Wednesday, July 29, 2009

Banking Bonuses

This faux-recovery we are now in, being hailed as the beginning of a true turn-aroud, continues to defy top-calling from bloggers and pundits alike—not so much in amplitude, which is still modest, but in duration. I figure, you get to make a top or bottom call once. Mish threw his away months ago, I blew mine earlier this month. Both of us were close in terms of value, the market has not gone up much since we made these calls, not far beyond the normal range of noise, but it still hovers in mid air, and is certainly not going down.

The March rebound began with Citibank's announcement of better-than-expected profits, defying expectations, and other banks have done likewise, and many are taking aggressive steps to pay back TARP money. This latest spike once again stemmed from Citibank's announcement of profits.

And as a result of widespread "profits" and repayment of TARP bailouts, financial executives will resume collecting outrageously high salaries and bonuses. Keep in mind the amount of government (taxpayer) support for the credit industy, even outside the TARP, and the ongoing suspension of mark-to-market accounting, where one can place whatever value they like on toxic assets. Financial stocks are still in the toilet and their shareholders are still screwed.

The day of reckoning is merely postponed. Saying: "we need to rescue banks because our economy depends on credit" is like saying: "we need to bailout Enron because we need energy."

Friday, July 10, 2009

California IOUs

An interesting situation is brewing around the IOUs California started issuing last week due to budget gridlock in Sacramento—in the face of tax income for 2008 being greatly below expected. A number of banks agreed to honor these IOUs until today. After today though, many banks, at local and national levels, are voicing resistance about honoring them any further.

California will almost certainly pay them back. They carry an annual rate of 3.75%, which is a better deal then I've gotten on any of my CDs even at promotional rates for a long time, and better than I recall on Treasuries for awhile now. If a holder of an IOU were to sell it for 90 cents on the dollar, that would be the hottest deal in town. Even at 95 cents they would probably fly off the shelves. At 3.75%, even at face value I bet they would sell well.

Which makes it strange that banks are starting to refuse them, particularly with the bad PR and the risk of losing accounts with depositors going elsewhere. It would appear their ongoing liquidity problem, at this point, may be extreme.


In a humorous turn of events, banks are claiming their refusal to take state IOUs is a public service. Wells Fargo says: "The State of California–just like any household or business–must be responsible for living within its means." Bank of America adds: "We do not want our acceptance of registered warrants to deter the state from reaching a budget agreement as soon as possible." Does Wells Fargo suggest that major banks, being a business, ought to live within their means as well?

Plenty of credit unions see the opportunity here and will be accepting state IOUs.

UPDATE [7/12/09]: It looks like the market rate for California IOUs is emerging between 80-95 cents on the dollar. The cited problem is they are cumbersome to deal with. In a climate of scarce liquidity, I can see it as an issue. Otherwise why couldn't a bank take out a loan from the Fed at under 1% to service these at nearly a 3% markup?

Agency Debt

Today the Fed will buy nearly $4B of "agency debt"—the first of an earmarked $200B. $7B was offered for sale to the Fed, of which only about half of that was taken. It appears they are starting slow.

By "agency," they mean the GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. As for "debt," it would be packages other than mortgage backed securities since that has been distinguished separately. Bonds perhaps? It still seems rather vague but may clarify in further press releases.

It's small potatoes now, but if the Fed starts buying, with printed cash, debt that has no chance of being repaid, from agencies where no recourse will be demanded, that would constitute a pure infusion of cash into the money supply, which would reflect a permanent devaluation of the dollar by the relative percentage the money supply was expanded.

This is in contrast to credit-driven bailout measures (i.e. funded by Treasury Bonds), or any easy credit, which is only a temporary devaluation of the dollar. It also contrasts to taxpayer-funded bailout measures which does not devalue the dollar at all but simply shifts cash from taxpayers and the usual tax money recipients to those who receive the bailouts. A poor investment at best.

Friday, July 3, 2009


Amid the California state government resorting to IOUs, and the Bureau of Labor and Statistics cooking the unemployment numbers to keep things safely under 10%, economic strife has hit home and yesterday was my last day at a job of 8 years.

No, I'm not moving in with my parents. It was a half-time job and I work part time elsewhere. They wanted me to do more work for less pay, so I decided it was time to move on. My pay was funded at city, state, and federal levels so it was not surprising, and I might have brought this upon myself by voting down props 1A-1E and encouraging others to do the same—although even if they passed I figure it would have only delayed the inevitable. I'm glad I voted the way I did.

Leaving a job is pretty stressful. I feel it is the right course and will open up new opportunities, but I wouldn't call this past month a good one.

But, there's plenty on the bright side. Having been a renter, I've saved up money and get by on very little. With my other part time job I'm pretty sure I'll be cash flow positive. I haven't taken a vacation in years—now, I don't have much of an excuse anymore. So I'm going to be living it up. I've also had my fill of being an employee so will at least be an independent contractor and hopefully start of my own practice when the time comes. At least, I will have the chance to rethink my direction in life.