Downey Financial - The Next IndyMac?

Well, in my post from July where I predicted the demise of WaMu I also identified three other depository insitutions that I viewed as at risk. Those were Downey Financial, BankUnited Financial, and Sterling Financial. As of now, those are seeming like a good hit-list.

Subsequent to that post, BankUnited chose to sue Dick X. Bove and his employer for its inclusion on a list he published post-IndyMac about who is next. If that doesn't that just scream "confident" to the BankUnited depositor base, I don't know what will (perhaps a government takeover?). So much for "sticks and stones may break my bones, but words will never hurt me."

Downey, however, has taken it a step further by actually suffering a variety of real damages. Since my post, Moody's has cut Downey's primary operating subsidiary's financial strength rating to D rating, it reported a substantial quarterly loss and, last night, Downey announced in its 10-Q that it has been suffering net withdrawals from its deposit base and that the OTS is beginning to limit its activities. Wow.

This language is fascinating to read (from Note 10 - Subsequent Events in Downey's June 30, 2008 10-Q filing). My comments are inserted in [brackets] and italicized:

In addition to its deposits, Downey’s principal source of liquidity is its ability to utilize borrowings, as needed. The Bank’s primary source of borrowings is the FHLB. At June 30, 2008, the Bank’s FHLB borrowings totaled $1.5 billion, representing 12.1% of total assets. As of August 8, 2008, the Bank’s FHLB borrowings totaled $2.8 billion [holy crap. After grwoing just $400 million in the prior twelve months, Downey has tapped an additional $1.3 billion of FHLB borrowings in the last six weeks?]. Approximately half of the Bank’s increase in FHLB borrowings subsequent to June 30, 2008 is being held in cash equivalents and short-term investment securities to meet our liquidity needs [that means the other half went to fund deposit withdrawals]. The Bank currently is approved by the FHLB to borrow up to a maximum of $3.0 billion to the extent it provides qualifying collateral, providing the Bank with an additional $0.2 billion of borrowing capacity from the FHLB as of August 8 [set the bankruptcy clock to T minus six weeks]. The amount the FHLB is willing to advance differs based on the quality and character of qualifying collateral offered by the Bank, and the advance rates for qualifying collateral may be adjusted upwards or downwards by the FHLB from time to time. The Bank also is approved to borrow funds on an overnight basis from the Federal Reserve Bank of San Francisco subject to the amount of qualifying collateral it pledges. The Bank views the Federal Reserve Bank as a back-up source of liquidity. As of August 8, 2008, the Bank had no outstanding borrowings from the Federal Reserve Bank of San Francisco and the Bank’s available qualifying collateral would have permitted it to borrow up to an additional $1.5 billion. Neither the FHLB nor the Federal Reserve Bank of San Francisco is obligated to lend to us under these loan facilities. To the extent deposit renewals and deposit growth are not sufficient to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans and investment securities and otherwise fund working capital needs and capital expenditures, the Bank may utilize additional borrowing capacity from its FHLB and Federal Reserve Bank borrowing arrangements.

After the end of the second quarter, the Bank experienced elevated levels of deposit withdrawals [no sh!t]. More recently, in response to steps taken by management to address the situation, the Bank has experienced net deposit inflows. If the Bank’s deposit levels continue to stabilize with withdrawals at historical levels, Downey believes its current sources of funds, including deposits; advances from the FHLB and other borrowings; proceeds from the sale of loans and real estate; payments of loans and payments for and sales of loan servicing; and income from other investments would enable Downey to meet its obligations while maintaining liquidity at appropriate levels. However, if elevated levels of net deposit outflows resume, the Bank’s usual sources of liquidity could become depleted, and the Bank would be required to raise additional capital or enter into new financing arrangements to satisfy its liquidity needs. In the current economic environment, there are no assurances that we would be able to raise additional capital or enter into additional financing arrangements.[Prediction: if the press picks up on this language, it is game over. Thusly, it is game over.]

Management believes that the Holding Company, on a stand-alone basis, currently has adequate liquid assets to meet its current obligations, which are primarily interest payments on $199 million of senior notes. Limitations imposed by the Office of Thrift Supervision (“OTS”) discussed below currently prohibit the Bank from providing a dividend to the Holding Company without prior OTS approval, and the Holding Company from paying dividends (other than the quarterly dividend payable in August 2008), and incurring and renewing debt, without prior non-objection of the OTS. At June 30, 2008, the Holding Company’s liquid assets, including amounts deposited with the Bank, totaled $53 million, down from $102 million at the end of 2007 due primarily to a $50 million capital contribution to the Bank.

Downey’s stockholders’ equity totaled $0.9 billion at June 30, 2008, down from $1.3 billion at December 31, 2007 and $1.5 billion at June 30, 2007. The Board reduced the quarterly per share dividend payment from $0.12 to $0.01 for the dividend payable in August 2008 [I love this whole concept that banks, etc. are employing of cutting dividends to one or five cents. Lord forbid that you cut to zero - then you cannot tell people "we've paid dividends every quarter for 105 years" etc.], after which no future dividends will be paid without prior non-objection of the OTS.

In light of the current operating environment and Downey’s recent quarterly losses, the Holding Company and the Bank have been working closely with the Bank’s federal banking regulators. In that regard, the OTS, the Bank’s principal regulator, has also imposed the following limitations on the Holding Company and the Bank: the Bank may not pay dividends to the Holding Company without prior OTS approval, and the Holding Company may not pay dividends without prior non-objection of the OTS; the Bank may not increase its assets during any quarter in excess of an amount equal to net interest credited on deposit liabilities without prior OTS approval; the Holding Company may not issue or renew debt without the prior non-objection of the OTS; the Holding Company and the Bank must provide prior notice to the OTS regarding any additions or changes to directors or senior executive officers (or changes in the responsibilities of senior executive officers); the Holding Company and the Bank may not pay certain kinds of severance and other forms of compensation without regulatory approval; the Bank may not enter into, renew, extend or revise any contract related to compensation or benefits with any director or senior executive officer without prior regulatory approval; the Bank must provide prior notice to the OTS (and not receive any objection) before engaging in transactions with any affiliate or subsidiary. In addition, Downey is subject to higher regulatory assessments and FDIC deposit insurance premiums than those prevailing in prior periods. [emphasis added]

In response to the challenges facing Downey in the current operating environment, Downey has formed a special Board committee to explore a range of strategic alternatives, including the raising of additional capital to levels deemed by the Board to be appropriate under the circumstances. [the end is nigh]

It is worth noting that Downey is a $12.6 billion asset base bank. If it were to be taken into FDIC receivership and the loss metrics of recent failures applied (15-28% of assets are losses that the FDIC absorbs), then the FDIC will take another $1.9B to $3.5B of losses. Also, if this list is to be trusted, IndyMac is #3 and would bump all of the others down one spot. Downey, if it were to go, would bump Homefed and all the banks below it down another notch putting Downey at #9. Not a trivial matter.

Bank Failures get the Headlines, but Credit Unions are Failing too

Occasional commentor on The Investment Linebacker's message boards, Wendell Brock, has begun blogging on his Denovo Strategy site about the difficulties that credit unions are facing. We may think banks and S&Ls are struggling, given the collapse of eight so far this year, but Brock is reporting that TWENTY ONE credit unions have already collapsed.

There's a bull market in hiring FDIC regulators, I am sure.

So, I wrote all of the above yesterday with the intent of posting it this a.m. Obviously Wendell has been all over this issue for a while now. However, I wake up this a.m. and what do I see on the front page of the WSJ? Immediately above the fold on A1 the headline, "Mortgage-Market Trouble Reaches Big Credit Unions".

While The Journal's article amazingly does not address Wendell's specific fact about the collapse of 21 small credit unions, it does highlight the reality that a number of very large credit unions have suffered enormous unrealized losses. It also gets further into the ridiculousness of GAAP accounting and the subjectivity of both Fair Value accounting and the Available for Sale vs Hold to Maturity concept. These credit unions are clearly intentionally obfuscating the facts in order to improve their GAAP accounting performance despite the fact that it may or may not reflect economic reality.

As an aside, having a front page article in The Wall Street Journal on the potential insolvency of your depository institution is probably not great for business. I'd hate to be on the front lines of client confidence assurance at U.S. Central Federal Credit this morning (or any of the other four highlighted institutions).

The Unders Take It (again)

Well, the week of August 8th has passed (yes, I now measure weeks on a Friday methodology) and we had no bank failures. As noted in prior posts, I can't help but have some amount of excitement each Friday after the close of business as we await the announcement from the FDIC as to which banks they have deep sixed. This week was a zero. "Good news, it seems the 'subprime crisis' has been contained. Nothing to see here, nothing to see here. Keep on moving."

The Brothers Linebacker have set the weekly over/under line at 1.5, thus giving another point to the unders. Somewhere in the distance, Hank Paulson does a quiet fist pump.

Is It Friday Evening Yet?

I'm sorry, but to be honest, for some reason I can hardly contain my interest/curiosity as to what banks are going to be put to sleep this weekend.

We have the over/under set at 1.5 per week for the foreseeable future. I'm going with the under yet again this week, but it's just a gut feel.

The reality is that ABS prices have continued to deteriorate and the consumer has done nothing but get weaker and weaker. That said, I think the FDIC wants to make this meltdown happen as slowly as possible initially such that depositors do not gain a fear-based momentum. This is incredibly complex and given the fragility of the typical depository institution's business model, I think fear is the rational behavior.

Anyway, schadenfreude reigns as I await my weekly bank failure news.

Strap your boots on.

Strap Your Boots On, It's Coming: The Alt-A and Prime Mortgage Collapse

One of my recent favorite blogs (linked on the left hand side) is Mr. Mortgage's Guide to the TRUTH! His recent post on the state of the Alt-A and Pay Option ARM Market is directly in line with my recent post on The Pending Mortgage Default Wave - Alt-A and Prime. Take a moment to read those two posts if you haven't yet.

If you look at bank balance sheets, you will find enormous Option ARM portfolios that have not yet taken significant markdowns. I normally pick on WaMu but will give them a break for the time being. Instead, let's look at Wachovia. This is a bit more fun given that it is the fourth largest depository institution in the United States ($477 billion of net loans and $436 billion of deposits).

If you take a look at Wachovia's Q2 2008 earnings presentation you'll see, on page 12, that of Wachovia's entire $488 billion gross (pre-reserve) loan book, Wachovia provided for $5.6 billion of additional reserves in Q2 of which $4.2 billion related to its $122 billion pick-a-pay book (Option ARMs). [stated another way, WB only reserved an additional $1.4 billion on the other $366 billion loan book]. Of Wachovia's total $11 billion credit loss provisions (2.25% of total loans), $5.2 billion related to the pick-a-pays (which means only 1.6% of the remaining loan book is reserved against, but, again, a story for a different day).

So, $5.2 billion of reserves on a $122 billion pick-a-pay loan book sounds like a lot. But is it?

If you take a typical Option ARM securitization from 2006 or 2007 and aggregate all the tranches such that you recreate the whole loan portfolio, those securitizations are generally trading in sum for about $0.40 to $0.60 on the $1.00. Wachovia's whole loan Option ARM portfolio is marked at $0.96 on the $1.00. A tad generous, perhaps?

Now, I accept that Wachovia's Golden West subsidiary, which originated most of these loans, is a superior underwriter in many ways. But the loans are still overwhelmingly California and Florida (about 85%), they are still high LTV, and they are still building size through negative amortization. In addition to these soft factors, we can see on page 14 the acceleration of pick-a-pay delinquencies (NPAs) and charge-offs. NPAs as a percentage of outstanding pick-a-pay loan balance at 6/30/07 were 1.03%. On 3/31/08, they were 3.82%. As of 6/30/08, they were 5.78%. That is literally exponential growth of NPAs. And resets from the nastiest vintages have yet to start while negative amortization continues apace. Even Wachovia's own estimates, which can be seen on page 16, show that the average current LTV on the entire pick-a-pay book will reach 99% at the house price trough. At that moment, severities will be highest and default rates will be brutal.

So, will Wachovia's Option ARM book be worth fifty cents on the dollar? No, it probably won't be that bad. But will it be seventy five cents on the dollar? Well, perhaps. Today, they have that book at ninety six cents.

A 25% write-off on that portfolio means another $25 billion of losses on just the pick-a-pay book. I'm willing to suppose that at that time, the rest of Wachovia's loan book will also be performing below expectations. Now, Wachovia is generating $4 billion of pre-tax operating income every quarter (excluding writedowns and above normal reserving), so the longer Wachovia can string out taking its hits, the better its odds are of earning its way through the problem. And with a $39 billion market cap (as of today's close at $18.40) it is trading at less than 3x pre-tax operating earnings. So, I'm not saying it's a short, I'm just saying that there is a ton of pain left to come and if Wachovia is forced to take that pain in a condensed period of time, as one of the least well capitalized major banks (based on Tier 1 Capital Ratio), equity holders could have a zero (or, more likely, massive dilution). While Wachovia could sell AG Edwards to raise capital, given the suboptimal environment to sell into today, Wachovia would be stealing from its future to survive which would also impair long-term value if Wachovia gets to the other side.

This problem hits WaMu as well, but worse given that a greater percentage of WaMu's asset base is in residential mortgages.

We all need to be very hopeful on two fronts:
1) these losses either do not come or come over a very long time such that depository institutions can earn their way out of this mess; and
2) that investors continue to have an appetite for investing new capital in existing depository institutions such that if losses come fast, the capital shortfalls can be plugged.

Prediction with regards to #2: we begin to see a wave of denovo banks. Why put your money into a blackbox of assets when you can start a new bank without legacy liabilities and use all these fun federal lending conduits (FHLB, Fed TSLF, etc.) to buy highly rated yet wide-spread securities and build your leverage base? I also suspect you'd be able to attract brokered deposits given the lower risk profile of a fresh bank. Buy 7% yielding assets, fund at LIBOR, lever 10x through the bank structure and have a 35%+ ROE. I can think of worse things to do with my money!

Speaking of socialism....

Have to love this. I'm so glad that my money is going to below-market loans to companies that I would guess, in aggregate, have not made money over their 100 year history. Just think about that...and we are talking about lending them $25 Billion of taxpayer money? This is crazy. From Bloomberg today:

Dingell Pushes Access to $25 Billion in Plant Aid for GM, Ford
2008-08-05 15:25:18.980 (New York)

By Jeff Green
Aug. 5 (Bloomberg) -- A Michigan lawmaker is asking the U.S.
to speed rules that would free up $25 billion in government loans to convert General Motors Corp., Ford Motor Co. and Chrysler LLC factories to build alternative-fuel vehicles.

The funding is part of last year's energy bill, and the rules were supposed to be written within a year of its December passage, Representative John Dingell wrote yesterday in a letter to U.S. Department of Energy Secretary Samuel Bodman.

``It is essential for the department to undertake this effort with urgency,'' wrote Dingell, a Democrat and chairman of the House Energy and Commerce Committee. ``Providing the domestic automobile industry with targeted and timely assistance will help stimulate the entire economy.''

The push follows Ford's and GM's posting of a combined $24.2 billion in losses for the second quarter. GM, Ford and Chrysler are closing factories that produce pickups and sport-utility vehicles being shunned by U.S. consumers as gasoline hovers near
$4 per gallon. They are also speeding development of models such as gasoline-electric hybrids, fuel-cell vehicles and electric cars that use less or no fossil fuel.

``The Congress and candidates are asking how they can support an industry critical to the economy,'' GM spokesman Greg Martin said. ``We're pointing to an existing mechanism that can help,'' he said, referring to the Energy Independence and Security Act of 2007. Ford spokesman Mark Truby and Chrysler spokeswoman Shawn Morgan didn't have an immediate comment.

Dingell said that vehicle sales account for about 4 percent of U.S. gross domestic product. He said he is committed to securing ``substantial appropriations to fund the award and loan programs before Congress adjourns for the year.''

The rules call for loans for as long as 25-years with an interest rate set at the cost of funds to the Department of Treasury for obligations of comparable maturity, according to the text of the legislation. The loans can cover as much as 30 percent of the cost for assembly plants, component production and some engineering of qualifying vehicles and components.

For related news:
Autos and government: TNI AUT GOV BN

Ellsworth Toohey, I mean, Hugo Chavez could not be more from an Ayn Rand novel

Chavez's rise and sustained power shows you the manipulatability of people and the oppression that results from desperation. Desperation causes all sorts of irrational behaviors and if combined with certain psychological/influence techniques can lead to lollapalooza effects.

In that sense, Hugo Chavez is a brilliant practitioner of manipulation and control. Here is his latest bit of evil genius. These 26 Decrees are so Randian, it is remarkable. It's fascinating that one of the most frequent criticisms of Rand's works is how improbable the behaviors of the antagonists are, but here we are watching it happen in real time.

From our perspective here in the US, we look at what is happening in Venezuela and say, "wow, that's crazy. That would never happen here." I hope that sentiment is correct. But I always note that Germans are not so different from traditional Americans. Wiemar Germany operated with a constitution and some semblance of a democracy. The damning cost of "reparations" and the ensuing hyper-inflation met head on with the encroachment of communists and socialists and within 15 years, one of the most glorious countries in the world with a historically proud, strong people succumbed to mental and emotional collapse setting the stage for the rise of Hitler. It certainly does not seem beyond the realm of possibility that it could happen here.

I always think about Munger's boiling frog metaphor (if you put a frog in boiling hot water, it will jump out instantly, but if you put a frog in room-temperature watch and then slowly heat it, it will boil and die). While I'm not sure that's actually true about a frog, the point is obviously incremental changes are hard to track and negative incremental changes can lead to stealthily horrible outcomes (e.g., being boiled). We see things like the suspension of habeus corpus for terrorist suspects, torture being justified in certain situations, preemptive wars, mass federal wire tapping, the socialization of credit risk, the specter of tax increases, and the mass push for government driven social/entitlement programs and I cannot help but wonder what the temperature of the water is.

Having property in New Zealand as an insurance policy against what I refer to as Hotel Rwanda outcomes continues to seem like a good idea.

Great Charlie Munger Video at Caltech

Below is a link to Berkshire Vice Chairman Charlie Munger talking about some of his favorite topics including (un)common sense, worldly wisdom, Jacobian inversion, employing a "mental model" framework for solving problems, understanding a few big ideas in a variety of disciplines, investing, why the Chinese have genetic advantages vs. the average American, and "other".

Always funny. Always insightful. Always worth your time.

As an aside, kind of strange to see Whitney Tilson and David Winters ask questions given this was an event for Caltech students.

Enjoy!

Video of Munger at Caltech

If you have not read poor Charlie's Almanack , I highly recommend it. You are missing a great opportunity to expand the way you think about complex issues and investment risks/return scenarios.

The Pending Mortgage Default Wave - Alt-A and Prime

Honestly, this article ought to strike fear. For most, it probably won't, it will just be another housing crisis article. But it should serve as a wake-up call. This article is one of the first major pieces I've seen from the mainstream media on the increasingly ugly performance of the non-subprime portions of the residential mortgage market.

Vikas Bijaj of the NY Times who often covers financial markets and macro economic happenings writes about the sneaky increase in the rate of mortgage delinquencies among Alt-A and prime borrowers. While a year ago many politicians and now-former bank CEOs wanted to characterize the current "crisis" as "contained" and as unique to the sub-prime cohort, we are seeing it is not. Forget for a moment that this credit contagion is almost certain to contaminate other consumer lending collateral types (credit cards, cars, etc.), commercial mortgages, and corporate lending. No, forget that. Focus on the fact that given the crisis's roots are in housing, it is goinng to become an sbsolute vomitorium in the rest of the residential mortgage sphere.

The reality is that:
1) the incentive of avoiding a bad credit score is declining as having a foreclosure (or five) on your credit score will hardly be the anomolistic scarlet letter it once was;
2) declining home prices eats into the homeowner's equity first (to the extent the homeowner ever had any), reducing his or/and her incentive to stay in that specific house and thus pay their mortgage;
3) Alt-A and Prime securitizations are supported by a much thinner layer of equity and other credit enhancement meaning that losses will penetrate to the higher rated tranches faster;
4) resets are coming. As Option-Arm and Interest Only resets hit in the coming 12-36 months, the incentive to default will increase;
5) consumers are being pinched in other ways too. Fuel prices, food prices, job losses, wage cutbacks (including through reduced hours worked), etc., ad nauseum. Fuel alone is scary. If you fill up a 20 gallon tank once a week, that's gone from $35 to $80 per fill-up. That $45/week tax is another $1000 per year hit to the consumer;
6) Alt-A alone is as big as subprime. Prime dwarfs them both combined. If prime goes really toxic, it will make people forget about subprime as a standalone problem. Suprime will come to represent not the core of the issue or the cause of the problem, it will come to represent the (now dead) canary in the coalmine;
7) to the extent prime continues to deteriorate in quick fashion, the equity of Fan and Fred is toast (the speed of the deterioration is really important since Fan and Fred are tonning it on new business and could earn their way through this if the cash losses are spread out over enough time. If not, the GSEs are going to be forced to either do an enormous capital raise or be nationalized; thus I suspect they will do everything in their power to postpone actual cash losses (as opposed to MTM, which is less important))
8) to the extent prime continues to deteriorate, many banks that are perceived as weak will obviously fail and some other banks that folks believe couldn't possibly get hurt may face potentially mortal wounds.

Regarding #8, let's use WaMu's asset base as an example. Since they have yet to release a detailed balance sheet for the June 2008 Q, we'll use the March 31, 2008 version:

Of its $320 billion of asssets, WaMu had a $201 billion loan book: $57 billion short-term option ARMs, $16 billion in other ARMs, $41 billion in medium-term ARMs, $12 billion in fixed rate home loans, and $9 billion in credit card loans. I should conclude by mentioning their $63 billion HELOC book.

Let's just think about that for a second. WaMu's target borrower was Alt-A. Let that sink in for a second.

Seriously, these are scary times.

The Week of August 1st - The Unders take it! FDIC Nationalizations Continue Apace

My younger brother (LB) has set the over/under on FDIC weekly depository institution nationalizations at 1.5. He sent me an email about this on Thursday of this week. I think he's spot on. Last weekend we had two (over). We picked up one more this week (under).

While trying to avoid schadenfreude, I have to admit that I start checking my Blackberry every Friday evening at around 6:30pm EST to see which banks the FDIC chose to euthanize that week. I keep expecting SnaFu to show up on the list, but it's probably still six or eight weeks out. As fear builds, housing prices fall, and credit values decline, SnaFu loses. I can't help but feel it is only a matter of time. Part of me hopes I'm wrong... (see my July 15th and July 27th posts for more on the pending death of WaMu/"SnaFu" - for the record, I'm personally short WaMu, but primarily as a macro hedge).

This week's "victim" (I'm not sure that's the right word, since really the bank is the culprit) is Florida based First Priority Bank. It's a fairly small bank with only $260 million in assets and is almost entirely deposit funded. The FDIC is expecting a $72 million loss on the nationalization. At 28% of assets, that is a relatively enormous hit. Let's hope for all our sakes that if, oh, I don't know, some hypothetical $320 billion depository institution was nationalized it doesn't suffer a similar loss ratio since a $90 billion hit would be astoundingly high. Seriously, how is nobody talking about this? This is a potentially enormous issue with a reasonable probability and there seems to be this radio silence on the topic.

First Priority is the first bank in Florida to go down since March 2004, which is kind of surprising to me given how overbanked Florida is, how crazy its housing situation was, and the generally low level of good corporate governance in Florida. Florida's situation just screams "pending wave of banking failures". I suspect that this will not be the last depository institution to go down this year in America's Right Foot (frankly, I suspect it won't be the last one in August!). By the way, how horrible did the bankers of the 2004 banking failure have to be? Was there a better place and time in history to run a bank?

Anyway, strap your boots on. I'm worried the snowball is still near the top of the mountain just beginning to gain strength.

Merrill takes a(nother) giant writedown

Here's an email I wrote tonight:

How can anyone still believe one word that comes out of these guys' mouths? Merrill's raising another $8.5 billion of capital after pounding the table for six months that not only were they adequately capitalized, they are over-capitalized. Not even two weeks ago Thain said he was comfortable with Merrill's capital position. I don't think we can remotely believe the market value of bank balance sheets. Merrill marked this $30.6 billion notional value CDO portfolio at 36 cents ($11 billion) on June 30th and four weeks later sold it for 21 cents ($6.7 billion). That's down 42% in four weeks!!! This isn't some rounding error position on their balance sheet...and they financed the sale with 75% seller financing, so the true price is really below that! Holy krike! These are remarkable times, I hope everyone is storing this in their memory bank somewhere since there are a ton of lessons in this banking epoch. Crazy.

I don't know when this deleveraging negative cycle will end, but as leverage goes away, bankers (both "i" and "commercial") are going to demand bigger and bigger spreads on loans which is going to continue to put downward pressure on multiples (upward pressure on cap rates), which is going to put pressure on asset values, which is going to put pressure on existing loan prices, which is going to pressure banks' balance sheets, which is going cause further deleveraging, repeat, etc. etc. We may literally be seeing a fundamental change in the way banks are operated for the next generation.

Anyway, here are Thain's quotes. He's either a boldfaced liar or these guys still don't have a handle on what they own and what it's worth (probably more of the latter with a sprinkle of the former).
Thain Quotes on Merrill's Capital Adequacy

Roger Lowenstein on the GSE's and socializing credit risk

Roger Lowenstein, who has brilliantly written the definitive books on topics ranging from the collapse of Long Term Capital Management and the tech bubble to the life of Warren Buffett, discusses the dangers of socializing Fan and Fred in this past weekend's NY Times Sunday Magazine. Succinct and spot on.

Lowenstein's No Free Bubble

July 27, 2008
The Way We Live Now
No Free Bubble
By ROGER LOWENSTEIN
The short take on the economic crisis of the 1970s was that regulation failed. Price controls failed; high taxes failed; regulation was outmoded.

The mortgage and banking crisis of 2008 feels diametrically different. What failed this time were markets. The lenders who were supposed to regulate mortgage borrowing — and the credit-rating firms who monitored them — failed utterly. The investors whose job it was to monitor the capital of financial institutions were asleep at the switch.

It is not really that simple, because investors were encouraged by the creeping government doctrine of “too big to fail.” But if, after the ’70s, the solutions in one way or another were about opening industry to the fresh breath of markets, today the remedies issue from Washington. It is quite possible that the great experiment in laissez-faire has, for this generation, run its course.

The Federal Reserve and the U.S. Treasury have lately widened the federal safety net more quickly and more aggressively than at any time since the New Deal era. Indeed, a recent front-page headline in this newspaper, “Confidence Ebbs for Bank Sector and Stocks Fall,” had distinctly Depression overtones. (You could almost envision the next line: “Hoover Urges Calm.”) And not since the Depression (under the Reconstruction Finance Corporation) has the government bought significant equity in private firms, as the Treasury has sought the authority to do in the case of Fannie Mae and Freddie Mac. At least during the 1930s, legislation followed months of deliberation and public hearings. The proffered fixes to today’s fast-moving crises are worked out hastily and in private.

At a visceral level, it is deeply upsetting when institutions that once reaped fabulous profits (a goodly share of which were snared by their executives) are granted the protection of Uncle Sam. Robert Rodriguez, the C.E.O. of First Pacific Advisors (which has a fund I’m invested in), confessed to a “sickening” feeling at the news that the Treasury might guarantee the debts of Fannie and Freddie. Rodriguez was one of the few fixed-income investors who, having noticed the bloated balance sheets of the mortgage giants, refused to buy their debt securities. Ordinarily, less prudent investors would have suffered a loss; instead, any pain will be borne by the taxpayers.

More troubling than the unfairness is the potential that the solutions will exacerbate moral hazard: that people who feel inoculated will run greater risks. As Rodriguez observed: “Nobody wants to take the pain for excesses. Each time the problem gets bigger.”

The entire U.S. policy of promoting homeownership, which during the boom raised the ownership rate from 64 percent to 69 percent, now looks to be a case study in unintended consequences. Encourage more housing than markets will support and you get — voilà! — mortgages that fail. Fannie and Freddie were among the chief implements of the policy. Though judged by Standard & Poor’s to be only a Double A-minus credit, they were able, thanks to the widely held belief (since validated) that the United States would not allow them to fail, to borrow at lower than Triple A rates.

As the balance sheets of the agencies swelled, they grabbed the profit margin that traditionally went to savings and loans. The thrifts complained, but they were no match for Fannie and Freddie’s well-heeled lobbyists. And so housing was increasingly financed by lenders insensitive to market risk.

Recently, as mortgage companies began to fail, the U.S. encouraged Fannie and Freddie (which already owned or guaranteed $5 trillion in mortgages) to buy still more mortgages. This aggravated the problem. Since the agencies’ capital was inadequate, they should have been reducing risk.

In a similar vein, federal regulators seized IndyMac, a Pasadena bank whose depositors had crowded the door demanding their money and which became the second-biggest bank failure ever. The head of the Federal Deposit Insurance Corporation immediately announced that IndyMac would stop foreclosing on mortgages. No doubt this was pleasing to California homeowners, as well as to the 55 congressmen and senators who represent them (and who help to oversee the F.D.I.C.). But it amounted to yet another giant socialization of risk and to a dubious precedent.

What if politically mindful regulators now lean on Freddie and Fannie to halt foreclosures? Exactly which losses are immunized and, just as important, who gets to decide? Similar questions have been raised by the Fed’s various actions to protect Bear Stearns and other investment banks and their collective creditors. In the space of several months, a wide swath of American finance has ceased to operate under normal rules.

Fixes are being introduced, and the next administration will very likely initiate its own reforms. The Fed has tightened mortgage rules; higher capital requirements are coming. Also, better accounting and disclosure rules would help investors to understand the often-complex assets that banks own.

But there is a difference between increasing transparency, with regard to risk-taking, and underwriting losses. The government should get out of the business of assuming risk — which hinders markets in a function they can handle better. With investors conditioned to look for rescues, it will not be easy to get the genie back in the bottle. A good first step would be to draw a bright line between Fannie and Freddie’s outstanding obligations, which total $1.5 trillion, and the borrowings they undertake in the future as their current paper matures. Their current debt is presumably socialized. But if the Treasury were to announce that new obligations were not protected, markets would gradually force the beleaguered twins to both raise more capital and shrink their asset bases. The U.S. might even consider splintering the companies, AT&T style, into pieces. The goal should be to ensure not that they never fail, but that for Fannie and Freddie and for other institutions, failure reacquires its proper status in a capitalist society: that of a tolerable event.

WaMu given Bankrate.com's lowest score under the "Safe & Sound" scale:

I still cannot figure out why any depositor over the FDIC insured limits would keep deposits at WaMu. You are making a loan (albeit fairly senior) to what is effectively a junk credit (BBB-) and getting paid basically 0% interest for it. The going rate for credit default swaps (CDS) on WaMu's debt was 19 points up-front - which is enormous - then a few points running. So, as a depositor, you get 0% but Wall Street is telling you that it is a toxic credit. Wall Street may be wrong, but I don't see how you are getting paid enough to take the risk as a depositor.

There is nothing that WaMu provides that differentiates them enough to put at risk any money as a large depositor. I still suspect a slow motion run-on-the-bank is underway (see post from two weeks ago). Would be an epic failute. From a societal perspective, I hope it doesn't happen but it sure would add some spice to an already tangy economic environment.

Bankrate.com's Safe & (un)Sound rating on WaMu

Seth Klarman on leadership

Value investing hero Seth Klarman of The Baupost Group gives his thoughts on leadership to HBS students in 2006:
Klarman Video

Warren Buffett, Boone Pickens, and James Tisch all have substantial wind power investments

If huge financial commitments by those three folks don't tell you all you need to know about not just the viability, but the attractiveness of wind investments, then nothing will. Each of these three business and investing legends has invested billions of personal capital either directly or through their holding company conglomerates into wind power. That is not a subtle hint.

Today, billionaire investor James Tisch (Chairman of the Loews Corp. conglomerate), decided to take an even less subtle tact. He wrote an excellent oped that was published in today's Washington Post (included below) about how the development and adoption of alternative energy technologies is happening at lightning speed. Specifically he highlighted the attractive economics of wind and personal solar. Amazingly, this development and adoption is largely happening without incremental regulation, legislation or "incentive" taxation.

Can't you just picture the monkeys in Congress almost fretting about this fact? Worried that free market capitalism might actually solve three major platform issues without them signing their name to a legislative "solution"? What will they tell their constituents? I predict they will not stand for this. It undermines too much of what they have been espousing for the past several years. If this plays out as Tisch and I expect it to, the implications are that things like President W's refusal to sign the Kyoto Treaty may actually indicate that he did not cover the Earth in a man made global climate change sludge. I mean, are legislators really going to standby and allow three of their go-to policital hot button policy issues to be solved with them watching from the sidelines? I seriously doubt it. They've dreamt of regulatory and legislative "solutions" to these problems for years and now each of those issues may be stolen from them by the market? These three issues will not go quietly into the capitalistic night - not of the Nancy Pelosi's of the world have a say. She must worry about the potential removal of these three issues:
1) addressing the high cost of energy;
2) addressing our dependance on foreign oil; and
3) reducing our carbon footprint.

This has to be unbelievably frightening to the political monkeys. It is almost as if the market is saying to them, "just give us a fair legal framework to operate within, get out of our way, and we will take care of the rest." But that doesn't sate the average political ego. It does not sell in November either. Somehow they'll need to mess this up.

How can they mess it up? I'll propose three ways:
1) Interfering with the roll-out of alternatives like wind, hydro, nuclear, solar, or some other future technology by making regulatory hurdles unnecessarily burdensome.
2) Promoting one "alternative" over another. Don't promote corn ethanol, let the market promote it. If it is going to work, it will. Corn ethanol probably should fail and the unintended consequenses of its artificial elevation are that a) we are diverting precious agricultural resources from more useful efforts like, I don't know, growing food for things like eating and b) we are diverting financial and human intellectual resources from pursuing the best alternative energy efforts.
3) Disallowing competition. Let oil compete on a level playing field - the marginal barrel of oil is already incredibly expensive to extract. Let's not make it more expensive. Like it or not, we need oil and I personally prefer that we get it from "Big Oil" than from "Mother Russia". Let's not handicap our own industry as other nations subsidize their's. Outside of oil, let foreign suppliers of alternative energy or related technology present their solutions to the market. Brazilian ethanol may be a great risk diversifier for us as opposed to incremental Saudi oil.

All of these can be summed up as "don't interfere with the market mechanism by trying to create large incentives or disincentives for one 'solution' or another. This will create artificial distortions and likely prevent the best solution from rising to the top."

As I've been saying for years, the solution to high oil prices is high oil prices. I've said those will come as easy/cheap oil vanishes and the marginal barrel is in deeper water, tougher geology, or scarier places. And here we are, as forecast (Read Matt Simmons' Twilight in the Desert for an excellent primer).

Expensive oil creates an incredible incentive to look at alternatives and ramp up scale (e.g., reduce unit costs) of alternative energy technologies. Tisch describes this happening in wind right now. As noted, this will have the ancellary benefit of reducing carbon emmissions and decreasing our dependance on foreigh oil.

As alluded to above, can we please get rid of the imbosolic import tax on foreign ethanol? This is so stupid. We are "protecting" our domestic ethanol business, but corn ethanol is not a particularly productive solution. We may be the Saudi Arabia of wind, gas, and coal, but Brazil is the Saudi Arabia of sugar ethanol. Sugar ethanol is much more green than corn-based and Brazil has room to expand growing capacity without merely replacing other useful crops as corn in America has done (switchgrass, on the other hand, is another story...). Let's allow consumers, through their individual spending habits, to direct us toward the appropriate mix of these energy sources.

Anyway, here's Tisch's OpEd:

The Answer's in the Wind -- and Sun
By James Tisch
Updated: 07/20/2008

Bob Dylan said it best: "The answer is blowin' in the wind." While politicians and environmentalists have been busy arguing about how best to require that greenhouse gases be curtailed, the world around them has changed. The precipitous rise in oil and gas prices over the past year has made the debate on greenhouse gas emissions moot. The reduction in the output of those gases will move forward at warp speed, not because of rules, regulations and cap-and-trade decrees but because of free markets and economics.

Two factors are driving this sea change. First, the price of our traditional fuels -- oil, gas and coal -- has risen dramatically. Second, the silent and inexorable march of technology has dramatically reduced the costs of clean alternative energy sources such as wind turbines and photovoltaics, which converts sunlight into electricity. The result will be a dramatic reduction in the emission of greenhouse gases -- without politicians passing a single additional piece of legislation.

How have we come to this point? Blame it on oil prices and technology. The extraordinary increase in the price of hydrocarbons and coal has created a price umbrella under which competing technologies can flourish. Already, clean wind energy is increasing by leaps and bounds. In the past five years, more than 5 gigawatts of wind turbine capacity has been built in Texas alone; on days when the winds whistle along the plains, wind energy represents just under 10 percent of the electrical supply in the Lone Star State.

Today, wind energy is economic at about 7 cents per kilowatt hour, and that is without factoring in production tax credits. A few years ago, that cost was 15 to 20 cents. Compare the 7 cents for wind energy with the 12 cents per kilowatt hour required to build a gas-fired power plant, and you can see why there is a veritable land rush to harness wind energy.

Texas is not the only state where the gravitational pull of economics and markets is working. Across the country, the price of electricity has skyrocketed for homeowners and businesses. This steep increase is creating a wide opening for technologies such as photovoltaics. The cost of this technology has fallen over the past few decades and is about ready for prime time. That retail electricity prices are increasing by as much as 30 percent this year will only accelerate the arrival of the "liftoff" phase of photovoltaics. Also, retail electricity prices in New York may soon be headed to 30 cents per kilowatt hour. At those prices, an investment in a photovoltaic array on the rooftop of a house will pay for itself in fewer than 10 years, resulting in a greater than 10 percent return on one's capital cost. Compared to the sub-5 percent yield on municipal bonds, this return represents an extraordinary investment.

So, without a gavel coming down in a single additional legislative session, wind and the sun will become much bigger contributors to our national electricity mix. And an added benefit is that they generate absolutely no greenhouse gases.

One more fast-approaching major change will all but guarantee that curtailment of greenhouse gases becomes an issue of the past: the advent of the electric car. Improvements in battery technology mean that in the next five to 10 years, plug-in hybrid electric vehicles will finally be on our roads. Within the next two to three decades, the gasoline-fired internal combustion engine automobile will no longer be sold. Since gasoline accounts for more than a third of worldwide oil demand, the rise of plug-in hybrids represents a mega-change in terms of emissions.

Plug-in hybrids are dramatically cheaper to operate than today's cars. They will consume about 2 cents' worth of electricity to travel one mile, compared with the current 20- to 25-cent cost of driving a mile using gasoline. If consumers flock to them because of their lower operating costs, and they will, the resulting reduction in greenhouse gases will be a benefit of extraordinary proportion -- one that the Kyoto crowd thought could be achieved only through draconian regulation.

These changes will take place not only in the United States but worldwide. These technologies will be adopted simply because they are cheaper than their hydrocarbon-burning cousins. The old world of burning hydrocarbons to generate energy and power automobiles is on the way out because it is being priced out of the market. In the next few decades, it is possible that the only thing oil products will be used for is to power airplanes, heavy vehicles and ships. All that is required on the part of those wanting to reduce greenhouse gases is a little patience so these new technologies can be adopted by the market.

So there is a silver lining in the run-up of hydrocarbon prices. These elevated costs are causing a dramatic change in our energy and automobile mix that will result in significantly less greenhouse gas emissions in the next few decades. The change is already on the way based on today's technology, and it will only quicken with the technological advances that are sure to come. Without a doubt, the answer is blowin' in the wind.

The writer is chief executive of Loews Corp., which has interests in Diamond Offshore drilling; Boardwalk Pipelines, an interstate natural gas pipeline company; and HighMount Exploration and Production, which drills for natural gas.

Where is the Outrage

Jim Grant brilliantly writes about the slow, boiling frog victory of populism. Paper money, socialized credit risk, socialized education, socialized home lending, socialized savings, socialized medicine, socialized banking, socialized deposit insurance, etc., ad nauseum. The slow creeping victory of populism, crystalized only in retrospect.

Why No Outrage? - WSJ.com.

It isn't the GSEs we should worry about...it's WaMu

Here's a copy of an email I sent tonight. Should be interesting to see what comes:

All,

Sorry in advance. This is long. But I'm kind of worried.

With all of the hoopla surrounding Fred and Fan, I think a bigger story in the banking sphere is being ignored. To the extent the GSEs are taken into conservatorship (read: nationalized), really, not much will have changed. Some equity holders will get wiped out, but the institutions will keep on making mortgage loans. They are already quasi-governmental. In fact, as official arms of the gov't, the GSE's may become more aggressive as avoiding losses will likely be weighed against the perceived policy benefit of lubricating the housing transaction market (I say "perceived" for a reason, but that's a discussion for another day). While it will be scary to see the U.S. of A. put the GSE's $5 trillion of obligations on the federal balance sheet, in some sense, it is already there and has always been there. Plus, the assets are generally good assets so losses are unlikely to be much more than a short-term blip in the context of the Federal government's budget. I'm sure systemic fear would tick up a notch, but regular people won't be directly impacted. No depositors exist to be hurt and lenders will be made whole. However...

I saw tonight that WaMu has started pounding the table with assertions that it is "well-capitalized" in order to calm fears about its funding position (see here for WaMu's defense). This is not exactly what you want to hear from your bank. Personally, I prefer the sweet sound of silent confidence. There is a famous Wall Street saying that those that have to defend their financial reputations have already lost them.

For context, we just witnessed the nationalization of IndyMac (IMB) and the FDIC's resultant treatment of depositors that had over $100,000 in their IMB bank accounts (the FDIC has said officially it will not guarantee their excess over $100k). Given that backdrop, if I am a depositor in a hypothetical bank - let's call it Snashington Futual (SnaFu) - and I have over $100,000 on deposit, if SnaFu attempts - hope against hope - to convince me that everything is fine - for any reason whatsoever - I'm at the bank's front door at 9 a.m. (or whenever it is that banks open) and I am taking home cash. I am not bringing home a cashier's check. Not a wire transfer to be set-up for processing later in the day. I am certainly not bringing home mere "assurances". With a can of mace in tow, I am going into the bank and demanding my account balance be handed to me in the form of some f'ing cold hard cash and I'll happily risk the walk to my car. If SnaFu also happened to be incurring enormous losses on its asset base and had a stock price down 90% in the past 12 months, I might go 3G iPhone on them and camp out at my local branch overnight after maxing out my ATM withdrawal limit.

Unlike the GSE's that cannot have their funding source go negative because they do not rely on the goodwill of depositors, banks can and do. Particularly savings and loans which are overwhelmingly deposit and CD funded. Given Washington Mutual's market price, its own defensive pronouncements, its recently displayed need for capital, the run on and subsequent nationalization of IMB, the recent collapse of Bear Stearns, the general fear around highly levered financial institutions, the ongoing collapse in home prices, and the FDIC's handling of the IMB runoff, I think WaMu may be done. Perhaps within a week or two if the fear contagion spreads quickly, as it is apt to do. Remember, WaMu is already getting crushed on the asset side due to lax lending standards (e.g., defaulting mortgages), if this spreads to the liability side (i.e., deposits) the pinch from both directions may be too great to bear.

Predicting how others will react to news and circumstances is incredibly difficult and I'm probably going to be wrong. However...

In the past twelve months, WaMu's stock price has declined from $43 per share to $3.23 at today's close, a 92% decline. This is starting to receive national attention and I suspect their assertion of a sound capital position will add to the volume of press. I also suspect the typical depositor with over $100,000 in their bank account happens to be above average in their market awareness quotient. Looking back at IMB's $19 billion of deposits, about $1 billion were uninsured (too big or not qualifying for other reasons). That that ratio is after the 11 day run on IMB that began with Sen. Chuck Schumer's (D - NY) idiotic remarks two weeks ago during which time $1.3 billion was withdrawn (article about Schumer's remarks). I feel confident that a disproportionate number of withdrawals during the run on IMB were by large depositors given they are the most aware and have the strongest incentive to bail. So, the pre-run on the bank ratio was probably something like 15:1 insured to uninsured deposits. It is worth noting that in a mere 11 days, more than 5% of IMB's entire deposit base was withdrawn. No modern bank can withstand that. It is worth noting that IndyMac does not garner the media attention that WaMu garners yet word still got around that it was on the brink and the vaults were emptied lickity split.

Much like IndyMac, which is HQ'd in SoCal, Seattle-based WaMu has a huge California presence and both specialize in Alt-A loans. WaMu will be heavily mentioned in the news tonight and in the papers tomorrow a.m. as it is the largest S&L in the United States (IMB was #8 on the list) and WaMu's stock was down another 35% Monday the 15th (it nearly kissed $3.00 at one point reaching $3.03 before closing at $3.23). In conjunction with the news surrounding IMB's nationalization, I'm predicting WaMu's deposits begin their outflow shortly, if they have not already. Imagine another day like today in WaMu's stock - we'd have a stock price looking something like "$1.50" and the media would be all over it. If you were a depositor, why would you not withdrawal? What is your upside to staying? Do you really want WaMu credit risk? This is like Lehman on the weekend after Bear's debacle but before the Fed stepped in. Who wants that risk? And for most depositors, we are talking about their livelihood. What is your upside? I know WaMu's "stores" are brightly lit, chicly furnished, and in convenient locations with good customer service, but I suspect the family with a $500k nest egg is going to say, "I am not willing to pay $400k for customer service."

This sort of thing feeds on itself and I'm not sure there is enough capital that can move quickly to plug the hole in the dam short of the Federal government. If the $7.2 billion that TPG's consortium does not convince people of WaMu's soundness, how much money will it take? Why would depositors ever be convinced to stay once the fear has set in? Plus, TPG's deal includes a ratchet that makes any new capital raises incrementally more difficult to pull off given the dilution and there are substantial regulatory barriers to non-bank holding companies buying banks. I hope against hope it does not play out like this, but I certainly would have brown undies if I were in TPG's place.

So, what happens if WaMu goes down? Let's do some quick, frightening math:

IndyMac: $32B in assets, $4-8 billion in announced expected losses by the FDIC. Prior to the IMB nationalization, the FDIC had a $53 billion deposit insurance fund which will likely be at least 10% lower after the IMB clean-up ($4-8 billion lower, in fact).

WaMu's asset base is around $320 billion. So, almost exactly 10x IMB. If somehow WM went under, and if the FDIC pronounced a similar ratio of loss estimates, the FDIC's insurance fund would effectively be wiped out. They'd be wiped out and my suspicion is the bank-bankruptcy train would just be leaving the station. The next bk would truly be on the tax payer's dime. Not saying it (FDIC takeover and/or similar loss ratios) is definitely going to happen, but I put the odds at high enough that we should be more than a little worried. Yet nobody is talking about this. I suppose it is uncouth for a media outlet to speculate on runs on banks, since they may accidentally create their own news, but this is a real problem. And I can say with confidence the FDIC is not in a position to run a bank like WaMu. I don't care how many people the FDIC has staffed up with: first off, they would be taking over an enormous institution with broad footprint and second off, on average, if they were great bank executives, they'd be working for a bank and not the FDIC.

Further, while the FDIC's funding gap would probably be made whole by tax payers (go team!), if I'm a depositor at a somewhat fragile institution (basically any regional bank with heavy southeast or southwest exposure), even -a depositor under $100k, I am probably going to the bank, cashing out, taking my bag of cash and aforementioned can of mace across the street and either getting in my car to go home and stuff the cash under a mattress or, under a more optimistic scenario, I'm going to a bigger seemingly safer institution like Wells Fargo or B of A and opening an account there. But are they really safe? Fear begets fear. As FDR said in the midst of the greatest season of bank runs in recorded history, "all we have to fear, is fear itself." Ugh.

All of this is a wee bit Chicken Little, I readily admit. But I also think the probability skew is uncomfortably high. And, if you are a lender that is "all-in" on one loan (e.g., a bank account holder), all of the sudden that 0.125% interest rate on your "free" checking account does not seem so important. Sometimes it is bed time and the hour has come for you to take your toys and go home, take a Rumplestiltskin style nap, and assess the situation on the other side.

Others that would die if WaMu goes down (randomly selected by searching for who already are the walking dead):
- Downey Financial (DSL - SoCal based and also defending its capital position - $12.6B in assets)
- BankUnited Financial (BKUNA - SoFlorida and defending its capital position - $14B in assets)
- Sterling Financial (STSA - Washington State based - $13B in assets)
See here for other S&Ls that are laggards in P/B ratio which will pretty much tell you who the market thinks is toast:
see here for P/B laggards in the S&L industry
[it is also worth noting that Lehman, which is unrelated to this in so many ways but connected by mindshare, may be lit on fire under this scenario. Lehman loses the more fear increases. Further, anyone that is levered and holding a substantial Alt-A book might be in super, duper trouble since that is WaMu and IndyMac's bread and butter...ING anyone?]

In related news, socialism received yet another boost from our incumbent government as FDIC Chairwoman Sheila Bair announced IndyMac will halt all foreclosures on portfolio'd mortgages and aggressively seek loan-modifications. I think of this as socialism squared. I'm sure IMB's uninsured depositors are appreciative!...or maybe not so much. Don't worry, it's not your money Sheila!

Before I get into the implications on our portfolio of a potential WaMu collapse, it's worth noting that crises in financial related businesses are so much more damning than other kinds of companies. When a telecom company goes under, it sucks for the shareholders, employees, and some of the lenders, but its impact is generally limited in scope and folks can see it coming. Plus, the assets of the business don't generally disappear, they either are acquired or the company re-orgs and comes out with a cleaned up balance sheet. But levered financials with deposit funded businesses are so fragile: the collapses happen all of a sudden, they impact tons of small folks right in their wallet, and they spread a paralyzing fear. This fear is rational because banks and savings & loans disproportionately owe their existence to trust - the trust of depositors. And collapse impairs that trust for a long time.

So, what does all this mean for us? First off, it has not happened and it is quite possible no big banks go into conservatorship. I am definitely spreading fear and perhaps it is not justified. But, as I noted above, all of these institutions are already getting absolutely crushed on the asset side of their balance sheet. If the liability side starts demanding repayment, watch out below. Implications: in general, forced deleveraging is deflationary. This is because the money multiplier begins working in reverse and losses are magnified 12x or so in credit contraction via the bank capitalization structure. However, our government seems to have indicated one thing if nothing else. That one thing is a refusal to allow de-leveraging and the concomitant potential for deflation to run their course. Instead, they have decided to socialize credit risk, avoid deleveraging and supplement the holes created by real losses with newly minted money. If the government chooses to address a real banking crisis (and, to be clear, to date we have not had a banking crisis, we have merely had a credit contraction - see 1932 or even 1989 for a banking crisis) by cranking up Uncle Ben's Crazy Helicopter and dropping money from the sky, we may light off the great inflation of our times simultaneous to a massive economic slowdown. Thus, the pain that banks feel on both sides of their balance sheet will spread and consumers will get a similar pinch at home.

Ways to protect yourself: gold, TIPS, curve steepeners, consumer staples with low capex and strong pricing power, Singaporean dollars, currencies of growing commodity-strong economies (Russia, Brazil, Canada (the Looney!), puts on anything equity related, continued shorting of financials (though that game is getting dangerous so I'd stay focused on marginal regional players). I'm sure other folks have ideas and my brain is drained for the night...

Again, my scare scenario has not happened but the question is do we take steps prior to the collapse, do we wait until after it becomes obvious a collapse will happen, or do we just sit tight and hope it does not happen?

On that cheery note, off to bed.

-TTB

Windfall profits, housing boom, bust and mortgage interest musings...

This weekend, our good friend CK sent me the following email:

Something that I find interesting in newspaper reporting is the titling of articles. For example, the title of this article is "House Approves $16bn in Taxes on Oil Companies". At the VERY end of the article, the reporter describes the tax hike as a rollback of tax incentives. Perhaps this is splitting hairs, but rolling back tax breaks is different than a tax hike in my mind.

In any case, the title did get me to read the article, so "mission accomplished".

[As an aside, the article basically says that Congress passed a bill that will eliminate some subsidies and tax breaks that oil companies have had for a number of years.]

My younger brother (Bro2), replied to CK's email with this:

CK, your feeble attempts to rile us up with a silly comment like "rolling back tax breaks is different than a tax hike" is just plain obvious.

Disguise it how you will, but raising taxes is still raising taxes (and what is this revenue going toward I might ask, I highly doubt its to a consulting study to eliminate government waste!). Next you'll tell me that when the government votes to raise capital gains rates back to ordinary rates it won't be a "tax hike", because they used to be that way. Well, I'll show you how much my taxes will increase from this non-tax hike.

Then you'll argue that raising the rate individuals pay on top earners to 50% wouldn't be tax increase because the rate was higher than that once. As a fine legal scholar like yourself must know, changing a law and then changing it back still creates 2 distinct laws. (See US Consititutional Amendments for a fine example). Much like creating government incentives to invest in an industry the government deems important (by lowering taxes) is one course of action and then raising rates (and decreasing a rational person's propensity to invest in the same industry) is an entirely separate course action.

So CK, take your hippie ways back to Canada with that bushleague tax hike comment.

My older brother, Bro1, followed that beauty up with this:

In the WSJ this week, there was a fine opinion / editorial on the US tax system and how until 1921 the Supreme Court did not consider capital gains income and had in fact ruled against the IRS's imposition of taxes on those gains. Dividends either. It is truly amazing how government creeps. The opinion really gets into the fact that the tax on capital gains is more of a wealth tax and why is there a difference between realized gains and unrealized gains. Based on the current take on capital gains, should they not just tax everyone's wealth? It would increase revenues just as those in power always seem to desire. It would allow the US government to continue unimpeded its 3% - 5% annual growth and it would kill a second bird by making it a great deal more difficult to become truly wealthy. Would it not be great if we could retard everyone's returns by a couple percentage points?

So, smelling blood in the water, and irked on by my brothers' comments, I composed the following:

I know you two are my brothers because as soon as I read CK's intro paragraph, I thought the exact same thing. As Bro2 alluded, CK, your description is effectively an argument for a flat tax. And your positioning is genius: any tax that has been lowered in the past (either explicitly, via incentives, or via subsidies (or via tariffs on foreign competition - ethanol)) cannot actually be "raised" in the future, it is merely an unwinding of the lowering. I'm not getting older, I'm getting less young! It feels so much better that way.

Bro1's point is something I've thought of often: why are only realized capital gains taxed? Economically, there is no dfference between realized and unrealized. The answer is because it's easier, which is of course an answer that inevitably leads to unintended consequences. Why is a "return of capital" not taxed currently (it merely reduces our cost basis) but a dividend is? What is the difference? Why are dividends considered income at all?

Bro2, as you may know, I take umbrage with your referencing of tax dollars as "revenue". It's not revenue - the government is not a business with sales. The government shouldn't be targeting Record Sales! Tax dollars are largely an involuntary confiscation of the money I earned taken under the precept that the government has a better use for it, societally speaking, than I do. The problem with using the word "revenue" is that it invokes traditional connotations: higher revenue is better and lower revenue is worse! Of course, in government, I challenge you to tell me why this is the case on the marginal tax dollar. Newsmen worry when the government has lower "revenue" in 2001 than it had in 2000. For the right reasons, lower tax confiscations is a great thing! Why do we assume the government is going to make good decisions with our money when time and time again it has been shown that they do not? Luckily, as Buffett says about businesses, when the reputation of management and the reputation of the economic quality of a business go head to head, it is often the reputation of the business that remains intact. Our politicians are our management and our country is the company. Luckily, our company has such a huge, deep sustainable competitive advantage that it is hard even for our morononic managment to fuck it up.

Regarding CK's article and the targeting of oil companies specifically. This has of course happened before (see the windfall profits taxes of 80 and 87) - article 1 and article 2. H-dub [a colleague of mine at work, also known as Hatch] predicted to me two years ago that these would be rolled out again and that is effectively what this legislation is. That said, I'm not saying it is a bad thing, but it is clearly a targeted tax increase. All of this is very two faced as corn ethanol is not a conservative (invoking the environmental/conservation definition, not the political/right-leaning definition) solution. I've seen compelling arguments that corn ethanol is actually worse from a carbon standpoint than traditional fossil fuels. Even if we assume corn ethanol is slightly beneficial vs. traditional fuels, I'd argue it is clearly negative as it utilizes important and scarce resources (farmland, crops, human effort, machinery, etc.) for what is basically a non-productive purpose. Sugar ethanol, which is proven hugely superior from a carbon conversion standpoint, is largely an import product but imported ethanol is heavily taxed (which is just crazy!). We are shooting ourselves in the foot on that front. Why we need to have oil companies pay subsidies to their future competitors is beyond me. It's so Randian that I can hardly believe it. Somehow our oil dependance is "big oil"'s fault. BS, of course.

Congress and the Senate are currently in the sweetest position. They basically have a put option at their disposal. They can write the most headline friendly, but functionally stupid legislation of their careers knowing that it will never get passed. They know Bush will veto this assinine shit and, ironically, that knowledge empowers them to push it forward. Knowing that they will never have to face the consequences of the downside of their legislation while getting to reap the publicity is a perfect political situation to be in if you are looking out first for yourself, second for your consituents, and third for America (which is the backward order to what ought to be).

While I'm ranting, how hilarious is it to watch all these congressmen worried about the poor subprime borrower? This was not some little scheme happening behind the scenes that nobody could possibly have seen coming. This was being advertised on every internet website I visited for the past three years. Dancing cowboys, hula'ing Martians, and bright flashing ads to REFINANCE NOW! Major, major financial institutions were involved. Teaser rates were advertised on TV, radio, print, and online (and by automatic recordinged spam phone calls to my home). It was written about, skeptically and idolically, by major media. I remember reading an article in the WSJ from 3-4 years ago about former truck driver-types that were making half a million dollars a year as mortgage brokers - did we think this was because they were helping Americans fulfill The Dream by fitting everybody in exactly the right mortgage for them? Sorry, but that's not a job that deserves $500k of compensation, so it was clear that something else had to be going on. Think about when that article was written - we are three to four years past what was already insane and probably six years into a bubble building - why does anyone assume that a 7% house price correction, which unwinds 2/3s of one year's recent appreciation, is going to be the extent of this unwind if this has been going on for six years? This could be an enormous, enormous correction. I could see nearly every house bought in the last two years ultimately being underwater. Last week, even for prime borrowers, banks like Wells Fargo hiked interest rates on jumbo prime rates to 8.0% on 30 yr. fixed - basically saying, "we don't want to make a loan." Supply of mortgages is evaporating - guess what will happen to the price of mortgages... As a new, prime buyer tries to get a mortgage and is faced w/ 8% rates, not only will the Plankton Theory (upward mobility in buyers needed to support home prices - see this PIMCO report) be on full display, but even buyers that were moving laterally won't be able to afford what they used to be able to.

The government ought to consider looking in the mirror when trying to place blame for problems in the mortgage market: in addition to sitting idly by (or outright encouraging the behavior), they lit the fire 15-20 years ago by isolating a tax deduction for home mortgage interest specifically - they are basically encouraging the trimuverate of higher prices financed largely by debt, the use of a home equity line of credit for as many purchases as possible, and the overall avoidance of building equity in lieu of debt. "I'm shocked, shocked, to find that gambling is going on in here!" Stunning that this incentive led to higher prices (what else could it lead to?)! They artificially lowered the cost of owning; check that, they artificially lowered the cost of borrowing against a house. Can I think of a more important asset the government should want me to not borrow against? Insane! All that tax break does is raise the price of houses and encourage taking on loads of debt against my house! Genius!

-TTB

Sub-prime and home ownership redux (aka, Why Barney Frank is a Moron)

Earlier today, my younger brother, who we'll call LB (little brother), sent me and a few other guys this article. He prefaced it with this statement, "Apparently Barney Frank not only thinks he's smarter than the markets, but wants to determine where you allocate your capital. If people want to lose by purchasing subprime mortgages why should that be his concern?"

This led to a series of responses between me, LB, and our friend CK. CK respoonded first, saying this:

It's not only Barney Frank, Spencer Bachus is featured prominently in the article, too.

I think their overriding concern is for the poor, over-leveraged homebuyer who is cajoled into buying an overpriced house using an exotic mortgage they don't understand. Assuming that Congress wants to prevent homeowners from getting "screwed" they have a couple of levers they can use.

1. They could directly limit subprime borrowers from borrowing - not politically feasible.

2. They could put in tougher standards for subprime originators - probably the most sensible place for regulation. However, given the collapse of many originators, Congress feels originators won't be around long enough to help "make whole" the subprime borrowers who fell victim to predatory lending.

3. They could place the liability on the source of capital - see article below. While this affects how the market works for subprimes, this is the area where there are deep pockets that won't go "poof" like the originators when the market gets tough (e.g. the originators get going).

This seems like a least worst attempt to address the whoas of subprime borrowers and the wave of defaults...these are disgruntled voters that will affect whether Congressmen get reelected.

-Ck

My younger brother (LB) responded with this:

CK, I think you're leaving out choice 4.

4. Let the markets work. As defaults increase, purchasers of the loan will require a higher rate of return due to the increase in the perceived riskiness of the asset. This will force borrowers to pay a higher interest rate, which will increase the cost of the loans to homebuyers, and which should decrease the amount of capital attracted to the sector. For those who are less laissez faire, you could also combine this strategy with actually prosecuting the people who lied on their loan applications (a Federal offense, mind you), but that might be hurting the poor over-leveraged homebuyer, which we clearly can't do.

Suspecting that CK was being a bit sarcastic, but frightened by his attempt to deflect any blame from Barney Frank (one of the biggest morons in the political arena), I responded with this rant:

Good God, CK, I hope your second sentence was intended to be dripping with sarcasm. Please, please, please. [note: it turns out CK was being sarcastic, thank goodness]

My main problem with this whole line of thinking is that it totally, totally bypasses personal accountability. It’s the lenders’ fault, not the borrowers’. The borrowers were just poor, abused souls who were given enormous amounts of money to buy houses they knew they couldn’t afford.

Here’s my favorite sentence from the entire article, “’More money was being lent than should have been lent,’ Committee Chairman Barney Frank, 67-year-old Democrat from Massachusetts, said in an interview from Washington. Frank, who last month predicted that the House would approve such a bill this year, said growth in the market for mortgage bonds ‘provided liquidity without responsibility.’”

Here’s how I might reword it if I were so inclined (though I’m not), “more money was borrowed than should have been borrowed.”

The lenders have a responsibility to their company and their shareholders, which they failed on. Bankruptcies abound and, guess what, the guys who own these toxic bonds are already being punished. And how on Earth do you fine someone for buying a bond? Which guy do you fine? The primary purchaser, or one of the innumerable secondary purchasers? Is it based on how long I owned the bond for? What if I lost money on it, do I still get fined? What if the bond ultimately lost money but I made money on it? Are you going to fine the originators of the bonds? Well, most of them are out of business. What a dumb idea.

Frank is such an enormous moron. I mean, a huge, huge, unprecedentedly huge moron. Let’s think who’s about going to get screwed if someone actually enacted this socialist law: it’s the f’ing homeowners that aren’t in default! That is who. If you change the standards of the lending market artificially in a negative fashion, you will eliminate the ability of the marginal borrower (or, perhaps, several layers into marginal borrowers) to access loans on what otherwise would have been prevailing market terms. If the marginal borrowers (e.g., prospective home buyers/refinancers) cannot access loans on market terms even though the current owner paid a price that reflected market terms, then the marginal home seller is totally, totally fucked. Frank is trying to dry up the home-buyer market, which obviously means drying up the home selling market. Further, for sub-prime homeowners that actually managed to not default yet but need to re-fi because they are about to reset on their 2 year option ARM, well, sucks to be that guy. Frank just decimated your ability to re-fi. I hope you like renting because you’ll be mailing your keys back soon! I give Bachus some minimal credit for at least recognizing that risk and saying, “It's very important to preserve the liquidity in the subprime lending market. If you get too aggressive with assignee liability, you dry up the ability of low and middle income families to own homes.'' Indeed. Including the fact you totally F those that already own homes! Frank goes on to say, “Our job is to continue to have money available for people to continue to buy homes with minimal chance of these kind of disasters. The effect this has on the ability of people in the bond market to make money is simply not a factor.” That shows such a lack of understanding, that it is hard to know where to begin. I suppose I’ll just summarize by saying that if “people in the bond market” can’t make money on homebuyers, there won’t be any “people in the bond market.” And if there are no “people in the bond market”, the odds of continuing to “have money available for people to continue to buy homes” is remote. Borrowers will only ever be able to access money if “people in the bond market” believe they are being rewarded for the risks they are taking.

This is the beauty of capitalism! It is imperfect in that it is not always in balance, rather, it is like a snaking curve that goes above and below a line, but keeps reverting to the line over time. It often requires pain to cause the reversion, both at bottoms and tops. But it is self correcting. This legislation and dumbass legislation like Sarbanes-Oxley, they are both trying to prevent problems that already happened and have already been addressed by the market. Instead, they add to the problem and cause pain to those who were the good people, those left standing.

I put the whole sub-prime disaster in my “who gives an F” category. It is typical of capitalism and necessary for society. And guess what, it helped a lot of people.

The good news is no bill like this would ever get out of the Senate, much less the White House, so it is just a bunch of saber rattling by people trying to win brownie points back in their district. In some sense, I almost wish it would become law because it would crush home prices and I’d be a happy purchaser. But I like benefiting from unnecessary regulation just a tiny bit more than being hurt by stupid regulation, which is to say I hate them both.

-TTB

PS: Barney Frank is an idiot. The fact that he is head of the House Financial Services Committee literally makes me ill. Bachus seems only marginally better.

After writing that, I went back and re-read CK's email and got upset all over again, thus sending this diatribe out to the group:

CK, I just re-read your email and got angry all over again. LB’s point could not be more spot on! How do you leave out the option of “don’t do anything since there’s nothing that needs to be done”?

I always laugh about things like this (see tech market 99, portfolio insurance in the 80s, buying fixed rate bonds in the 70s, the Nifty Fifty in the 60s, etc., ad nauseum). During the emotional ride up, everyone knows this BS is happening. It is being highlighted in real time by intelligent skeptics everywhere, but Frank and Bacchus look the other way and don’t feel the need to stop the gravy train from derailing even as it is obvious that the mountain is becoming too steep to climb and the tracks can’t possibly hold the increasing burden as more and more passengers (many of whom effectively stole their ticket) jump on board. It isn’t until after the train crash that fools like Frank pile onto the damage and, as they walk over the bodies of the fallen, accidentally break the necks of some of the survivors in order to find those that financed the building of the train (not even the builder of the train himself or the conductor (see Alan Greenspan or “the mirror”, since mortgage interest is deductible, it basically encourages borrowers to avoid building equity and to debt finance as much as possible and massively discourages renting!)). But the financiers are in ruins too – the assets backing their loans have collapsed in value and the prospect of putting new capital out is dim. Future financiers have learned a lesson and have already made adjustments. Capitalism has worked. This is the point in time when Frank, standing on the bodies of those already dead or injured, steps in and metes out his “punishment”, even as the market has already punished the offenders on all sides (the lenders, the brokers, the borrowers). But his punishment is redundant, ill focused, and full of unintended consequences. At least it was “a least worst attempt to address the whoas [sic] of borrowers…[the] disgruntled voters.” Sickening.

Personal accountability is important. Our government’s nannying just causes more of this crap and inherently reduces innovation.

-TTB

CK responded, probably fearing that I was about to stalk and kill him (which, given the tone of my rants wasn't an irrational worry), with this:

TTB, your prior email was correct, the second sentence was dripping with sarcasm. Unfortunately, you couldn't see my sarcastic visage as I typed the email in class. Alas, we'll have to wait until Web 3.0 for that feature.

LB, as for leaving out option 4...I was trying to finish the email quickly at the end of class and realize that I didn't put the obvious choice in the list. Mea culpa.

As I am again facing the clock - as I have to get to class - I will leave my email at that and face the wrath of the Brothers Linebacker for any omissions I may have made.

-Ck

I felt much assuaged knowing that CK was being sarcastic. I presumed he was until I saw him try to deflect some blame from Barney Frank. That behavior calls all assumptions into question and I told him so. He responded with this:

Yes, I guess that providing an observation that both senior members of the House committee were making comments on this subject could make you think that I was "defending" Frank, whereas I was only being bipartisan.

One more thought on the subject of regulation. While I agree with the non-regulation viewpoint, I offer the paternalistic view for the sake of flushing out the discussion fully. An argument for regulation in this context is the information assymetry between "naive" borrowers and "sophisticated" originators. Obviously, no one is in a better position to know their financial well being than the borrower themselves. Likewise, originators are in a much better position to understand the dynamics of the loans they are offering, including the benefits and costs of the loan. So, it comes down to which side has the best information. If you believe that borrowers are being led astray by transaction hungry originators, then you would believe that some sort of regulation is necessary. This is essentially the viewpoint that is offered by Congressmen Frank and Bachus (and, I assume, many others in Congress).

Why? Because we're talking about people's homes. The American Dream.

That is the crux of the problem for Congress. Their office seeking incentives align them with their constituents who are crying over losing their homes. This isn't the stuff of which great policy is made. However, it is the reality we have to live with in a democracy.

Anyway, I'm against lender liability in this case...especially since I am going to work in the leveraged lending business!

-Ck

PS. CNBC had an interview with Barney Frank where he sounded quite concerned with the proper functioning of the capital markets. This isn't entirely surprising as his district does include the financial center of Boston (Fidelity, State Street, etc.).

Noting that I never accused CK of "defending" Frank, given his indefensibility I don't presume to think CK would even try. Instead, I noted CK tried to "deflect" blame from Frank and, as noted above, Frank deserves all the blame he gets in my email below:

For the record, I didn’t accuse you of “defending” Frank. I know not even you would stoop that low (backhanded compliments abound!). I said you tried to “deflect some blame” from Barney Frank, which is true. You and I both know that in life, Barney Frank deserves any blame that comes his way, even if he doesn’t “deserve” it, he deserves it.

The fact that we’ve been brainwashed into thinking owning a home equates to The American Dream is part of what is wrong with America. I love that we have legislated that as part of The Dream and that legislation perverts prices without making The Dream more attainable, since it merely makes houses more expensive. Good times. Not only do laws that allow mortgage interest as a deduction make houses more expensive, it encourages owners to avoid building equity and to stay nice and levered. The fact few people in government actually think beyond first order outcomes does not surprise me, given we live in a sound bite world. But it certainly disappoints me.

I totally agree with the flaws of Office Seeking Incentives (good phrase, by the way). It’s why I’m a proponent of changing the House to four year terms and the presidency to six year terms. Three Senate terms, two presidential terms, and four house terms would be my limit. I think the House would serve as a natural farm team for the Senate, though I wish it wouldn’t. I don’t like resigning myself to bad outcomes for big issues just because it is the reality we have to live with. That’s what rants are for!

-TTB

This interchange led to another IM'ing session between CK and me (TTB). Again, anything in brackets was added to clarify, I cleaned up a few typos and reordered some parts of the conversation so they make sense, but nothing of substance was added or removed after the fact:

CK: That was a fun interchange of thoughts today. I knew after I sent the email that I would catch some hell for leaving off the best solution (e.g. doing nothing) from my list.
CK: Your analogy of the train crash killing most onboard, followed by the well-meaning samaritans breaking the necks of the survivors was very entertaining.
TTB: thanks. you deserve hell for even pretending to deflect blame from Barney Frank.
CK: I just wanted to give a "fair and balanced" disclosure that both Rep. & Dem. were involved in this plan.
CK: Disparage Frank all you want, but don't forget Bachus.
TTB: i didn't forget Bachus, I just note that Frank is a moron. [i don't know enough about Bachus to give him moron status yet]
CK: While reading Rubin's "An Uncertain World" today, I stumbled upon an appropo quotation from the Asian crisis: "Both borrowers and lenders are at fault."
TTB: Rubin is fantastic. Probabalistic thinking is massively underutilized.
CK: Agreed.
CK: Its a pretty good book and interesting to see what was going on in government during the various crises.
TTB: he's absolutely right that both borrowers and lenders are at fault. and they both were punished by the market.
TTB: really, they were punished for their on choices, which is how it should be.
CK: true
CK: This is such a good topic for this audience [basically CK, me and my brothers], specifically because of your passionate views on mortgage interest deduction.
TTB: indeed
TTB: [mortgage interest deduction is] just a total perversion of what should be
CK: True
CK: I'm surprised [your older brother] hasn't weighed in [given his passion on the subject of housing as well]
CK: I'm all for getting rid of the mortgage interest deduction.
TTB: [speaking of getting rid of things] I'm all for getting rid of the cap on social security tax...and then getting rid of social security!
TTB: okay, the latter's not totally true
TTB: but the former is. it is ridiculous that SS tax is capped on high income
CK: The Tax Reform Panel suggested that we have a credit instead of a deduction. Credits being more equitable. [I don't know much about this, but I'm assuming that it is a uniform housing credit that can be spent toward rent or ownership]
TTB: why anything?
CK: The cap on social security will have to be raised in order to save the system.
TTB: again, it just flows threw to pricing
TTB: "through"
CK: Sure. But they have a transition problem with "pulling the rug out".
TTB: then phase it out
TTB: 10 year phase
CK: Seems equitable to me.
CK: Frankly, they wanted to remove the whole deduction, but it is too much of a political football to do...politics doesn't make good policy.
CK: Which, ultimately, is sad, as the country is hurt by not getting the best policy.
TTB: regarding "saving" the social security system, i'm not a huge fan of really trying to do that too prematurely, because I suspect the actuarial assumptions leave a margin of error a mile wide.
TTB: but I am a fan of treating people equitably and for now the rich are getting let off the hook
CK: Agreed.
CK: There are a couple of things that could shore it up, too. No borrowing against the trust fund [by the government]...which would make the gov't a better steward of your tax dollar (as I paid minimal taxes this year).
CK: ;)
CK: We ought to increase the age limit as people are living (and working) longer.
TTB: absolutely.
TTB: and probably phase [social security] out to people with net assets above some inflation indexed baseline
TTB: [phasing out above a net asset value] will create bizarre problems as well, such as the gov't wanting the inflation measure to be as low as possible [or certain sorts of assets being tough to value or somewhat punitive to include, like a large family farm, but life's tough]
CK: You should be Secretary of the Treasury
TTB: probably ;)
TTB: i finally updated my blog with a rant we had on IM a long time ago. I forgot until about five minutes ago that I had saved it in my "edit posts" area.
TTB: it's from August 06. Seems fairly precient right now!
CK: I've lost your blog address, can you send it to me again?
TTB: http://investmentlinebacker.blogspot.com/
CK: thx
CK: gotta run
TTB: later
TTB: i'm in the zone today. going to update my blog some more
CK: good
CK: i look forward to it