Finance

Colorado College political science professor David Hendrickson has put together a nice resource at his new “Cause for Depression” blog: Think of it as a cartoon guide to the ongoing earthquake in the world of high finance. Through pictures, we will try to understand the dimensions of the current financial crisis–its origins and causes, its likely consequences, its potential remedies. The “Labels” in Blogspot allow us to construct a chapter organization that the reader should approach as she would a book. By hitting on the topics under “Labels,” the presentation will appear in an orderly fashion. Blogspot is not made for blogbooks, though it is easily adaptable to that purpose. Ordering within each of the chapters depends on time of posting, so my time stamps are not necessarily indicative of the actual time the material was posted. I have altered them to allow for an orderly presentation. If it seems to matter, I will post the date of composition and updates in the entry. The initial foray of posts was made in mid-October 2008. In seeking to understand the crisis, we need to begin with the credit mechanism. We are living through the bust of one of the greatest credit cycles of all financial history. In order get a handle on the seriousness of the bust, we must register the mania that fed the boom. We’ll first look at some measures indicative of the financial turmoil. Then we examine general conditioning circumstances: the role of the housing boom and bust, the general growth of credit market debt, the explosion in derivatives, all of which are relevant in considering how much insolvency exists within the financial system. That question–are our financial institutions insolvent?–in turn is vital in assessing the wisdom of various bailouts and rescues, the opportunity costs associated with the government-mandated maintenance of the “FIRE” sector (Financials, Insurance, Real Estate), and how the global imbalances that have marked the last fifteen years are likely to change. I conclude with some lessons. The final entry is a collection of paper topics for interested students to consider. Where possible, I’ve tried to indicate where readers can find updated sources of information for the material presented here. Given my harsh view of “derivatives,” I’m obliged to say that this compendium is almost entirely derivative. I’m deeply indebted to my blogroll for ideas, inspiration, and many of the charts contained herein. So, if you’ve read thus far, go now to “Financial Stress” in the “Labels” section.(Via Financial Armageddon.) The amount of public and non-public U.S. debt will inevitably come back down, one way or another. I just hope we don’t end up as a third-world nation (or worse yet, multiple third world nations) in the process.

IM conversation between two Standard & Poore’s employees, April 2007, as revealed in testimony before Congress today: Shannon Mooney: i didn’t really notice…but now that i think about it i kindof tune her out when she talks Rahul Dilip Shah: well she just is too political…and she doesn’t have anything of substance to say…but keeps thinking that she does. Rahul Dilip Shah: (I’m done venting now) :) Shannon Mooney: k go take a nap Shannon Mooney: see you later Rahul Dilip Shah: ok Rahul Dilip Shah: btw - that deal is ridiculous Shannon Mooney: i know right…model def does not capture half of the rish Shannon Mooney: risk Rahul Dilip Shah: we should not be rating it Shannon Mooney: we rate every deal Shannon Mooney: it could be structured by cows and we would rate it Rahul Dilip Shah: but there’s a lot of risk associated with it - I don’t personally feel comfy signing off as a committee member.(Via the Big Picture blog and The Epicurean Dealmaker. The latter has a pictorial illustration that I like, Mark Tansey’s “The Innocent Eye Test”; the former has links to the transcript.)

An article at Time magazine suggests that those following the “prosperity theology” of some Pentecostal ministers are more likely than average to have obtained mortgages they cannot afford, leading to foreclosure: Has the so-called Prosperity gospel turned its followers into some of the most willing participants – and hence, victims – of the current financial crisis? That’s what a scholar of the fast-growing brand of Pentecostal Christianity believes. While researching a book on black televangelism, says Jonathan Walton, a religion professor at the University of California at Riverside, he realized that Prosperity’s central promise – that God will “make a way” for poor people to enjoy the better things in life – had developed an additional, dangerous expression during the subprime-lending boom. Walton says that this encouraged congregants who got dicey mortgages to believe “God caused the bank to ignore my credit score and blessed me with my first house.” The results, he says, “were disastrous, because they pretty much turned parishioners into prey for greedy brokers."Yet another case of religious trust being exploited to victimize those who have it. (Via Dispatches from the Culture Wars.) ...

At Trading Markets is a story about the largest corporate bankruptcies in U.S. history, with the recent Chapter 11 filing of Lehman Brothers Holdings Inc. at the top of the list. At #9 on the list is my employer, Global Crossing Ltd., about which the article says: Hurt by a sluggish demand and declining prices for bandwidth capacity, and burdened by a heavy debt load, telecom company Global Crossing Ltd. filed for Chapter 11 bankruptcy on January 28, 2002. At the time of filing, Global Crossing had $30 billion in assets and $12 billion in debts. ...

A lot of my investments are in S&P 500 index funds, which, until the recent dive by financial institutions, included financial stocks as its largest sector of investment (finance is now third after energy and IT). Over the past couple years, I’ve held shares in the Prudent Bear Fund (BEARX), a mutual fund that uses a strategy of shorting various stocks, purchasing put options, and investing in gold, as well as making some short-term trades of the exchange-traded funds ProShares UltraShort S&P 500 (SDS), which goes up when the S&P 500 goes down, and ProShares UltraShort Financial (SKF), which goes up when the Dow Jones U.S. Financials Index (DJUSFI) goes down. I had been holding some shares of SKF for a couple weeks with a 30-day limit order to sell at $142, which would give me a nice profit. When it shot up Thursday, I upped my limit, and ended up selling some of my shares at over $150, and closing out my position. The market then reversed, and SKF dropped as low as $110, so I picked up a few more shares at around $117. Friday morning, SKF dropped to $87 and started to climb back up, when all of a sudden it stuck at $93 and no more trades went through. Trading was halted. The SEC announced a “temporary emergency action” to ban short selling in 799 stocks of financial companies for the next ten business days (until the end of the day on October 2), which may be extended for up to another twenty business days (until the end of the day on October 31, bringing us right up to the election). The UK instituted a similar ban. Because of this ban, trading in SKF was temporarily halted. The SEC seems to be under the illusion that short sellers are responsible for the stocks of financial companies falling, rather than the fact that these companies have been engaging in risky behavior and are now loaded down with bad debt. But a short time later today, trading in SKF resumed, after ProShares announced that they cannot accept orders to create new shares in the fund, since that would require taking new short positions in financial stocks, but those who hold existing positions are still permitted to trade them. This effectively turns SKF into a closed-end fund, making SKF shares more scarce than they otherwise would be. When I saw that SKF was again trading, I bought more shares at $90, reasoning that the financial problems are far from fixed, the proposed government action is likely to be full of holes, and with normal routes to short selling closed, more of those who wish to hedge their bets against further drops in the financial sector will turn to other alternatives such as put options (though options markets are likely to be hurt by this ban as well, since the U.S., unlike the UK, didn’t make an exception for options market makers) or shares in funds like SKF, the latter of which they will only be able to purchase from existing holders of the fund. It’s a serious mistake to think that short selling is something solely done by vultures trying to destroy companies at risk–it’s a defensive measure against catastrophe for those who are mostly holding long-term investment positions. An Associated Press story on the ban shows that the SEC is starting to recognize that it may cause some unintended problems: ...

Before Sarah Palin was mayor of Wasilla, Alaska, the town received no federal funds. As mayor, she hired the Anchorage law firm of Robertson, Monagle & Eastaugh, to help the town obtain federal funds. The Wasilla account was handled by Steven W. Silver, a partner in the firm and former chief of staff to indicted-for-corruption Sen. Ted Stevens, who helped secure $67 million in federal earmarks for the town of 6,700 residents–$4,000 per person. (Via Dispatches from the Culture Wars.) Palin has stood up to corruption, blowing the whistle on unethical behavior by the chairman of the Alaska Republican Party despite taking a lot of heat for it. But she’s also gotten into some trouble of her own, and it almost seems that she fell into her anti-corruption role by accident. A description of Palin from her fellow Wasilla, Alaska resident Anne Kilkenny is well worth reading. (Kilkenny is also quoted regarding Palin in this New York Times story.) For further perspective, here’s another close-up view of Palin as she’s seen in Alaska. UPDATE (September 4, 2008): As governor of Alaska, Palin asked for $550 million in earmarks in her first year in office, and for 31 federal earmarks totaling $198 million so far this year. Oink! John McCain has long been a critic of earmarks. Turns out he has specifically been critical of earmarks requested by Sarah Palin.

Ed Brayton at Dispatches from the Culture Wars shows that McCain’s VP nominee, Sarah Palin, didn’t take long to utter her first falsehood as candidate. Near the beginning of her acceptance speech, she said: And I championed reform to end the abuses of earmark spending by Congress. In fact, I told Congress – I told Congress, “Thanks, but no thanks,” on that bridge to nowhere. (APPLAUSE) If our state wanted a bridge, I said we’d build it ourselves. ...

Integrity Bank of Georgia, set up to run on Christian principles, has failed. Integrity’s employees regularly prayed before meetings or in branch lobbies with customers, while the bank gave 10 percent of its net income to charities. “We felt if we prayed and obeyed God’s word and did what He asked, that He would help us be successful,” the bank’s founder, Steve Skow, told the Journal-Constitution in 2005. The executives seem to have done OK, though: CEO Steve Skow earned $1.8 million that year, while senior lender and executive vice president Doug Ballard earned $847,222. A typical community bank CEO, banking consultants said, earn roughly $300,000 per year.(Via Pharyngula.)

I received a letter in the mail from Chase Bank offering me a fee waiver on a mortgage refinance to “lower [my] monthly payments,” “to save interest,” and to “Save up to $1,000 in waived fees." The letter gives me two options for “a fixed-rate first mortgage tailored to fit [my] needs - and with a new low rate.” Option one is a 20-year fixed-rate mortgage at 6.13% (6.26% APR) with a payment of principal and interest that is described as giving me “monthly payment savings” of $178 and “total annual savings” of $2,132. Option two is a 10-year fixed-rate mortgage at 5.63% (5.80% APR) that is described as giving me “total interest savings” of $12,817. There’s just one problem with this. My current mortgage is a 30-year fixed-rate mortgage at 5.25%. I currently make extra principal payments every month so I am paying more than what my new monthly payment would be for option two of their refinance offer, the 10-year fixed-rate mortgage. This means that both option one and option two are losers–neither will save me a cent. If I keep doing what I’m doing now, I’ll have my mortgage paid off in nine years, paying less in interest and in total than in either option one or option two. By choosing option one I could choose to pay less per month without being penalized (except due to the higher interest rate), but I’d pay significantly more over the term of the loan–more than $50,000 more. By choosing option two, the “total interest savings” would only occur by comparison to my current loan if I were not making extra principal payments. But compared to what I’m actually doing, it again would cost a bit more (by a few thousand dollars), and I wouldn’t have the flexibility of paying less in a given month if necessary that I have now with my current loan. In short, Chase Bank has knowingly sent me an offer with two options that will cost me more money than my current loan, given how I am currently paying it off (and have been for as long as I’ve had the loan). But they’ve tried to describe them to me as though they will save me money, when they won’t. Don’t accept one of these offers unless you either need to (e.g., it will give you lower monthly payments and you’re struggling to make your current payments) or it will genuinely save you money in the long term (e.g., it has a lower interest rate that saves you more than any fees that may be rolled into the new loan).

Yesterday we participated in the 6th Annual PACC911 Bowl-a-Rama on Arizona RESCUE’s dog team. I bowled in the cat team’s lane and brought down their average score, helping the dog team to another win–apparently Nintendo Wii bowling doesn’t help train for the real thing. The event had a morning and afternoon session; RESCUE was in the morning session from 10-12:30. RESCUE came in second place for “loudest cheer,” which added another $50 There were about 60 groups participating in the morning session which raised a total of about $122,000–of which RESCUE alone raised $42,000! Thanks to everyone who supported our efforts and to Lisa and Einzige for coming out to the event to cheer us on! ...