts the screws to the world's economy, Morgan Stanley has tasted some of the first blood in the SCDO arena. When General Motors enters bankruptcy, we strongly suspect that many more SCDOs will be triggered, and thus what will likely be the single greatest transfer of wealth in world history will continue. As the action on the SCDO front is heating up, we will be reporting much more regularly on the topic. You can likely expect another update soon after GM enters bankruptcy.
Saturday, March 7, 2009
Another Face of Predatory Finance
In a previous post, we wrote about synthetic CDOs, the multi-trillion-dollar ticking time-bomb of financial doom. Those SCDOs are still out there in the financial aether, waiting for the right set of companies to go bankrupt, so that they may transfer an unknown, but vast, amount of money to major American banks.
This is predatory finance at its finest: create an 'asset' which has no basis in realty, hoodwink investors into believing the monster is a bond, set up a holding company in the Cayman Islands with a used office chair for collateral... and then wait. Sooner or later, the companies which trigger the SCDOs (General Motors, American Insurance Group, Fannie Mae, el al) will implode, and gift to the sponsoring banks a huge bag of money.
There's another tool of predatory capitalism we've just found: negative-basis trade. Bloomberg has a good article about the subject, but we'll summarise. A bond-holder of a failing company -- say, Ford -- can purchase a credit default swap for their bonds, to insure against Ford going bankrupt. If Ford did indeed go bankrupt, the bond-holder would be reimbursed the full face value of their bonds, rather than what the market says the bond is worth.
With Ford dying of carbon monoxide poisoning as we type, it's looking more attractive to these negative-basis trading bond-holders to simply force Ford into bankruptcy. That way, the bonds will pay out their full face value, rather than the understandibly depressed value seen in the bond market.
Negative-basis trading is, above all, a tool of financial assassination: it allows holders of significant amounts of bonds to obstruct a company's reorganisation and force the company into bankruptcy. Investors who make their money in this manner have every interest in forcing as many companies -- no matter what the potential for recovery -- into bankruptcy. This is horrifically destructive to the economy: first and foremost, it is cannibalism; secondly, it is seriously damaging the economy's capacity to form investment capital for productive ventures.
On top of it all, this is the Golden Bullet for any and all banks waiting for their SCDOs to activate. With negative-basis trading, a bank can efficiently and legally 'kill' any and all companies which need to fail in order to trigger the $50+ trillion in SCDOs. It's akin to taking out jumbo life insurance policies on one's neighbours... and then killing them.
This is predatory finance at its finest: create an 'asset' which has no basis in realty, hoodwink investors into believing the monster is a bond, set up a holding company in the Cayman Islands with a used office chair for collateral... and then wait. Sooner or later, the companies which trigger the SCDOs (General Motors, American Insurance Group, Fannie Mae, el al) will implode, and gift to the sponsoring banks a huge bag of money.
There's another tool of predatory capitalism we've just found: negative-basis trade. Bloomberg has a good article about the subject, but we'll summarise. A bond-holder of a failing company -- say, Ford -- can purchase a credit default swap for their bonds, to insure against Ford going bankrupt. If Ford did indeed go bankrupt, the bond-holder would be reimbursed the full face value of their bonds, rather than what the market says the bond is worth.
With Ford dying of carbon monoxide poisoning as we type, it's looking more attractive to these negative-basis trading bond-holders to simply force Ford into bankruptcy. That way, the bonds will pay out their full face value, rather than the understandibly depressed value seen in the bond market.
Negative-basis trading is, above all, a tool of financial assassination: it allows holders of significant amounts of bonds to obstruct a company's reorganisation and force the company into bankruptcy. Investors who make their money in this manner have every interest in forcing as many companies -- no matter what the potential for recovery -- into bankruptcy. This is horrifically destructive to the economy: first and foremost, it is cannibalism; secondly, it is seriously damaging the economy's capacity to form investment capital for productive ventures.
On top of it all, this is the Golden Bullet for any and all banks waiting for their SCDOs to activate. With negative-basis trading, a bank can efficiently and legally 'kill' any and all companies which need to fail in order to trigger the $50+ trillion in SCDOs. It's akin to taking out jumbo life insurance policies on one's neighbours... and then killing them.
Friday, March 6, 2009
A Brief Lesson in Debt
Hyman Minsky (1919-1996) was a rather obscure economist who came up with an excellent theory of debt which seems especially appropriate to current events. In brief, he divided borrowers into three categories: the hedge borrower, who can make loan payments easily out of income and extinguish the principal; the speculative borrower who can make interest payments more or less easily out of income, but cannot repay the principal except by rolling over the debt; and finally the Ponzi borrower whose income does not cover even the interest on debts, and therefore needs an ever expanding supply of credit to service loan payments.
A clear example of the hedge borrower is the homeowner who takes on a traditional fixed mortgage, the payments of which are a fairly small part of his or her income. An example of the speculative borrower is the house buyer who takes out the interest-only mortgage hoping to sell the house at a profit. The ponzi mortgage borrower takes out the reverse amortisation mortgage, hoping the house will appreciate fast enough that he or she can refinance at a higher amount.
In the housing bubble bust of the last two years or so, most of the borrowers in the Ponzi category have already lost their houses. Most of the borrowers in the speculative category are 'underwater', and many have 'walked away'. An increasing number of mortgages in the hedge category are going delinquent due to falling incomes and rising unemployment. It is not pretty, and the situation will probably get worse. We expect, on the other side of this Depression, that hardly anyone will ever want to buy a house with a mortgage again.
Of course Minsky's model applies not only to mortgage borrowers, but to the banks that lend to them. Banks are completely dependent on continuously rolling over their entire debt structure. This is why they are the first to feel the strain of a credit crisis.
As things are currently unfolding, central banks and governments are stepping up to fund banks who need their debts rolled over. Banks are not as generous to their borrowers, and are mostly calling in risky loans, and mostly not expanding safe loans. This is hurting a great many businesses who rely on speculative finance, and will cause a great many to go under. We suspect a lot of individual borrowers who are getting their credit cards cancelled will also be forced into bankruptcy.
If the Depression continues to unfold along these lines, most speculative finance units (as Minsky would call them) will be euthanised. Exceptions will be made for banks, insurance companies, and public utilities. The consequences will be very dramatic: tens of millions of failed businesses and hundreds of millions, if not billions of downwardly mobile citizens.
We doubt this this process can be arrested until it is spent. If you are a borrower and you cannot pay your debts out of your income (and these days incomes are not so reliable), you will need to liquidate assets or default. The end result is that you will become poorer. So-called 'rescue plans' will be of little help. If you are able to service your debts - congratulations! - you will be fortunate enough to experience the down-not-so-much that is the new up.
A clear example of the hedge borrower is the homeowner who takes on a traditional fixed mortgage, the payments of which are a fairly small part of his or her income. An example of the speculative borrower is the house buyer who takes out the interest-only mortgage hoping to sell the house at a profit. The ponzi mortgage borrower takes out the reverse amortisation mortgage, hoping the house will appreciate fast enough that he or she can refinance at a higher amount.
In the housing bubble bust of the last two years or so, most of the borrowers in the Ponzi category have already lost their houses. Most of the borrowers in the speculative category are 'underwater', and many have 'walked away'. An increasing number of mortgages in the hedge category are going delinquent due to falling incomes and rising unemployment. It is not pretty, and the situation will probably get worse. We expect, on the other side of this Depression, that hardly anyone will ever want to buy a house with a mortgage again.
Of course Minsky's model applies not only to mortgage borrowers, but to the banks that lend to them. Banks are completely dependent on continuously rolling over their entire debt structure. This is why they are the first to feel the strain of a credit crisis.
As things are currently unfolding, central banks and governments are stepping up to fund banks who need their debts rolled over. Banks are not as generous to their borrowers, and are mostly calling in risky loans, and mostly not expanding safe loans. This is hurting a great many businesses who rely on speculative finance, and will cause a great many to go under. We suspect a lot of individual borrowers who are getting their credit cards cancelled will also be forced into bankruptcy.
If the Depression continues to unfold along these lines, most speculative finance units (as Minsky would call them) will be euthanised. Exceptions will be made for banks, insurance companies, and public utilities. The consequences will be very dramatic: tens of millions of failed businesses and hundreds of millions, if not billions of downwardly mobile citizens.
We doubt this this process can be arrested until it is spent. If you are a borrower and you cannot pay your debts out of your income (and these days incomes are not so reliable), you will need to liquidate assets or default. The end result is that you will become poorer. So-called 'rescue plans' will be of little help. If you are able to service your debts - congratulations! - you will be fortunate enough to experience the down-not-so-much that is the new up.
Sunday, January 11, 2009
We Smell Trouble...
In a previous post we wrote about the looming tidal wave of mind-numbing horror and destruction known as synthetic collateralised debt obligations (SCDO). In that post, we pointed our bony finger at JP Morgan and screeched, "it's them! THEM!"
We still stand by that statement, but this article from CNNMoney.com got us thinking. Citigroup has announced that it will back legislation allowing bankruptcy judges to unilaterally rewrite mortgage terms. This, in effect, means that judges can 'cram-down' the principle of the mortgage, or lower the interest rate on the loan... or both, presumably.
It makes sense, in a way: with house prices on a one-way trip to purgatory, banks' balance sheets will be obliterated as the value of their foreclosed properties approach zero. Citigroup, realising this, decided to cheerfully volunteer itself to be violated by bankruptcy judges, since it seems like the less painful option.
We wonder about that, though. There are trillions of SCDO's floating around in the aether, just waiting for the right company, or companies, to collapse. We're confident JP Morgan has a pretty big piece of the pie... but maybe Citigroup has its own trillion or so, waiting in the wings.
Honestly, dear Reader, we don't know. Perhaps Citigroup is simply making a last-ditch effort to bail itself out. We just have to wonder what the hell it's doing, as this move smells fishy.
We still stand by that statement, but this article from CNNMoney.com got us thinking. Citigroup has announced that it will back legislation allowing bankruptcy judges to unilaterally rewrite mortgage terms. This, in effect, means that judges can 'cram-down' the principle of the mortgage, or lower the interest rate on the loan... or both, presumably.
It makes sense, in a way: with house prices on a one-way trip to purgatory, banks' balance sheets will be obliterated as the value of their foreclosed properties approach zero. Citigroup, realising this, decided to cheerfully volunteer itself to be violated by bankruptcy judges, since it seems like the less painful option.
We wonder about that, though. There are trillions of SCDO's floating around in the aether, just waiting for the right company, or companies, to collapse. We're confident JP Morgan has a pretty big piece of the pie... but maybe Citigroup has its own trillion or so, waiting in the wings.
Honestly, dear Reader, we don't know. Perhaps Citigroup is simply making a last-ditch effort to bail itself out. We just have to wonder what the hell it's doing, as this move smells fishy.
Friday, December 12, 2008
Clueless Leadership
Today we learned a 'Pension Relief' bill whizzed through the U.S. Congress, passing both houses unanimously. Among the many popular items, was one in particular that caught our eye: easing the requirement that Corporate Defined-Benefit Pensions be fully funded. This comes just two years after the Federal Government toughened enforcement to protect workers and the Government Pension Insurance Fund.
No one likes to lose money, but pretending one didn't lose it doesn't help the situation. If a pension fund had terrible losses in the stock market this year, the employer should put more money in to ensure there will be enough to pay the retirees. If it can't cough up the bucks, then the benefits need to be cut. One can't go on paying out as if nothing happened.
This sort of thinking is not the exception these days. For another example, banks are being allowed to shuffle more of their impaired investments into the 'marked to make-believe' category of valuation to avoid writing it down to actual market values. The most extreme examples are to be found in the 'horror stories' of people who loose their income and yet continue spending on their credit cards all the way to bankruptcy and homelessness.
If any economic unit - be it household, business, or nation - is to emerge from the 2007 Depression not ruined, it must begin by fully acknowledging the painful losses that have already happened, and accept the possibility of further losses ahead. Only then can there be a truly appropriate response - which typically involves austerity and hard work. The glaring lack of leadership from elected representatives and regulators on this point is certain to have destructive consequences, namely: more insolvency, more income loss, and (as long as governments can pretend they have resources) more bailouts.
No one likes to lose money, but pretending one didn't lose it doesn't help the situation. If a pension fund had terrible losses in the stock market this year, the employer should put more money in to ensure there will be enough to pay the retirees. If it can't cough up the bucks, then the benefits need to be cut. One can't go on paying out as if nothing happened.
This sort of thinking is not the exception these days. For another example, banks are being allowed to shuffle more of their impaired investments into the 'marked to make-believe' category of valuation to avoid writing it down to actual market values. The most extreme examples are to be found in the 'horror stories' of people who loose their income and yet continue spending on their credit cards all the way to bankruptcy and homelessness.
If any economic unit - be it household, business, or nation - is to emerge from the 2007 Depression not ruined, it must begin by fully acknowledging the painful losses that have already happened, and accept the possibility of further losses ahead. Only then can there be a truly appropriate response - which typically involves austerity and hard work. The glaring lack of leadership from elected representatives and regulators on this point is certain to have destructive consequences, namely: more insolvency, more income loss, and (as long as governments can pretend they have resources) more bailouts.
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