Crazy Nut Job

In what concentration/area is your dissertation?

Thu, 29 Jul 2010 12:57:09 -0400

Not telling. The most specific thing I’ve said about my current research is that it is not related to anything I post nor to any job I’ve had in the last five years. I almost violated this rule of silence when I submitted a paper with a reference to a Nobel Prize winning economist, simply because I had never cited a Nobel Prize winner before. Rest assured, my dissertation is boring, academic, and in no way related to the real world.

Unemployment: New Claims Slightly Down

Thu, 29 Jul 2010 12:22:00 -0400

This week’s Unemployment Insurance Weekly Claims Report could have been much worse. Some analysts were expecting an increase in new claims up to 500k, terrible news this late in a “recovery.” Fortunately, new claims fell to 457k. Unfortunately, last week’s number was revised up by 4k. Discounting the revision, this is extremely slow progress. The new claims number fell near the low end of the Bloomberg consensus range of 455k to 500k. From the report:

In the week ending July 24, the advance figure for seasonally adjusted initial claims was 457,000, a decrease of 11,000 from the previous week’s revised figure of 468,000. The 4-week moving average was 452,500, a decrease of 4,500 from the previous week’s revised average of 457,000.

The advance seasonally adjusted insured unemployment rate was 3.6 percent for the week ending July 17, an increase of 0.1 percentage point from the prior week’s unrevised rate of 3.5 percent.

The advance number for seasonally adjusted insured unemployment during the week ending July 17 was 4,565,000, an increase of 81,000 from the preceding week’s revised level of 4,484,000. The 4-week moving average was 4,548,250, a decrease of 18,000 from the preceding week’s revised average of 4,566,250.

If there’s some genuinely good news in this report, it can be found by looking at the unadjusted data. The unadjusted data isn’t useful for tracking trends, but let’s face it: the trend is sideways and has been for more than six months. The unadjusted data is useful for measuring the actual impact on state programs. An 18% swing to the good side may be seasonal, but it’s also 91 thousand actual people not left scratching their heads at the labor market.

The advance number of actual initial claims under state programs, unadjusted, totaled 411,107 in the week ending July 24, a decrease of 91,366 from the previous week. There were 511,628 initial claims in the comparable week in 2009.

The advance unadjusted insured unemployment rate was 3.6 percent during the week ending July 17, unchanged from the prior week. The advance unadjusted number for persons claiming UI benefits in state programs totaled 4,564,922, a decrease of 12,920 from the preceding week. A year earlier, the rate was 4.6 percent and the volume was 6,104,047.

This week’s good / bad lists look worse than I anticipated. This assessment stems from the fact that I live in California. New York has as much reason to smile as I have to frown. Next week will have a 91,366 bias toward the good list:

The good list (-1000 or more): NY, IN, MI, PA, FL, NJ, KY, KS, OH, WI

The bad list (+1000 or more): AL, GA, TN, IL, NC, SC, CA

CA (the worst) was +19,809 vs NY (the best) at -19,552. The sectors responsible were pretty well balanced between the good and bad lists.

In other news, the checks are in the mail. The recent unemployment benefits extension was signed into law and playing retroactive catch-up. Unfortunately, the long awaited “next shoe” appears genuinely ready to drop. According to a recent report, crunches in state and local budgets will cause another 500,000 government jobs to get the axe. California is already back in a declared “State of Emergency” and may start issuing IOUs instead of paychecks as early as August (next week?!). Labor law lawyers should probably move to California. There’s bound to be work there. Too bad neither side has money to pay you. IOU?

There were fears that this report was going to be absolutely terrible. Instead, it was merely mediocre. State budgets will prove to be an ongoing problem. With the exception of California’s IOUs, most state woes will hit like a never-ending Washington drizzle, not a Florida hurricane.

Frozen Thin Mints and dissertation writing go together like tumblr and procrastinating on said...

Thu, 29 Jul 2010 03:19:57 -0400

Frozen Thin Mints and dissertation writing go together like tumblr and procrastinating on said dissertation writing.

HAMP Report Revised After Analysts Question New Metric

Wed, 28 Jul 2010 12:32:10 -0400

HAMP Report Revised After Analysts Question New Metric:

This is depressing. Turns out the brightest part of the HAMP report, the low re-default rate, was subject to a miscalculation.

“In an effort to review and better explain the methodology, we learned from our program administrator, Fannie Mae, that not all cancelled [sic] loans were included in the underlying information provided to Treasury,” Paustenbach continued. “The error caused inconsistent reporting of permanent modifications during the snapshots reported. These omissions have impacted our previous analysis… with respect to the performance of HAMP permanent modifications.”

A Treasury official added that the agency had approved a methodology that included cancelled [sic] modifications, but Fannie Mae’s coding error led to those mods not being included in their calculation of re-default rates. The official added that Treasury will release the revised data when it’s confident in its accuracy.

…

Meanwhile, last month analysts at Fitch Ratings projected that as many as 75 percent of HAMP modifications will ultimately result in re-default — despite the lower monthly payments. In their note last week, the Barclays analysts said they’re sticking to their original re-default projection of about 60 percent.

(via CalculatedRisk)

"When one considers the information available to a central clearing facility, somewhat like an..."

Tue, 27 Jul 2010 16:35:56 -0400

“When one considers the information available to a central clearing facility, somewhat like an exchange, it does give one pause to have the owner of that facility as a somewhat notorious and aggressive market participant with a known penchant for exploiting information for its own ends.”

- Jesse’s Café Américain: Goldman’s Derivatives Clearing Service: The Better To Cheat You With My Dear

Local Governments To Cut 500,000 People In 2010 And 2011, As $400 Billion Budget Shortfall Brings State Economies To A Halt

Tue, 27 Jul 2010 15:35:00 -0400

Local Governments To Cut 500,000 People In 2010 And 2011, As $400 Billion Budget Shortfall Brings State Economies To A Halt:

I am linking to this so that you can read the study from the National League of Cities (their press release is here, download pdf report here). Note that this is significantly larger than the state budget problem I referenced last night (also different time frame and scope). From the report:

Local budget crises lead to job losses in both the public and private sectors. The business of local governments is often conducted through the private sector — construction and maintenance, garbage collection and recycling and tree trimming are just a few examples. The Economic Policy Institute estimates that for every 100 public sector layoffs there are 30 private sector layoffs. Local government investment in transportation, water, sewer and communications infrastructure also leverages significant private sector growth by reducing private sector costs and creating opportunities for additional investment. Local governments are also significant sources of employment. Local and state governments comprise one of the nation’s largest employment industries, larger than the manufacturing and construction industries combined. Local governments account for seven in every 10 of these employees.

Local governments across the country are now facing the combined impact of decreased tax revenues, a falloff in state and federal aid and increased demand for social services. Over the next two years, local tax bases will likely suffer from depressed property values, hard-hit household incomes and declining consumer spending. Further, reported state budget shortfalls for 2010 to 2012 exceeding $400 billion will pose a significant threat to funding for local government programs. In this current climate of fiscal distress, local governments are forced to eliminate both jobs and services.

People still think municipal bonds are a safe investment.

Bank stocks gain after compromise on capital rules

Tue, 27 Jul 2010 15:13:06 -0400

Bank stocks gain after compromise on capital rules:

Summary of Basel III:

European banking stocks posted strong gains Tuesday after global regulators agreed to soften some of their new capital and liquidity rules and to phase in the reforms over several years.

Most of the banks passed the stress tests. But sane accounting practices might cause the whole fraud to be exposed for what it is.

This isn’t simply an example of captured regulators. The regulators may have some understanding of the magnitude of the problem. Several European banks are operating with insane leverage ratios, holding assets much larger than their home countries’ GDPs. As a consequence, regulators must either allow the banks lie about their health or allow the banks to collapse. They aren’t just too big to fail, they are too big to be bailed out. Since everyone is afraid of the consequences of a banking system collapse, they will do anything they can to allow the system to continue. But as I’ve said before, sometimes authority and effort aren’t enough to determine outcome.

State budget gaps total $84 billion: study

Tue, 27 Jul 2010 02:12:31 -0400

State budget gaps total $84 billion: study:

That bleak assessment contains one ray of good news: The total is slightly less than the estimate in March for an $89 billion gap.

Progress!

Fitch says its head will essplode

Tue, 27 Jul 2010 00:18:03 -0400

Fitch says its head will essplode:

For some reason, this post read like poetry to me. Many things are absurd about everything related to the AmeriCredit purchase. It’s a short post, clicky.

Seven Bank Failures

Fri, 23 Jul 2010 21:31:00 -0400

Updated. I knew I didn’t wait long enough.

Bank Failure Friday

Fri, 23 Jul 2010 20:36:00 -0400

The second half bank failures are in full swing (I missed last week due to vacation. Six banks failed). Today, seven banks were added to the FDIC Failed Bank List:

Sterling Bank, Lantana, FL - $372.4 million in total deposits and an estimated hit to the Deposit Insurance Fund (DIF) of $45.5 million. This deal required a loss-share agreement between the FDIC and IBERIABANK entered on $244.3 million of Sterling Bank’s assets.
Crescent Bank and Trust Company, Jasper, GA - $965.7 million in total deposits and an estimated hit to the DIF of $242.4 million. This deal required a loss-share agreement between the FDIC and Renasant Bank on $617.4 million of Crescent Bank and Trust Company’s assets. All 11 branches will reopen for business on Saturday.
Williamsburg First National Bank, Kingstree, SC - $134.3 million in total deposits and an estimated hit to the DIF of $8.8 million. This deal required a loss-share agreement between the FDIC and First Citizens Bank and Trust Company, Inc. on $64.4 million of Williamsburg First National Bank’s assets.
Thunder Bank, Sylvan Grove, KS - $28.5 million in total deposits and an estimated hit to the DIF of $4.5 million. Nothing particularly special about the deal, which these days is pretty special. This was the 100th bank to fail this year.
Community Security Bank, New Prague, MN - $99.7 million in total deposits and an estimated hit to the DIF of $18.6 million. The bank will reopen Saturday.
SouthwestUSA Bank, Las Vegas, NV - $186.7 million in total deposits and an estimated hit to the DIF of $74.1 million. This deal required a loss-share agreement between the FDIC and Plaza Bank on $111.3 million of SouthwestUSA Bank’s assets.
Home Valley Bank, Cave Junction, OR - $229.6 million in total deposits and an estimated hit to the DIF of $37.1 million. This deal required a loss-share agreement between the FDIC and South Valley Bank & Trust on $211.6 million of Home Valley Bank’s assets.

We’ve now witnessed 103 failures for the year. The FDIC planned on an increased failure rate in the second half, something that appears to be panning out. Even if the financial crisis was truly over, bank failures would continue for some time (they are a lagging indicator). Since I doubt we are even half of the way through this, expect failures for quite some time. Absent another bubble, many local and regional banks are going to struggle.

China's Banks Said to See Risks in Loans

Fri, 23 Jul 2010 19:43:00 -0400

China's Banks Said to See Risks in Loans:

This is probably more significant banking news than the European stress tests:

Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation’s regulator.

About half of all loans need to be serviced by secondary sources including guarantors because the ventures can’t generate sufficient revenue, the person said, declining to be identified because the information is confidential. The China Banking Regulatory Commission has told banks to write off non-performing project loans by the end of this year, the person said.

Simple checklist:

Massive loads of unserviceable debt? Check
Huge counterparty risk from guarantees that experts thought never would need to be called upon? Check

On the plus side, there’s a chance that the banks will raise capital before the window closes:

The nation’s five-largest banks, including Agricultural Bank of China Ltd., plan to raise as much as $53.5 billion to replenish capital after the sector extended a record $1.4 trillion in credit last year.

Still no reason to panic? I starting looking at this graph to...

Fri, 23 Jul 2010 16:12:11 -0400

Still no reason to panic?

I starting looking at this graph to help convince myself (and a few others) that hyperinflation wasn’t going to be the immediate impact of the exploding monetary base. In the passing year, bread still isn’t a thousand dollars a loaf, so it is possible that we haven’t yet had hyperinflation.

At this point, I’m a little surprised these two have managed to track each other so perfectly. As before, the explosion (and wiggly increase and contraction) in the base money supply is entirely explained by the excess reserves plugging the gaping holes on banks’ balance sheets. Neither inflation nor deflation has emerged as a true victor here. All of this is merely a chart of the Federal Reserve’s (successful, so far) attempt to prop up the banks.

Do you know what would be really impressive? If that green line manages to keep on its current trend through the next crisis. Whether that crisis is crunching state budgets, bank failures in Europe, stock market collapse in the US, or any of the other big potential problems, if those red and blue lines manage to track one another, that would be impressive. There’s only a single small bump in the green line during all of that chaos. And do you know what would be scary? If that green line deviates too far from the trend. That means the Fed has lost control of monetary policy. Unfortunately, sometimes authority and effort aren’t enough to determine outcome.

(source: St. Louis Fed: FRED Graph)

The CEBS (the people responsible for reporting the stress tests) website is really slow right now. I...

Fri, 23 Jul 2010 13:31:56 -0400

The CEBS (the people responsible for reporting the stress tests) website is really slow right now. I guess people are actually interested in the details.

Seven EU Banks Fail Stress Test, Face $4.5 Billion Shortfall

Fri, 23 Jul 2010 13:24:00 -0400

Seven EU Banks Fail Stress Test, Face $4.5 Billion Shortfall:

I’ve been watching the various reactions to the stress tests. I even got online to ask a buddy in Europe for a man-on-the-street perspective (he decided to go to a pub and start a brawl). The general consensus seems to be “Glad we got that farce over with, now we can move on.” But I’d like to offer a different perspective:

Everything is great again:

Seven European Union banks failed the region’s stress tests with a combined capital shortfall of 3.5 billion euros ($4.5 billion), according to the Committee of European Banking Supervisors, which coordinated the initiative.

It is hard to stress how impressive this is. Just a day ago, from data from the banks themselves, we were told to expect a shortfall between 24 billion and 83 billion euros (some estimates were actually higher). Fortunately, the results of these stress tests make it clear that the banks have no clue whatsoever how much money they need. This should fill everyone with confidence. I mean, finance is only their primary function. They should be able to be off by a factor of 10 or more and everything should be fine. Fortunately, the banks can be off on their estimate of needs by a factor of 10, but there’s zero chance of the stress tests being off of their loss estimates by a factor of 10.

Confidence restored (except for those seven banks that failed. They are totally screwed).

Double Dip? The change in ECRI’s Weekly Leading Index has just...

Fri, 23 Jul 2010 13:01:00 -0400

Double Dip?

The change in ECRI’s Weekly Leading Index has just passed the level they claim has reliably predicted recessions. The growth reading moved from -9.8 on the July 9 reading to -10.5 on the July 16 reading (released today).

Now that we’ve crossed the threshold, it is worth pointing something out: ECRI will sit on this data before they call a recession. They claim to have a reliable indicator, but are afraid of being wrong. Better late than wrong. The official recession labeler, the NBER, still hasn’t called an end to the last recession. If we do double dip, we may be out of the second recession before the NBER decides when one recession ended and the next began (if they even choose to distinguish between the two).

FDIC Cash

Thu, 22 Jul 2010 19:00:00 -0400

True Life: I am a boring person asked:

2) $500B through the end of 2010, which is either slightly over half over, or slightly over 3/4 over, depending on whether the bill is referring to the federal fiscal year or not. Have they actually drawn down on this LOC, if it did pass?

unsolicitedanalysis responded:

2.) Not to my understanding. Remember that “special assessment” on bank profits? I believe they’ve been operating on that for now. They also received an exemption to normal reserve requirements if I’m not mistaken - the FDIC is air.

I’m a little late to the party, but allow me to clarify that the FDIC’s Deposit Insurance Fund has a negative balance, but that is due to accounting for losses that have not been paid out. That’s not quite the same thing as “air,” but a typical insurance fund would be forced to cover the gap. The FDIC actually has the cash on hand to operate, plus they think they have enough cash to handle all of the bank failures for the next five years. Their assessment memo from last month (pdf warning) spells out quite a bit. Also, if the fund were to run out of cash, the deposits are still backed by the “full faith and credit of the US Government.” This could mean they draw on a line of credit, but if push really came to shove, it would mean that Congress would have to hold a special meeting to figure out where the extra money would have to come from (or repeal the whole burrito). Otherwise, I suppose the US would be in a technical state of default. That would be bad.

A few tidbits from the memo:

Assessment rates were increased effective January 2011.
Banks prepaid half of the estimated assessments for 2010, 2011, and 2012, for a one-time boost of $46 billion back in 2009.
The FDIC estimates losses for the next 5 years at $60 billion.
Loss estimates were made before the $250k limit was made permanent and retroactive, so some wiggle-room adjustments are necessary.

Now, the FDIC has obviously had some bad forecasts in the recent past. They didn’t intend to run down their reserves. A negative fund balance is sort of a black eye. You probably need to discount a little there.

There are other problems, such as the fact that FDIC loss expectations are mitigated by reported profits, but these profits are in many cases accounting voodoo. Banks are draining their loss reserves and calling the transfer a profit. They are accounting for the drop in the price of their bonds as profit (theoretically, they could buy back their debt at a discount and have a net positive position to actually paying back the debt). But if insurance is for failure scenarios, having low loss reserves and a bad credit rating probably should not count in the banks’ favor. And since profits can be paid out in dividends, that means that actual capitalization can be falling due to these accounting games. Actual money is leaving some of these banks with only bookkeeping money taking its place.

You probably have a greater risk of not getting access to your money because a natural disaster has taken down your local ATM communication network than because the FDIC couldn’t pay out from the fund. The last line of credit made a bad scenario extremely problematic. The current line of credit requires true US Financial Armageddon to get the same level of pain. Fortunately, that should wait until 2012.

Footnote or Afterthought

Thu, 22 Jul 2010 14:12:48 -0400

I apparently wrote this on December 5, 2009, but it finally seems appropriate to post now.

When a Libertarian longs for the days of William Black, you know things are broken. No, this is only half true. Many Libertarians believe the proper role of government is to prosecute fraud, and WB was willing to commit career suicide to play that role. And the word “career” is probably unnecessary. There were legitimate threats against his life for his role in cleaning up the S&L crisis. It was his views on the scope of banking regulation that makes him a non-favorite of Libertarians. Unfortunately, today’s regulators seem to have the same desire to expand the power of regulators without the guts to actually prosecute those that violate the laws.

Bankrupt GM uses $3.5 billion of taxpayers’ money to buy subprime auto lender Americredit and signal a return to the good old days for Wall Street

Thu, 22 Jul 2010 14:05:00 -0400

Bankrupt GM uses $3.5 billion of taxpayers’ money to buy subprime auto lender Americredit and signal a return to the good old days for Wall Street:

I’m glad someone wrote something decent on this.

What about GMAC, you ask? Good question. GM sold a majority interest in GMAC, but still owns 6.7% direct and another 9.9% via a trust (and the US Treasury owns 56.3%). GMAC’s business is making loans on GM (and Chrysler) cars. It is worth noting that GMAC was not, and is not, a subprime auto lender.

You can almost hear the “dun dun dunnnnnnnn.”

Thoughts on this?

http://www.theatlantic.com/business/archive/2010/07/considering-elizabeth-warren-the-scholar/60211/

Thu, 22 Jul 2010 13:46:00 -0400

Interesting article. I was familiar with much of the discussion about her academic work. I think it’s a non-issue. Unfortunately, she doesn’t put her conference slides on her faculty webpage. Those would be more telling. In her papers (some of which are available at the previous link), the definitions she uses are spelled out. And while I agree that having $1000 in medical bills hardly seems like a “conservative definition” of medical bankruptcy (the Atlantic article provides a particularly funny example of someone with massive debts and over $1000 in medical bills that would qualify under Warren’s definition), it was not obfuscated. Believe it or not, this is good even compared to other academics.

But let me be clear: I will not agree with her politically. This was also true of William Black. But that’s not what will make her and did make him competent regulators. I have no doubt that if Warren says she is restricting credit card companies, that is what she is doing. The corollary is equally true. If she makes a rule restricting mortgages, she’s not going to come out and say the opposite.

Compare this to the fact that we’ve committed an equivalent to TARP in new bailouts in the last year, despite a significant amount of talk about no more bailouts. $700 billion more to Wall St.? Are we supposed to assume this is still to help Main St.? If you include commitments from the Fed, several trillion dollars have gone to bail out Wall St., but most regulators cite numbers far smaller. In fact, you want to know who helps report the correct figure? Elizabeth Warren (in that last example, the reporting was due to Neil Barofsky, but Warren has certainly done her part in the past).

Compare this to the fact that the head of the Treasury is a tax cheat, was asleep at the head of the New York Fed when Wall St. was engaged in obvious fraud, and was largely responsible for one of the greatest foreign currency crises in recent history. If he says he’s doing something to help the banks, I think, “This will help the banks.” If he says he’s doing something to restrict the banks, I think “This will give more power to the banks.” He’s entirely predictable in his objectives, but not what I would call competent.

Compare this to Greenspan, who claimed to support the free market while exercising unilateral, central control over one of the most important aspects of the economy. He had to actively intervene in the free market to keep rates lower than what the market was setting. Those low rates helped fuel a housing bubble, exactly as his own research years before predicted. The man researched creating housing bubbles via the manipulation of interest rates! Then he blew a housing bubble by manipulating interest rates while talking about a free market that he himself squashed.

Compare this to our accounting laws, tax laws, etc.

Compare this to the Federal Department of Education (not states, which, save Texas, seem to benefit education).

Heck, compare this to the Justice Department.

We have a severe lack of competent regulators.

Incidentally, I don’t actually expect to disagree with all of her actions. She has an honest interest in exposing and eradicating fraud, the absolute best motivations for a regulator. She strikes me as quite intelligent and uncompromising.

I also have reservations for the CFPA after Warren’s tenure ends. What happens when she’s gone? In all likelihood, we’ll get another incompetent regulator sitting on top of an agency that makes people feel safer while undermining those very goals. I think FinReg will be a massive, expensive disaster. But I believe in benign despotism for as long as the benign despot remains. I think that the CFPA will be a net benefit under Professor Warren even when I disagree with her actions. But let me relax that endorsement a little to put things in perspective: As long as she’s in charge, I’ll be significantly more worried about the IRS, the Department of Homeland Security, the FAA, the FCC, the FDA, etc. Overall, the quality of government will be improved, however slightly, by the addition of Warren as a regulator.