Links 3/2/09

Australians Urged to Flee as Gales Threaten New Fire Disaster Bloomberg

HSBC to scale back US lending Financial Times. Another bank cutting offshore lending.

And Do I Hear 2 Million for That Condo? No? 1 Million? Sold! New York Times (hat tip reader Betsy). Residential real estate is sold pretty much solely by auction in Australia. Clearance rates in Sydney got a shot in the arm due to government intervention, but had been in the 50-60% range. In Brisbane, it’s in the low 30s. But the article presents auctions as a panacea.

Global policy shortcomings will cost us dear Wolfgang Munchau, Financial Times

Deutsche Bank analyzes oil production costs Oil & Gas Journal (hat tip reader Michael)

Stock prices and fundamentals Jim Hamilton, Econbrowser

The curious art of stress testing Models and Agents. Offers some very good observations.

Our financial system is not the same as “our” big financial institutions Interfluidity

Dismantle and start again Business Spectator. There are big pieces he has wrong (for instance, he looks at the large number of US banks and concludes the industry is not concentrated, when in fact the top 10 have 70% of the deposits). Similarly, he makes the securitization story all about the GSEs. That’s inaccurate; banks were big issuers in the 1980s, and other securitized produces (credit cards, auto loans) do not depend on Federal guarantees. The driver of securitization was that it was cheaper than on-balance sheet lending (equity and FDIC insurance cost money). The reasons these systems did not take off elsewhere was due to a combination of lack of a sufficiently large domestic bond market (securitized paper is a yield pickup story), mortgage features that may have inhibited securitization, greater conservatism of banks and investors.

EU Rejects a Rescue of Faltering East Europe Wall Street Journal. While there are logical reasons for nixing the concept (it was a one-size fits all program for disparate countries) I have “son of Lehman” worries. There were similarly good reasons (at the time) for not bailing out Lehman, but there was no Plan B as to how to limit the damage. Financial failures in Eastern Europe will have a very serious impact on the EU, and that suggests that an effort to contain the conflagration might be worth the cost. But this is being treated as an all-or-nothing deal.

Yale will fire up to 300 staff Yale Daily News (hat tip reader John)

When Does the Faith in Financial Engineering Wane? Tim Duy, Economist’s View. Today’s must read. On how Bernanke rationalized growing leverage and other policy fantasies.

Antidote du jour. A doubles, since it looks like a volatile day is in the offing:

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  1. pd130

    “since it looks like a volatile day is in the offing”

    [sigh] I was holding out hope that it was because your trip went well. I’m going to go pet a virtual kitten.

  2. Anonymous

    The Australian banking/mortgage system only looks good because our housing bubble hasn’t burst yet. We have the second most expensive residential housing market in the world. An average house is six times average earnings. All bubbles pop eventually, and then the banks’ balance sheets won’t look so good.

  3. brushes9

    Click “brushes9” above to watch Dean Baker embarrass Megan McArdle. Read thse comment too. Here is mine:

    A libertarian analyzes the world based on reason, not emotion. But, before anyone say that that is a good thing, imagine the emotion-less activity of BTK, the serial killer. Reason, without emotion, is sociopathology, verging on psychopathology (ie, BTK and Ayn Rand, and the “person” of The Corporation).

    Anyone who has studied Ayn Rand knows that she believed emotions to be weakness.

    In the interview, do Megan’s sentences and arguments sound disjointed, similar to output from an AI prototype? That is because only emotion allows us to humanely organize our language output, something AI machines cannot yet do. Through emotion, we can poetically organize our thoughts by properly feeling where each word should go, and which argument should follow next,..we are efficiently measuring each and every meaning, putting everything in its proper place. Megan, apparently, is emotionally constrained, or handicapped, to put it mildly.

    So, the WPA built many good things, but also extended the lives of many people who, otherwise, would have died. This latter point, Amity Schlaes, nor Megan McArdle, would understand, because they are just dusted off, articulate and salaried sociopaths, or psychopaths, of course, not surprisingly, similar to the modern day corporation.

  4. Anonymous

    The Australian housing market has moved down in recent months, 500,000 median in my neck of the woods, its lost about 140,000 off the top so far with more to come. Family member was just recently at yacht party in Sydney with Sonja McMahon and John Laws, so party time is still swinging for the well heeled, Titanic theme would have gone down well (pun intended). Have connections via family to the banking and mining industry over here and shes not pretty. They are in a bit of shock, hoping beyond hope that things will turn around. Point in case, family member is partner in Heavy Equipment concern (Doc holiday he can supply said Caterpillar Trucks for TARP fund transfer), he is now selling housing assets at bellow price paid to stay afloat to the next quarter, no sales for the last 4 months.

    The lag effect is months out from the northern hemisphere, but it is starting to show its face at last. CBofA is experiencing its own little problem with the Storm finance debacle, brokers getting people to take out mil+ loans to invest via Storm, now its coming out that people with 25k to 45k were getting ARM/low doc/we sill fill the forms out OK, mil+ loans to invest with Storm all with CBofA knowledge.

    One of the better programs over here (Insight SBS Australia) just ran a open forum with people of all strata here in Australia and two guests from the US, one economist from Standford and one from Yale, highly recommend watching it.

    Skippy…Yves, you soon may have to change the theme of Antidote du jour… could bring on hunger pangs in readers.

  5. Glen

    …and not to mention Skip all of those first home buyers who have taken up the government grant right before the recession and unemployment comes into full swing. This’ll damage the banks balance sheets even further. An act of total irresponsibility by the Rudd government.

  6. Anonymous

    Tim Duy:

    “Leaving aside the issue of housing prices for a moment, consider the issue of household net worth. I always feel that academics misinterpret balance sheets, particularly household balance sheets. Here Bernanke is saying that debt is not a problem because it is matched by an asset of equal or greater value. Ergo, you have positive net worth, so everything is good. But that debt needs to be supported by a positive cash flow, and the many assets on household balance sheets generally do not generate cash flow, especially owner occupied housing assets. This differs from a corporate balance sheet, where the assets are supposed to be combined in some fashion that generates a positive cash flow.”

    The second order effect is worse. Rising asset prices signals increasing debt translating to reduced free cash flow. Throw in the variable cost of money (ARMs).

    The world is not linear.

  7. Anonymous

    A ‘Tim Duy’ via anonymous: But that debt needs to be supported by a positive cash flow, and the many assets on household balance sheets generally do not generate cash flow, especially owner occupied housing assets. This differs from a corporate balance sheet, where the assets are supposed to be combined in some fashion that generates a positive cash flow.

    Isn’t this just, well, a bit demented?

    If household assets were net drains, then, gee, no one would buy them.

    The cash flow for a household is no different from the cash flow a corporation generates from its “combined assets”. Even a gold mine is just a hole in the ground until the workers arrive in the morning.

  8. Lucifer

    canucks are lying… they are just as exposed to CDS and other exotic instruments. Not acknowledging exposure is not the same as not having exposure.

    They probably have a much higher exposure than the 800 billion they have acknowledged.

    Canadian banks stuck with more than $800B in credit default swaps

    Posted: September 16, 2008, 1:00 PM by Drew Hasselback

    Amid the ongoing credit crisis few investment instruments have fallen out of favour as much as credit default swaps, and that is becoming a problem for Canadian banks that hold them.

    In a note put out this morning, RBC Capital Markets analyst Andre-Philippe Hardy estimated that the Big Six hold about $832-billion of credit default swaps.

    Hardy said some of those positions may be in trouble because of the collapse of Lehman Brothers and the potential failure of the insurance giant AIG, both significant players in the US$62-trillion global credit default swap market. Dealers in the U.S. and the U.K. have voted to delay rollovers in the market due to the turmoil left by the Lehman collapse.

  9. Anonymous

    Yale will fire up to 300 staff Yale Daily News (hat tip reader John)

    If Yale and its Sisters does not continue to churn out well Papered Sons and Daughters of the Elite to man the command posts of our Economy, how will America survive?

  10. cj

    Private securitisation did not exist in the US prior to the early-to-mid 1980s. And it came about in the US prior to any other country in the world because of the GSEs.

    Between the establishment of the two GSEs and the mid 1980s the ONLY securitisers were the GSEs. Read Liars Poker. In fact, Lewis Rinieri, who is widely regarded as the godfather of private securitisation, was at the summit with me presenting to the Obama team.

    It was the long precendent established by the GSEs that enabled a private securitisation market to eventually emerge. And when it did other countries, like Australia and the UK, followed suit.

    The reason GSE and private securitisation funds around 70% of all US home loans (again dominated by the GSEs) and only a very small fraction elsewhere is almost certainly because of the absence of GSEs in most of those other countries.

    This person’s claim that there were “mortgage features that prevented securitisation” in other countries seems pretty specious.

    In adjustable-rate dominated markets like Australia (where three quarters of all loans are variable) it is much easier to securitise than in the US, where the bulk of all loans are 30 year fixed rate. Why?

    As anyone who understands the US history knows, the 30 year fixed rate mortgage created massive prepayment risks that for years dampened any private sector interest: why invest in a fixed income security with an uncertain term when the borrower effectively has a free prepayment option to game against you and repay when rates fall?

    This prepayment risk caused major havoc in the first years of the emerging US securitisation market (I did not have space in my article to go through all of these issues).

    The point on deposits is also wide of the mark. The empirical fact is that the US banking system is extraordinarily decentralised with over 8,400 institutions (around half of which have assets of less than $100m), and extroardinarily prone to failure with over 2,600 such failures between 1985 and 2003 (according to the FDIC).

    While there had been a big increase in consolidation by the 1990s as laws prohibiting bank mergers and, amazingly, the establishment of branches interstate, were slowly removed, the dominant position of the GSEs and the displacement of traditional bank balance-sheets had already occurred decades prior (remember Fannie was set up in 1938 and Freddie in 1970).

    Indeed, bank failures in the US between 1987 and 1991 still averaged an incredible 388 per year.

    By the time some bank consolidation in the US did belatedly come about (ie, where today you have a much higher level of savings concentrations) the dominance of the GSEs in the housing finance space care of their government-supplied fund-raising advantages (ie, the implicit AAA rating), the effective disintermediation of traditional deposit-taking institutions had already taken place. And whatever partial consolidation did occur could not compete effectively with the GSEs.

    I ran my article by an academic banking expert at MIT, David Singer, to have him check it for accuracy. He said he thought it was very good and could not find any glaring or nonglaring errors.

    It is also widely accepted in the US that even today they only have one truly coast-to-coast bank: Bank of America. And friends of mine tell me that transferring money from the the east and west coasts within Bank of America is like dealing with two completely different institutions.

    Again, I did not have space to deal with all these issues in the article due to the fact that it was already way over limit.

  11. Anonymous

    For as long as I’ve been alive, Yale has always had a third-world despot’s approach to labor relations. Yale has so much money that cutting these jobs is totally unnecessary. However, making students see how to treat labor poorly by exploiting downturns in the economy is a kind of education for them that they can apply readily to the real world.

  12. Anonymous

    Throughout this “crisis” the Germans have been the only thinking and level-headed people. They know that they among all Europeans will be on the hook for bailing out other Europeans for years into the future, and they don’t want to waste money in one-size-fits-all solutions that are bound to fail. If only the U.S. government had a similarly frugal, effective and targeted approach. This is the sort of thing that builds investor confidence.

  13. Thomas

    Regarding HSBC:

    No wonder that they have to cut back in the US: While the group posted a nice-looking profit for 2008, an easily-overlooked detail is that their shareholders equity went down a whopping 35 bn US$. It wasn’t taken through the p+l, but they still lost all that money!

    Makes one wonder what “net income” figures are supposed to convey, if a drop in the valuation reserve can totally erode a bank’s capital base, while the bank is still showing a healthy headline profit…

  14. Anonymous

    Kitty must be on Haldol. No chance birdie would survive that close an encounter if things were otherwise. While I’ve trusted the recent kitty and puppy and doggie and fawn pictures, this one defies both nature and common sense. It has all the credibility of an Obama promise.

  15. artichoke

    Yale students are very good at complaining. When I was in grad school there, my “fellow” grad students went on strike to demand the right to unionize their work as Teaching Assistants.

    This was a “groundbreaking” action nationwide that produced copycat movements later at other schools.

    It was nonsense. We were there to learn to be academics, not to join the SEIU.

  16. Anonymous

    Great point in that Models & Agents post about derivatives' effect on receivables. They put firms in a situation where the quick ratio abruptly blows up beyond critical levels. Monitoring is useless.

  17. Anonymous

    So who’s going to be the first to get and publish the secret report, “A.I.G.: Is the Risk Systemic?”

  18. Old Bogus

    cj’s long screed sounds like a ringing endorsement for monopolistic banking. His conflating the failure of small banks’s failures with the need for big monopolies is specious logic.

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