Mar 24, 2009
Are You Smarter Than a Fifth Grader?
Congressional Edition
From Politico reprinted in its entirety for non-subscribers:
Rep. cries foul over Nets naming rights
"Maybe they should just call it TARP Arena.
Rep. Bill Pascrell Jr. (D-N.J.), wary of taxpayer anger over the AIG bonuses, wants the New Jersey Nets to reconsider selling naming rights to the British bank Barclays for an NBA arena being built in Brooklyn.
Barclays received $8.5 billion in bailout funds from the Treasury Department, and Pascrell believes the $400 million it cost to have the naming rights for the soon-to-be Brooklyn Nets arena should be used, say, for lending to consumers instead. Pascrell was quick to make an exception for the new Citi ballpark the New York Mets are building, because that ball yard was already well under construction under the Citi name before the bailout money was approved.
“I believe that any further payments of taxpayer money, whether through TARP or the Federal Reserve System, be conditioned on the cancellation of any stadium or arena naming-rights agreements that may be in place,” Pascrell said.
It’s worth noting, of course, that Pascrell represents a lot of New Jersey Nets fans quite unhappy about losing their NBA team to Brooklyn."
Actually, Congressman, Barclays did NOT receive any "bailout" funds from the Treasury Department. Nor have they accepted any bailout money from the government of the UK, where they happen to be domiciled. To their credit, they have steadfastly resisted taking money that comes with governmental strings attached; and with each passing day and every congressional comment like yours, the wisdom of their strategy becomes more clear.
True, Barclays received $8.5 billion from AIG, presumably as collateral against or settlement of AIG's contractual obligations under trading arrangements. But to suggest that this is the same as a bailout is just wrong. To further imply that any organization that does business with a recipient of bailout funds is thereby subject to mindless Congressional meddling is either stupid or frightening, depending on how serious you are.
Oh, and Congressman, pretty much all "payments of taxpayer money" are made "through the Federal Reserve System." In fact, when you give a one-dollar tip to the guy who shines your shoes in the Congressional cloak-room, you're using what we in this country call a "Federal Reserve Note". It's actually printed on the top of the dollar bill in capital letters to help you remember.
Perhaps you'd like to regulate what he does with that too?
Rep. cries foul over Nets naming rights
"Maybe they should just call it TARP Arena.
Rep. Bill Pascrell Jr. (D-N.J.), wary of taxpayer anger over the AIG bonuses, wants the New Jersey Nets to reconsider selling naming rights to the British bank Barclays for an NBA arena being built in Brooklyn.
Barclays received $8.5 billion in bailout funds from the Treasury Department, and Pascrell believes the $400 million it cost to have the naming rights for the soon-to-be Brooklyn Nets arena should be used, say, for lending to consumers instead. Pascrell was quick to make an exception for the new Citi ballpark the New York Mets are building, because that ball yard was already well under construction under the Citi name before the bailout money was approved.
“I believe that any further payments of taxpayer money, whether through TARP or the Federal Reserve System, be conditioned on the cancellation of any stadium or arena naming-rights agreements that may be in place,” Pascrell said.
It’s worth noting, of course, that Pascrell represents a lot of New Jersey Nets fans quite unhappy about losing their NBA team to Brooklyn."
Actually, Congressman, Barclays did NOT receive any "bailout" funds from the Treasury Department. Nor have they accepted any bailout money from the government of the UK, where they happen to be domiciled. To their credit, they have steadfastly resisted taking money that comes with governmental strings attached; and with each passing day and every congressional comment like yours, the wisdom of their strategy becomes more clear.
True, Barclays received $8.5 billion from AIG, presumably as collateral against or settlement of AIG's contractual obligations under trading arrangements. But to suggest that this is the same as a bailout is just wrong. To further imply that any organization that does business with a recipient of bailout funds is thereby subject to mindless Congressional meddling is either stupid or frightening, depending on how serious you are.
Oh, and Congressman, pretty much all "payments of taxpayer money" are made "through the Federal Reserve System." In fact, when you give a one-dollar tip to the guy who shines your shoes in the Congressional cloak-room, you're using what we in this country call a "Federal Reserve Note". It's actually printed on the top of the dollar bill in capital letters to help you remember.
Perhaps you'd like to regulate what he does with that too?
Mar 23, 2009
The Beginning of Wisdom...
"The beginning of wisdom is to call things by their right names" according to the Chinese proverb.
The chart above (click the chart to enlarge) shows the relative frequency of Google searches for "Troubled Assets" vs. "Toxic Assets" over the past 12 months. As the Treasury introduces "TARP 2.0" today, the change in the vernacular reflects a shift from a market view (or hope, really) that the problem was a temporary impairment of "troubled" assets to the acknowledgment that many of the assets at the center of the financial storm are permanently impaired or "toxic". If this view is widely shared, it may actually speed the recovery process as buyers and seller converge on valuation for the assets.
Contrarians may find a bullish signal in this verbal shift.
If you want to update this chart, click here and enter the search terms "troubled assets" and "toxic assets" separated by a comma.
Mar 20, 2009
H.R. 1586
The Law of Unintended Consequences
Well, they did it.
The US House of Representatives, apparently vying for the title of "The World's Greatest Retributive Body" passed HR 1586 - "To impose an additional tax on bonuses received from certain TARP recipients". HR 1586 was designed specifically for the purpose of taxing the bonuses of several dozen employees of AIG, the giant insurance company at the epicenter of the financial crisis.
Look, I'm no fan of AIG. AIG's reckless underwriting of credit default swaps has required a $170 billion injection of government aid to post collateral with counter-parties and extinguish obligations. And I will be surprised if AIG doesn't require more aid before this crisis is over.
So I am as infuriated as any other taxpayer to read that AIG planned to pay out $165 million in bonuses, including bonuses to employees who worked in their Financial Products group, where the credit default swaps were written.
But the speed with which the House has wielded its most powerful weapon -- As Chief Justice John Marshall put it, "The power to tax is the power to destroy" -- is a truly frightening precedent. By levying a confiscatory 90% tax on bonuses paid by firms who have received aid under the Troubled Asset Relief Program, the House has undermined the compensation model of our leading financial institutions, not just AIG. More to the point, it will create a financial hardship for many employees whose banks may not have needed TARP funds, but were persuaded by former Treasury Secretary Hank Paulson to accept them in an act of industry solidarity designed to stabilize the crisis late last year. It will also create financial hardship for many employees who had absolutely nothing to do with mortgage securities, credit default swaps or crazy leverage ratios and who probably earned their bonus. For some, it may mean selling their houses into an inventory-clogged market. For all, it will surely mean a reduction in both their saving and spending, just exactly what we don't need in the current economy.
It was bad enough last month when Deputy Sheriff Barney Fife... I mean House Financial Services Committee Chairman Barney Frank... was chiding Northern Trust for honoring its commitment to sponsor a PGA event in Los Angeles. But HR 1586 is a breathtaking act of power, passion and political pandering that should give pause to any believer in liberal democracy. Look hard enough and you will find federal aid, if only in the form of freedom from federal tax, in almost every nook and cranny of our modern society. Will lesser forms of federal aid be used as a pretext for the House to follow its new precedent of hastily drafted confiscatory taxes to coerce private behavior?
Fortunately, the administration has expressed reservations about the House bill and the public outrage has encouraged some AIG employees to forfeit their bonuses, so cooler heads may yet prevail and this hastily drafted legislation may be rejected or modified.
If you'd like to see how your representative voted, click here.
The US House of Representatives, apparently vying for the title of "The World's Greatest Retributive Body" passed HR 1586 - "To impose an additional tax on bonuses received from certain TARP recipients". HR 1586 was designed specifically for the purpose of taxing the bonuses of several dozen employees of AIG, the giant insurance company at the epicenter of the financial crisis.
Look, I'm no fan of AIG. AIG's reckless underwriting of credit default swaps has required a $170 billion injection of government aid to post collateral with counter-parties and extinguish obligations. And I will be surprised if AIG doesn't require more aid before this crisis is over.
So I am as infuriated as any other taxpayer to read that AIG planned to pay out $165 million in bonuses, including bonuses to employees who worked in their Financial Products group, where the credit default swaps were written.
But the speed with which the House has wielded its most powerful weapon -- As Chief Justice John Marshall put it, "The power to tax is the power to destroy" -- is a truly frightening precedent. By levying a confiscatory 90% tax on bonuses paid by firms who have received aid under the Troubled Asset Relief Program, the House has undermined the compensation model of our leading financial institutions, not just AIG. More to the point, it will create a financial hardship for many employees whose banks may not have needed TARP funds, but were persuaded by former Treasury Secretary Hank Paulson to accept them in an act of industry solidarity designed to stabilize the crisis late last year. It will also create financial hardship for many employees who had absolutely nothing to do with mortgage securities, credit default swaps or crazy leverage ratios and who probably earned their bonus. For some, it may mean selling their houses into an inventory-clogged market. For all, it will surely mean a reduction in both their saving and spending, just exactly what we don't need in the current economy.
It was bad enough last month when Deputy Sheriff Barney Fife... I mean House Financial Services Committee Chairman Barney Frank... was chiding Northern Trust for honoring its commitment to sponsor a PGA event in Los Angeles. But HR 1586 is a breathtaking act of power, passion and political pandering that should give pause to any believer in liberal democracy. Look hard enough and you will find federal aid, if only in the form of freedom from federal tax, in almost every nook and cranny of our modern society. Will lesser forms of federal aid be used as a pretext for the House to follow its new precedent of hastily drafted confiscatory taxes to coerce private behavior?
Fortunately, the administration has expressed reservations about the House bill and the public outrage has encouraged some AIG employees to forfeit their bonuses, so cooler heads may yet prevail and this hastily drafted legislation may be rejected or modified.
If you'd like to see how your representative voted, click here.
Mar 17, 2009
A Lesson in This Recession?
During economic booms, certain publications and political parties can be counted on to point out that the growing wealth produced by the expanding economy is being inequitably bestowed upon various segments of the population. This (unsurprising) observation usually leads to journalistic hand-wringing, cynical campaign slogans and calls for a more progressive tax code and redistributionist spending programs.
The breadth and depth of the current recession provides an interesting opportunity to observe the results of an experiment no sane policy-maker would ever intentionally conduct.
Last week, the Federal Reserve released its latest triennial analysis of changes in family income and net worth:
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
Trust me, you probably don't want to read it all (I haven't yet either) but I'll share one of the authors' observations. The report is based on household surveys conducted in 2007 and focuses on changes in household finances since the 2004 survey. In light of the significant changes in housing and equity prices during 2008, the study's authors also make an attempt to estimate the impact of 2008's market meltdowns through October.
A number of assumptions are required, which can be found on pages A10-A12. The authors conclude, "...these assumptions imply large drops in median and mean net worth since the 2007 survey — 17.8 percent and 22.7 percent, respectively."
These numbers feel about right. From January to October 2008, the S&P 500 declined 34.0% and the Case-Shiller 20-city composite house price index declined 14.5%.
Many commentators get tripped up when confronting means and medians, and politicians are probably responsible for statistics being lumped together with lies and damned lies. So here's a little refresher (page A6) on interpreting means and medians that most students should've had by ninth grade.
"Where a comparable median and mean are given, the gain of the mean relative to the median may usually be taken as indicative of relatively greater change at the top of the distribution; for example, when the mean increases more rapidly than the median, it is typically taken to indicate that the values in the top of the distribution rose more rapidly than those in the lower part of the distribution."
This is equally true in reverse, i.e., when the mean decreases at a greater rate than the median, it is typically taken to indicate that the values in the top of the distribution fell more rapidly than those in the lower part of the distribution.
So by certain conventional measures of inequality, the concurrent meltdowns in the financial and housing markets plus the economic recession have increased "fairness" in the United States.
This is not a headline I expect to read soon.
I make this observation not in defense of the well-to-do compared to the less fortunate. To be sure, this recession is hurting every family at every level. And the hardship at the lower end of the income and wealth spectrum is undoubtedly more palpable and immediate. What's more, the magnitude of federal aid being provided to companies like AIG evokes uncomfortable echoes of the "Welfare Queens" who figured in class warfare debates of the '70s and '80s. It seems we all live in a glass house now; so maybe everyone should put down his stone.
But when this economy recovers, as it certainly will, maybe we'll have learned that although prosperity inevitably benefits the prosperous, it's better (for everyone) than the alternative.
The breadth and depth of the current recession provides an interesting opportunity to observe the results of an experiment no sane policy-maker would ever intentionally conduct.
Last week, the Federal Reserve released its latest triennial analysis of changes in family income and net worth:
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
Trust me, you probably don't want to read it all (I haven't yet either) but I'll share one of the authors' observations. The report is based on household surveys conducted in 2007 and focuses on changes in household finances since the 2004 survey. In light of the significant changes in housing and equity prices during 2008, the study's authors also make an attempt to estimate the impact of 2008's market meltdowns through October.
A number of assumptions are required, which can be found on pages A10-A12. The authors conclude, "...these assumptions imply large drops in median and mean net worth since the 2007 survey — 17.8 percent and 22.7 percent, respectively."
These numbers feel about right. From January to October 2008, the S&P 500 declined 34.0% and the Case-Shiller 20-city composite house price index declined 14.5%.
Many commentators get tripped up when confronting means and medians, and politicians are probably responsible for statistics being lumped together with lies and damned lies. So here's a little refresher (page A6) on interpreting means and medians that most students should've had by ninth grade.
"Where a comparable median and mean are given, the gain of the mean relative to the median may usually be taken as indicative of relatively greater change at the top of the distribution; for example, when the mean increases more rapidly than the median, it is typically taken to indicate that the values in the top of the distribution rose more rapidly than those in the lower part of the distribution."
This is equally true in reverse, i.e., when the mean decreases at a greater rate than the median, it is typically taken to indicate that the values in the top of the distribution fell more rapidly than those in the lower part of the distribution.
So by certain conventional measures of inequality, the concurrent meltdowns in the financial and housing markets plus the economic recession have increased "fairness" in the United States.
This is not a headline I expect to read soon.
I make this observation not in defense of the well-to-do compared to the less fortunate. To be sure, this recession is hurting every family at every level. And the hardship at the lower end of the income and wealth spectrum is undoubtedly more palpable and immediate. What's more, the magnitude of federal aid being provided to companies like AIG evokes uncomfortable echoes of the "Welfare Queens" who figured in class warfare debates of the '70s and '80s. It seems we all live in a glass house now; so maybe everyone should put down his stone.
But when this economy recovers, as it certainly will, maybe we'll have learned that although prosperity inevitably benefits the prosperous, it's better (for everyone) than the alternative.
Mar 16, 2009
Yearning for the Good Old Days When the Glass was 130% Full...
From today's WSJ (link)
"The rise in the stock market, even if it isn't always a reliable predictor of the direction of the economy, could offer a sorely needed boost to confidence. "What you're trying to do is reverse psychology," said Robert Barbera, an economist at ITG, a research and trading firm. "You're trying to get people to think of the glass as a third full instead of 97% empty. ..."
"The rise in the stock market, even if it isn't always a reliable predictor of the direction of the economy, could offer a sorely needed boost to confidence. "What you're trying to do is reverse psychology," said Robert Barbera, an economist at ITG, a research and trading firm. "You're trying to get people to think of the glass as a third full instead of 97% empty. ..."
Mar 6, 2009
Are Investment Advisors Worried Enough?
According to a survey by discount brokerage Charles Schwab summarized here,
Fifty-five percent [of independent financial advisors polled] said it could take as long as three years for portfolios to return to their levels of last September..." (emphasis mine)
Assuming that the "levels of last September" are the Dow's closing price of 10,851 on September 30 and the poll was taken when the Dow was hovering around 7,000, that implies that 55% of the respondents think the Dow will recover 3,851 points in three years. That's a 55% return over the period, or a 15.7% compound annual return.
What are the odds?
The graph above is the distribution of rolling 3-year compound annual price changes for the Dow Jones Industrial Average since 1930, according to Yahoo! Finance. (This captures only the change in the index, not reinvestment of dividends). Based on the past 78 years of market history, the odds of a 3-year return of this magnitude are about 15-16%.
Which makes the following quote pretty hilarious.
“Advisers don’t have a GPS to guide them, but they have the experience and savvy to see that there are still potholes on the road ahead,” said Bernie Clark, senior vice president for Schwab’s adviser services, which supports 5,700 independent investment advisers. “Their long-term view, reasoned outlook and steady approach will serve their clients well in this environment.”
Despite the gloom in the economy and markets these days, sell-side optimism appears undimmed.
Fifty-five percent [of independent financial advisors polled] said it could take as long as three years for portfolios to return to their levels of last September..." (emphasis mine)
Assuming that the "levels of last September" are the Dow's closing price of 10,851 on September 30 and the poll was taken when the Dow was hovering around 7,000, that implies that 55% of the respondents think the Dow will recover 3,851 points in three years. That's a 55% return over the period, or a 15.7% compound annual return.
What are the odds?
The graph above is the distribution of rolling 3-year compound annual price changes for the Dow Jones Industrial Average since 1930, according to Yahoo! Finance. (This captures only the change in the index, not reinvestment of dividends). Based on the past 78 years of market history, the odds of a 3-year return of this magnitude are about 15-16%.
Which makes the following quote pretty hilarious.
“Advisers don’t have a GPS to guide them, but they have the experience and savvy to see that there are still potholes on the road ahead,” said Bernie Clark, senior vice president for Schwab’s adviser services, which supports 5,700 independent investment advisers. “Their long-term view, reasoned outlook and steady approach will serve their clients well in this environment.”
Despite the gloom in the economy and markets these days, sell-side optimism appears undimmed.
Mar 5, 2009
Greenspan-o-Meter - Two Down, One to Go
On December 5, 1996 Fed Chairman Alan Greenspan famously wondered whether stock prices reflected an "irrational exuberance" on the part of investors. This afternoon, The Nasdaq Composite index joined the S&P 500 by closing below its level on that day more than twelve years ago. For its part, the Dow Jones Industrial Average is a mere 2.4% above its level that day, or about one day's volatility in this choppy market.
As it turns out, Greenspan was perhaps too modest about his abilities to spot a bubble. For earlier posts on the same subject, click here and here.
Mar 2, 2009
"We Don't Need No Stinkin' TARP Money" - Northern Trust
Northern Trust has released a response to Congressman Barney Frank regarding its sponsorship of the Northern Trust Open, a PGA golf tournament. Congressman Frank, Senator John Kerry and a score of political grandees have been publicly harrumphing about Northern Trust's expenditures on the golf tournament while the US Treasury holds preferred stock in Northern Trust under the Capital Purchase Program of the Troubled Assets Relief Program (TARP).
Northern Trust's basic message is "We're happy to give back the money we didn't ask for.... where should we send the check?"
In his letter to the Congressman, Northern Trust CEO, Frederick H. Waddell, gets the nuance right when he says, "As we have stated publicly, the Northern Trust Open and its related activities were in no way reliant upon Capital Purchase Program funds, and would have occurred even had we not received Capital Purchase Program funds."
Click here for my earlier post on the topic.
At the end of the day, congressional meddling in the day-to-day operations of TARP recipients may be the most effective way of getting the funds back quickly. But it will certainly cause investors -- and possibly depositors -- to discriminate between those banks who can and do return the funds and those who can't. When the Treasury took stakes in the various banks late last year, it apparently cajoled some of the stronger financial institutions into accepting the funds. The Treasury's intent was to characterize the financial crisis as a systemic liquidity issue that could be alleviated by a temporary injection of capital from the government. The Treasury specifically tried to avoid singling out banks that needed the money to avoid creating more concerns among their counter-parties and depositors.
As the Treasury Department put it back on October 14,
"Nine large financial institutions already have agreed to participate in this program, moving quickly and collectively to signal the importance of the program for the system. These healthy institutions have voluntarily agreed to participate on the same terms that will be available to small and medium-sized banks and thrifts across the nation."
With Citicorp trading at $1.27 per share at the moment, maybe the Treasury's desire for benign opacity was naive. But if Northern Trust, JP Morgan, Goldman Sachs and a few others rush to repay the TARP money so they can be left alone to run their businesses, it could have a serious impact on those banks who don't.
This is a pretty serious policy reversal to be driven by a golf tournament.
Addendum: Northern Trust's June 17, 2009 press release regarding its repayment of TARP funds.
Northern Trust's basic message is "We're happy to give back the money we didn't ask for.... where should we send the check?"
In his letter to the Congressman, Northern Trust CEO, Frederick H. Waddell, gets the nuance right when he says, "As we have stated publicly, the Northern Trust Open and its related activities were in no way reliant upon Capital Purchase Program funds, and would have occurred even had we not received Capital Purchase Program funds."
Click here for my earlier post on the topic.
At the end of the day, congressional meddling in the day-to-day operations of TARP recipients may be the most effective way of getting the funds back quickly. But it will certainly cause investors -- and possibly depositors -- to discriminate between those banks who can and do return the funds and those who can't. When the Treasury took stakes in the various banks late last year, it apparently cajoled some of the stronger financial institutions into accepting the funds. The Treasury's intent was to characterize the financial crisis as a systemic liquidity issue that could be alleviated by a temporary injection of capital from the government. The Treasury specifically tried to avoid singling out banks that needed the money to avoid creating more concerns among their counter-parties and depositors.
As the Treasury Department put it back on October 14,
"Nine large financial institutions already have agreed to participate in this program, moving quickly and collectively to signal the importance of the program for the system. These healthy institutions have voluntarily agreed to participate on the same terms that will be available to small and medium-sized banks and thrifts across the nation."
With Citicorp trading at $1.27 per share at the moment, maybe the Treasury's desire for benign opacity was naive. But if Northern Trust, JP Morgan, Goldman Sachs and a few others rush to repay the TARP money so they can be left alone to run their businesses, it could have a serious impact on those banks who don't.
This is a pretty serious policy reversal to be driven by a golf tournament.
Addendum: Northern Trust's June 17, 2009 press release regarding its repayment of TARP funds.
Subscribe to:
Posts (Atom)