This post is by Jim Fitch of Some Assembly Required.
Examination of public debate in the US
reveals little but childishness.
The New Sub-Prime: FirstFed, 4th largest LA based bank, reports that 40% of its mortgages are at least 30 day delinquent, after ARM mortgages reset. These are mainly ‘payment option mortgages’ and the debtors are opting not to pay. Don’t worry, Bernanke and Paulson will soon explain that the problem is confined to the middle class market and won’t affect the real economy.
Fiscal Innovation: Morgan Stanley is pioneering a new form of home-equity lines of credit, which involves determining the amount of equity a homeowner has accumulated and not letting them borrow against it.
Joker Jack of Diamonds Turns out Saddam’s Intelligence Chief, Tahir Jalil Habbush, was working for the US all along. Before the war he told the US there were no WMD. The US paid him $5 million and put him in the ‘Knows Too Much’ protection program.
Down And Out: Market analysts breathlessly reported that the Fed didn’t raise interest rates. Unemployment is climbing past 5.5%, mortgage rates are climbing towards 7% and folks were worried about an increase in Fed Funds rates? Hello? Anybody home?
Speechless: The Treasury Department hired Morgan Stanley to advise it on Fannie and Freddie’s capitalization and ways to support their financial operations. Really. You can’t make this stuff up.
Batting Order: Twenty-nine states have entered the budget shortfall contest. Currently leading the pack are: CA with a 21% budget shortfall, followed by AZ at 18%, NV 13%, RI 12%, FL 11% and NY 9% It is expected that there will eventually be 50 entrants in the contest, many having constitutional prohibitions against unballanced budgets.
Belt & Suspenders: The Fed is not worried about inflation; the rest of us better be.
More Math: If a train leaves Detroit with $10 million in GM debt, how much will the total cost be for a five year credit-default swap? (a) $7.2 million – $4.7 up front and half a million a year for five years – or (b) Less than $5 million – because the CDS will pay off before the half-million annual fee kicks in.
Some Assembly Required reflects my somewhat cynical view of the world on a daily basis. Think of it as having coffee with a curmudgeon. Come visit.
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Re: GM CDS costs. Actually, it’s neither. GM’s CDS costs no longer have anything to do with their true bankruptcy risk.
The impending bankruptcy of all three domestic automakers is nearly a foregone conclusion as their model of leasing expensive SUVs comes under a triple assault (they can’t offer attractive leasing due to their rapidly increasing borrowing costs, consumers can’t afford expensive cars any more, and of course, no one wants an SUV; could a perfect storm be any more perfect?). Thus, the true cost of insuring $10mil in GM debt for 1 year would be about $9.5mil (with the discount based on net-present value, not based on any chance of GM surviving).
The current pricing of GM’s CDSes is therefore purely based on the chance for a government bailout of the Big Three (now the little three based on market value…). After all, Michigan is a swing state in this year’s election. And right on schedule, Obama is proposing $4 billion to start.
Rather than providing $40bil in loans that these incompetents are asking for, it would be cheaper for the government to just buy out GM and Ford (total market cap combined: $17bil), or to provide $40bil in cheap loans for better managed foreign car companies (e.g. the Japanese) to set up factories here. Thanks to stagnant wages, rising unemployment, and Bernanke’s debasement of our currency, we can now aspire to become the world’s sweatshop once again.