Links 7/11/10

I’m officially taking the night off, this was queued up yesterday.

Black hole blows huge gas bubble BBC

For Speed, Paper Beats iPad Seismologik

Miami Herald Invents a “Consensus Among Economists” to Push Social Security Cuts Dean Baker

The Wall Street Journal Editorial Page, Encapsulated Ryan Chittum

Industrial Policy Dani Rodrik v. Josh Lerner, Economist. The debate starts July 12.

Shadow Banking Zoltan Pozsar, Tobias Adrian, Adam Ashcraft, and Hayley Boesky, Federal Reserve Bank of New York (hat tip reader Carter the Examiner). I confess I have only read the summary thus far, it looks to be informative, but I have serious trouble with its bottom line:

We document that the shadow banking system became severely strained during the financial crisis because, like traditional banks, shadow banks conduct credit, maturity, and liquidity transformation, but unlike traditional financial intermediaries, they lack access to public sources of liquidity, such as the Federal Reserve’s discount window, or public sources of insurance, such as federal deposit insurance.

This extract ought to be a joke, but I fear this is deadly serious. By some estimates (we’ll see what the Fed comes up with), the shadow banking system came to $8 trillion dollars (repo alone was $10 trillion, but that is often double-counted, and many shadow banking assets were used as repo collateral). This $8 trillion had close to zippo equity behind it, and quite a few of those assets, starting with ABS CDOs. were greatly overvalued. But the Fed seems constitutionally incapable of seeing the financial crisis as a solvency crisis, and keeps insisting it was a liquidity crisis. That view, by the way, may not be that of all the staffers whose names appeared on this work.

Regardless, a quick look at the table of contents suggests that this paper is a deep and very useful dive into the plumbing of these heretofore somewhat opaque funding mechanisms (I was impressed that they included credit oriented hedge funds on their list).

America: Optimism on hold Financial Times

AIG: Res Ipsa Loquitur The Financial Investigator (hat tip reader Carter the Examiner). I think he oversells his thesis, but this is a good corrective to some conventional wisdom about AIG.

Antidote du jour:

Picture 11

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  1. Peter L

    Hi Yves,

    at least on my computer the link ‘shadow banking’ does not work – it is not even highlighted. Could you kindly add some details to the link? Thanks!

  2. Siggy


    Two very helpful links here.

    Note that Zoltan Pozsar helped Mark Zandi in the development of his essays and book “Financial Shock; A 360 Look at the Subprime . . . “. That book was published in 2008 and is very insightful as to the causes and effects of the operation of the ‘shadow banking’ system.

    The AIG piece is also very revealing in that it appears that AIG not only had a liquidity problem it did in fact have a solvency problem in it’s securities lending activities. I’ve yet to fully digest the piece, however, I sense that there is a very big probability that AIG should have been put in the bankruptcy court rather than this half assed nationalization limbo were it currently resides.

    Thank you very much for these pieces.


  3. Tim Duncan

    Yves –

    Thank you for the link to the Fed paper – very intersting. I agree with your statement re: solvency versus liquidity. Also, I find one of thier primary conclusions simply astounding. To wit: “private sector balance sheets will always fail at internalizing systemic risk. The official
    sector will always have to step in to help.”

    Let’s examine this conclusion because it says so much about the mind-set. What the paper calls “systemic risk” is the risk that a financial asset will not behave as it is supposed to behave in an effecient economy with effecient markets and nice bell curve models that can be used with mathmatical certainty.

    What we observed in housing was that the implicit guarantees by the Fed of institutions in the banking system (and randomly choosen entities in the shadow system) along with incorrect AAA rating and “guarantees” from firms leveraged at incredible numbers misallocated trillions of dollars of capital used to build a huge oversupply of housing.

    The lenders in the housing bubble made poor credit decisions plain and simple. They were largely spared the pain of their poor credit decisions because the Fed, TARP etc bailed them out under the claim that economic “catastrophe” would otherwise have ensued. Now, the Fed characterizes the failure as “systemic” – the same old “who coulda known??” line.

    So, less than three years from the meltdow, the Fed is saying they will step in to guarantee the debts of the banks and shadow banks again as long as they can characterize defaults as “systemic”. Again, lenders and investors will make their decision on this implicit guarantee and not make the appropraite credit, term and rate evaluations before investing which will lead to misallocations and asset bubbles.

    It really seems that the Fed consists of intelligent and well-educated folks who for some reason are absolutely incapable of seeing the world without a set of blinders on.

  4. Bates

    “Black hole blows huge gas bubble BBC”

    Little by little we are being shown conclusively that black holes act in many different fashions…and not always dependent on the size of the black hole. Some seem to sit dormant while others exhibit various strange phenomena.

    The universe, with the very ununiform distribution of galaxies, will someday lead scientists to the conclusion that black holes can explode and do so with incomprenhinsible energy. I believe that gamma ray bursters are already proof of black hole explosions…though gamma ray bursters are usually very very far away.

    Fortunately, no black hole has exploded near enough to our little globe to offer conclusive proof…at least, not in the short record of our written history. Though if a black hole did explode near the Milky Way Galaxy our economic problems would be solved instantly.

    1. alex black

      Unless my antiquated astrophysics instruction fails me, isn’t there a notion circulating that all black holes inevitably create “white holes” Elsewhere and Elsewhen in the fabric of Space-Time – and that the Big Bang itself might actually BE an extremely large white hole?

      It’s a notion that is….elegant, in a way, and if true, being inside a black hole isn’t always a bad thing. It’s a sunny day, I’ve got a beer in my hand, and the World Cup final is about to start….

      Malaria, lemmings, STD’s and asteroid collisions make things a bit chaotic in here, but it’s still an interesting place.

      1. MyLessThanPrimeBeef

        Why must we always put things in black and white, with black holes and white holes.?

        What about yellow holes, blue holes or green holes?

        Where is diversity?

  5. Doc BP Holiday

    List of George W. Bush legislation and programs

    Also see: Energy Policy Act of 2005

    The Energy Policy Act of 2005 (Pub.L. 109-58) is a bill passed by the United States Congress on July 29, 2005, and signed into law by President George W. Bush on August 8, 2005

    Provides incentives to companies drilling for oil in the Gulf of Mexico;

    ==> Royalty relief for oil and natural gas production in water depths greater than 400 meters in the Gulf of Mexico.

    Section 345, which provides royalty relief for oil and natural gas production in water depths greater than 400 meters in the Gulf of Mexico from any oil or natural gas lease sale occurring within 5 years after enactment, is modeled in NEMS. The minimum production volumes for which royalty payments would be suspended are as follows:

    5,000,000 BOE for each lease in water depths of 400 to 800 meters
    9,000,000 BOE for each lease in water depths of 800 to 1,600 meters
    12,000,000 BOE for each lease in water depths of 1,600 to 2,000 meters
    16,000,000 BOE for each lease in water depths greater than 2,000 meters.

    For AEO2006, the water depth categories specified in Section 345 were adjusted to be consistent with the depth categories in the Offshore Oil and Gas Supply Submodule of NEMS. The suspension volumes are 5,000,000 BOE for leases in water depths 200 to 800 meters; 9,000,000 BOE for leases in water depths of 800 to 1,600 meters; 12,000,000 BOE for leases in water depth of 1,600 to 2,400 meters; and 16,000,000 BOE for leases in water depths greater than 2,400 meters. Examination of the resources available at 200 to 400 and 2,000 to 2,400 meters showed that the differences between the depths used in the model and those specified in the act would not materially affect the model results.

    (that there shit is from: )

    ==> See: The Deepwater Horizon platform commenced drilling in February 2010 at a water depth of approximately 5,000 feet (1,500 m).[12] At the time of the explosion the rig was drilling an exploratory well.[13] The planned well was to be drilled to 18,360 feet (5,600 m) below sea level, and was to be plugged and suspended for subsequent completion as a subsea producer.[12] Production casing was being run and cemented at the time of the accident.

    Also see:

    Exempts oil and gas producers from certain requirements of the Safe Drinking Water Act;

    Tax reductions by subject area:
    $2.8 billion for fossil fuel production

    Pondering: At 09:45 p.m. CDT 20 April 2010, during the final phases of drilling the exploratory well at Macondo,[48] a geyser of seawater erupted from the marine riser onto the rig, shooting 240 ft (73 m) into the air.

    Isn’t there a way to determine what amount of pressure which would be required to shoot a geyser to that height; physics anyone?

    2. Curious? In 2002, the Deepwater Horizon rig was upgraded with “e-drill

    Monitoring system reduces rig downtime

    Published: Nov 1, 2002

    Varco International has developed a way to reduce rig downtime by monitoring drilling equipment in near real-time. The system is called e-drill, a product the company describes as the industry’s first system for remotely monitoring and diagnosing Varco equipment on rigs anywhere in the world.

    E-drill supplies data via an Internet link to a manned service center based in Houston, Texas. The center offers remote diagnostics in the form of trained technicians and engineers who monitor rig activities 24 hours a day.

    ==> I don’t think that I saw this here stuff:

    On March 10, 2010, a BP executive e-mailed the Minerals Management Service that there was a stuck pipe and well control situation at the drilling site, and that BP would have to plugback the well.[32] A draft of a BP memo in April warned that the cementing of the casing was unlikely to be successful.[24] Halliburton has said that it had finished cementing 20 hours before the fire, but had not yet set the final cement plug.[21][33] A special nitrogen-foamed cement was used which is more difficult to handle than standard cement.[31]

    * The author has no idea what’s going on…

  6. Doc BP Holiday

    BP Oddities

    1. BP Plc was struggling to seal cracks in its Macondo well as far back as February, more than two months before an explosion killed 11 and spewed oil into the Gulf of Mexico.

    It took 10 days to plug the first cracks, according to reports BP filed with the Minerals Management Service that were later delivered to congressional investigators. Cracks in the surrounding rock continued to complicate the drilling operation during the ensuing weeks. Left unsealed, they can allow explosive natural gas to rush up the shaft.

    2. Meanwhile: The Coast Guard has announced new rules keeping the public, including photographers and reporters covering the spill, from coming within 65 feet of any response vessels or booms on the water or on beaches. Violators could face a fine of up to $40,000 and felony charges. In order to get within the 65-foot limit, media must get direct permission from the Coast Guard captain of the Port of New Orleans.

    3. According to most recent data, which is being retrieved and analyzed daily, the sonar as Mayer proposed has detected oil approximately 4,000 feet below the water’s surface.

    In two specific areas, Mayer and his crew believe they have found the presence of oil 3,700 to 4,000 feet below the water’s surface.

    “Oil should float to the surface, but something is keeping it deep. This is a very intriguing scientific question,” he said. >>>> RETARDS … dah…. more than 1.62 million gallons of dispersants have been used so far ….. to F’ing hide this spill …. and these fools hired by BP/NOAA are not sure why the oil is not rising?????? WTF!

    From :

  7. Doc BP Holiday

    Reporters say new Coast Guard rules restrict coverage of oil disaster

    An editorial in the New Orleans Times-Picayune said the move “mostly protects BP from bad PR.”

    NBC correspondent Kerry Sanders, who has reported extensively on the oil disaster since May, said reporters and photographers saw distressed wildlife up close in the disaster’s early days.

    These days, those islands off the Louisiana coast are surrounded by booms that can extend 40 feet, and journalists can’t get close without approval from authorities. Reporters are working within the restrictions, he said, and Sanders has not heard of anyone violating the zones.

    Still, he likened the rules to “an unnecessary bureaucratic step” that could prevent journalists from quickly following up on tips. In the 24 or 48 hours it takes to have a request approved and an escort arranged, he said, “the oil may move, might sink.”

    “We don’t want the view put through any prism,” Sanders said. “We want to see it directly and share it.”

  8. Doc BP Holiday

    Media Blackout + Payoffs/Bribes to Locals = $$ ??

    In Louisiana, oil spill’s economic impact is muted – so far,0,5146345.story

    Therein lies a paradox to the worst oil spill in U.S. history: Despite individual tales of woe, many people are reaping a windfall in the cleanup. The overall economic impact has been surprisingly muted so far in Louisiana, which has more oil-splashed coastline than all other Gulf Coast states combined.

    “People have essentially changed occupations,” said James Richardson, an economist at Louisiana State University’s Ourso College of Business. “One reason there’s less local fish available, for example, is because everyone has been recruited to help in the cleanup. So people are adjusting.”

    Signs of the new cleanup economy are increasingly visible.

    “Cash Your Oil Checks Here,” reads a banner on a pawn shop east of New Orleans. “Oil Spill Claim? For consultation, call…” says a road sign near Port Sulphur. Nearby, a long convoy of pickup trucks hauled yellow boom, swamp boats and other gear to the operations hub at Venice, a once-sleepy town now as frenzied as a gold rush camp.

  9. KFritz

    Re: The Economist Debate

    A thesis: nothing of earth shaking importance (besides the earth shaking!) was going to happen during the World Cup. A great deal of attention was on the ‘pitch’ in S. Africa. Very clever of the Economist to begin the debate on July 12.

    Now, if only all of us Repliers were that clever. (-;

  10. Doc BP Holiday

    One last comment:

    First, in regard to the media blackout and bribes:

    Re: “”Everyone is working on the oil spill now,” said Chanda In, a 36-year-old dock hand who just returned from two months aboard a shrimper skimming oil from BP’s blown-out well in the Gulf of Mexico. He was paid $300 a day, far more than his usual salary.

    “It’s easy money,” he added with a smile.”

    2nd: Jimmy Bob there is happy as a clam (or pig in shit) to be hauling in that juicy reward, but what happens in ten years when Jimmy Bob has unique health problems from Corexit — will Jimmy be helped by BP, or EPA, maybe the CDC or FDA, perhaps the Coast Guard captain of the Port of New Orleans and other people that are in offices pretending that there are no risks….

    I know, I know ….maybe Jimmy needs to stop being an ignorant hillbilly on the Redneck Riviera and wake up to the long-term health challenges that are part of this fun — this giant BP casino lotto game, where Ya’ll win cash, and yah can exchange your jobs from cleaning out the fish in the GOM, to cleaning up BP gas station bathrooms…… ok, ok …. that’s it. I realize you can take the hillbilly’s out of the Riviera, but you can’t take the Riviera out of the hillbilly’s (or is the other way round?)….

    1. alex black

      See? Green shoots! And you doubted CNBC….

      And who knows? Maybe all those years of Jimmy snorting homemade crystal meth someone created a protection against the toxic effects of Corexit. God works in ways mysterious….

      1. alex black

        “someHOW”, not “someONE”. Geez… Where’s the edit button for clowns like me?

        1. Doc Mud Holiday

          The BP Dwarves dug too greedily and too deep. You know what they awoke in the darkness of Khazad-dum… shadow and flame.

          — Saruman, The Lord of the Rings

          The well itself started 5,000 feet below the surface. That’s the depth of the Grand Canyon from the rim.
          And then the company attempted to drill more than 30,000 feet below that — Mt. Everest would give 972 feet to spare.


          Same old stuff there, but I like the intro and visuals… and here is a great old story/link:

          Their Game Is Mud May 1997 issue; published online May 1, 1997

          In the laboratory, under suitably high pressure and low temperatures, water molecules form cages around methane, creating a solid substance called methane hydrate. It packs in methane so efficiently that 164 cubic feet of free gas can be squeezed into a single cubic foot of hydrate. In the 1970s geologists began to suspect that methane hydrates might exist outside chemistry labs. They theorized that methane-excreting bacteria in deep sediments might cause a buildup of the gas. And if the sediments were cold enough and at a high enough pressure, they conjectured, hydrates might form. Such hydrates, they realized, would be found only in a narrow band of sediments, however. Below a certain depth, Earth’s internal heat would make it impossible for the reaction to take place.

  11. sgt_doom

    This whole “shadow banking” thing at this point is rather ludicrous; with the endless bailouts, the shadow banking system has become the mainstream banking system, or the fantasy finance sector fully realized.

    With leveraged loans treated as assets upon which to issue various notes, which are then treated as assets upon which synthetic CDOs, synthetic CDSes, and endless ABCP is issued, the layers of ultra-leveraging grow exponentially.

    Issuing a paper on a farce doesn’t make it any less the farce!

  12. Ramanan


    The shadow banking article is very nice. The involvement of European banks/financial institutions is interesting. The Fed-ECB swaps is related to that. The European FIs purchased a lot of securitized products and issued ABCPs to finance the purchases. When they couldn’t keep continuing doing that, they had funding problems. The FX swaps in 2009 and in recent times helped the European banks.

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