Author Archives: Yves Smith

Mirabile Dictu! FDIC Suing Former WaMu CEO, Two Execs, for $900 Million

The FDIC is suing three former WaMu executives for their role in the bank’s failure. The directors of the board, according to the Wall Street Journal, already settled for $125 million. More details:

The Federal Deposit Insurance Corp. sued three former executives of the failed Washington Mutual Bank, along with two of their wives, in a lawsuit filed on Wednesday.

The FDIC is seeking $900 million in damages for alleged gross negligence and other failures by the former executives in the run up to WaMu’s collapse in September 2008…

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Irish Perspective on Bank/Sovereign Default

This program on RTEOne from the Ides of March gives a window on how the prospect of default looks from Irish perspective (hat tip Richard Smith). Note that it is the chairman of Goldman Sachs International who argues against debt repudiation.

We’ve argued that it’s rational for the Irish to threaten default and if the debt is not restructured, to act on its promise. The EU has more to lose, since one country rebelling against austerity demands will embolden others, and also brings the real underlying problem, that of Eurobank undercapitalization, to the fore.

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Microsoft, General Electric on List of World’s Most Ethical Companies

Ethisphere just published its annual list of the most ethical companies in the world. I am surprised to see Microsoft and General Electric included among the 110 singled out. GE is the only member of the “diversified industries” group; the other companies in the “computer software” cohort are Adobe, Salesforce.com, Symantec, and Teradata.

Some industries, such as arms merchants, Big Pharma, and US health insurers, are apparently so compromised as to have no representatives.

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Satyajit Das: The Economic Calculus of Japan’s Tragedy

By Satyajit Das, the author of “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives”

The behaviour of financial markets over recent days confirms British Prime Minister Lloyd George’s observation that “financiers in a panic do not make a pretty sight”. While workers in the Fukushima nuclear plant risked death trying to bring damaged reactors under control, financiers cowered in fear. Oscillating between boom and doom, they sought opportunities to benefit from death and destruction.

Instant experts on the nuances of nuclear power generation and the Japanese economy have crowded the airwaves providing ‘analysis’.

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Quelle Surprise! New Home Construction Plunges

How could anyone have expected new home building to be anything more than anemic with housing prices expected to fall nationwide in 2011? Did some forecasters miss the fact that there are a lot of foreclosures in the pipeline given the current level of serious delinquencies as well as a lot of shadow (homeowners who would like to sell but are not putting their homes on the market due to depressed prices in their market?)

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Obama Pressing for a “Shock and Awe” Mortgage Mod Program, 3 Million in 6 Months

Given how well “shock and awe” worked in the Iraq war, I’d see the Administration’s use of that expression in the context of the mortgage mess as a Freudian slip.

I must confess to being surprised at the report by Shahien Nasiripour of Huffington Post, namely that the Administration is pushing for an even more aggressive-looking mortgage modification program than has been rumored. The reason I’m surprised is that this effort, even though it appears misguided on several fronts and falls far short of what is needed, represents an upping of the demands being made against banks. That is contrary to both the Obama Administration’s past behavior of making great sounding promises and walk them so far back as to wind up in a different country, and of inconveniencing the banks terribly much. But Shahien is an able reporter, so I’m sure he has the facts right.

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Japan Earthquake Shows Business Reengineering Relies on Bogus Thinking Similar to Financial Engineering

Gillan Tett’s latest offering in the Financial Times discusses the woes that have befallen various major companies that find themselves exposed as a result of having extended supply chains that have Japan-based manufacturing as an important part. She correctly depicts this as a symptom of a much larger problem, of having pushed the idea of wringing out production costs too far. But perhaps due to space constraints, she fails to draw out the most important conclusion: just as with financial engineering, management incentives favored ignoring risk, and the resulting blow ups were predictable.

Tett tells us the Japan-related disruptions are merely the most visible symptom of a widespread pathology:

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Remaining Staff at Fukushima Plant Told to Leave (Temporarily?); Intrade Predicts IAEA Will Upgrade Accident Level (Updated)

Markets like Intrade are only as good as the intelligence (as in G2, not IQ) of the people making the bets. Given the dearth of real information coming from Tokyo Power, it’s hard to reach informed conclusions about whether the powers that be are making progress in getting the damaged reactors in the Fukushima power complex under control. Japanese are just not big on Western-style disaster presentations: “Here is what happened,” (with a few schematics) “here is what we’ve done and this is what we are going to do next” with backup plans sketched out if the first line of attack fails. Their reflex is instead a combination of apologies and sincere vows to do better, plus and inward hiss if they are asked a really uncomfortable question. So the collective nervousness is based on the legitimate concern that Something Really Awful still could happen, and the incomplete and often inconsistent tidbits don’t provide much reassurance.

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Will Ireland Threaten to Default?

We were surprised that Ireland capitulated so quickly to pressure from its Eurozone confreres and accepted a punitive bailout of its government, when it was in fact its banks that were a mess. As we noted in November:

Note that the Irish government is still holding out for a banking-system-only bailout, even if the funds are channeled through the government. Since I am not aware of any IMF bailout being done on this format, it’s likely to be a sticking point if the Irish refuse to back down (recall that the government itself is under no immediate funding pressure; they have six months before they need to go to market, which is an eternity in crisis-land).

The other major bone of contention is Ireland’s super-low corporation tax, which served as a significant incentive for multinationals to set up shop in Ireland. The Germans and French are insistent that it be increased to balance the budget. The Irish objections here are plausible, particularly since the low rates are a cornerstone of their national strategy (do you want 12.5%, the current corporate tax rate, of a decent sized number or 25% of a vastly smaller number?). The Irish have made it clear that they are non-negotiable on this point, and as keenly as the rest of the eurozone would like to beat Ireland back into line, I doubt they’d be willing to risk negotiations failing over this issue.

Fast forward, the Irish agree to a deal, the ruling party suffers substantial losses precisely for accepting the terms demanded by the eurozone and the IMF, and the new incumbents are much less willing to play nicely with counterparties who are engaging in what amounts to “every man out for himself” behavior, no matter what spin is put on their demands.

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John Hempton: “What the demise of China Media Express says about the demise of Hank Greenberg and AIG”

By John Hempton, a Sydney-based investor, recovering financial services analyst, and former Australian government official who writes at Bronte Capital

I met Hank Greenberg in late 2000. He was chatting mostly to Ajit Jain – the Berkshire Hathaway reinsurance impresario and I was a spare wheel. But Hank was I thought the most impressive person I had ever met. He name-dropped shamelessly (he had had just flown back to New York on a private jet after “chatting” with Li Peng). But he was so far ahead of me on so many issues it made me feel dumb. He even looked – at least in the brief conversation – as if he were considerably smarter than Ajit Jain – and Ajit is no intellectual slouch.

I was just out of my league…

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Japanese Stock Market in Free Fall on Nuclear Fears, Nikkei Down Nearly 13%

The stock market decline in Japan thus far today is second worst to the 1987 crash. As a mere mortal with delayed Bloomberg readings, Topix is now down “only” 12.64 versus a recent 13.18% and the Nikkei is off 12.74%, having recovered a smidge from down 14.1%. Good thing I didn’t listen to some recent stock market recommendations that the Japanese stock market would be up 20% in the first six months of this year.

The yen has firmed only modestly, to 81.55, due to Bank of Japan emergency liquidity operations only partially offsetting a rally. Note the BoJ’s operations are being criticized for being inadequate (ahem, do you think even a central bank can stand in front of a freight train of a major reset in economic fundamentals, unless it chooses to intervene in the stock market directly? Given the current and potential economic damage, the Japanese bond and money markets don’t sound too terrible with call money rates in a much wider trading range than normal. 008% to 0.13% versus the BofJ’s target of 0.1%, so the BoJ appears to be addressing what it considers to be its main priority). From Bloomberg:

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