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Archive for February, 2008

Happy Valentines day

by henrycopeland
Thursday, February 14th, 2008

Oceana, one of the first causes to buy blogads way back in 2003, dreamed up this clever and, ultimately, sad spot…

More on too-late-is-worse-than-never bond insurer band-aids

by henrycopeland
Saturday, February 9th, 2008

Bill Gross, biggest bond fund manager in the world, is skeptical of bond insurer bailouts too:

That the monolines could shoulder this modern-day burden like a classical Greek Atlas was dubious from the start. How could Ambac, through the magic of its triple-A rating, with equity capital of less than $5bn (£2.5bn), insure the debt of the state of California, the world’s sixth-largest economy? How could an investor in California’s municipal bonds be comforted by a company that during a potential liquidity crisis might find the capital markets closed to it, versus the nation’s largest state with its obvious ongoing taxing authority? Apply the same logic to the gargantuan size of the asset-backed market it has insured in recent years – subprimes and CDOs in the trillions of dollars – and you must come to the same logical conclusion: this is absurd. It is as if Barney Fife, television’s Sheriff of Mayberry in The Andy Griffith Show , promised to bring law and order to the entire country.

… the sense of stability imparted to an oligopolistic industry with visible flaws is not likely to last, nor may the hope for a return to economic growth of recent years. The modern US financed-based economy has a striking resemblance to Barney Fife, guaranteeing global prosperity without the productive industrial-based firepower to back it up. Neither ultra-low interest rates or tax rebates, nor investor-led and authority-based monoline bailouts are likely to change that significantly during the next few years.

Meanwhile, the chief of Germany’s biggest bank is sounding the alarm also, talking to Bloomberg TV.

Deutsche Bank AG Chief Executive Officer Josef Ackermann said rating downgrades for bond insurers pose risks that could match the U.S. subprime market collapse.

“It could be a tsunami-like event comparable to subprime,” Ackermann said in a Bloomberg Television interview in Frankfurt today. Deutsche Bank, Germany’s biggest bank, is “well positioned” on its risk from bond insurers, he said.

Bond investors stand to lose $200 billion should MBIA Inc., Ambac Financial Group Inc. and Financial Guaranty Insurance Co. forfeit their AAA grades because of declines in mortgage-backed securities they insure, according to data compiled by Bloomberg. Ratings on $2.4 trillion of debt that the industry guarantees would be thrown into doubt.

Hillary loans campaign $5 million?

by henrycopeland
Thursday, February 7th, 2008

“Hillary Rodham Clinton lent her campaign $5 million late last month as Barack Obama outraised and outspent her in the Democratic presidential race,” says the AP.

Where did HRC accumulate this money amid all her years of public service? I’m not suggesting the money is ill-gotten, but that some of it might come from a joint bank account with her husband. She did get an

$8 million book advance in 2000, but after taxes that number drops to roughly $4 million. Maybe that money was shrewdly invested in post-bubble Internet stocks that were in HRC’s name only.

If not, headlines might read “Hillary and Bill” loan campaign $5 million. I assume all this will be covered in disclosure documents. I realize that when Romney gives his campaign tens of millions from a bank accounts held jointly with his spouse, the headlines don’t read “Mitt and Ann invest in campaign,” but Bill Clinton makes the story more complex. And the headlines for Romney should be corrected too.

I liked Hillary a lot when I saw her speak at YearlyKos in Chicago last August, but I think she’d do better, now and in the Whitehouse, if she wasn’t shadowed (or overshadowed) by big Bill.

As Walmart goes, so goes GDP?

by henrycopeland
Thursday, February 7th, 2008

Walmart’s January same-store sales were just +1% year-over-year. That equals -3% in real terms. And that means down 10% relative to WM’s historic growth.

Imagine GDP down 10%.


This is the kind of quite Thursday when more people throw in the towel and trickle of sellers becomes a gusher as the day passes.

Gee, what if these rate cuts don’t pull us out of the spin. Why did commercial paper rates for XYZ Corp just jump 75 bp?

Cognitive dissonance starts to slip, the pixels re-arrange themselves and the pretty lady becomes a hag.


Spy versus spy

by henrycopeland
Wednesday, February 6th, 2008

In a fascinating first, one advocacy group sees its opponent advertising on blogs, gets aroused and asks Senators to help it advertise too. Yes, the tale is kinda tangled, but it’s DC.

We are Jerome Kerviel

by henrycopeland
Saturday, February 2nd, 2008

It turns out that one newly unemployed guy wasn’t doing so bad earlier in the month. Jerome Kerviel had ‘1.4 billion in profits on his book earlier in January 2008. (WSJ.)

I keep wanting to sketch out how Kerviel –speculating wildly, way beyond his limits, hiding his speculation from everyone with a series of offsetting paper trades — is a near perfect metaphor for our entire economy. Everyone is in on it and nobody wants to look too closely at how rotten the whole scheme is.

Consider that US banks are getting ready, with the collusion of bank regulators, to try to bail out the bond insurance agencies who are supposed to cover bond defaults. Why? Because if the bond agencies get downgraded from their current AAA rating, then all the bonds they’ve insured are worth less. And if those bonds are worth less, then the banks’ portfolios will have to go through another round of brutal markdowns.

Does nobody notice that this circle of risk-washing is fictitious — the banks are basically just stepping in as guarantors of the bonds already on their own books? You could call it fraud, except regulators are right there at the table too.

You have to read the NYT article to see how perverse the scheme is (bolds are mine):

Eight major banks are in talks to bolster the Ambac Financial Group, the troubled bond insurance company, as part of an industrywide rescue being orchestrated by state regulators, people briefed on the negotiations said Friday.

The banks, which include Citigroup and UBS, are considering injecting capital into Ambac and assuming some of the risks associated with guarantees written by the company, these people said.

The plan is still in flux, and it is unclear how much money the banks might commit to the effort, either by extending credit to Ambac or by buying a stake in it. It is also uncertain if such moves would be enough to restore confidence in the insurer and safeguard its triple-A credit ratings from Standard & Poor’s and Moody’s.

A spokesman for Ambac declined to comment, but people briefed on the talks said Ambac’s management is involved in the negotiations. The group is planning to reach a deal in ‘days, rather than months,’ one person involved in the talks said. Once the parties have reached a deal they will present it to the ratings agencies to make sure the plan meets their requirements for a triple-A rating.

Regulators are hoping to arrange similar rescues for other guarantors like MBIA and the Financial Guaranty Insurance Company, which have been hit hard by declining values in mortgage securities they insured, but are moving one company at a time. Ambac is in more dire financial straits than its larger rival, MBIA, which has raised $1.5 billion in recent weeks.

The New York insurance superintendent, Eric Dinallo, has hired Perella Weinberg Partners, the investment bank, to advise him and bring the parties together. Mr. Dinallo is not attending the negotiations but is receiving frequent updates and is keeping Gov. Eliot Spitzer abreast of the developments.

Speed is crucial, according to people involved in the talks. On Friday, Moody’s warned that it might downgrade the bond guarantors by late February if the companies did not raise capital and pursue a ‘viable business plan.’

Investors fear a chain reaction of losses might rock the financial industry if even one big bond insurer were to lose its top credit rating. The concern is that Ambac and MBIA, which have guaranteed more than $1 trillion in municipal, corporate and mortgage debt, will not have the capital they will need to pay claims as defaults rise.

Many big banks and investors that hold mortgage securities guaranteed by the companies would have to write down the value of those investments if the insurers were to lose their top ratings. Those losses could total tens of billions of dollars for some banks.

The banks participating in the Ambac talks are said to be those that have the most direct exposure to that company, people briefed on the talks said. Likewise, other banks that have heavier involvements with MBIA and Financial Guaranty are working on plans to help those companies.

“Speed is crucial.” That’s the give-away that this is a flimflam, a shell game. If we don’t hyperfast stuff this dreadful panther back in the bag of denial, we’ll have to admit how wildly unstable our banking system really is… and then it’s gonna shred of us.

The whole banks-underwriting-insurers-of-bonds-in-bank’s-portfolios scheme is just as fictitious as Jerome Kerviel’s paper-trading to cover up his massive profits and losses. Banking is based on faith — I give you money today based on my faith that you’ll give it back to me tomorrow — and bad faith banking is suicidal.

But we can’t throw 10,000 upright Wall Street folks — rating agency staff, bond insurance executives and bond-addicted-bankers — in jail, can we? (Or can we?)

The real solution is morally rotten, but might keep the economy from cratering. We should skip the charade of having the bankers guarantee their own bonds with the collusion of ratings agencies and regulators; to avoid a banking cataclysm, the government will probably have to bail out the rotten bond insurance agencies, thus bailing out the rotten bankers. (Just as the 3% discount rate is padding their profit margins right now.) Then we’ll all pretend the whole thing never happened. Except we’ll have to live with the higher taxes and the inflation.

First, though, the government should expropriate 10 years worth of banker, bond insurer and ratings agency executive bonuses and the Porsches, Greenwich swimming pools and Winged Foot memberships they bought.

Initial unemployment claims

by henrycopeland
Saturday, February 2nd, 2008

Two of the leading (bleeding) edges of an economy are new hire and new fires. The latter shows up in initial unemployment claims, a number that is released weekly by the labor department. Here’s a chart of seasonally adjusted claims over the last 40 years.

The latest reading was 375,000, up from the previous week’s 306,000. We’re still well below previous peaks were:
10/82: 695,000
3/91: 509,000

(Here’s the DOL chart generator:


Newspaper revs plummet

by henrycopeland
Friday, February 1st, 2008

The recession is here folks.

In Q4 ’07, USA Today’s ad revenue was down 17% versus a year ago. NYTimes properties’ ad sales were off 5.6%.

(It’s worth noting that we’ve seen two consumer brands cancel all their online spending in recent days.)

Google grappling with social advertising

by henrycopeland
Friday, February 1st, 2008

Interesting to see that Google is having trouble monetizing social media:

‘We have found that social networks are not monetising as well as we were expecting,’ said George Reyes, chief financial officer, as Google reported its earnings for the final quarter of last year.

Since Google has guaranteed to make minimum payments to a number of social networks that carry its advertising, principally MySpace, the slow growth of the business had left the company out of pocket and contributed to falling profit margins in the quarter, he added.

Sergey Brin, co-founder, said a number of initiatives in the final months of last year to boost social networking advertising had failed, but that he remained confident that Google would find ways to build a successful business around the growing traffic on these sites.

Other Google executives said that the difficulties arose from creating an appropriate ‘look and feel’ for adverts, so that they matched the content on social networks.

Tempus Fugit

by henrycopeland
Friday, February 1st, 2008

Febclub, the ultimate celebration of grey February, once propagated by tshirts and word of mouth and then killed by changing liquor laws, attempts a post-collegiate come-back powered by the interweb. It’s weird history gets debated here.

The Doodle shutters.

Brad Westerfield, Plato to Bush and Cheney, died January 19.


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