Not quite. But it seems that during his pre-Senator years, he and Michelle spent substantially more than their income and made up the difference by repeatedly taking out loans against the rising value of their home during the home-price bubble. At least according to this story...Sphere: Related ContentIn April 1999, they purchased a Chicago condo and obtained a mortgage for $159,250. In May 1999, they took out a line of credit for $20,750. Then, in 2002, they refinanced the condo with a $210,000 mortgage, which means they took out about $50,000 in equity. Finally, in 2004, they took out another line of credit for $100,000 on top of the mortgage.And they weren't exactly "poor" during this time. They were what they now call "the rich". Apparently they were just free with their money, not rich enough, spending more than they had coming in ...
Tax returns for 2004 reveal $14,395 in mortgage deductions. If we assume an effective interest rate of 6%, then they owed about $240,000 on a home they purchased for about $159,250....... until he got elected to the Senate in 2005 ...During the presidential primary campaign, Michelle Obama complained how tough it was to make ends meet ... "I know we're spending - I added it up for the first time - we spend between the two kids, on extracurriculars outside the classroom, we're spending about $10,000 a year on piano and dance and sports supplements and so on and so forth."...
The Obamas' adjusted gross income averaged $257,000 from 2000 to 2004. This is above the threshold of $250,000 which Obama initially used as the definition of being "rich" for taxation purposes during last year's election campaign.
The Obama family apparently had little or no savings during this period since there was virtually no taxable interest shown on their tax returns.Wasn't it lucky that they found their magic beans just as he got locked into a limited-salary government job for six years? Anyhow, for them things easily could have been much different.the Obamas were living off lines of credit along with other income for several years until 2005, when Obama's book royalties came through and Michelle received her 260% pay raise at the University of Chicago.
This was also the year Obama started serving in the U.S. Senate ... Michelle explained, "It was like Jack and his magic beans."
Barack might well have lost his Senate run, but for his respected and well-financed Republican opponent being done in by allegations that he had wanted to take his wife to a sex club ... that were contained in four-year-old sealed legal documents, which a Chicago judge decided to release to the press during the campaign, that had been filed against him by his wife in a divorce proceeding ... which she'd initiated after pursuing an on-the-job dalliance with a man who was the near co-destroyer of the Star Trek franchise. But I digress (though in case you are interested).
If Barack hadn't been elected...Without those magic beans, the Obama family would have eventually suffered the consequences of too much debt ... and they might have suffered financially during the decline in housing prices had they relied on taking ever larger amounts of equity from their home to pay the bills...Here's a counterfactual: Let's imagine a world in which long-sealed court documents remained sealed during elections, and Star Trek producers didn't hit on married actresses.
Suppose in that world Barack had lost his Senate run, and he and Michelle had thereafter continued to live their lives as previously, beanless. Then the housing bubble burst, leaving them as short of income as ever before but now with no way to cover the income gap, and also tens of thousands of dollars "underwater" on their home, owing that much more than it was worth.
Today, in response to the mortgage crisis and masses of foreclosures everywhere, the new Clinton Administration is putting together its Innocent Overstretched Homeowner Bailout and Mortgage Relief Plan.
Should the plan be written so that that Barack Obama -- a virtuous, hard-working citizen, state legislator, respected professor (indeed a person fully qualified to be President of the United States!) -- should have tens of thousands of dollars knocked off his loan balance and his interest rate reduced, dropping yet another loss on the staggering banking system and endangering its creditors, because he and the wife always liked to spend more money than they had? Can he say greedy bankers exploited him into over-extending himself like that?
Or should the Obamas be told: stick it, move to an apartment, forget all the fancy private lessons for the kids, wear the same clothes for a while, and cut your spending until it is less than your income and you finally are saving something.
hat tip IMA5U
Monday, May 11, 2009
Was Obama A Subprime Borrower?
A humorous if somewhat serious post by scrivener.net, which analyzes whether the current President would have benefited from the ongoing mortgage relief plan, assorted bankruptcy initiatives and other programs set in place to make life for subprime borrowers easier, especially if a butterfly had flapped its wings in China between 5 and 10 years ago. The answer is...
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Intellectually Challenged Rally?
The chart below pretty much says it all, compliments of sentimentrader.com
(as for the definition of dumb money, well as the saying goes, if you're gonna ask...)
Sphere: Related Content
(as for the definition of dumb money, well as the saying goes, if you're gonna ask...)
Sphere: Related Content
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Some More CRE Venus Fly Trap Shoots
Between RealPoint and TREPP, any investor who has the reading comprehension of an 8 year old, the excel skills of a moderately well-trained primate and access to either or both of these databases, should be able to extract sufficient data that will promptly indicate just what commercial real estate is shooting up these days. Whatever it is, it sure ain't green. Also begs the question of just what qualifications one needs these days to be a REIT analyst for a major recently acquired investment bank (or for a real-estate focused asset manager that just happens to rhyme with colon and sneers, for that matter) if failure in either of the above categories is not grounds for flunking the application process.
Some more CRE charts coutresy of TREPP.
hat tip Pat Sphere: Related Content
Some more CRE charts coutresy of TREPP.
hat tip Pat Sphere: Related Content
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FDIC Sold $470 Million Commercial Loans In March At 46.4 Cents On The Dollar
When Zero Hedge previously demonstrated the results of FDIC commercial loan auctions and the discount the Federal Deposit Insurance Corporation was willing to take in order to offload commercial loans (both non-performing and performing) from its books, the result was very startling, specifically when considered in the context of the vocal endorsement Ms. Bair had given to the PPIP's Legacy Loan program and the expected commercial loan clearing levels in the 80s and 90s. At that time Zero Hedge concluded that it was very hypocritical for the FDIC to solicit banks in offloading loans, and for hedge funds to buy them at out of market prices (especially with taxpayer-subsidized guarantees for hedge fund purchases, compliments of the administration, Geithner and Bair).
The facts: in April, the average auction clearing price on the 331 loans the FDIC sold in January and February was 49.3%. In March, the number of loans FDIC sold in various auctions increased almost four-fold to 1,328, for a total of $470 million in book values of sales, with the average price dropping even more: the latest being at 46.4%. So much for a stabilization in the commercial real estate market.
And for those who claim that this price is distorted because it includes several non-performing loans, well - we have a control for that too. Compiling just the data from performing loans gives a great auction clearing price boost to... 51%.
Yes, the same FDIC which is advocating using taxpayer money to endorse and guarantee legacy loan sales as part of the PPIP in the 80/90 cents on the dollar range, continues selling performing commercial loans at about 50% off their book value. Ms. Bair's hypocrisy continues to amaze. Sphere: Related Content
The facts: in April, the average auction clearing price on the 331 loans the FDIC sold in January and February was 49.3%. In March, the number of loans FDIC sold in various auctions increased almost four-fold to 1,328, for a total of $470 million in book values of sales, with the average price dropping even more: the latest being at 46.4%. So much for a stabilization in the commercial real estate market.
And for those who claim that this price is distorted because it includes several non-performing loans, well - we have a control for that too. Compiling just the data from performing loans gives a great auction clearing price boost to... 51%.
Yes, the same FDIC which is advocating using taxpayer money to endorse and guarantee legacy loan sales as part of the PPIP in the 80/90 cents on the dollar range, continues selling performing commercial loans at about 50% off their book value. Ms. Bair's hypocrisy continues to amaze. Sphere: Related Content
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Stanford Financial CIO To Be Indicted On Additional Charges
It has been a while since the general public, in its ecstatic following of every S&P uptick, was reminded about the dirty side of capitalism. Fox Business Network reports that Laura Pendergest-Holt, chief investment officer of the Stanford Financial Group, will be indicted Tuesday on additional charges besides existing counts of obstruction of justice.
It will be curious to see if the regulators pursue the perpetrators of the much broader ponzi which we are all witnessing every day on main stream media and cable channels, with the same zeal and fervor, once this particular scheme pops as well.
Stay tuned. Sphere: Related Content
It will be curious to see if the regulators pursue the perpetrators of the much broader ponzi which we are all witnessing every day on main stream media and cable channels, with the same zeal and fervor, once this particular scheme pops as well.
Stay tuned. Sphere: Related Content
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The Federal Reserve Can Not Account For $9 Trillion In Off-Balance Sheet Transactions
This video is a must watch for anyone who wants to understand just how "effective" the Fed is at safeguarding taxpayer money. Apparently nobody at the Federal Reserve has any clue where the trillions of dollars that have come from the Fed's expanded balance sheet have gone. Additionally, nobody there seems to have any idea what the losses on the Fed's $2 trillion portfolio really are.
As for the pittance of $9 trillion in Fed off-balance sheet transactions over the past 8 months, well, yeah, that's also somewhere out there... Just don't ask the Federal Reserve where.
Rep. Alan Grayson summarizes it best "I am shocked to find out that nobody at the Federal Reserve is keeping track of anything."
(P.S. Zero Hedge uses the term "anyone" generically, with the presumption that the Fed's Inspector General should traditionally receive most memos on memorandum items that deal with a dollar sign and +/- 12 zeros after it).
hat tip g llc Sphere: Related Content
As for the pittance of $9 trillion in Fed off-balance sheet transactions over the past 8 months, well, yeah, that's also somewhere out there... Just don't ask the Federal Reserve where.
Rep. Alan Grayson summarizes it best "I am shocked to find out that nobody at the Federal Reserve is keeping track of anything."
(P.S. Zero Hedge uses the term "anyone" generically, with the presumption that the Fed's Inspector General should traditionally receive most memos on memorandum items that deal with a dollar sign and +/- 12 zeros after it).
hat tip g llc Sphere: Related Content
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Novelty Chart Of The Day
The good folks at comstockfunds demonstrate just how cheap the S&P is as of April 30. Not to fear though, corporate earnings will have no problem rebounding by about 100% next year. No problem at all.
Sphere: Related Content
Sphere: Related Content
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More Quants In The Spotlight
Alpha magazine is out, albeit with about a month delay for frequent Zero Hedge readers, with an article that follows in the footsteps of WSJ's expose from earlier, focusing on the belated topic de jour of quantitative funds. In "Stat Arbitrageurs: Merchants of Volatility", Alpha has done a nice job of rephrasing the arguments that Zero Hedge has been disecting since mid April. Better late than never, especially when the spectre of another August 2007 is constantly just around the corner (and even closer if one reads between the lines of certain quant performance numbers that have been posted here lately).
“Stat arbs take the other side of a move,” Sunier says. “We provide liquidity. If it’s a good time to do that, we earn an economic rent as prices return to normal.”While the article will be mostly a recap of themes Zero Hedge has expounded upon extensively, I recommend readers take a quick look at it for an efficient 30,000 foot summary of topics that are sure to become much more relevant before all this is over. Sphere: Related Content
....
It’s a dramatic turnaround for a strategy that had been all but left for dead after the summer of 2007. During the first two weeks of August that year, statistical arbitrageurs — including major players like AQR Capital Management, D.E. Shaw & Co., Goldman Sachs Asset Management and Renaissance Technologies Corp. — suffered huge losses. Goldman’s once–$5 billion Global Equity Opportunities Fund, for example, was down 30 percent; the then–$1.7 billion Highbridge Statistical Opportunities Fund fell 18 percent. For managers like Goldman and Highbridge that were able to hold on, performance snapped back later that month, but those that were forced to liquidate missed the rebound. In retrospect the crippling losses were more the result of margin calls that originated in the credit markets than of any flaw in statistical arbitrage theory, according to Andrew Lo, a finance professor at the MIT Sloan School of Management.
“There was some kind of unwinding, most likely due to a multistrategy fund that needed to raise cash to meet margin calls for other investments,” says Lo.
Investors nonetheless were spooked and took flight. Judith Posnikoff, a managing director and co-founder of Pacific Alternative Asset Management Co., an Irvine, California–based firm that manages about $9 billion in funds of hedge funds, estimates that between one third and one half of the hedge fund capital dedicated to statistical arbitrage had fled the strategy by early last year. At the same time, proprietary trading desks at many of the big investment banks also got out of the game. The exodus set the stage for a rebound in 2008. Lo points out that stat arbs tend to be long volatility, which shot up to record levels in the fourth quarter of 2008.
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Guest Post: "Why I Am Freaking Out"
Submitted by Gonzalo Lira
"Why I'm Freaking Out"
Insofar as this burgeoning Millennial Depression goes, I've noticed there are two sorts of people: Ones such as myself, obsessively following every blog and every chart and chasing after every little Bloomberg article like a starving hunter in an African veldt chasing down every little rodent with a spear, and others who vaguely know that there's a crisis going on but who are pretty much buying the stock markets' rise and the mainstream media's line that "Green shoots are sprouting, and everything will soon be back to normal." Obsessives like me and presumably you who are reading this are more or less outraged that these pathetic cud-chewers are placidly eating up this "green shoots" nonsense. We see our charts, we read our Bloomberg, we see one and one thing only: THE END IS HERE!!! REPENT NOW YE SINNERS!!! IT'S A SHORT SQUEEZE, YOU IDIOTS!!! SAVE YOURSELVES FROM DAMNATION!!!
We obsessives are a high-strung bunch.
Now, the economy isn't like the weather: If the weatherman says it'll be sunny tomorrow, the weather don't grow cloudy to spite him. The weather don't care what the weatherman say. But in macroeconomics, if enough people say that things are going to suck canal water, well then, things will suck canal water—hell, they'll suck turpentine. Macroeconomics is the ultimate example of the Heisenberg Uncertainty Principle, only magnified: If some observers say it'll get better, it'll get a lot better. If enough observers say it's going to get worse, it'll get a LOT worse. A relatively small group of influential market participants—the MSM and some key people, not even necessarily powerful people—can literally create self-fulfilling prophecies.
So if we discard the old, clearly failed model of perfectly rational markets and economic actors, and instead think of macroeconomics in these more realistic terms—more-or-less rational models and charts and numbers, plus a really big slug of basic human psychology—a healthy bit of denial is actually not a bad thing. The very act of believing things will get better actually makes things get better. So when I torque down and try to coolly analyse what's going on, macroeconomically speaking, I am actually okay with all this talk about green shoots and light at the end of the tunnel. I figure, Happy talk leads to calm people, leads to happy markets, leads to renewed confidence, leads to . . . you get the picture.
But I'm still freaking out. Why?
It's because of what's behind the mask.
In every economic crisis or mushrooming recession, the MSM and the leadership classes always talk up how great things really are, and how great things are going to get in just a little while, putting on a brave face and putting out optimistic talk—and that's fine: That sort of mild deception is not only acceptable, it is in fact necessary. Putting on the happy mask is not the issue.
The issue is, what's behind the happy mask. In other words, what are the people in power actually doing, and do they have any sense that they know what they're doing, or where they're going? Or are they making it up as they go along? Are they on a path—even if it's the wrong path, or one I don't agree with—or are they lost in a wilderness and just going around in circles?
That's my problem. That's why I'm freaking out.
Sixteen months into this Millennial Depression, and less than a business quarter into Obama's administration, it is inescapably clear that Team Obama hasn't the slightest idea what it's doing. To pretend otherwise is self-deception. The louts and Constitutional traitors of the Bush administration didn't much know what they were doing either—but they were flat stupid. Team Obama doesn't have that excuse.
Let's do a quick recap—roll tape:
*The banks: The stress test was so obviously so much window-dressing that it's rather questionable what utility the whole process actually served. I mean, c'mon: The banks negotiated the results of the test (!). This is a far cry from Roosevelt's bank holiday in March '33—a far cry? Hell, it's a whole other musical genre. But even if the stress tests had been on the up-and-up, it is clear that Team Obama will not do what has to be done—nationalise the banks, fire management, liquidate the stock-holders, write off the bad assets, get the bond holders to take haircuts (or quasi-decapitations, as the case may be) and turn the banks around and send them on their way, FDIC-style. Why they won't do this is besides the point, though capture by Wall Street—akin to state capture of East European governments by the native oligarchy—seems to be the general consensus. Regardless, the banks are zombies—and they will remain zombies indefinitely. Zombie banks can undercut solvent competitive banks, strangling financial competition and ironically curtailing market liquidity, because the zombies know they will always be propped up by Uncle Sam (sorry for the mixed metaphors, but you get the idea). This is exactly what happened—and is still happening—in Japan. Zombie banks will take the government's largesse, lend out no money, squeeze out their non-zombie competition, and wind up turning the entire financial industry zombie—and Team Obama has no idea how to stop this, aside from shoveling even more liquidity in their direction. Or maybe they DO know what has to be done—put an FDIC receivership bullet in the brains of these zombies—but lack the political courage to do so.Either way, the result is the same: Zombies everywhere, killing everything, ironically curtailing liquidity even as they are propped up in the name of improving liquidity.
The charitable conclusion here is, this shows Team Obama doesn't have the foresight to envision the obvious traps of allowing zombie banks to exist. Hence they don't have an overall plan for the banking sector—if they did, they'd realize the perniciousness of zombie banks and therefore put a stop to them by setting up a real stress test and putting the banks that failed it—no matter their size—into receivership. The uncharitable conclusion is that Team Obama are captured lackeys of Wall Street.
*Industry: Team Obama's capitulation to entrenched interests in the automobile industry—that is, the United Auto Workers Union—is a very, very bad sign. The government's involvement, instead of being good for Chrysler and GM in their respective bankruptcy processes and shielding upstream suppliers from the harm of a drawn-out bankruptcy, will actually mean that the business decisions of these two companies will effectively be beholden to political considerations from here on out. After all, the reason these companies were nationalised was in order to save the UAW's bacon. (BTW, to compare what's going on at GM and Chrysler today to Chrysler in 1980 is apples and Agent Orange: In 1980, the US government guaranteed Chrysler's bonds. In 2009, the US government is guaranteeing CHRYSLER—and GM too.) Moreover, Team Obama hasn't presented any rationale for the de facto nationalization of Chrysler and GM—so what's to stop any other industry (or union) from asking to be nationalised? I'm not one of these fools who says that any state-run enterprise is "Communist" or "Socialist"—I would prefer bankruptcy for an insolvent business, but on principle I have no
problem with a government takeover of a business or industry, so long as there is a clear, compelling, non-trivial, non-political reason, and so long as there is a clear horizon for the exit of the government, if the interference was for exigent or unique reasons. But the arbitrary de facto nationalization of Chrysler and GM through this sham (and probably illegal) pre-pack bankruptcy has no rationale, no raison d'etre, aside from propping up some union (which is receiving a shockingly sweet and possibly illegal deal in the Chrysler case, a deal presumably to be repeated in the imminent GM bankruptcy)—the way it's being done makes no rational business sense, but makes terrific POLITICAL sense. These are the twin problems with Team Obama and their auto industry meddling: It's not that they are meddling in the private sector, it's that they're giving priority to political considerations over financial or macroeconomic considerations, and they're meddling without a clear and compelling rationale, opening the door for every private business to seek state subsidy so long as they have the political muscle to get the sweet taxpayer-financed deal out of Team Obama.
This shows Team Obama's lack of an overall plan, coupled with a lack of faith in capitalism and bankruptcy, a lack of faith that the laws and system in place will actually do what they're supposed to do. When an administration doesn't have faith in the law, it starts to break it. If you don't believe me, ask the Bushies.
*The military: No one is noticing this, and I know I'm odd man out on this subject, but weapons procurements and excessively large military expenditures—above and beyond the two wars being fought—are continuing apace, and no one is saying a thing. This is a disaster. Military weapons are, by definition, expenses—they're a waste of money, at best a very inefficient redistribution of income from taxpayers to workers on the factory floors of the weapons' manufacturers. Now, I'm no pinko-Commie-Hippie-Vegan freak—I have a gun, I ate raw baby seal with some Inuit friends in Alaska one time (delicious), and I sure as hell don't go around wearing that stupid little semaphore sign which is really just the footprint of the American chicken. However, the exorbitant military spending going on is a tremendous drain on the economy. It doesn't seem so because the economy has been so used to it, and because in the good times it wasn't such a pressing issue. Keep in mind, the Millennial Depression is the first truly serious economic downturn since the end of the Cold War. But even during the Cold War, when the Soviet Union presented an obvious and equal military challenge, there were cutbacks in '81 and after '73, as well as in the Fifties, when the economy got rocky. Now—with no serious or imminent enemy except low-tech terrorists—we have a massive military industry, above and beyond the endless, pointless occupations in Afghanistan and Iraq. The military would be the obvious place to start cutting—is Team Obama cutting? . . .
Team Obama's failure to cut non-occupation military expenditures shows a lack of political will, even though from a rational point of view, cutting weapons procurements and the excessive military in order to redirect those monies to more productive, more clearly stimulative programs is obvious and indeed necessary, if the rationale for the recently passed stimulus package is to be believed. Yet Team Obama does not have the will to do so.
*The deficit: Here we come to the big kahuna, the ultimate issue. Team Obama delivered on its promise to stimulate—boy did they deliver! What a doozy of a stimulus package! And the financing of that stimulus? Deficit. The Constitutional traitor Dick Cheney declared that "deficits don't matter", and Team Obama is drinking from the same Kool Aid. The budget deficit is being financed by the emission of Treasury bills, notes and bonds. This year, I believe $2.3 trillion worth of Treasury paper will be sold. Question: What happens when there are no buyers for those Treasuries? Don't tell me it can't happen—that's what they told me last year about Lehman going under, and then they said the same about AIG. In the Millennial Depression, anything can happen. Simple math makes it obvious that those Treasuries won't find foreign
buyers like before—not when the petro-states are selling less oil and at cheaper prices than a year ago, not when China and Japan are exporting a fraction of what they did before. The Fed is willing and able to buy those Treasuries, effectively printing money—and Team Obama is a-okay with that. No budget cuts, just print money. Is anyone else realizing that the dollar will eventually crash if this isn't stopped? Or am I whistling Dixie in a hurricane?
This shows that Team Obama is either willfully irresponsible in its cavalier attitude towards the currency, or else hasn't seriously thought through what a crash of Treasuries and a run on the dollar could actually mean for the United States. I can tell you what will happen: In a nutshell, it would mean out-and-out chaos: Fighting in the streets over food. It's happened before, elsewhere and in the U.S. immediately after the Civil War. No reason to believe it can't happen in America today.
This is a quick recap, light on detail, maybe a bit on the hyperbolic side, yes—but you who are reading this, an obsessive like me, know all the details already. You can fill in those blanks, and the picture they paint is unmistakably clear: Team Obama is lost, with no guiding principles or overall plan, making it up as they go along.
I didn't even go into abortions like the P-PIP or the collapsing balance sheets of the state and local governments (which the Federal Government is doing nothing to alleviate) or the looming pension fund blow-up, not to mention credit-card asset blow-ups (happening even now as I rant), CMBS blow ups (which are about to hit like Katrina), and on and on and on. I don't have to mention any of this: All these details only add to the picture—Team Obama gives a great speech with a huge happy mask firmly in place.
But behind the mask, there is nothing. No plan, no vision for the endgame or the way out of this Millennial Depression, no idea what to do except put out every little fire that pops up in front of them while the general conflagration goes on all around. Team Obama doesn't even believe that they should do nothing, on the assumption that time alone will heal the banks and the economy—if they really believed that time itself would be the cure for our current ills, they wouldn't have passed such an aggressive stimulus package, or be playing with legal fire in the Chrysler and GM bankruptcies, or playing with financial Armageddon with the shockingly massive Treasury paper sale.
Team Obama does not have a clue what it is doing. Behind the happy mask of green shoots and hope we can believe in, there is nothing: Just a plastic, reassuring, empty smile.
That's why I'm freaking out. Am I the only one? Sphere: Related Content
"Why I'm Freaking Out"
Insofar as this burgeoning Millennial Depression goes, I've noticed there are two sorts of people: Ones such as myself, obsessively following every blog and every chart and chasing after every little Bloomberg article like a starving hunter in an African veldt chasing down every little rodent with a spear, and others who vaguely know that there's a crisis going on but who are pretty much buying the stock markets' rise and the mainstream media's line that "Green shoots are sprouting, and everything will soon be back to normal." Obsessives like me and presumably you who are reading this are more or less outraged that these pathetic cud-chewers are placidly eating up this "green shoots" nonsense. We see our charts, we read our Bloomberg, we see one and one thing only: THE END IS HERE!!! REPENT NOW YE SINNERS!!! IT'S A SHORT SQUEEZE, YOU IDIOTS!!! SAVE YOURSELVES FROM DAMNATION!!!
We obsessives are a high-strung bunch.
Now, the economy isn't like the weather: If the weatherman says it'll be sunny tomorrow, the weather don't grow cloudy to spite him. The weather don't care what the weatherman say. But in macroeconomics, if enough people say that things are going to suck canal water, well then, things will suck canal water—hell, they'll suck turpentine. Macroeconomics is the ultimate example of the Heisenberg Uncertainty Principle, only magnified: If some observers say it'll get better, it'll get a lot better. If enough observers say it's going to get worse, it'll get a LOT worse. A relatively small group of influential market participants—the MSM and some key people, not even necessarily powerful people—can literally create self-fulfilling prophecies.
So if we discard the old, clearly failed model of perfectly rational markets and economic actors, and instead think of macroeconomics in these more realistic terms—more-or-less rational models and charts and numbers, plus a really big slug of basic human psychology—a healthy bit of denial is actually not a bad thing. The very act of believing things will get better actually makes things get better. So when I torque down and try to coolly analyse what's going on, macroeconomically speaking, I am actually okay with all this talk about green shoots and light at the end of the tunnel. I figure, Happy talk leads to calm people, leads to happy markets, leads to renewed confidence, leads to . . . you get the picture.
But I'm still freaking out. Why?
It's because of what's behind the mask.
In every economic crisis or mushrooming recession, the MSM and the leadership classes always talk up how great things really are, and how great things are going to get in just a little while, putting on a brave face and putting out optimistic talk—and that's fine: That sort of mild deception is not only acceptable, it is in fact necessary. Putting on the happy mask is not the issue.
The issue is, what's behind the happy mask. In other words, what are the people in power actually doing, and do they have any sense that they know what they're doing, or where they're going? Or are they making it up as they go along? Are they on a path—even if it's the wrong path, or one I don't agree with—or are they lost in a wilderness and just going around in circles?
That's my problem. That's why I'm freaking out.
Sixteen months into this Millennial Depression, and less than a business quarter into Obama's administration, it is inescapably clear that Team Obama hasn't the slightest idea what it's doing. To pretend otherwise is self-deception. The louts and Constitutional traitors of the Bush administration didn't much know what they were doing either—but they were flat stupid. Team Obama doesn't have that excuse.
Let's do a quick recap—roll tape:
*The banks: The stress test was so obviously so much window-dressing that it's rather questionable what utility the whole process actually served. I mean, c'mon: The banks negotiated the results of the test (!). This is a far cry from Roosevelt's bank holiday in March '33—a far cry? Hell, it's a whole other musical genre. But even if the stress tests had been on the up-and-up, it is clear that Team Obama will not do what has to be done—nationalise the banks, fire management, liquidate the stock-holders, write off the bad assets, get the bond holders to take haircuts (or quasi-decapitations, as the case may be) and turn the banks around and send them on their way, FDIC-style. Why they won't do this is besides the point, though capture by Wall Street—akin to state capture of East European governments by the native oligarchy—seems to be the general consensus. Regardless, the banks are zombies—and they will remain zombies indefinitely. Zombie banks can undercut solvent competitive banks, strangling financial competition and ironically curtailing market liquidity, because the zombies know they will always be propped up by Uncle Sam (sorry for the mixed metaphors, but you get the idea). This is exactly what happened—and is still happening—in Japan. Zombie banks will take the government's largesse, lend out no money, squeeze out their non-zombie competition, and wind up turning the entire financial industry zombie—and Team Obama has no idea how to stop this, aside from shoveling even more liquidity in their direction. Or maybe they DO know what has to be done—put an FDIC receivership bullet in the brains of these zombies—but lack the political courage to do so.Either way, the result is the same: Zombies everywhere, killing everything, ironically curtailing liquidity even as they are propped up in the name of improving liquidity.
The charitable conclusion here is, this shows Team Obama doesn't have the foresight to envision the obvious traps of allowing zombie banks to exist. Hence they don't have an overall plan for the banking sector—if they did, they'd realize the perniciousness of zombie banks and therefore put a stop to them by setting up a real stress test and putting the banks that failed it—no matter their size—into receivership. The uncharitable conclusion is that Team Obama are captured lackeys of Wall Street.
*Industry: Team Obama's capitulation to entrenched interests in the automobile industry—that is, the United Auto Workers Union—is a very, very bad sign. The government's involvement, instead of being good for Chrysler and GM in their respective bankruptcy processes and shielding upstream suppliers from the harm of a drawn-out bankruptcy, will actually mean that the business decisions of these two companies will effectively be beholden to political considerations from here on out. After all, the reason these companies were nationalised was in order to save the UAW's bacon. (BTW, to compare what's going on at GM and Chrysler today to Chrysler in 1980 is apples and Agent Orange: In 1980, the US government guaranteed Chrysler's bonds. In 2009, the US government is guaranteeing CHRYSLER—and GM too.) Moreover, Team Obama hasn't presented any rationale for the de facto nationalization of Chrysler and GM—so what's to stop any other industry (or union) from asking to be nationalised? I'm not one of these fools who says that any state-run enterprise is "Communist" or "Socialist"—I would prefer bankruptcy for an insolvent business, but on principle I have no
problem with a government takeover of a business or industry, so long as there is a clear, compelling, non-trivial, non-political reason, and so long as there is a clear horizon for the exit of the government, if the interference was for exigent or unique reasons. But the arbitrary de facto nationalization of Chrysler and GM through this sham (and probably illegal) pre-pack bankruptcy has no rationale, no raison d'etre, aside from propping up some union (which is receiving a shockingly sweet and possibly illegal deal in the Chrysler case, a deal presumably to be repeated in the imminent GM bankruptcy)—the way it's being done makes no rational business sense, but makes terrific POLITICAL sense. These are the twin problems with Team Obama and their auto industry meddling: It's not that they are meddling in the private sector, it's that they're giving priority to political considerations over financial or macroeconomic considerations, and they're meddling without a clear and compelling rationale, opening the door for every private business to seek state subsidy so long as they have the political muscle to get the sweet taxpayer-financed deal out of Team Obama.
This shows Team Obama's lack of an overall plan, coupled with a lack of faith in capitalism and bankruptcy, a lack of faith that the laws and system in place will actually do what they're supposed to do. When an administration doesn't have faith in the law, it starts to break it. If you don't believe me, ask the Bushies.
*The military: No one is noticing this, and I know I'm odd man out on this subject, but weapons procurements and excessively large military expenditures—above and beyond the two wars being fought—are continuing apace, and no one is saying a thing. This is a disaster. Military weapons are, by definition, expenses—they're a waste of money, at best a very inefficient redistribution of income from taxpayers to workers on the factory floors of the weapons' manufacturers. Now, I'm no pinko-Commie-Hippie-Vegan freak—I have a gun, I ate raw baby seal with some Inuit friends in Alaska one time (delicious), and I sure as hell don't go around wearing that stupid little semaphore sign which is really just the footprint of the American chicken. However, the exorbitant military spending going on is a tremendous drain on the economy. It doesn't seem so because the economy has been so used to it, and because in the good times it wasn't such a pressing issue. Keep in mind, the Millennial Depression is the first truly serious economic downturn since the end of the Cold War. But even during the Cold War, when the Soviet Union presented an obvious and equal military challenge, there were cutbacks in '81 and after '73, as well as in the Fifties, when the economy got rocky. Now—with no serious or imminent enemy except low-tech terrorists—we have a massive military industry, above and beyond the endless, pointless occupations in Afghanistan and Iraq. The military would be the obvious place to start cutting—is Team Obama cutting? . . .
Team Obama's failure to cut non-occupation military expenditures shows a lack of political will, even though from a rational point of view, cutting weapons procurements and the excessive military in order to redirect those monies to more productive, more clearly stimulative programs is obvious and indeed necessary, if the rationale for the recently passed stimulus package is to be believed. Yet Team Obama does not have the will to do so.
*The deficit: Here we come to the big kahuna, the ultimate issue. Team Obama delivered on its promise to stimulate—boy did they deliver! What a doozy of a stimulus package! And the financing of that stimulus? Deficit. The Constitutional traitor Dick Cheney declared that "deficits don't matter", and Team Obama is drinking from the same Kool Aid. The budget deficit is being financed by the emission of Treasury bills, notes and bonds. This year, I believe $2.3 trillion worth of Treasury paper will be sold. Question: What happens when there are no buyers for those Treasuries? Don't tell me it can't happen—that's what they told me last year about Lehman going under, and then they said the same about AIG. In the Millennial Depression, anything can happen. Simple math makes it obvious that those Treasuries won't find foreign
buyers like before—not when the petro-states are selling less oil and at cheaper prices than a year ago, not when China and Japan are exporting a fraction of what they did before. The Fed is willing and able to buy those Treasuries, effectively printing money—and Team Obama is a-okay with that. No budget cuts, just print money. Is anyone else realizing that the dollar will eventually crash if this isn't stopped? Or am I whistling Dixie in a hurricane?
This shows that Team Obama is either willfully irresponsible in its cavalier attitude towards the currency, or else hasn't seriously thought through what a crash of Treasuries and a run on the dollar could actually mean for the United States. I can tell you what will happen: In a nutshell, it would mean out-and-out chaos: Fighting in the streets over food. It's happened before, elsewhere and in the U.S. immediately after the Civil War. No reason to believe it can't happen in America today.
This is a quick recap, light on detail, maybe a bit on the hyperbolic side, yes—but you who are reading this, an obsessive like me, know all the details already. You can fill in those blanks, and the picture they paint is unmistakably clear: Team Obama is lost, with no guiding principles or overall plan, making it up as they go along.
I didn't even go into abortions like the P-PIP or the collapsing balance sheets of the state and local governments (which the Federal Government is doing nothing to alleviate) or the looming pension fund blow-up, not to mention credit-card asset blow-ups (happening even now as I rant), CMBS blow ups (which are about to hit like Katrina), and on and on and on. I don't have to mention any of this: All these details only add to the picture—Team Obama gives a great speech with a huge happy mask firmly in place.
But behind the mask, there is nothing. No plan, no vision for the endgame or the way out of this Millennial Depression, no idea what to do except put out every little fire that pops up in front of them while the general conflagration goes on all around. Team Obama doesn't even believe that they should do nothing, on the assumption that time alone will heal the banks and the economy—if they really believed that time itself would be the cure for our current ills, they wouldn't have passed such an aggressive stimulus package, or be playing with legal fire in the Chrysler and GM bankruptcies, or playing with financial Armageddon with the shockingly massive Treasury paper sale.
Team Obama does not have a clue what it is doing. Behind the happy mask of green shoots and hope we can believe in, there is nothing: Just a plastic, reassuring, empty smile.
That's why I'm freaking out. Am I the only one? Sphere: Related Content
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Hedge Fund LP Secondary Market Interest Update
Secondary market hedge fund interests continue to be actively traded, and as LP broker Hedge Bay indicates, the discounts for offers have hit unprecedented levels. The most recent level of Hedge Bay's Secondary Market Index Value hit an all time low of 80.31 for the month of March.
In terms of specific bids and asks, presented below are the most notable blocks for sale over the past 10 days:
Quantek Opportunity Fund: $15.0 million
Diamondback Offshore Fund: $10.0 million
Brevet Capital Special Opps: $10.7 million
New Stream Capital Fund: $8.2 million
Global Secured Capital Fund: $6.5 million
Whitecap Offshore: $5.0 million
Hound Partners: $2.0 million
Contrarian Capital Finance: $1.9 million
On the bidside, there have been quite a few interested buyers as well, the most notable of which are the following brand name hedge funds:
Basso Investors: $10.0 million
GoldenTree Offshore: $10.0 million
Millennium: $8.0 million
Third Eye: $19 million (offset by $12.5 million for sale)
Ore Hill: $5.0 million
Paulson Advantage: $5.0 million
King Street Capital: $5.0 million
Pershing Square: $5.0 million
Jana Partners: $5.0 million
One East Partners: $1.8 million
Ultimately, whether a transaction occurs depends on whether the buyer and seller are willing and able to agree on a final transaction price. It is likely that the bid/ask spreads in this highly illiquid market would be wide enough to prevent all but the most determined sellers and buyers. Sphere: Related Content
In terms of specific bids and asks, presented below are the most notable blocks for sale over the past 10 days:
Quantek Opportunity Fund: $15.0 million
Diamondback Offshore Fund: $10.0 million
Brevet Capital Special Opps: $10.7 million
New Stream Capital Fund: $8.2 million
Global Secured Capital Fund: $6.5 million
Whitecap Offshore: $5.0 million
Hound Partners: $2.0 million
Contrarian Capital Finance: $1.9 million
On the bidside, there have been quite a few interested buyers as well, the most notable of which are the following brand name hedge funds:
Basso Investors: $10.0 million
GoldenTree Offshore: $10.0 million
Millennium: $8.0 million
Third Eye: $19 million (offset by $12.5 million for sale)
Ore Hill: $5.0 million
Paulson Advantage: $5.0 million
King Street Capital: $5.0 million
Pershing Square: $5.0 million
Jana Partners: $5.0 million
One East Partners: $1.8 million
Ultimately, whether a transaction occurs depends on whether the buyer and seller are willing and able to agree on a final transaction price. It is likely that the bid/ask spreads in this highly illiquid market would be wide enough to prevent all but the most determined sellers and buyers. Sphere: Related Content
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Zero Hedge Exclusive: One Whistleblower's Fight Against Goliath Over The Definition Of Risk
When Zero Hedge recently posted a letter from Deepak Moorjani, it was means to be shared as more of an opinion piece with some policy implications - it is, after all, rare to get the insight of whistleblowers who decry allegedly illicit practices. The fact that Moorjani's previously published piece had been removed from certain main stream media outlets, however, raised some red flags and I decided to probe further.
What I have discovered is an ever-developing, very intricate story, with potentially substantial ramifications not only for one specific company's internal corporate policy and potential abuses thereof, but additionally having significant political implications, as well as explaining a lot in terms of recent oddities in terms of Mark-To-Market, mainstream media interactions with sensitive Wall Street clients, and lastly, shedding some much needed light on that most thorniest of recent subjects - the commercial real estate bubble.
First some background. Mr. Moorjani, contrary to what Zero Hedge represented, is still technically an employee of Deutsche Bank Japan, specifically their Commercial Real Estate department, despite being already involved in several years of litigation with the company. We provide his relevant biography compliments of The Huffington Post:
As some more background, in April 2007 Mr. Moorjani sent a due diligence report to DB's head of global banking, Michael Cohrs, in which he detailed numerous observations from a whistleblower's perspective. The company's retort was the pursue litigation against Mr. Moorjani, which has since escalated over the past two years. I will not focus as much on the details of the lawsuits, however I do provide links to documents which are public domain and have been filed in Japanese court for whoever desires to conduct additional an drill-down on this topic. A full overview of the background of the Moorjani-case can be gleaned from the following set of documents, posted by Mr. Moorjani on his Scribd account.
Among some of the other relevant allegations, is an interesting piece that could be quite interesting to Zero Hedge readers as it deals with an issue I have touched upon in the past, namely potential Mark T0 Market shenanigans in the world of CMBS. A Nikkei press release from April 29 summarizes a few of the most pertinent issues best:
These are very critical allegations, especially since it is arguable whether this type of CMBS marking frivolity was isolated to the Japanese market and was not a more pervasive phenomenon (and not just at DB for that matter).
And it has been none other than Deepak Moorjani who has been fighting to get both internal and external attention not only on this issue, but many others, which go to the core of Moorjani's argument of rampant alleged Moral Hazard violations at the German bank. A full reprint of one of Mr. Moorjani's letters to his supervisors is presented below, with the key points recaptured:
And the whisteblower fight goes on. In a missive sent out on April 28, 2009, which among others CC:'s not just Deutsche Bank executives Josef Ackermann, Hugo Banziger and Michael Cohrs, but German chancellor Angela Merkel herself, Moorjani presents yet more critical arguments (full referenced letter from Scribd provided below), especially with regard to the sensitive topic of AIG-funneled taxpayer bailouts:
Has Ms. Merkel taken these allegations seriously? The German bank, that by some estimates, has a leverage ratio that far surpasses even the wildest dreams of its U.S. counterparts, has been considered the epitome of European systemic risk, and the prudent course of action for not just her, but all DB executives (not to mention the gentlemen at the Federal Reserve) would be to take all the warnings presented by Mr. Moorjani and act upon them, instead of continuing to pursue allegedly retaliatory litigation.
In the meantime, Mr. Moorjani's story waits to be told. As I pointed out the removal of his opinion letter from Dealbook without a reason leaves many unansewered question. The questions only become louder if one considers the lack of response by other main stream media sources to capture this story and present it is in entirety: as Mr. Moorjani points out, a dissemination of this case could simply "offend powerful interests" and as such various media outlets would be loathe to shut out powerful and wealthy clients from the ranks of sponsors and revenue generators. Zero Hedge does not have that problem.
Of course, the questions of moral hazard, of mismarking and outright adjusting CMBS price levels, of obvious "overbidding" practices (with other people's money) remain, and will continue to do so until there is a clear resolution of Mr. Moorjani's case. In the meantime, Zero Hedge will continue to present every ongoing development in this saga as it is the right (and duty) of shareholders (and recently taxpayers), both foreign and domestic, to see just how their capital is (mis)spent in the ongoing pursuit of ever increasing Wall Street bonuses and levered revenues at global banking concerns. Sphere: Related Content
What I have discovered is an ever-developing, very intricate story, with potentially substantial ramifications not only for one specific company's internal corporate policy and potential abuses thereof, but additionally having significant political implications, as well as explaining a lot in terms of recent oddities in terms of Mark-To-Market, mainstream media interactions with sensitive Wall Street clients, and lastly, shedding some much needed light on that most thorniest of recent subjects - the commercial real estate bubble.
First some background. Mr. Moorjani, contrary to what Zero Hedge represented, is still technically an employee of Deutsche Bank Japan, specifically their Commercial Real Estate department, despite being already involved in several years of litigation with the company. We provide his relevant biography compliments of The Huffington Post:
Deepak Moorjani is an employee and shareholder of Deutsche Bank AG. The views expressed herein are his own and do not necessarily represent the views of Deutsche Bank AG. As disclosure, he is presently involved in litigation as a plaintiff and as a defendant with Deutsche Securities Inc, a subsidiary of Deutsche Bank AG.The reason Mr. Moorjani is still employed at DB Japan is that in Japan the concept of at will employment does not exist. His status as an employee would end when either (i) he resigns or (ii) the courts officially recognize a valid termination by the company. So far, neither has happened. Indeed, DLA Piper chimes in on the topic: "Japanese labor laws tend to be very labor friendly, especially when compared to the labor laws from other Asian jurisdictions and countries such as the United States. There is no concept of "at-will" employment in Japan and the employer's right to terminate, transfer and discipline employees is limited by statute, case law and custom."
As some more background, in April 2007 Mr. Moorjani sent a due diligence report to DB's head of global banking, Michael Cohrs, in which he detailed numerous observations from a whistleblower's perspective. The company's retort was the pursue litigation against Mr. Moorjani, which has since escalated over the past two years. I will not focus as much on the details of the lawsuits, however I do provide links to documents which are public domain and have been filed in Japanese court for whoever desires to conduct additional an drill-down on this topic. A full overview of the background of the Moorjani-case can be gleaned from the following set of documents, posted by Mr. Moorjani on his Scribd account.
Among some of the other relevant allegations, is an interesting piece that could be quite interesting to Zero Hedge readers as it deals with an issue I have touched upon in the past, namely potential Mark T0 Market shenanigans in the world of CMBS. A Nikkei press release from April 29 summarizes a few of the most pertinent issues best:
Deutsche Securities May Take Lumps For Sloppy Asset Value Calculations
Tokyo (Nikkei)
April 30, 2008
Deutsche Securities Inc. is suspected of using sloppy, inconsistent methods in computing the fair value of asset-backed securities sold to institutional investors, The Nikkei learning Tuesday.
With the potentially far-reaching impact on the market, authorities are considering recommending administrative action against the brokerage under the Financial Instruments and Exchange Law.
The irregularities were detected through Securities and Exchange Surveillance Commission inspections that began last November. According to the SESC's findings, the brokerage is suspected of presenting different market prices for the same securitized product depending on the client, in addition to showing multiple market prices for a single securitized product and having the investor choose from among them.
Deutsche Securities is also believed to have used the wrong dates in calculating market prices and to have erred when computing changes in such prices, among other missteps.
The SESC is taking the situation seriously because the market prices that brokerages give for securitized products are used as reference prices, as recognized under accounting rules, for businesses to assess the value of their securities holdings and to book valuation gains and losses. Should there be a problem in how these reference prices were calculated, this would impact not only the earnings of companies that bought these securitized products, but also ordinary investors that invested in these businesses.
...The SESC itself lacks the authority to take punitive action. It can only make a recommendation to the FSA, and the two organizations are now discussing the matter.
Securitized products are backed by such assets as loan claims and real estate. In some cases, those products are divided up and rebundled as separate products. Many financial institutions have sustained large losses on these complex products, including collateralized debt obligations. The products in question apparently include such complex securitized vehicles.
These are very critical allegations, especially since it is arguable whether this type of CMBS marking frivolity was isolated to the Japanese market and was not a more pervasive phenomenon (and not just at DB for that matter).
And it has been none other than Deepak Moorjani who has been fighting to get both internal and external attention not only on this issue, but many others, which go to the core of Moorjani's argument of rampant alleged Moral Hazard violations at the German bank. A full reprint of one of Mr. Moorjani's letters to his supervisors is presented below, with the key points recaptured:
In approximately six months, we have announced more than $7 billion of write-down related to our credit exposure. Our losses were made in two announcements: (i) a €2.2 billion write-down announced in October 2007 and (ii) a €2.5 billion write-down announced in April 2008. For perspective, these write-downs are slightly more than 75% of total net income for 2006 and slightly more than 130% of net income for 2005. It may no longer be appropriate to say, "Strategically our path is clear: we stay the course!"The letter goes on to give many more details on the alleged subsequent retaliation by DB against Mr. Moorjani and his proposed recommendations for fixing the problems he has addressed.
With two write-downs, some may begin to attribute these write-downs to failings on our part, rather than to an external "crisis." We should consider whether we contributed to these losses by our actions or by our omissions to act. Some may allege that we mispriced risk, or perhaps more accurately, we underpriced the risk. Some may contend that lax controls allowed a culture of risk to flourish with negative consequences for our stakeholders. Warren Buffett recently commented on the "crisis" by saying: "It's sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end." [TD: even more poetic that Mr. Buffett himself apparently had come to the punch bowl party armed with plastic cups himself.]
...
As you know, I come from an investment management background with more than ten years of private equity experience in the U.S. In this role, one of my responsibilities has been to provide oversight of management teams and to be an agent of change, when necessary. I was recruited to join Deutsche Bank to build an investment business in 2006, and over time, I began to conclude that we had inadequate corporate governance structures and law internal controls. While some of this commentary may have offended powerful interests, we should address these issues proactively. As Edward R. Murrow offered, "We must not confused dissent with disloyalty."
In addition to legal and regulatory concerns, we have a moral hazard problem. Specifically, there may be a principal-agent problem which led us to take excessive risks. I did a summary economic analysis of our Commercial Real Estate ("CRE") lending activities in Japan in January 2007. This email was distributed to several of my colleagues, and my conclusions was simple: our real estate lending activities in Japan did not make economic sense, or as I stated, "We would generate more profits in the carry trade."...
And the whisteblower fight goes on. In a missive sent out on April 28, 2009, which among others CC:'s not just Deutsche Bank executives Josef Ackermann, Hugo Banziger and Michael Cohrs, but German chancellor Angela Merkel herself, Moorjani presents yet more critical arguments (full referenced letter from Scribd provided below), especially with regard to the sensitive topic of AIG-funneled taxpayer bailouts:
At Deutsche Bank, I consider our poor results to be a "management debacle," a natural outcome of unfettered risk-taking, poor incentive structures and the lack of a system of checks-and-balances. In my opinion, we took too much risk, failed to manage this risk, and broke too many laws and regulations.Moorjani presents a very curious case study, demonstrating the excesses of the Commercial Real Estate bubble.
As widely reported, we have been one of the biggest beneficiaries of the AIG bailout. We recently received nearly $12 billion from AIG, a firm which has effectively been nationalized with $180 billion in taxpayer funds. (Note: This $12 billion payment was more than 50% of our market capitalization at the time of its disclosure.) Since taxpayers have been forced to pay for the losses from our bad trades, we have an increased obligation to encourage transparency and accountability within our firm.
Project LindbergThe full text of this mesmerizing story is presented below:
Perhaps we should consider an example. The attached documents detail “Project Lindbergh,” our lending proposal to Morgan Stanley’s real estate investment group in late 2006. Internally, this lending transaction was supported by Frank Forelle and Steve Adang of the Deutsche Bank Commercial Real Estate (“CRE”) lending business.
As reported, Morgan Stanley was in the process of purchasing “13 hotels and two property management units from Japanese airline All Nippon Airways Co. Ltd. for $2.4 billion in the biggest hotel transaction in Asia, the U.S. investment bank said on Friday, making it the largest hotel owner in Japan . . . Under the deal, ANA will sell its stakes in ANA Property Management Co. Ltd., ANA Hotel Management Co. Ltd. and subsidiary companies of 13 hotels as of June 1 for 281.3 billion yen . . . Analysts said the deal underlines a shift in investors' strategy to seek riskier assets including shares of companies that hold properties.”
For Morgan Stanley, this investment was sponsored internally by Sonny Kalsi. As reported in February 2009, Mr. Kalsi was placed on administrative leave after Morgan Stanley disclosed in a filing to the Securities and Exchange Commission that one of the members of his group in China "appear to have violated the foreign corrupt practices act, a US law that prohibits corporate bribery.”
The Deutsche Bank CRE business delivered a highly-aggressive proposal for these risky assets. While we “lost” this deal to Citigroup, this lending proposal illustrates that bankers sought to commit billions of dollars of shareholder and depositor capital in a highly-leveraged transaction. The reason is simple: our incentive structure encourages this excessive risk-taking. Had we won this lending assignment, bankers would have been paid millions of dollars of bonuses for their “success.”
How risky was our proposal? While the properties were appraised at only JPY 236 billion (US $1.97 billion), Morgan Stanley purchased these properties for JPY 281.3 billion (US $2.34 billion), a 2.74% cap rate. Our lending proposal offered JPY 220.1 billion (US $1.83 billion), approximately 93.27% of the value of the properties. In any market, this 93.27% loan-to-value purchase would be considered risky. In hindsight, this lending proposal is seen as ridiculous given (i) the assumption that the underlying cash flows would increase more than 65% by 2010 and (ii) the realization that much of this loan could not be securitized due to its riskiness; much of this loan would have been forced to remain on the Deutsche Bank balance sheet.
Has Ms. Merkel taken these allegations seriously? The German bank, that by some estimates, has a leverage ratio that far surpasses even the wildest dreams of its U.S. counterparts, has been considered the epitome of European systemic risk, and the prudent course of action for not just her, but all DB executives (not to mention the gentlemen at the Federal Reserve) would be to take all the warnings presented by Mr. Moorjani and act upon them, instead of continuing to pursue allegedly retaliatory litigation.
In the meantime, Mr. Moorjani's story waits to be told. As I pointed out the removal of his opinion letter from Dealbook without a reason leaves many unansewered question. The questions only become louder if one considers the lack of response by other main stream media sources to capture this story and present it is in entirety: as Mr. Moorjani points out, a dissemination of this case could simply "offend powerful interests" and as such various media outlets would be loathe to shut out powerful and wealthy clients from the ranks of sponsors and revenue generators. Zero Hedge does not have that problem.
Of course, the questions of moral hazard, of mismarking and outright adjusting CMBS price levels, of obvious "overbidding" practices (with other people's money) remain, and will continue to do so until there is a clear resolution of Mr. Moorjani's case. In the meantime, Zero Hedge will continue to present every ongoing development in this saga as it is the right (and duty) of shareholders (and recently taxpayers), both foreign and domestic, to see just how their capital is (mis)spent in the ongoing pursuit of ever increasing Wall Street bonuses and levered revenues at global banking concerns. Sphere: Related Content
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Loans Versus Bonds Relative Value: Week Of May 7
Heat seeking in both bonds and loans was the dominant theme, with the usual suspects continuing to rip. Comparing current levels on garbage credits like Neiman Marcus, Sealy and TRW with their spreads 3 months ago and one can only question the sanity of even the credit market. Unlike last week when there were just three Fox Two instances, targeted at Huntsman, Graham Packaging and Neiman Marcus, this past week's IR-signature tracking selection is broader and even junkier.
"Solid" names like Compucom, Huntsman, Neiman Marcus, Sealy and TRW continued their ripfest tighter in bond land, and in many instances, in loans as well, while Aeroflex loans where the best relative secured performer. The only bonds widening in the entire 30 name universe were those of Michael Foods, and Constellation Brands - obviously consumer staples have every right to be seen as the riskiest last week when the rolling squeeze among garbage credits was doing all it could to flatter the equity markets.
Sphere: Related Content
"Solid" names like Compucom, Huntsman, Neiman Marcus, Sealy and TRW continued their ripfest tighter in bond land, and in many instances, in loans as well, while Aeroflex loans where the best relative secured performer. The only bonds widening in the entire 30 name universe were those of Michael Foods, and Constellation Brands - obviously consumer staples have every right to be seen as the riskiest last week when the rolling squeeze among garbage credits was doing all it could to flatter the equity markets.
Sphere: Related Content
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Frontrunning: May 11
- Capital One, U.S. Bancorp, BB&T to sell shares in the induced squeeze (Bloomberg)
- HSBC says 2009 to be tough as U.S. bad debts rise (Bloomberg)
- Latvian economy in rapid decline (BBC)
- The risks of denying reality (Financial Armageddon)
- GMAC to receive $7.5 billion from taxpayers next week (Reuters)
- Bullish spirit may lack legs for the long run (Times Online)
- Clear Channel one step closer to bankruptcy (WSJ)
- Pesek: Irrational exuberance 3.0 is oozing into market (Bloomberg)
- Should Ben Bernanke cool it? (Weekly Standard)
- Burns: Is America about to go broke? (MSN)
- Recession Culture: The impact on New York (NY Mag)
- Visualizing New York subway trends (Infectious Greed)
- Samuelson: Addressing overseas tax dodge questions (RCM)
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Big week for price action coming up
As we mentioned earlier, we are very interested in seeing how the price action plays out in the coming months as the economy grapples with the strong macro forces. This week in particular is going to be important as China and the US both will be releasing CPI data - we'll keep you posted as it comes out.
Sphere: Related Content
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Big Trouble In Not So Little Quant Land
Finally coming to mainstream media near you.
Now taking bets on who will succeed the mega quants as market liquidity provider once they are made redundant. Sphere: Related Content
Now taking bets on who will succeed the mega quants as market liquidity provider once they are made redundant. Sphere: Related Content
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Sunday, May 10, 2009
RealPoint Downgrades Hundreds of CMBS Classes, CRE Deterioration Accelerates
Commercial real estate powerhouse RealPoint has downgraded several hundred deals and CMBS classes in its April evaluation of the sector.
Publish at Scribd or explore others:
RealPoint also provides a comprehensive April CMBS delinquency report. A must read for both our readers and Merrill Lynch REIT analysts. Main charts extracted below. Most notable is the explosion in 90+ day delinquencies for March relative to April. In fact the deterioration is accelerating across all metrics: no second derivative green shoots anywhere in sight in CRE land.
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Wanda Sykes Shines Some Light
The roasting is to be expected, the seating of CNBC propaganda machine Jim Cramer next to chief of staff and apparent media liaison Rahm Emanuel (fwd to 7:02 and 10:47) not so much, although not that very surprising.
hat tip a a Sphere: Related Content
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Deutsche Bank's Socialization Of Risk Culture Redux
Deepak Moorjani shares the below letter, which initially appeared in NYT's DealBook, but subsequently was taken down for reasons known, and now only a big gaping 404 hole remains in its place (http://dealbook.blogs.nytimes.com/2009/04/16/another-view-deutsche-banks-culture-of-risk/). Moorjani, who is currently involved in litigation with Deutsche Bank, shares his perspectives on his former firm's risk policies and the culture and reward structure that encouraged these, with Zero Hedge readers. The story is all the more relevant as it intersects a core theme for Zero Hedge, that of commercial real estate and the skewed risk/return investment perspective from the bubble years, which we may very well be returning to if the administration gets its releveraging ways.
When speaking about the banking sector, many people mention a “subprime crisis” or a "financial crisis” as if recent write-downs and losses are caused by external events. Where some see coincidence, I see consequence. At Deutsche Bank, I consider our poor results to be a “management debacle,” a natural outcome of unfettered risk-taking, poor incentive structures and the lack of a system of checks and balances.Sphere: Related Content
In my opinion, we took too much risk, failed to manage this risk and broke too many laws and regulations.
For more than two years, I have been working internally to improve the inadequate governance structures and lax internal controls within Deutsche Bank. I joined the firm in 2006 in one of its foreign subsidiaries, and my due diligence revealed management failures as well as inconsistencies between our internal actions and our external statements.
Beginning in late 2006, my conclusions were disseminated internally on a number of occasions, and while not always eloquently stated, my concerns were honest. Unfortunately, raising concerns internally is like trying to clap with one hand. The firm retaliated, and this raises the question: Is it possible to question management’s performance without being marginalized, even when this marginalization might be a violation of law? Two years later, our mounting losses are gaining attention, and I offer my experiences and my thoughts in the hopes of contributing to the shareholder and public policy debate.
Background
Born and raised in Toledo, Ohio, I was infused with Midwestern values of hard work, individual responsibility, honesty, quiet integrity and fiscal prudence. After careers in New York City and Menlo Park, Calif., I moved to Tokyo in 2005 to pursue investments in corporate restructurings and distressed assets. At the time, the Japanese market offered unique opportunities.
I joined Deutsche Bank in 2006 to build an investment business within its commercial real estate lending operation, and I was generally surprised by the aggressive sales culture within our firm. While many people consider the banking sector’s problems to be caused by residential lending, I witnessed multibillion-dollar loan proposals for commercial property.
With funds provided at more than 90 percent loan-to-value, these loans were “priced to perfection” and assumed that property prices and rental rates would continue to rise. For perspective, a single billion-dollar commercial real estate loan is equivalent to 2,000 residential loans of $500,000.
In general, my colleagues are hard-working, decent people, but the system of incentives encourages people to take risks. I have seen honest, high-integrity people lose themselves in this cowboy culture, because more risk-taking generally means better pay. Bizarrely, this risk comes with virtually no liability, and this system of O.P.M. (Other People’s Money) insures that the firm absorbs any losses from bad trades.
As these losses have grown, taxpayers are being forced to absorb these losses. As an example, my firm recently received nearly $12 billion from American International Group (which has effectively been nationalized with $180 billion in taxpayer funds). Essentially, every American household sent my firm a check for $105. The reason for this payment: my firm bought credit default swaps from A.I.G. In plain-speak, we bought unregulated “insurance” from A.I.G. to cover losses from bad trades. What did taxpayers get in return?
Nothing. Taxpayers simply paid an I.O.U. triggered by our gambling losses. (Note: This $12 billion payment was more than 50 percent of our market capitalization at the time of its disclosure).
Solution
While shareholders (and taxpayers) are becoming angry, I think they should be furious. Our management has eviscerated the concept of moral hazard by systematically adopting pay schemes that reward excessive risk-taking despite its long-term implications. If governments have decided to socialize our losses, governments are implicitly saying that the banking industry is fundamentally sound. In effect, governments would be voting in favor of the status quo. In my opinion, the status quo does not work, and we need to address the core issues of structure and compensation. Capping executive compensation is a first step, but as a solution, it is insufficient.
While I am on the “inside” at Deutsche Bank, much of my career has been within partnership structures, and I continue to advocate a partnership-like structure for our firm. With collective liability, partnerships provide a proper alignment of incentives between management and its stakeholders. In a partnership, bonuses are paid from co-investments and profits, not revenues. Losses are shared, and these losses introduce an appropriate penalty for excessive risk-taking. If profits are overstated in one-year, the already-paid bonuses are clawed-back (returned to the partnership).
Conclusion
Our asymmetric incentive structure is fundamental to our problems. The question remains: Do we maintain the status quo and naively hope for better results, or do we begin to implement structural reforms in order to align the incentives? If taxpayers are forced to pay for the losses from bad trades, this socialization of risk adds to the moral hazard problem. This socialization of risk actually encourages more aggressive behavior in the future.
The call-option bonus structure has led to the ascendency of sales over risk management. Maintaining the status quo is not a smart bet, and we cannot afford to ignore the fundamental issues of structure and compensation. We need to introduce personal responsibility into the system, because accountability is glaringly absent. The collective liability aspect of partnerships achieves this goal; collective liability is the most powerful way to align incentives and encourage rational risk-taking.
As an employee and as a shareholder, I am doing my part to build a better firm. Unfortunately, the political landscape within our firm finds it difficult to assimilate any criticism of management’s leadership. To my fellow employees, I ask that you resist the incentives that reward groupthink. To my fellow shareholders, I ask that you implement the changes needed to address our asymmetric incentive structures.
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Weekend Reading
- Must-watch panel from Milken conference: Milken, James Walker, Steve Tananbaum, Stephen Nesbitt, David Malpass (Milken Institute)
- Words from the (investment) wise (The Big Picture)
- BlackRock has become Fed's go to firm (Bloomberg)
- An offer you can't refuse (Economist)
The credit card squeeze (NYT) - Vanishing credit lines for consumers and small businesses (GEA)
- Chavez seizures fuel Venezuela oil fears (FT)
O'Connor, Volcker, Levitt main candidates to investigate crisis (Bloomberg) - Evans-Pritchard: Enjoy the rally while it lasts (Daily Telegraph)
- Chrysler's dissenting lenders abandon fight over Fiat sale (Bloomberg)
- Psychologists are better stockmarket speculators than economists (Alea)
- Shift to saving may be downturn's lasting impact (NYT)
- LCH.Clearnet received $1.2 billion offer from ICAP-led group (Bloomberg)
- John Dizard: The long road to a "goog GM" filing (FT)
Chartology:
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The Chrysler CDS Question
There has been some media and political debate lately over who if any entities may have profited from a Chrysler bankruptcy due to CDS holdings. As is often the case, when you get the mainstream media entering the ever so slightly more complex world of CDS contracts, many of the theories that develop have the same "logic" that is underpinning the current market rally.
A little due diligence in this case reveals relevant facts. The 2019 White & Case filing from the Chrysler docket has some critical disclosure:
If there really are CDS holding culprits (and we really are talking LCDS here) they would be in the non-holdout creditor camp. But most likely, CDS holders did not have secured long positions in the first place, and bankruptcy beneficiaries would likely not be found anywhere in the list of secured or unsecured creditors. However, due to the LCDS nature of the holdings, this is a case unlike GM or the recent finance company bankruptcies. Now, in GM things will likely get more interesting, as DTCC reports that the company has roughly $33.6 billion and $2.4 billion in gross and net CDS exposure, respectively.
As for any allegations that AIG was a taxpayer funnel again, this is not the case, as AIG rarely if ever underwrote single-name CDS (and much less LCDS). Thus comparing the AIG gift to banks in early 2009 with fund flows in the Chrysler and, soon to be, GM bankruptcies is in the apples and oranges realm. Sphere: Related Content
A little due diligence in this case reveals relevant facts. The 2019 White & Case filing from the Chrysler docket has some critical disclosure:
4. None of the Chrysler Non-TARP Lenders hold any credit default swaps or hedges with respect to their holdings of Senior Debt.In other words, the original Non-TARP holdouts, who owned $295 million of Senior Debt, did not have one Chrysler Credit Default Swap to their name. Thus, being unhedged they did not stand to benefit at all from a Chrysler bankruptcy and any claims that they implicitly or explicitly pushed the company into bankruptcy are nonsensical (granted the question stays open of whether they had CDS at any point in the past, although that can not be gleaned from the filing).
If there really are CDS holding culprits (and we really are talking LCDS here) they would be in the non-holdout creditor camp. But most likely, CDS holders did not have secured long positions in the first place, and bankruptcy beneficiaries would likely not be found anywhere in the list of secured or unsecured creditors. However, due to the LCDS nature of the holdings, this is a case unlike GM or the recent finance company bankruptcies. Now, in GM things will likely get more interesting, as DTCC reports that the company has roughly $33.6 billion and $2.4 billion in gross and net CDS exposure, respectively.
As for any allegations that AIG was a taxpayer funnel again, this is not the case, as AIG rarely if ever underwrote single-name CDS (and much less LCDS). Thus comparing the AIG gift to banks in early 2009 with fund flows in the Chrysler and, soon to be, GM bankruptcies is in the apples and oranges realm. Sphere: Related Content
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