Berkshire’s CDS and Counterparty Hedging

Posted on November 24, 2008 by Felix

In Barron’s this weekend, Andrew Bary brought up the subject of Berkshire’s credit default swaps, and why they’re trading at such a wide level:

The Street talk is that Berkshire’s counterparties, believed to include Goldman, are worried about their Berkshire financial exposure and are trying to hedge that by buying protection in the credit-default swap market. The cost of that protection last week hit five percentage points — up from a half-point earlier this year, and seemingly absurd for a company that still deserves a triple-A credit rating. Similar protection for Chubb (CB), which has a lower credit rating, costs less than a percentage point.

I’d heard that talk too, but it never made much sense to me. The story went something like this: Berkshire sold its equity puts to investors via Goldman Sachs. Berkshire doesn’t need to put up collateral, but Goldman does. And somehow Goldman is making up for the fact that it’s putting up collateral by buying Berkshire CDS.

Jeff Matthews thinks this smacks of disloyalty on the part of Goldman Sachs, but I can’t quite connect the dots and see why Goldman should be buying Berkshire CDS as its collateral requirements go up.

On the other hand, what if it’s not Goldman at all, but rather the investor who is buying the CDS? That, I think, would make much more sense. Shitting alpha, I think, is closer to the truth here, but his post is quite cryptic, so let me try to expand it a little.

Let’s say you’re the investor who bought the equity puts from Berkshire — and let’s say that although Goldman might have brokered the deal, your contract is with Berkshire directly. As a large institutional investor, you mark your positions to market daily. The puts are part of your portfolio, and whatever value you put on them, that value has surely been rising substantially in recent months.

As the value of those puts rises, so your counterparty risk with Berkshire Hathaway rises as well. So long as the puts are out of the money and stock-market volatility is low, the chances of Berkshire having to pay out on the puts is small, and your counterparty risk is likewise small. But now that the puts are well in the money and volatility is high, the value of the puts has gone up a lot, the chances of Berkshire having to pay out on the puts has also gone up a lot, and your counterparty risk is much higher than it was. After all, there’s no point in paying billions of dollars for puts, if the counterparty you buy the puts from isn’t going to be around to pay out on them at maturity.

Erik Holm reports today that Berkshire’s annual report will include more information than we’ve received in the past on these puts: apparently the SEC demanded "more robust disclosure" on how Berkshire values the contracts, and the report will now disclose "all aspects of valuation". With luck, that will clear up confusion over the volatility numbers that Berkshire is using. I wonder whether Buffett might not take the opportunity, too, to talk a bit about his CDS spreads, and whether their gapping out is a direct consequence of the fact that he doesn’t need to put up collateral against these equity puts. If he did, that would be very helpful indeed.

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Citi’s Credit Barely Tighter

Posted on November 24, 2008 by Felix

While most people are looking at the share price, Alea has the Citi CDS datapoint: 19bp tighter, at 482bp. That seems disappointing: what kind of a rescue is this, if Citi is still trading at levels more normally associated with junk bonds?

But the one thing we’ve seen quite consistently over this crisis is that while spreads can gap out quite dramatically, they generally come back in more slowly — even when the US government is providing help or guarantees. Look at Frannie and AIG as cases in point. Given that it’s going to take a while for the markets to fully digest the details of the Citi bailout — what’s been guaranteed, what hasn’t — it makes sense that the CDS market isn’t rushing to judgment.

Remember too that although the stock market might look like it’s doing well this morning (Dow up 300), in fact it’s still very low (Dow 8,300, S&P 832) and looks healthy only in a directional, not in an absolute, sense. And as far as Citi in particular is concerned, I suspect its spreads will remain wide so long as the stock remains in single digits.

Update: As per Alea’s update, the spread’s now come in to 250bp.

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Citi’s Share Price Problem

Posted on November 24, 2008 by Felix

When it comes to judging the stock market’s reaction to the Citigroup bailout, there’s only one number that everybody’s looking at: the Citi share price, which opened Monday at about $5.80. What does this mean? Two things are worth bearing in mind:

  1. Ignore the percentage change, which will look massive, but only because it’s coming off such a low base. At $5.80 a share, the stock’s up less than $2 — a perfectly healthy move, but nothing spectacular.
  2. This time last week, Citi opened at a distressed level of $9.36 per share. By the close of trade on Wednesday, when it closed at $6.40 a share, panic was setting in — the share price was so low that absent a major announcement it would almost certainly continue to decline all the way to zero.

At $5.80, then, the stock is still trading at what was, last week, a panic level. That’s clearly not a good sign for anybody concerned about the viability of Citigroup, but it also comes as very little surprise, since there was almost nothing in the bailout for shareholders. Yes, they get to keep the full interest and upside on the $306 billion of assets which are being guaranteed by the government. But all the capital injections have come in the form of preferred shares with an 8% coupon — shares which might look like equity from a regulator’s point of view, but which look very much like extra debt from a shareholder’s point of view.

As far as the common stock is concerned, little has changed as a result of last night’s announcement — and certainly there’s been no change in any ratio based on tangible common equity, or TCE. That’s the number which has most worried analysts: Citi’s TCE is very, very thin compared to its rivals’. As a result, the Citi share price is likely to remain very low — and as a result of that, concerns over Citi’s future are not going to go away.

It’s a vicious bind for the government. On the one hand, it doesn’t want to bail out Citi’s shareholders — and indeed it shouldn’t bail out Citi’s shareholders. On the other hand, however, so long as Citi’s stock is in the toilet, the problems at America’s largest bank are not going to be considered resolved. I’m not sure how to resolve this dilemma without nationalizing Citi — which is clearly something Paulson considers a last resort. It hasn’t happened yet, but don’t rule it out completely.

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Has the FDIC Bumped Up its Deposit Insurance Again?

Posted on November 24, 2008 by Felix

At 6am this morning, I got a peculiar email from Citibank — not as a journalist, but just as one of their depositors. The subject line was startling:

Unlimited FDIC Insurance Coverage on your Citibank Checking Account

The email continued:

Good news! Citibank is participating in the FDIC’s Temporary Liquidity Guarantee Program. Through December 31, 2009, all of your non-interest and interest bearing checking deposit account balances are fully guaranteed by the FDIC for the entire amount in your account. [Emphasis mine.]

Can someone explain to me what’s going on here? I haven’t seen this referred to in any of the stories or press releases about the Citi bailout, and the official FDIC FAQ about the Temporary Liquidity Guarantee Program states unambiguously that it covers only noninterest-bearing accounts.

As part of the bailout, has the FDIC quietly started insuring all Citi’s interest-bearing checking accounts, even above the $250,000 limit? Is there a press release to this effect somewhere? Or is Citi getting a little ahead of itself, or even a little panicked, when it comes to email communication? The timing of the email certainly implies that it’s somehow related to the latest bailout, but it never says that explicitly. Most peculiar.

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Extra Credit, Sunday Edition

Posted on November 24, 2008 by Felix

Should "bad" financial contracts be banned? "No rational regulator concerned with substantive transparency would approve of common stock, if it were a novel investment vehicle. It guarantees no cashflows whatever; its "control rights" are so weak for most purchasers that representations thereof should be viewed as fraudulent. The only instrument in wide use more substantatively opaque than common stock is fiat money."

The Option ARM Non-Bomb? An ARM resetting from 6.25% to just 4.25%.

Art in a Poorer World: My Bloggingheads diavlog with Kriston Capps.

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Citi’s Underwhelming Bailout

Posted on November 24, 2008 by Felix

If you want an idea of just how bad Citigroup’s position was on Friday, just take a look at the term sheet of the deal announced on Sunday night. After the $309 billion of toxic assets have been ring-fenced, Citigroup will take the first $29 billion of losses. Citi will continue to take 10% of the losses after that, too, but the lion’s share of the second $5 billion of losses will be taken by Treasury, using TARP funds. In return for taking on that $5 billion of contingent losses, Treasury will receive $4 billion of preferred stock, paying 8% interest per year, up front.

In other words, the deal is essentially pricing in the expectation that Citi’s toxic assets are worth much less than Citi has valued them at — so much less, indeed, that Treasury (a/k/a the taxpayer) is probably going to have to pay out the full $5 billion, even after Citi has lost a further $30 billion over and above the write-downs it’s taken already.

Of course, it’s not quite as simple as that. The FDIC (a/k/a the taxpayer) is taking a $10 billion third-loss tranche, and the Federal Reserve (a/k/a the taxpayer, even if it’s nominally owned by the banks) is on the hook for hundreds of billions of dollars more, and isn’t getting any preferred stock at all.

Sensibly, Citi’s barred from paying dividends until it gets its act together and at least reaches the point at which the equity market window is open to it. Citi also gets to issue another $20 billion of preferred stock to the government, which will help shore up its capital ratios but which will come as little comfort to anybody holding Citi’s common stock. Between the $25 billion TARP injection at 5% and the $27 billion announced today at 8%, Citi has to pay out $3.4 billion a year in interest payments to the government alone, before shareholders see any profit at all.

What’s more, the capital being injected into Citi seems small beer, in relation to the size of the bank’s balance sheet. Here’s the WSJ:

In addition to $2 trillion in assets Citigroup has on its balance sheet, it has another $1.23 trillion in entities that aren’t reflected there. Some of those assets are tied to mortgages, and investors have worried they could cause heavy losses if they are brought back on the company’s books…

Despite the unprecedented scope of the rescue plan, it’s not clear whether it will be enough to stabilize Citigroup. The roughly $300 billion pool of assets that are included in the rescue plan represent only a sliver of the company’s more than $3 trillion in assets, including its holdings in off-balance-sheet entities…

Among the off-balance-sheet assets are $667 billion in mortgage-related securities.

It’s going to be interesting to see just how much detail gets released about the make-up of both the $306 billion being ring-fenced and guaranteed by the government, and the rest of the $2.95 trillion for which Citi retains full responsibility. When the government guaranteed $30 billion in Bear Stearns assets as part of JP Morgan’s takeover, no one really needed to know the details except for the government, on the one hand, and Bear’s new shareholder, on the other.

In this case, however, Citi has shareholders across the globe, all of whom have every right to demand details of the transaction. Is a $27 billion cash injection, plus a $250 billion guarantee, really big enough to cause a change in trajectory of a $3 trillion institution? On the face of it, quite possibly not — especially since existing management will remain in place, at least for the time being.

In the medium term, however, Vikram Pandit is surely toast. The board represents Citi’s shareholders, who are now seeing the insult of the eradication of the dividend added to the injury of the past year’s stock-price decline; his one big transformative deal — the acquisition of Wachovia — fell apart days after it was announced, with devastating consequences for Citi’s stock price and viability. Of all the CEOs crunched by the present crisis, only Dick Fuld looks worse.

The fate of Citi as a whole is equally uncertain. No one knows who’s going to lead it, over the medium term; hell, nobody knows who’s going to own it, over the medium term. The US government might have guaranteed a chunk of Citi’s assets, but it’s done nothing about Citi’s liabilities, including hundreds of billions of dollars in unguaranteed deposits, which are essentially unsecured senior debt yielding much less than Citi’s unsecured senior bonds. Nothing in today’s announcement makes Citi immune to a bank run, which means there’s a very good chance the stock will remain under significant pressure. Given that it was the tumbling stock price which was responsible for this deal in the first place, one wonders if there was any point to this exercise at all.

In general, there’s no sense of finality here, of the government stepping in and taking charge of the situation. Instead, Treasury seems to hope that with $20 billion and some loan guarantees it will be able to help Citi muddle through for the time being. I suspect that it might end up disappointed.

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Ben Stein Watch: November 23, 2008

Posted on November 23, 2008 by Felix

I think it’s fair to say that Ben Stein has officially capitulated. In his panicked and unhelpful column this week he says that the economy is "shot through and through with fear, even terror", and that things could get much worse:

If a colossal worldwide deleveraging spreads to Treasury debt owned by foreigners, the situation will be deadly serious.

Ben, let me explain to you what deleveraging is. When you borrow at a low rate to lend at a higher rate, you’re leveraged. Traditionally, banks do that by borrowing short (through taking in deposits) and lending long, making their money from a positively-sloping yield curve. More recently, they tried other ways of doing much the same thing, setting up off-balance-sheet investment vehicles which had triple-A ratings and could therefore borrow at very low rates while lending to riskier credits in sectors such as subprime mortgages.

In a deleveraging, those trades are unwound. The riskier, higher-yielding assets are sold, and your own excessive borrowings are paid down. If the assets have fallen substantially in value, the deleveraging can be associated with large losses.

As a result, the one asset class which is absolutely safe from global deleveraging is the Treasury market. No one ever borrowed at low rates to invest in Treasuries, because Treasuries are always the lowest-yielding bonds in the world. No one can borrow cheaper than the US government.

Now it’s possible that foreigners will sell their Treasury bonds for dollars, convert those dollars back into their domestic currency, and start spending at home. That would help to stimulate the global economy, and it might weaken the dollar. A weaker dollar, right now, would be a good thing: it would help US exporters, and no one’s worried about inflation, which often accompanies currency weakness. So I don’t understand why Stein is so worried about foreigners selling Treasuries.

But he’s soon onto other subjects: for instance he calls, again, for "solvency guarantees for banks", without even hinting as to what on earth he might be talking about. How can the government guarantee that banks are solvent? If there’s an insolvent bank, what would Stein have the government do? Lending money to the bank at low rates wouldn’t help, since that would only increase the bank’s liabilities. The government could buy a large chunk of equity, but that’s not a "solvency guarantee", that’s nationalization.

Stein then forgets his worries about the Treasury market, and decides that the government should simply issue enormous amounts of new debt:

There is virtually no dose of stimulus that is too much in an economy as shellshocked as today’s.

Well, if you stimulate the economy so much that US debt is no longer risk-free, that’s the one course of action which is most likely to result in foreigners selling their Treasuries, and interest rates going up rather than down. And of course Stein knows what happens when rates go up: "a typical recession," he says in one of his trademark highly-contentious oversimplifications, "is brought on by Federal Reserve tightening". If rising interest rates coming from the Fed slow down the economy, why shouldn’t rising interest rates caused by the Treasury do the same thing?

Stein also urges a Detroit bailout, while adding that "I understand well the arguments against rescuing Detroit, as I have often said." Er no, Ben, you haven’t said anything against rescuing Detroit. To the contrary, you’ve said that "the national security considerations make saving General Motors, Ford and Chrysler a life-or-death matter". Today, for good measure, you add this, on the subject of a possible bankruptcy:

It would kick the economy to the curb, increase the dose of fear running through the nation’s bloodstream, frighten consumers from buying, choke lending, and tend to keep the economy from returning to full employment.

Wow, bankruptcy is truly a monster of horrific proportions. It kicks, near curbs! It doses bloodstreams with fear! It frightens! It chokes! Are we in need of a bailout, here, or a superhero? No, what we need is something stronger still:

A stimulus package that is big enough and long-lasting enough to do the job, perhaps with Treasury rebates for buying cars, trucks, refrigerators and toasters.

I swear I’m not making this up. The NYT is seriously giving Ben Stein precious space to advocate a government rebate for buying toasters. Let’s just hope they’re not the Chinese-made GE toasters which were recalled recently by Wal-Mart.

Posted in ben stein watch | Comments Off on Ben Stein Watch: November 23, 2008

Did Rubin Kill Citi?

Posted on November 23, 2008 by Felix

The vipers’ nest of recriminations and finger-pointing that is Citigroup has now turned on the one man who was until now untouchable, Bob Rubin:

Citigroup insiders and analysts say that Mr. Prince and Mr. Rubin played pivotal roles in the bank’s current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits.

Of course, none of these insiders and analysts are named, and anonymously-sourced stories like this are often exercises in axe-grinding which should be taken with a large pinch of salt. Still, this is not something we’ve heard before, and it might well be true:

For some time after Sanford I. Weill, an architect of the merger that created Citigroup a decade ago, took control of Citigroup, he toned down the bank’s bond trading. But in late 2002, Mr. Prince, who had been Mr. Weill’s longtime legal counsel, was put in charge of Citigroup’s corporate and investment bank.

According to a former Citigroup executive, Mr. Prince started putting pressure on Mr. Maheras and others to increase earnings in the bank’s trading operations, particularly in the creation of collateralized debt obligations…

“Chuck Prince going down to the corporate investment bank in late 2002 was the start of that process,” a former Citigroup executive said of the bank’s big C.D.O. push. “Chuck was totally new to the job. He didn’t know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, ‘You have to take more risk if you want to earn more.’ “

The first part of this sounds as though it comes from Sandy Weill, turning on his former protégé. But I don’t think it’s Weill firing poison darts at Rubin. And those poison darts are hitting home. Up until now, I had a vague concept that Rubin’s biggest mistake at Citi was to have spent too much time as a rainmaker, schmoozing clients, and not enough time sorting out internal problems.

According to this story, however, Rubin was front and center in encouraging Citi’s investment bank to take on more risk — a strategy which had been hugely profitable at his former bank, Goldman Sachs. Did Rubin really think that he could turn Salomon Smith Barney into Goldman Sachs just by encouraging more risk-taking? I doubt it. But if Rubin wasn’t spending much time on the trading floor, it’s possible he was unaware of just how screwy Citi’s risk management was:

It was common in the bank to see Mr. Bushnell waiting patiently — sometimes as long as 45 minutes — outside Mr. Barker’s office so he could drive him home to Short Hills, N.J., where both of their families lived. The two men took occasional fly-fishing trips together; one expedition left them stuck on a lake after their boat ran out of gas…

As the bank’s C.D.O. machine accelerated, its risk controls fell further behind, according to former Citigroup traders, and risk managers lacked clear lines of reporting. At one point, for instance, risk managers in the fixed-income division reported to both Mr. Maheras and Mr. Bushnell.

Bushnell, here, is the chief risk officer within the fixed-income group: the person who’s meant to be keeping a close eye on the people running it: Maheras and Barker. Instead, he’s palling around with them, and his employees are even reporting to Maheras.

How much of this can reasonably be blamed on Rubin is still unclear. But the fact that Rubin is now coming under public attack from Citi types is certainly indicative of how little discipline remains within the bank, and of the size of the task facing Paulson and Geithner this weekend.

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Extra Credit, Saturday Edition

Posted on November 23, 2008 by Felix

The Auto Industry Bailout: Thoughts About Why GM Executives Are Clueless And Their Destructive “No We Can’t” Mindset

What Securitization Problem? The F.D.I.C. Weighs In: Apparently most securitized mortgages can be unilaterally modified by servicers — if they’re seriously delinquent or in default. Which is yet another perverse incentive for homeowners to default.

And yet more Financial Downfall:

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Obama’s Economic Team

Posted on November 22, 2008 by Felix

Brad DeLong says there are six key economic policy jobs in the US government; we can now fill in most of the blanks. Running down Brad’s list:

  • Office of Management and Budget director: Will be Peter Orszag, an excellent and entirely natural choice.
  • Council of Economic Advisers chair: Will be Austan Goolsbee, getting repaid for all the work he did on Obama’s campaign.
  • National Economic Council chair: Will be Jacob Lew, with Jason Furman as his deputy Larry Summers.
  • Federal Reserve chair: Is, of course, Ben Bernanke, at least for the next two years.
  • Treasury secretary: Tim Geithner.
  • SEC chair: Still unclear.

On top of that, there’s still talk that Larry Summers will have some kind of senior White House role. Already it’s more than a little unclear on what exactly the difference is between the CEA and the NEC. By the time that Goolsbee, Lew, and Furman all manage to agree on something, do you really want Summers weighing in as well? Oh, and of course former investment banker Rahm Emanuel is Obama’s chief of staff; he’s no shrinking violet, and will surely contribute to the debate on economic policy.

DeLong says that the most important job on the list is the SEC chairmanship, since it includes "the task of designing the system going forward for regulating financial markets". But I suspect Geithner has been charged with that role, making the SEC job slightly less important.

There’s certainly nothing unexpected or heterodox about this list, although Goolsbee might bring a bit of fresh thinking to the CEA. It’s a very solid team — but of course the economy and the financial markets are so large that they tend to dwarf any attempt by Washington to steer them in a particular direction. The right minds might be in the right places, but whether they have the tools to do anything really substantive remains to be seen.

Update: Brad followed up on Thursday; Krugman calls this team the "ministry of all the talents".

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Great Moments in Punditry, Felix Salmon Edition

Posted on November 21, 2008 by Felix

Me, in July 2007, on the subject of the IPO of Kingdom Holdings, Prince Alwaleed bin Talal’s investment vehicle:

Fancy investing in an extremely successful hedge fund without paying 2-and-20? …

Kingdom could be the next Berkshire Hathaway (maybe it already is the next Berkshire Hathaway), and I suspect that its shares will trade up sharply in the secondary market.

Ben Holland, yesterday, on the same subject:

Those who bought Kingdom Holding shares when Alwaleed took his company public in a July 2007 initial share sale have lost 55 percent.

The S&P 500, yesterday, was down about 50% from July 2007, and Berkshire was down about 30%.

Note to self: when a billionaire sells equity in his own investment prowess, that’s normally a very good deal — for him. For the schmucks who buy the shares, not so much.

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Geithner!

Posted on November 21, 2008 by Felix

I’m pleased and surprised at the news that Tim Geithner will be the next Treasury secretary. Pleased because he’s an insightful pragmatist who’s more than qualified to do the job; surprised because I had thought that he might prefer to stay where he is, in what is essentially a tenured and extremely high-powered position at the New York Fed, rather than move to Washington for an uncertain period of time — especially when his former boss, Larry Summers, is likely to have his own senior job at the White House, which will certainly include both some element of policymaking, and having Obama’s ear. That said, Summers and Geithner work well together, so there aren’t likely to be too many tensions between the two.

As for the big end-of-week stock-market rally, I think it’s far too easy to ascribe it to the Geithner news. Stocks have moved around an enormous amount of late in the final hour of trading, especially on a Friday, and a small Geither uptick could easily snowball into a 500-point rally under those conditions. The chances that it will last, and that the bottom of the market will in retrospect be seen to be about 3pm this afternoon, seem slender indeed to me: I’d hazard that there are a few more major corporate failures coming down the pike, and that such events are just as capable of sending markets tumbling as Geithner’s appointment is to send markets spiking.

Geithner has been worried about the international regulatory architecture for some time, and his September 2006 speech on the subject looks prescient, even if it concentrated a bit too much on hedge funds and not enough on leverage more generally. At ease in the international policy arena, he is America’s greatest hope for putting together a coherent global financial system which encourages risk-taking without allowing it to get out of control. But before he can do that, he’s going to have a lot of fires to put out, and a major stimulus bill to help draft. I hope he finds a replacement for his New York Fed job sharpish, because he’s going to want a decent amount of time to prepare himself to hit the ground running on January 20.

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Berkshire Hathaway’s Peculiar Volatility Numbers

Posted on November 21, 2008 by Felix

I just got off the phone with someone who’s been making good money shorting Berkshire Hathaway stock in the past few weeks; he pointed out to me something very peculiar in Berkshire’s public statements.

First, look at the 10-Q for the second quarter, ended June 30. Have a look at page 24, where the company talks about its equity put options:

At June 30, 2008, the estimated fair value of these contracts was $5,845 million and the weighted average volatility was approximately 23%.

It then goes on to say that if volatility were to rise by 4 percentage points, the value of the contracts would rise by $1.124 billion, to $6.969 billion — a rise of $281 million per percentage point.

It’s not clear where Berkshire is getting its volatility numbers from, but the VIX volatility index, as of June 30, was at 24 — which means that Berkshire’s volatility number was pretty much in line with the VIX.

Now look at the 10-Q for the third quarter, page 25. Over the course of that quarter, the VIX rose substantially, from 24 to 39 — so one would expect Berkshire’s own volatility numbers to rise as well. But they didn’t. In fact, they fell, slightly:

At September 30, 2008, the estimated fair value of these contracts was $6,725 million and the weighted average volatility was approximately 22%.

Stock markets fell by about 9% over the course of the third quarter, which would explain why the value of the put options rose even if volatility fell, as Berkshire seems to think that it did. But of course voliatility rose substantially during the quarter, and it looks as though Berkshire is using an improbably low volatility number here.

In the third-quarter 10-Q, Berkshire reckons that the value of its put options goes up by about $250 million for every percentage-point increase in volatility. The VIX is now at 80, but the VIX is much more short-dated than Berkshire’s equity puts. But let’s say that a reasonable volatility number for Berkshire would be somewhere around 50: that would mean the value of those equity puts going up by about $7 billion, before taking into account that the S&P has fallen by a good 35% since September 30.

Add it all up, and Berkshire’s equity puts alone should probably have gone up in value (this is value to the holder of the puts, which means it’s a liability to Berkshire) by $15 billion or so since the end of the second quarter. Now this is a noncash loss, and Berkshire doesn’t need to post any collateral or otherwise lose liquidity as a result of any such losses. But when Whitney Tilson says that "there could be an additional $1-2 billion in mark-to-market, noncash losses so far this quarter", he could be underestimating greatly.

On the other hand, he might be right: Berkshire might end up taking only a relatively small markdown of one or two billion or two dollars on those equity put contracts. But if it does so, questions will continue to be asked about why Berkshire’s volatility numbers stubbornly refuse to rise even as every other volatility number in the world is going through the roof.

Essentially, the shorts’ argument is that Berkshire is short volatility, thanks to these puts, and that being short volatility has been a very, very bad trade over the past few months. Berkshire is in the happy position of not needing to take any cash losses on its short-vol positions, and it’s entirely reasonable for long-term shareholders (and most of Berkshire’s shareholders are long-term shareholders) to just want to ride out the present craziness. All the same, on a mark-to-market basis — and it’s entirely reasonable for the stock market to be marking Berkshire’s assets to market — it makes sense that Berkshire’s share price should be falling to reflect the mark-to-market losses on its equity puts, not to mention similar mark-to-market losses on its CDS, bond-insurance, and deposit insurance portfolios.

Now Berkshire’s lost a lot of market capitalization of late: about $77 billion, in fact, since September 30. So it’s entirely possible that mark-to-market losses on its equity puts and other derivatives contracts have been more than priced into its shares. But it’ll certainly be interesting to see how Berkshire values those puts in its next quarterly report. If the volatility number rises to something a bit more reasonable, Berkshire could end up reporting a quarterly loss — and that might spook quite a few investors.

Update: Many thanks to Andrew Clavell, who send me some long-term volatility numbers. They seem to be around 38%, which is a big spike up from the 22% which Berkshire used in its last 10-Q. Combine that with the drop in the S&P, and you could see a big noncash hit to earnings in Berkshire’s next quarterly report.

It’s worth noting, however, that long-term volatility at 38% implies a random walk in the index of near 2.5% every trading day for the next 20 years. If and when that number comes down, Berkshire’s noncash losses today will simply be cancelled out by noncash profits tomorrow.

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Who Will Take Over Citi?

Posted on November 21, 2008 by Felix

As John Carney notes today, Citigroup’s market capitalization is $21 billion; that of Goldman Sachs is $20 billion. Can anyone say "merger of equals"? Nothing’s unthinkable in this market, not even the idea that you can tie two rocks together and hope that they float. Reportedly Lloyd Blankfein approached Vikram Pandit with a merger proposal in September, and was rebuffed; now, however, the matter is out of Pandit’s hands, and Citi’s board might be more amenable to such a suggestion.

A Citi-Goldman merger would give Citigroup much more credible management, assuming that the Goldman guys took over most of the top jobs, and would give Goldman a much-needed deposit base, not to mention huge distribution capacity through Smith Barney. An enormous number of Citigroup investment bankers would surely lose their jobs, but that is probably going to happen anyway. Meanwhile, Goldman’s investment bankers would suddenly see their deal pipeline fill up with the job of selling off all the bits of Citi they had no interest in keeping.

Possibly more likely is the idea that Citigroup will be nationalized this weekend, with shareholders being wiped out. John Hempton today sketches out what might happen if bondholders got wiped out at the same time; I’m reasonably confident that in the wake of the Lehman debacle there’s no way that Hank Paulson would let that happen.

In any case, with Citi shares trading at less than $4 apiece, something needs to be done. That’s one of the problems with having a public listing: everybody can see when you’re in distress, even if you stop displaying the stock price on the screens in your offices. The market is essentiallly forcing the board’s hand here — not to mention that of policymakers. Citi’s managed to muddle through this week. But my guess is that there will be some kind of major announcement over the weekend.

Posted in banking, M&A | Comments Off on Who Will Take Over Citi?

When Stocks Go to Zero

Posted on November 21, 2008 by Felix

The percentage fall in the valuation of the stock market is, pretty much by definition, lower than the percentage fall in the enterprise value of America, Inc. And the more levered that America Inc was, the greater the difference between the two numbers.

But with a lot of high-profile stocks now trading in the low single digits (Citi, Ford, GM, airlines), and even General Electric trading at just $13 a share, the optics of what’s going on, especiallly among retail investors, are atrocious. I just got an email from Portfolio’s travel guru, Joe Brancatelli:

I’ve noticed people get REALLY nervous when shares of a company start costing less than a cup of joe at Starbucks. It’s sort of the dumb-guy’s-guide to the market. If I can buy shares for less than coffee, things are bad.

Well, yes, when a multi-billion-dollar corporation sees its equity wiped out, things are certainly bad. And nominal stock prices do matter, for reasons I don’t fully understand: somehow it’s worse that Citi’s gone from $35 to $5 than it would be if it had gone from $105 to $15.

But the whole leverage aspect I think is not well understood by the public. They know that if they buy a house with little or no money down, that means they have very little equity in the house and that equity can be quite easily wiped out, even if the house is still worth something. But they don’t look at stocks the same way: they don’t think of shares in Citigroup as equity in a house with a 90% mortgage while Apple, say, bought its house for cash.

If enough stocks go to zero during this stock-market downturn, that might change. Especially if and when companies start emerging from bankruptcy in listed form, the public might start to realise that companies don’t necessarily die along with their stocks, it’s just that their owners change. But for the time being, and for the foreseeable future, the news is likely to get worse before people start to see through to the other side.

Posted in stocks | Comments Off on When Stocks Go to Zero

This is Not Financial Meltdown

Posted on November 21, 2008 by Felix

Is this the low point of the crisis so far? From the stock market’s point of view, yes, it is. And the numbers coming out of the Treasury market would certainly seem to imply a flight to quality of unprecedented magnitude. Put plunging credit markets together with imploding banks, and there’s little doubt about what results: a soaring TED spread, right?

Wrong.

The TED spread today is 213bp — more or less exactly where it’s been for the past few weeks. Which says to me that for all that financial stocks are being crushed, this is no reprise of the financial crisis we saw in the wake of Lehman’s collapse. Rather, it’s an old-fashioned economic crisis, which severely erodes the equity of leveraged banks, but where money still flows and even the occasional IPO can get away if it’s priced at a discount. Or, to put it another way: it’s a bear market, not a financial meltdown. Which might be little solace to anybody whose stocks have been crushed of later, but which might help reassure policymakers at least a little.

Banks’ capital structures can cope with this: once the common is eroded, the bank belongs to its preferred stockholders. It’s not the end of the world if Citi stock goes to zero, and the Fed has made it very clear that Citi’s senior creditors are going to remain whole. This is not a great environment for a firm’s stock to be wiped out, but with the help of Treasury, it might not even need any new money to be able to continue operating indefinitely. Assuming it doesn’t sell itself first, of course.

Posted in bailouts, banking | Comments Off on This is Not Financial Meltdown

Extra Credit, Thursday Edition

Posted on November 20, 2008 by Felix

U.S. Financial System Still Needs at Least $1.0 Trillion to $1.2 Trillion: Says FBR Capital Markets.

The Mark Cuban charges – and the economic purpose of insider trading laws

Access Uber Alles: Why is the NYT acting as Sallie Krawcheck’s mouthpiece?

Remembering irrational exuberance: When Greenspan gave that famous speech, the S&P 500 was at 744. It closed Thursday at 752.

Carl Marks: Is a small New York invesment bank and fund manager. "The Carl Marks name is synonymous with integrity." For real.

Animal or Vegetable? A great NYT photo caption. And talking of photos, here’s a one from LOLfed:

bernankepraysmore.jpg

Posted in remainders | Comments Off on Extra Credit, Thursday Edition

What’s Happening to Berkshire Hathaway?

Posted on November 20, 2008 by Felix

Jonathan Stempel of Reuters has a very useful look at what’s going on at Berkshire Hathaway, which fell $6,500 per share today to close at its lowest level in over five years. After reading his article, I think we might be one step closer to understanding why Berkshire’s CDS are trading so very wide right now. But first, here’s David Gaffen:

In recent weeks, the credit-default swaps has seen a marked decline in liquidity and trading, so a smaller amount of insurance contracts purchased can still cause large shifts in prices of a particular credit-default swap. “It only needs a little bit to move the market a long way,” says Tim Backshall, chief credit derivatives strategist at Credit Derivatives Research.

Now here’s Stempel:

A credit rating downgrade would likely not be material. Berkshire would have to post "nominal" additional collateral on derivatives of "far below 1 percent of assets" if Berkshire lost its "triple-A" ratings, Buffett’s assistant, Jackie Wilson, said. It was posting no such collateral as of Sept 30, when Berkshire assets totaled $281.7 billion.

Put those two together, and things start to come into focus. The people who bought derivatives from Berkshire weren’t worried about counterparty risk at the time. But now, looking at what’s happened to triple-A counterparties such as AIG and the monolines, everybody is worried about counterparty risk. And nowhere is counterparty risk higher than in these derivative contracts written by Berkshire Hathaway — because even if it’s downgraded, it only has to put up a negligible amount of collateral.

Says Whitney Tilson, who knows Berkshire intimately:

I doubt Buffett would write any contracts that would require Berkshire to post collateral in the event of a downgrade.

Which is all you need to know, really: if that’s true, then anybody needing to hedge their BRK counterparty risk has no choice but to buy CDS protection, whatever the price.

If the stock is falling based on the idea that the CDS market might be on to something, then maybe Tilson is right that it’s a screaming buy at these levels. (Although one wonders whether it wouldn’t be more profitable to just write credit protection instead.)

But we’re in a Dow 7,500 market right now: there are lots of screaming buys out there. Back to Gaffen:

“The insurance business which is a significant portion of their earnings, is a very cyclical business,” says Harry Rady, CEO of Rady Asset Management in San Diego. “With everything else at an extremely significant discount, I see a lot more downside. There is so much opportunity to buy assets for 50 cents on the dollar, why buy a dollar for a dollar because Warren Buffett runs it?”

Or, to put it another way: if Warren Buffett isn’t buying back his own shares at these levels, then that must be because he sees better uses for Berkshire’s capital elsewhere. Which in turn means that you and I might be better off elsewhere, too.

Of course, Buffett might be buying back his own shares right now, we don’t know. But the way in which those shares are plunging would suggest that he isn’t. They ended last week at $101,000 apiece; now they’re $77,500 — a drop of 23% over the course of four trading sessions. If they just return to where they were on Friday, an investor buying at these levels would make a profit of more than 30%. But the same thing can be said of many other stocks, too, including ones in Buffett’s portfolio such as Goldman Sachs and General Electric — both of which, unlike Berkshire, have access to unlimited Fed liquidity.

So yes, Berkshire might be looking cheap — but other stocks are looking cheaper, and always remember that Berkshire, like any insurance company, is very highly leveraged, with contingent liabilities many times higher than its asset base. AIG and the monolines were brought down because they stopped insuring real-world risks and started insuring financial risks. Berkshire’s in the same business, with its credit default swaps and equity puts. Which means that in fraught times like these, there will be lots of question marks over its real value.

Posted in insurance | Comments Off on What’s Happening to Berkshire Hathaway?

The Dangers of Looking to Washington for Help

Posted on November 20, 2008 by Felix

Not since the House Republicans scuppered the first version of the TARP bill has the stock market paid so much attention to the legislative branch of government. I have no idea what’s going on on Capitol Hill: the WSJ is reporting that Congress might pass a last-minute bill before Thanksgiving, allowing lawmakers to leave town until January, while the Washington Post is adamant that there’s no deal today and that the fate of Detroit will lie in Hank Paulson’s hands, unless Congress returns for a rare post-Thanksgiving session.

What’s clear is that this is no way to put together a coherent bailout package which carefully balances the interests of all stakeholders. Instead, Washington has descended into unhelpful finger-pointing, with the White House blaming Congress, the Democrats blaming the Republicans, and everybody caring far too much about taking a two-month-long vacation in the middle of a worst economic and financial crisis in living memory.

For the past decade, the markets, when they’ve got into trouble, have looked to Washington for help. Right now, that seems like just another strategy which works until it doesn’t.

Posted in Politics | Comments Off on The Dangers of Looking to Washington for Help

TIPS Strips, Redux

Posted on November 20, 2008 by Felix

It took a bit of hunting, but I finally found someone who knows all there is to know about TIPS strips. Mike Pond is an Inflation-Linked Strategist at Barclays Capital (yes, that’s really a job, and yes, it still exists) — the bank which, as far as anybody can tell, is the only institution ever to have stripped TIPS. They even branded their stripped TIPS, as iStrips, not that it did any good: there was no demand for the iStrips product, and they haven’t been stripping TIPS for a while.

My conversation with Pond was fascinating, in a nerdy way, and I think I now have some very good answers to the question of why TIPS strips don’t exist, and also which TIPS to buy if you’re thinking of investing in them. (Answer: buy the TIPS with the highest real yield, which tend to be off-the-run bonds issued a long time ago.)

TIPS strips are created by "stripping" the coupons from an inflation-linked Treasury bond, and trading each coupon — and the final principal payment — separately. A bank like Barclays won’t even strip the bond in the first place unless there’s demand for the final principal piece — but then it winds up with a bunch of tiny coupons along the way, which are almost impossible to trade or to hedge with equally-illiquid CPI swaps.

"We stripped some tips," says Pond, "and those were really one-off events, where a specific client wanted a specific cashflow. But there was never a true market. There was a time where on daily basis we would put out indicative pricing, but there was never an active market for iStrips."

The reason why I thought that there would be such a market is that in times of uncertainty, people want to protect their future buying power — which TIPS do very well. They might well also want to minimize their reinvestment risk along the way: reinvesting TIPS coupons, which are small, is non-trivial, and in any case real yields in the future might well be significantly lower than real yields now, and buying a strip essentially locks in that reinvestment yield at today’s levels.

But it turns out that TIPS are what Pond calls "very backended": their coupon is low, relative to the principal amount, and it’s the big final principal payment which provides a large chunk of their total yield. So the reinvestment risk on TIPS is already lower than it is on most bonds.

Still, real yields on TIPS are ridiculously high: you’d be better off buying TIPS all the way out to 8 or 9 years than you would be buying Treasury bonds, just so long as inflation is greater than zero. And the higher that inflation gets, of course, the better off you’ll be in TIPS.

Do investors really believe that the US will see deflation over most of the coming decade? Probably not: what we’re seeing in the TIPS market, says Pond, is due to factors other than inflation expectations. Specifically, it’s liquidity concerns: TIPS are much less liquid than Treasuries, and therefore trade at a significantly higher yield, despite the fact that their credit risk is identical. Recently, the Treasury Department has been issuing more plain-vanilla Treasuries and fewer TIPS, even as the liquidity premium has gone up. The result has been a surge in real yields.

Even so, investors do seem to be inordinately worried about the possibility that they might see nominal losses on their TIPS investment in the event that there is deflation. For instance: The real yield on the July 2012 TIPS, which were issued back in 2002, is 3.45%. The real yield on the newer, on-the-run April 2013 TIPS is a full percentage point lower, at 2.45%. Then go out a bit further, to the April 2014 TIPS, and the yield spikes back up again, to 3.55%.

Why is that? Only partly because the 2013s are more liquid. It’s mainly because there’s a floor to the final principal repayment: it can never be lower than the intial par value. The floor on the older 2012s and 2014s is some ways away: their principal amount is well over 100, thanks to inflation between the time of issue and now, so if there is deflation, that principal amount could, in theory, fall quite a lot before hitting the floor. In contrast, the 2013s are much newer, which means the floor is closer, and investors therefore have more protection against losing money in nominal terms.

"In our view the premium investors are putting on the floor is too high," says Pond, "because of the actual probability of deflation." He’s almost certainly right: there’s no way the Fed will allow actual deflation for any substantial period of time, and it will, if necessary, simply print money to avoid such an eventuality. But for some reason investors seem petrified of deflation, and willing to sacrifice substantial real yield pick-ups for the sake of nominal downside protection. Which is a bit weird, but is hardly the weirdest part of today’s fixed-income markets.

Posted in bonds and loans | Comments Off on TIPS Strips, Redux

Can GMAC Save GM?

Posted on November 20, 2008 by Felix

GM and Chrysler aren’t just two troubled auto companies. They are also linked by GMAC, a financial company which used to be wholly-owned by GM and which is now 51% owned by Cerberus, which also owns Chrysler. GMAC has now applied to become a bank holding company (it owns a small bank) — with the obvious intention of asking Treasury for TARP funds. And just to complicate matters, GMAC owns ResCap, a troubled subprime mortgage lender.

As John Carney said this morning, this is clearly an attempt to procure a GM bailout by the back door. Will it work? I decided to ask Carney, via IM.

Felix Salmon:

So what on earth is going on with GMAC?

If GMAC owns a bank, and GM owns a minority stake in GMAC, is that all that’s needed to get TARP funds all the way up to GM?

And is there any way that those TARP funds can make their way up to GMAC’s majority owner, Cerberus, and thence back down to Chrysler?

John Carney:

Every operating company should buy a small bank if it’s allowed to do that.

Felix Salmon:

GM owns 49% of GMAC, is that right?

John Carney:

Yes

I suspect that the Treasury might very well tell GMAC to take a hike.

Felix Salmon:

Because it would suspect that the money would leave GMAC as soon as it arrived, and be dividended up to GM and Cerberus?

Also what’s the relationship between ResCap and GMAC? Can GMAC simply let ResCap collapse? Or is GMAC now guaranteeing ResCap’s liabilities?

John Carney:

Ordinarily, if you can use that word for this bailout, the government demands preferred equity, warrants and dividends from the companies it recapitalizes. But they are now making special accomodations for private banks. I think GMAC try to argue that they should be treated like a private bank. I’m not sure how that works though.

ResCap is a subsidiary of GMAC. I’m not sure if all the obligations are guaranteed by the parent company, though.

GMAC recently paid $607 million to cancel $1.2 billion worth of ResCap debt, and sank $2.7 billion into the firm last year in a bid to shore up its finance

Felix Salmon:

And 49% of that $2.7 billion came from GM? Talk about throwing money down the drain.

John Carney:

Yeah. Funnily enough, Josh Weintraub, formerly of Bear Stearns, was appointed to Rescap’s board earlier this year.

He is best known as Bear Stearns best boxer

Felix Salmon:

My feeling is that if GMAC gets TARP funds, that might help GM sell more cars if it can start extending financing to more potential buyers. But that the money shouldn’t go directly up to GM, and that GM still needs some serious working out, ideally within a pre-packed Chapter 11.

What happens to ResCap though I have no idea, is it worth throwing good TARP money after bad GMAC recapitalizations?

And why does ResCap need a board if it’s a wholly-owned subsidiary of GMAC?

John Carney:

They’d have to put serious restrictions on dividending up the money to the parents. I’m sure they’d say something like, "No upward flows of TARP money until the shares are bought back." But, as you said, they can send the money upward by normal operations, funding auto purchases.

Felix Salmon:

In this sense though the fact that GM is a minority owner helps, ‘cos Cerberus won’t allow GMAC to write bad loans just to prop up GM. Unless it thinks that it needs GM to stay alive in order for Chrysler to have any hope of survival.

John Carney:

That’s true. And apparently, RESCAP is already restricted from making dividends to GM.

They did this, and put in place a separate board, so they could continue to borrow money.

Felix Salmon:

Ha. As if ResCap is going to be paying any dividends in the foreseeable future.

John Carney:

From a corporate doc: "As part of this transfer of ownership, certain agreements were put in place between ResCap and us that restrict ResCap’s ability to declare dividends or prepay subordinated indebtedness owed to us. While we believe the restructuring of these operations and the agreements between ResCap and us allow ResCap to access more attractive sources of capital, the agreements inhibit our ability to return funds for dividends and debt payments."

Felix Salmon:

Seems to me that this is all mind-bendingly complex, and should really be worked out strategically, within the context of a restructuring of both GM and Chrysler.

Absent such a context, I have a feeling it’s not going to help, and could end up just limiting degrees of freedom in any future restructuring.

John Carney:

All along the Treasury department, from Paulson to Kashkari, has told us that the TARP is an investment not a prop to failed companies. If they mean it, this would be a great chance to prove it by closing the TARP window to GMAC.

Felix Salmon:

But do you really believe this fiction that TARP funds aren’t bailout funds?

John Carney:

I’m suspending my disbelief. Let’s see if they are willing to let at least one firm with no plausible systemic risk claims fail.

Posted in bailouts | Comments Off on Can GMAC Save GM?

Ugly

Posted on November 20, 2008 by Felix

If you thought that the sudden sell-off from yesterday afternoon would reverse itself in morning trade, think again: this is looking increasingly like a secular down market rather than simply a case of high volatility. Citi’s down further this morning, a vote of confidence from one of its largest shareholders notwithstanding; Berkshire Hathway’s tumbling too; and Americans are now being laid off at the rate of more than half a million a week. Oh, and the market cap of the entire New York Times Company is now less than $1 billion, which is less than it paid for the Boston Globe in 1993.

Finally, a large chunk of the stock market is trading at the kind of distressed levels which have been implied by the bond market for a good year now. The problem is that the bond market is falling just as fast, which means that the disconnect between the two is still there: if you think that shareholders are bleeding, just look at the state of bondholders. Given that the bond market has been a good leading indicator of where the stock market is going to go, I can’t get bullish about stocks right here — especially in light of Andy Kessler’s reasons why stocks are likely to fall further over the next couple of months. And I don’t think the market has necessarily priced in the full repercussions of GM going into Chapter 7, which is increasingly likely, let alone the costs of a Citigroup bailout.

The problem is that falls of this magnitude become self-fulfilling: there’s a vicious cycle of deleveraging causing price drops which in turn cause more deleveraging, and even unlimited central bank liquidity doesn’t seem able to stop it. Paulson and Bernanke really do seem to have run out of ammunition at this point: an extra 50bp in rate cuts would barely be noticed, and the second half of Paulson’s TARP funds won’t be spent until 2009. The markets have to shake out on their own, and it’s not going to be pretty.

Posted in stocks | Comments Off on Ugly

Tasting menus

Posted on November 20, 2008 by Felix

Pete Wells will tell you, and show you, and talk about, what you get for $1500: a 20-course meal, with paired wines. Gael Greene has the play-by-play, including this:

Several tables have emptied even before the bacon. Foodists have to catch the train back to Dutchess County or find their way home to Tribeca. So I see many chocolate bon bons left behind.

Spending $1500 a head on a meal? That’s obscene. But spending $1500 a head on a meal and then heading home before it’s even over? Now that’s conspicuous consumption.

But it’s also something I can understand. A huge multi-course tasting menu with paired wines is exhausting, and often not much fun. A great restaurant meal has to have great food, but it can’t be only about the food — it’s also about the guests enjoying — as opposed to simply being impressed by — the food. And when you’re concentrating on the molecular gastronomy, and the ever-changing wine pairings, especially at a meal which is billed in advance as being incredibly unique and special — well, then you lose a certain amount of fun.

I don’t think I ever want to have wine pairings again, they’re too distracting. For me, the best meal is one where I’m the happiest. Good food makes me happy, as does congenial atmosphere, and friendly servers, and great company, and, frankly, not eating in a shopping mall. This is good food, which made me very happy indeed.

While I’m as impressed as the next guy by auteurist pyrotechnics, I always get a whiff of self-congratulatory smugness, both from the chef and from the diners. And sometimes, as happened at one recent 20-course meal which started at 8pm and didn’t finish until 2 in the morning, the whole thing can become a chore. I think I’m the kind of person who cares more about the food than about the cooking. But ask me again in a couple of weeks, when I get back from Corton. I might have changed my mind.

Posted in Not economics | 4 Comments

Zimbabwe Datapoint of the Day

Posted on November 19, 2008 by Felix

Steve Hanke is mainly known in the world of international economics for his conviction that dollarization is the cure for all ills. (How’s that working out, Steve?) But he’s come up with something really rather fabulous for the Cato Institute: the Hanke Hyperinflation Index for Zimbabwe, which puts that country’s inflation at 89.7 Sextillion Percent. (You know what a sextillion is, right? It goes thousand, million, billion, trillion, quadrillion, quintillion, sextillion. Each one is three orders of magnitude greater than the last.)

Says Josh, noting that under 89.7 sextillion percent inflation, prices double only every 5.25 days:

The rate is accelerating, though – if you look at the weekly data for the last two weeks, prices have doubled about every 22 hours. (Side note: you’d think that a doubling every 24 hours would be a nice round level for inflation to plateau at, and you’d be pretty much right – it’s stalled there for nearly a month now.

It’s worth spelling this out in full, because I doubt I’ll have the opportunity to talk about numbers this big very often on this blog: Zimbabwe’s inflation right now is somewhere north of 89,700,000,000,000,000,000,000%. At this rate, it might eventually reach 1,000,000,000,000,000,000,000,000%, or one octillion. Which is not, of course, to be confused with a postillion. The question of what happens when an octillion is struck by lightning is left as an exercise for the reader.

Update: What was I thinking? An octillion is 1,000,000,000,000,000,000,000,000,000%, not 1,000,000,000,000,000,000,000,000%. Zimbabwe hasn’t been struck by that particular lightning yet.

Posted in emerging markets | Comments Off on Zimbabwe Datapoint of the Day

Extra Credit, Wednesday Edition

Posted on November 19, 2008 by Felix

Let Detroit Go Bankrupt: Mitt Romney joins those wanting the government to provide post-bankruptcy financing and warranty guarantees, rather than bailing out GM bondholders.

A Housing Fix with the Right Incentives: Jed Graham on how the government can become a super-senior lien holder and help shore up the property market without encouraging default or foreclosure, or bailing out lienholders.

Debt Man Walking: A very good article by John Judis on Bretton Woods III.

The Professor’s Pop Quiz: Who Controls A.I.G.? Answer: No one knows, although it would seem to be a shadowy entity known as the A.I.G. Credit Facility Trust.

137 pages of Wayne County foreclosures: ie Detroit. And that’s without any auto-industry bankruptcies.

Pirate Theory Of Credit Crunch Aversion: And also: Piracy V. Private Equity: A Comparison, between IRR and Aaargh.

Posted in remainders | Comments Off on Extra Credit, Wednesday Edition