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Archive for March 9th, 2009

The Oracle

Posted in Meltdown on March 9, 2009 | Leave a Comment »

As I mentioned in my comment at the Idea Locker, Berkshire Hathaway’s 2008 results are dramatically overstated due to the accounting treatment of consolidated subsidiaries:

If you recreated Berkshire in your portfolio with a series of consumer products investments, a big chunk of housing-related stocks, and an even more concentrated position in insurance, you got crushed.

This hasn’t stopped Warren from trying to talk up his investments.  While it isn’t surprising – every other finance guy bouncing through CNBC is promoting his interest – Warren always seemed a bit more noble.

That is why it is so nice to read this response over at the Big Picture:

He noted that Wells Fargo’s cost of funding is now extremely cheap, and earnings spreads have never been wider. When Betsy Quick retorts, asking why the banks should be able to do this and get huge bailout checks from the government, he responds that in wartime, no one ever questioned shipbuilders and the excess of profit they made during those times.

The banks are arguably the ones who goofed up the MOST. They are NOT like shipbuilders in a war. The shipbuilders didn’t instigate the war in the 1st place!

When we debate spending a couple of billion dollars on welfare payments to single mothers, we inevitably get into the debate of what these women were doing having children they could not support.  It is a fair point, but then we should be vigilant to avoid the “bad form, old boy” approach that says it is tacky to question hundreds of billions to the banks.  The banks blew up, and the scrutiny should be strict and pitiless.


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Smoking Gun

Posted in Corruption, Meltdown, Movies on March 9, 2009 | 1 Comment »

Finally, thanks to Calculated Risk, we have the AIG document that put the fear of the apocalypse into Washington.  It is worth reading the whole thing, but here are a few selections:

[P]ermitting AIG to fail would be even more serious today than in September, especially in view of the support of the U.S. government.  Public confidence in financial institutions is at a nadir and it is questionable whether the economy could tolerate another shock to the system that a failure of AIG would produce.

A VALIC/AIG Annuity failure would be one of the largest failures in the history of life insurance, putting applicable retirement savings significantly at risk and causing a loss of confidence in the private penion system in the U.S.

Failure would produce and immediate “run on the bank,” which would likely lead to state seizures of local operations, causing a lock-up in customers’ retirement accounts and payment of monthly/quarterly annuity checks.

Failure to provide a wrap on $38 billion of stable value funds could result in millions of lost value on money market positions potentially “breaking the buck”

Credit protection on $63 billion in CDOs/CLOs may be eliminated

In each of these points, as in the rest of the document, the key issue that is not mentioned is that AIG is an extraordinarily inefficient vehicle to provide the funds described.  We would be better off supporting insurance and money market reserve funds directly – and letting European governments deal with capital shortfalls in their banks – than spraying money through AIG to beneficiaries who may or may not be needy.

AIG’s arguments are completely time-independent.  If you believe the document, AIG will always be too big to fail, since its managers have no incentive to shrink it, as mentioned here.  I would turn it around; if AIG’s closure will always be a nightmare, why not get it over with today, when we still have the ability to borrow for virtually nothing, as opposed to a year into a recession after we have flushed hundreds of billions?

Beyond the arguments, though, is the sheer gall of the AIG folks.  Here is the lead argument of their summary slide:

Insurance is the oxygen of the free enterprise system.  Without the promise of protection against life’s adversities, the fundamentals of capitalism are undermined.

You jerks, you are the ones who undermined the promise of protection when you decided to stake several times your enterprise value in completely unrelated businesses.  You are the ones who destroyed a fantastic franchise and put us all on the brink.  Capitalism would have long since liquidated your business; it is only through the grace of the socialist aspects of our culture that taxpayers who had no input in your decisions and no benefit from your actions are being asked to bail you out of your mess.

The more I see these guys in action, the more I believe they have simply decided to hold themselves hostage.  Check out 2:45 into the clip to see their guiding logic (includes some NSFW language):

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Currency

Posted in Foreigners, Meltdown on March 9, 2009 | 3 Comments »

This is a topic I have never understood, so perhaps I should lead this off with a question and see if anyone has a comment.  If it is true (wary of articles with short data sets), why are people going short Euro/long dollar?

I can see how you arrive at the dollar by elimination:

  • Eurozone banks have been slow to acknowledge their losses and (especially in Austria/Italy) are way over their heads in Eastern Europe.  The peripheral economies – Greece, Ireland, Italy, Spain – have been hard-hit by the recession and, were they still operating their own currencies, would long since have chosen to devalue.
  • The yen is suffering from weakness in an export-based economy coupled by a long tradition of government intervention to keep the yen weak.
  • The Swiss franc and British pound have a bit of the Icelandic problem – modestly large economies dwarfed by the size of the banking sector, so a banking crisis can quickly become a sovereign crisis.  In the Swiss case, you can add the small but nonzero risk that the US/EU make a serious effort to crack down on offshore banking.
  • Other currencies are either not deep enough (Australian, Canadian, and New Zealand dollars) or convertible enough (renminbi) to feel safe.

So far, I think I get it.  I can even imagine a scenario where the Euro completely comes apart – where the struggling economies simply ditch it to go their own way.  But there seem to be two more issues:

  • Our government is making promises left, right, and center, and there is no reason to believe any sort of discipline is coming back any time soon.  We are going to try to print our way out of our problems, and our political system does not lend itself to professional management.
  • If there were no Euro, wouldn’t the Deutsche mark be high on anyone’s list of currencies?  Big banking sector run by some of the dumbest people in the finance industry, but not so big as to overwhelm the country.  Political will for fiscal and monetary discipline.  Reasonable current account.  And aren’t these the folks who effectively control the ECB?

By the way, I have heard variations of this logic in support of buying gold, but that seems to me to be simply kicking the question down the road. Gold is heavily stockpiled, inflates at the rate of its production, and trades for hundreds of times its metallurgical value; far from being an alternative to fiat currency, it is the most dependent upon the collective belief that it is a store of value.

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This Works?

Posted in Foreigners, Movies on March 9, 2009 | Leave a Comment »

Reads like one of the deleted scenes in Dirty Rotten Scoundrels:

The gigolo lover of Germany’s wealthiest woman – the owner of a large chunk of BMW – goes on trial today, charged with trying to blackmail her out of millions of euros of her family fortune.

He first met Ms Klatten in the summer of 2007 at the exclusive Lanserhof spa in the Austrian Tyrol. The indictment states that he had thoroughly researched Ms Klatten before approaching her – and that he was simultaneously playing along two wives of industrialists staying at the mountain resort. “He was charming, attentive,” said Ms Klatten in her later testimony to the Munich police, “and at the same time he seemed very sad. That stirred a feeling in me that we had something in common.” They went on long walks together and when Ms Klatten returned to her responsibilities at BMW and the chemical giant Altana they stayed in touch.

By August of that year, according to Ms Klatten’s version, the two were making love in a Munich hotel – but, unknown to her, they were being filmed from an adjoining room.

Let this be a lesson to you – if your wife goes to the Lanserhof spa, you should probably feel free to have everything being served in the Champagne room…

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