Archive for February, 2009

Can you nationalize a nation?

Friday, February 27th, 2009

Credit default swaps are contracts a lender can buy from an insurer which guarantee the lender will be made whole if a borrower defaults.  CDS’s have become a popular tool used in the credit markets for assessing the risk inherent in a company’s balance sheet.  The higher in price a CDS goes, the more risk is assumed to exist that the specific company may default on their debt.  For instance. Citigroup has seen the increased premium for default risk on their paper increase of late to a high of 4.9%.   That they apparently just sold another huge chunk of their franchise to the government today attests to the veracity of those concerns.  B of A has recently seen their CDS premium rise nine trading days in a row to approximately 3.1%.  Hardly surprising given all the negative press we’ve been seeing about banks being nationalized and some bond holders possibly getting wiped out.  But what about the nation itself?  Credit default swaps on U.S. Treasuries have risen to 1.0%.  A small number perhaps, but how could anyone even question our credit worthiness?  Has the world started to doubt our ability to repay all this debt we’re creating?  Apparently, but how can anyone “nationalize” a nation.  Who can repossess the entire United States?  And where would that leave you?  To whom would you pay your rent?

They’re back….

Thursday, February 26th, 2009

American International Group (AIG) was one of the government’s largest basket cases last year, receiving a total of $150 billion in bail-out money to get them through a rough patch.  Guess what, all that money has been spent and the company is back at the trough asking for more.  Early this week AIG suggested it was in negotiations for tens of billions in additional aid as their losses, estimated to total about $60 billion in their fourth quarter, continue to climb.  They’ll just have to get in line.  It seems Citigroup, already a recipient of $45 billion, is coming back for another big scoop too.  But wait; there’s more!  Don’t forget about Detroit.  General Motors and Chrysler are asking the government to pony up an extra $22 billion since the initial $17 billion they’ve already received just didn’t stretch all that far.  Whoo-ee, will somebody please tell me where that line is?  I want to get in it while there’s still some dough left.  Or is it pork?

GDP: Taking the Plunge.

Wednesday, February 25th, 2009

It takes a mighty big tape to measure our Gross Domestic Product, even on a quarterly basis.  Getting a firm grasp on the overall number within a few weeks after the quarter ends is impossible.  That’s why GDP gets reported once a month throughout the subsequent quarter with revisions applied as better information comes available.  The upshot is we receive three reports: the preliminany, the revised, and the final GDP, one each month.  Further revisions are not uncommon either, so take the concept of “final” with a grain of salt.  This Friday we will get the revised number.  The preliminary published last month surprised everyone by showing substantially less shrinkage than expected; it was off just -3.8%.  Now I know that’s a horrible number, but the street expected worse. I bet they’ll get it this Friday .  Since the last report, some of the components of GDP have been reported for December, such as our balance of trade and inventory accumulation.   There will be downward revisions to the preliminary report which point to broader weakness.  A substantial lowering of GDP below -5.0% is a good guess.  It should surprise no one but probably will.

Left-handed Screwdriver.

Tuesday, February 24th, 2009

Despite blaming irresponsible debt creation for much of the toxic asset problem we currently face, Congress complains that the banks aren’t manufacturing enough debt these days.  What is being produced in large quantities is confusion.   There seems to be no end to all the various labels trotted out to describe the current economic malaise and its possible solution.  If nationalization sounds too harsh, call it pre-privatization.  Better yet, obfuscate with acronyms like TARP or TALF.  The spin-meisters are no doubt in absolute heaven.  Never have their talents been so in demand.  Yet whether all these balls that are being tossed up are thrown right-handed, left-handed, or under-handed,  the truth remains obvious.  Our government seems to be pursuing a rapid course toward bankruptcy in an attempt to save the few at the expense of the many.  More and more people are coming to one basic conclusion about our current leadership’s dialogue: no matter which way they twist it, we all will end up getting screwed.

Tug-of-War; pity the rope.

Monday, February 23rd, 2009

I suspect most of us have played tug-of-war at some time in our lives.  Two teams face each other holding opposite ends of a strong rope, each with the intent of pulling the other forward, occasionally into some circumstance deemed undesirable, like a large puddle of mud.  Naturally the focus tends to be on the two teams.  Little thought is given to the rope, but it must feel (as if inanimate objects actually could) like both sides are trying to tear it apart.  The current dilemma regarding our nation’s banking system has some similarities to this children’s game.  On one side are private investors who would be glad to pull toxic assets onto their side of the balance sheet if only the price were set low enough.  On the other side we find the banks pulling for much higher prices in an attempt to mitigate losses and save their balance sheets.  These opposing forces are placing an enormous strain on financial systems everywhere, and resolution seems nowhere in sight.  Unfortunately, if the issue remains at a standoff, the solution might involve confiscating the rope.  In other words, nationalization of key banks may be the only way forward without getting somebody very dirty.

Drinking from a fire hose.

Friday, February 20th, 2009

When I was a kid on a hot Texas summer day, the water hose to the house was my oasis.  Always cool and refreshing, it offered quick relief.  Unless, of course, I turned it up too high.  Then the water pressure  tore at my cheeks, the quantity of water gushing into my mouth swirled violently, and I really couldn’t slake my thirst until it was turned down a bit.  Right now something akin to that experience is hitting all the world’s central banks simultaneously.  New problems are coming at them at such a pace that there is no time to swallow the current crises before the next one floods in.  Solutions are falling short because the problems are ballooning too quickly.  Even defining the situation is starting to move beyond the grasp of the controllers.  It is becoming increasingly apparent that a global solution will be called for, but true cooperation on such a scope has rarely been accomplished unless a significant majority of sovereigns decide the future viability of civilization is in question.  But who are we at war with?  Could it have been our own greed?

King Obama III?

Thursday, February 19th, 2009

Did you hear that thud?  That was the market’s reaction, it would seem, to President Obama’s plan to make like Robin Hood.  Couched within the rhetoric is some scary language.  The indices didn’t react adversely, possibly because the threat is veiled in uncertainty.  What seems certain is Fannie and Freddie will both get another $100 billion to help refinance property at levels up to 105% of appraisal.  So the ivory tower boys want you the taxpayer to buy homes for other people, spending more than they are currently worth.  But many existing loans will have to be reworked, and incentives totalling another $75 billion are included to sweeten the bitter taste lenders may experience when asked to lower the interest rate of the loans they made.  And some sugar seems set aside to entice investors (who are actually the ultimate lender) to settle for less than the full amount due to them at maturity.  Now the plan begins to get foggier.  Not all the lien-holders are covered by this plan.  They may be reluctant to take a loss of their hard-earned savings.  So the plan seems to include a potential threat that Obama will ask Congress to modify bankruptcy laws to allow the government to force the issues.  Another instance of blatant “taking” by the government in a plan devised to aid the greater good at an individual’s expense.  Sounds like something we fought a revolution against George III to avoid.  But it’s not a done deal yet.  Some particulars still need to be developed.  The president said he’d get back to us on that early next month.  Hold on to your wallet.