Monday, March 29, 2010

The Big Short

(c) 2010 F. Bruce Abel

April 2, 2010

"How'd they do it? The answer is clearly spelled out in the footnotes to AIG's (nyse: AIG - news - people ) 2007 consolidated financial statement. "In most cases AIGFP (American International Group Financial Products) does not hedge its exposures related to credit default swaps it has written."

My notes from listening to the NPR interview of Michael Lewis by Terry Gross with Michael Lewis about 13 days ago:

The Big Short
[verbatim as much as possible]
So much written and reported about the collapse is through the eyes of the people "who had no idea" -- the Treasury Secretary, the Chairman of the Federal Reserve, the heads of the investment banks -- as the crisis was gathering force.

[Lewis got to "Ground Zero" and, in his own words, found that a handful of people were not clueless and were themselves the cause of the crash, after (supposedly--ed note) they tried to warn Wall Street and the NYT and the WSJ.]

"Everybody was working with same set of facts."

The vast majority of people in the markets painted a “very pleasant” picture from the set of facts.

"We 'see' what we want to see."

Michael Burry

Had been studying to be a doctor, was a resident on his way to being one.

Instead went full-time into investing. Formed a hedge fund. Began studying the bond mkt.

Had/has asberger’s syndrome. Didn’t know it at the time.

Having asberger's he studied the prospectuses of mortgage companies.

2003-2004, early 2005

saw the phenomenal growth of interest-only mortgages and negatively amortizing mortgages

“the lending couldn’t get any worse”

he saw the "end of the madness" coming and wanted to bet against it, but didn't know how.

he begins to bet against the subprime mortgage market

the bond mkt is "the wild west;" it's much less regulated and for the investor it's much easier to get ripped off; he’s aware of that. In corporate bond mkt there were a credit default swaps and had been for 10 years. He felt that Wall Street was "bound" to invent them on subprime mortgage bonds.

Michael Burry pesters Wall Street to create credit default swaps for subprime mortgage bonds

He is Ground Zero; "Patient No 1;" March to May 2005

Makes the "bet" (with GS) in March; gets a written contract in May.

GS – why willing? GS had persuaded AIG to sell GS

AIG had unlimited appetite. In a few months $20 billion, at very low prices; close to free,

GS took some on as a bet. Turned around and multiplied price by 10 and sold to Michael Burry.

All of sudden a big institution in the picture.

GS was already thinking along these lines. In other words it wasn't just Michael Berry.

AIG had been insuring corporate bonds for almost a decade.

In 2004 and 2005 GS comes (to AIG) with “diversified consumer loans”

“we’ll do that too.” (said AIG)

GS went to AIG with subprimes too. “Yep.”

Burry dealt with GS, Deuche Bank, Morgan Stanley, Bank of America, Merrill Lynch too. Wall Street firms were on the other side of the bets. For the most part they had sold the bets on and AIG was on the other side.

Charley Ledley and Jamie Mai

Cornwall Capital

Started with $100,000 in a Schwab Account.

“Wall Street underestimated the likelihood of unlikely events.” (they felt)

They bought options on extreme things happening. Each bet cost them very little. Wrong most of the time but right enough…

Stumble into the subprime mortgage mkt

For paying 2%/yr on dicey subprime mort loans

They knew nothing re bond mkt but they pieced together a picture

They go to SEC; NYTimes, WSJ “there’s fraud in the system.” Nobody understands or pays attention.

They ended up betting against financial instutions themselves – Bear Stearns, etc.

“Who’s taking all this risk?” they asked. Figured out that the WS firms themselves were the dumbest guys at the table. Afraid that BS couldn’t honor their contracts. So bought credit default swaps CDS’s on Bear Stearns too.

Turned $100,000 into $100 million.

None of these guys are natural short sellers. They wanted to be investing in the stock markets but they saw that these markets would be killed by what was going on in the bond (CDS, etc. market).

Personally, although they were making a fortune they had panic attacks; stressed (being right); a bet against an entire financial system; their insight that the system had become rigged; Charlie worried about riots

They were by nature ordinary stock investors; the world forced them into this position.

Herein, on April 2, 2010, I add the following from this, my blog, which indicates that one person,

Joseph Cassano

was the cause of the meltdown. Read the whole interview above plus the link to Joseph Cassano, and you can see that we had a financial terrorist in our midst, one who started with Michael Milken.

And the NYT Article of April 1, 2010 adds to the list of names who make billions per year:

And this review in the WSJ which served as the research for Lewis's book:

But this reviewer says Michael Lewis has it all wrong:

Gretchen Continued

(c) 2010 F. Bruce Abel

She was interviewed on Bill Moyers Friday night. She's as good in person as she in in writing.

Sunday, March 28, 2010

Friday, March 26, 2010

Baseline Scenario


The Baseline Scenario

Metternich With A Blackberry

Posted: 20 Mar 2010 05:48 AM PDT

By Simon Johnson

If watching the twists and turns in European politics – “should we bailout Greece?”, “should we bring in the IMF?”, “should the Greeks go directly to the IMF, cutting out the EU?”, etc - has your head spinning and reminds you of overly complicated and opaque episodes from the history books, then you have actually caught the main point. European power structures and alliances webs are being remade before your eyes.

Is this all random – just the collision of disparate national interests with no coherent plans on any side? Or are there some strong, deliberate, and very personal hands at work guiding key pieces into place?

Prince Metternich worked long and hard to manoeuvre countries and people before and after 1815, cynically and cleverly building a system of interlocking interests that suited him – and his employer, the Austrian/Habsburg Emperor. Is there a modern Metternich now at work? Most definitely: Yes.

If you’ve followed the twists and turns of the global dimensions that emerged from the financial crisis of 2008-09, you’ll know that the IMF was transformed from an organization that was being euthanized by the G7 to an important element in the G20’s back-up financing for emerging markets (with the most dramatic turn of events in the run-up to the London summit in April 2009) – and definitely part of what helped stabilize confidence around the world.

This sequence of events created a great opportunity for the IMF’s Managing Director, Dominique Strauss-Kahn (known to friends and foe alike as DSK), to relaunch his political career in France – he previously ran for the presidency but could not secure the socialist nomination, and taking the IMF job seemed to everyone (including President Sarkozy, who lined it up) as akin to being marooned on a desert island. But DSK is – like Metternich – a master of the opportunity, a man who knows when to move and when to stand still, and someone always working a network of long-cultivated European political contacts (including socialists in Greece).

DSK’s objective is to cast himself as the savior of Europe - undoubtedly this would play well with the French electorate – and of course he is greatly aided by the serious underlying problems within the eurozone in general and for Greece in particular (back story is here). As he controls the IMF absolutely and completely, he has access to the best global economic intelligence as well as the means to make large loans to countries at low interest rates. He must of course bring others with him, but this is not hard – the White House, for example, could not care less about who ends up running Europe and at what growth rate, as long as it does not blow up.

President Sarkozy’s aim at this point is naturally to keep DSK and the IMF as far from the action as possible. But Sarkozy has three problems.

The Greeks have learned fast how to play international economic diplomacy – threatening to bring in the IMF in a way that would embarass the European leadership. Without question, they are being coached by people close to DSK. Watch the masters at work.
German voters really do not want to be involved in anything that looks or feels like a bailout. A low interest rate loan to Greece would really upset them. The Germans could do something off-balance sheet (i.e., get their banks to provide cheap credit to Greece), but the German banking system is already so ridden with governance problems and hidden bailouts that this is not appealing to the elite.
If you provide financing to Greece at anything other than low interest rates, the numbers simply do not make sense (we take you through this here.) Merrill Lynch pushed back against us this week with a report arguing that if Greece can borrow again at the level of German interest rates, everything would be fine – this is, of course, a legitimate point, but a cursory look at Merrill’s relatively sanguine research reports on Greece prior to the crisis (and also at their assessments of global credit markets prior to fall 2008) does not suggest that the “don’t worry, be happy” scenario is high probability.
Sarkozy is also an expert tactician and he is not finished yet – entering the weekend, the ball is definitely in his court. Expect further “let’s do it without the IMF” options to surface now – in particular, Sarkozy will try to scare the Germans regarding how the European Central Bank (ECB) would be undermined if the IMF enters the arena. Sarkozy can also commit, behind the scenes, to support Axel Weber for the ECB presidency – something top Germans want more than they want almost anything else in the world.

And what if Strauss-Kahn prevails and the IMF makes a loan to Greece, would this save the day? Not necessarily – remember that DSK’s goal is to just to look good until he leaves the Fund to run more openly for the presidency, which is probably no more 12 months from now. His incentive would be to put in place a relatively small program of funding that does not ask Greece to do too much up front; if this explodes later (as seems likely), that would not be his problem.

Sensible program design and dealing with the core underlying issues in a reasonable manner – including confronting the looming issue of “debt restructuring” – is not likely. This is French electoral politics after all.

The Canadian Banking Fallacy

The Baseline Scenario

The Canadian Banking Fallacy

Posted: 25 Mar 2010 03:58 AM PDT

By Peter Boone and Simon Johnson

As a serious financial reform debate heats up in the Senate, defenders of the new banking status quo in the United States today – more highly concentrated than before 2008, with six megabanks implicitly deemed “too big to fail” – often lead with the argument, “Canada has only five big banks and there was no crisis.” The implication is clear: We should embrace concentrated megabanks and even go further down the route; if the Canadians can do it safely, so can we.

It is true that during 2008 four of all Canada’s major banks managed to earn a profit, all five were profitable in 2009, and none required an explicit taxpayer bailout. In fact, there were no bank collapses in Canada even during the Great Depression, and in recent years there have only been two small bank failures in the entire country.

Advocates for a Canadian-type banking system argue this success is the outcome of industry structure and strong regulation. The CEOs of Canada’s five banks work literally within a few hundred meters of each other in downtown Toronto. This makes it easy to monitor banks. They also have smart-sounding requirements imposed by the government: if you take out a loan over 80% of a home’s value, then you must take out mortgage insurance. The banks were required to keep at least 7% tier one capital, and they had a leverage restriction so that total assets relative to equity (and capital) was limited.

But is it really true that such constraints necessarily make banks safer, even in Canada?

Despite supposedly tougher regulation and similar leverage limits on paper, Canadian banks were actually significantly more leveraged – and therefore more risky – than well-run American commercial banks. For example JP Morgan was 13 times leveraged at the end of 2008, and Wells Fargo was 11 times leveraged. Canada’s five largest banks averaged 19 times leveraged, with the largest bank, Royal Bank of Canada, 23 times leveraged. It is a similar story for tier one capital (with a higher number being safer): JP Morgan had 10.9% percent at end 2008 while Royal Bank of Canada had just 9% percent. JP Morgan and other US banks also typically had more tangible common equity – another measure of the buffer against losses – than did Canadian Banks.

If Canadian banks were more leveraged and less capitalized, did something else make their assets safer? The answer is yes – guarantees provided by the government of Canada. Today over half of Canadian mortgages are effectively guaranteed by the government, with banks paying a low price to insure the mortgages. Virtually all mortgages where the loan to value ratio is greater than 80% are guaranteed indirectly or directly by the Canadian Mortgage and Housing Corporation (i.e., the government takes the risk of the riskiest assets – nice deal if you can get it). The system works well for banks; they originate mortgages, then pass on the risk to government agencies. The US, of course, had Fannie Mae and Freddie Mac, but lending standards slipped and those agencies could not resist a plunge into assets more risky than prime mortgages. Let’s see how long Canada resists that temptation.

The other systemic strength of the Canadian system is camaraderie between the regulators, the Bank of Canada, and the individual banks. This oligopoly means banks can make profits in rough times – they can charge higher prices to customers and can raise funds more cheaply, in part due to the knowledge that no politician would dare bankrupt them. During the height of the crisis in February 2009, the CEO of Toronto Dominion Bank brazenly pitched investors: “Maybe not explicitly, but what are the chances that TD Bank is not going to be bailed out if it did something stupid?” In other words: don’t bother looking at how dumb or smart we are, the Canadian government is there to make sure creditors never lose a cent. With such ready access to taxpayer bailouts, Canadian banks need little capital, they naturally make large profit margins, and they can raise money even if they act badly.

Proposing a Canadian-type model to create stability in the U.S. is, to be blunt, nonsense. We would need to merge our banks into even fewer banking giants, and then re-inflate Fannie Mae and Freddie Mac to guarantee some of the riskiest parts of the bank’s portfolios. With our handful of new “hyper megabanks”, we’d have to count on our political system to prevent our banks from going wild; Canada may be able to do this (in our view, the jury is still out), but what are the odds this would work in Washington? This would require an enormous leap of faith in our regulatory system immediately after it managed to fail repeatedly and spectacularly over thirty years (see 13 Bankers, out next week, for the awful details). Who can be confident our powerful corporate lobbies, hired politicians, and captured regulators can become so Canadian so soon?

The stakes would be even greater with these mega banks. When such large banks collapse they can take down the finances of entire nations. We don’t need to look far to see how “Canadian-type systems” eventually fail. Britain’s largest bank, the Royal Bank of Scotland, grew to control assets equal to around 1.7 times British GDP before it spectacularly fell apart and required near complete nationalization in 2008-09. In Ireland the three largest banks’ assets combined reached roughly 2.5 times GDP before they collapsed. Today all the major Canadian banks have ambitious international expansion plans – let’s see how long their historically safe system survives the new hubris of its managers.

There’s no doubt that during the coming months many people will advocate some form of a Canadian banking system in America. Our largest banks and their lobbyists on Capitol Hill will love the idea. For some desperate politicians it may become a miracle drug: a new “safer” system that will lend to homeowners and provide financing to Washington, while permitting politicians and regulators to avoid tough steps. Let’s hope this elixir doesn’t gain traction; smaller banks with a lot more capital – and able to fail when they act stupid – are what U.S. citizens and taxpayers really need.

An edited version of this post appeared on the NYT’s Economix this morning; it is used here with permission. If you wish to reproduce the entire post, please contact the New York Times.

Financial Reform: Will We Even Have A Debate?

Posted: 25 Mar 2010 02:47 AM PDT

By Simon Johnson

The New York Times reports that financial reform is the next top priority for Democrats. Barney Frank, fresh from meeting with the president, sends a promising signal,

“There are going to be death panels enacted by the Congress this year — but they’re death panels for large financial institutions that can’t make it,” he said. “We’re going to put them to death and we’re not going to do very much for their heirs. We will do the minimum that’s needed to keep this from spiraling into a broader problem.”

But there is another, much less positive interpretation regarding what is now developing in the Senate. The indications are that some version of the Dodd bill will be presented to Democrats and Republicans alike as a fait accompli – this is what we are going to do, so are you with us or against us in the final recorded vote? And, whatever you do – they say to the Democrats – don’t rock the boat with any strengthening amendments.

Chris Dodd, master of the parliamentary maneuver, and the White House seem to have in mind curtailing debate and moving directly to decision. Republicans, such as Judd Gregg and Bob Corker, may be getting on board with exactly this.

Prominent Democratic Senators have indicated they would like something different. But it’s not clear whether and how Senators Cantwell, Merkley, Levin, Brown, Feingold, Kaufman, and perhaps others will stop the Dodd juggernaut (or is it a handcart?)

This matters, because there is more than a small problem with the Dodd-White House strategy: the bill makes no sense.

Of course, officials are lining up to solemnly confirm that “too big to fail” will be history once the Dodd bill passes.

But this is simply incorrect. Focus on this: How can any approach based on a US resolution authority end the issues around large complex cross-border financial institutions? It cannot.

The resolution authority, you recall, is the ability of the government to apply a form of FDIC-type intervention (or modified bankruptcy procedure) to all financial institutions, rather than just banks with federally-insured deposits as is the case today. The notion is fine for purely US entities, but there is no cross-border agreement on resolution process and procedure – and no prospect of the same in sight.

This is not a left-wing view or a right-wing view, although there are people from both ends of the political spectrum who agree on this point (look at the endorsements for 13 Bankers). This is simply the technocratic assessment – ask your favorite lawyer, financial markets expert, finance professor, economist, or anyone else who has worked on these issues and does not have skin in this particular legislative game.

Why exactly do you think big banks, such as JP Morgan Chase and Goldman Sachs, have been so outspoken in support of a “resolution authority”? They know it would allow them to continue not just at their current size – but actually to get bigger. Nothing could be better for them than this kind of regulatory smokescreen. This is exactly the kind of game that they have played well over the past 20 years – in fact, it’s from the same playbook that brought them great power and us great danger in the run-up to 2008.

When a major bank fails, in the years after the Dodd bill passes, we will face the exact same potential chaos as after the collapse of Lehman. And we know what our policy elite will do in such a situation – because Messrs. Paulson, Geithner, Bernanke, and Summers swear up and down there was no alternative, and people like them will always be in power. If you must choose between collapse and rescue, US policymakers will choose rescue every time – and probably they feel compelled again to concede most generous terms “to limit the ultimate cost to the taxpayer” (or words to that effect).

The banks know all this and will act accordingly. You do the math.

Once you understand that the resolution authority is an illusion, you begin to understand that the Dodd legislation would achieve nothing on the systemic risk and too big to fail front.

On reflection, perhaps this is exactly why the sponsors of this bill are afraid to have any kind of open and serious debate. The emperor simply has no clothes.


Even Mutual Funds Are Edging Away From Buy-and-Hold Now

Published: Friday, 26 Mar 2010 1:16 PM ET Text Size By: Jeff Cox

The debate over whether buy-and-hold investing makes sense in such an unpredictable market has made its way the mutual fund arena, where managers are increasingly turning a skeptical eye toward the traditional strategy.

While some of the larger funds remain ensconced in longer-term positions with only marginal levels of turnover, others are looking for a prolonged period of higher highs and lower lows that will create advantages for those willing to be more nimble.

The compressed market cycle is part of what what ING Investment Management experts are calling the "next normal."

Such a volatile climate will make it increasingly harder for buy-and-hold investors who like to park their money in positions for years and make only incremental adjustments along the way, executives at the firm said during a media briefing this week in New York.

"Expect more troughs, more volatility if you like—more non-linear behavior," said Tycho Van Wijk, senior investment manager for the ING Global Growth fund. "But do not trust your models very much. Judge every situation on its own."

The encouragement of investors to give their fund managers more leeway is a fairly bold one in the mutual fund world, where managers often give lip service to mobility but sometimes don't follow through.

"We've seen managers we deal with in a lot more discussion about concepts around sell discipline and risk budgets and things that really didn't exist 18 months ago," said Brett D'Arcy, chief investment officer at CBIZ Wealth Management, a San Diego-based risk advisory firm that deals with most high-net-worth clients. "If they had a sell discipline it was more theoretical. That's a change."

At ING, the "next normal" is a tweak on the "new normal" phrase coined by bond giant Pimco to describe a prolonged period of slow growth ahead.

Combining the dynamics of stronger global growth and greater volatility would require investors to be nimble if they want to capitalize on market moves higher and not get stung by drops. ING is a long-only firm so it does not make plays on the market heading lower.

"This could be the next normal," Van Wijk said. "The availability of global information is a very powerful key in understanding what is happening."

The result for the fund is a globally based strategy that focuses not only on individual parts of the world but also on investments that fit within seven broad themes: Economic growth, digital revolution, shifts in demography, changes in consumer behavior, industrial and technological innovation, environmental change and social and political change.

"Give your manager as much flexibility as possible," Van Wijk said.

Some investors appear to be taking the advice, as evidenced if nothing else in the proliferation of exchange-traded funds into the market.

ETFs use a variety of assets that track index performance, but they can be traded like stocks. So even if the ETF itself is a rather static way of tracking an index's performance, the ability for investors to buy and sell them at will essentially allows a trading environment inside of a buy-and-hold strategy.

"There's certainly more interest in tactical allocation. We've seen a growing number of funds doing that," said Russ Kinnel, director of fund research at Morningstar. "Part of the reason ETFs have grown is that they are catering to people who don't want to buy and hold."

The move way from buy and hold doesn't necessarily mean that investors are changing the time frames to meet their goals, but rather are changing tactics.

"Even if you're a long-term investor, given the extremes in the market it makes sense to have increased your turnover," Kinnel said. "There's good reason for long-term investors to create turnover."

To be sure, Kinnel said the turnover numbers still show that many of the dominant funds are sticking to their basics. But he said trends in the ETFs, which now have about $1.03 trillion under management, show that fund managers are adjusting their thinking.

For ING, a tactical shift does not mean a change in the firm's largely bullish outlook for the economy and the stock market.

The company remains overweight on stocks and high-yield bonds as well as commodities. ING remains underweight in US Treasurys in part because of concerns about debt in developed economies.

The key is the economy, but with emphasis on the importance not of how good things are from a historical standpoint but on how much they've improved from the recessionary lows, said Paul Zemsky, ING's head of asset allocation.

The theme fits into the notion that now is not a good time to be stagnant.

"The market tends to respond to the rate of change," Zemsky said. "There's a dichotomy. Those who have focused too much on the level of economic activity have missed the reality, because it's the change in economic activity that is the point."

The rise of developing economies combined with the proliferation of more sophisticated and faster information in the marketplace is making it essential for investors to allow fund managers more leeway in adapting, Van Wijk added.

"Buy and hold is probably not the best strategy," he said. "We decided to let go of the conventional tools. It was a tough step to take but we had to do it."

© 2010

Paul Daugherty

(c) 2010 F. Bruce Abel

Paul Daugherty -- how does he do it. A two-page, detailed, lyrical report on a great NCAA game ending after midnight in Cincinnati, in the print edition in my driveway at 6:30 am this morning.

Coming to the Glendale Lyceum April 15, 2010: 6 pm drinks, 6:30 dinner, 7:15 Paul:
"Covering Small Ball in the Garden of Eden."

Thursday, March 25, 2010

Natural Gas at Six-Month Lows

(c) 2010 F. Bruce Abel

This from off my Schwab newswire.

Natural Gas at 6-month Lows

3:35 pm ET 03/25/2010 -
[BRIEFING.COM] The dollar broke into positive territory after reversing its early losses as the Euro broke down amid numerous Greek rescue headlines. In turn, commodities pared their early gains.

Precious metals held on to minor gains despite the dollar's recovery. April gold closed 0.4% higher at $1090.90 per ounce. May silver closed 0.6% higher at $16.74 per ounce.

April natural gas sold off in the morning ahead of its inventory report this morning. It hit closed 2.9% lower at $3.99 per MMBtu. Natural Gas futures are now at 6-month lows.

Crude oil futures trended higher throughout the session but faded after hitting resistance at the $81.50 level. It closed fractionally lower at $80.53 per barrel.

Wednesday, March 24, 2010

The Big Short

(c) 2010 F. Bruce Abel

Michael Lewis interviewed by Terry Gross on NPR.

Trading Again

(c) 2010 F. Bruce Abel

Why "trade" the stock market? Because trading allows you to have a clear mind at every point in time, not burdened with "trying to catch up" or "hoping to get out when I'm even."

Trading is possible because of the low commissions. It involves money management and "feeling comfortable." It can avoid the addictive aspect by artificial restraints.

In January I put on a few trades in an addictive mode. I regretted them almost immediately. I realized what I was doing and decided to step back for some self-analysis. One of the trades was where I got a better execution than the price I had put in. Much better. A sure sign to get out immediately (which I didn't). More on this later.

One of the realizations from studying Schuch and Steidlmayer's work and the rsi method, etc. is that traders start each trade knowing that they do not know which direction the market will go. And they get out and go the other way when the discipline tells them to do that.

At the end of the chapter he lists specific observations that have a high enough probability of reoccurring he considers them rules:

If you find yourself holding a winning position, adding up your profits, and confidently projecting larger gains on the horizon, you are probably better off exiting the trade. The odds are that the trade has run its course.
When entering a trade with a market order and your fill is clearly better than expected, odds are it will end up being a losing trade. Good fill, bad trade. Get out!
If all your ‘trading buddies’ agree with your expectations regarding the next big move, it probably will not work out. If everyone’s conviction level is as strong as the consensus, do the opposite.


(c) 2010 F. Bruce Abel

What follows is not original of course. But it is noteworthy for its frontal attack. Refreshing.

For decades the G.O.P. has been the party of fear, ignorance and divisiveness. All you have to do is look around to see what it has done to the country. The greatest economic inequality since the Gilded Age was followed by a near-total collapse of the overall economy. As a country, we have a monumental mess on our hands and still the Republicans have nothing to offer in the way of a remedy except more tax cuts for the rich.

This is the party of trickle down and weapons of mass destruction, the party of birthers and death-panel lunatics. This is the party that genuflects at the altar of right-wing talk radio, with its insane, nauseating, nonstop commitment to hatred and bigotry.

Tuesday, March 23, 2010

Does Everything Relate to the Roosevelts, Or What?

(c)2010 F. Bruce Abel

Readers of this blog, or of my mind, know that I believe it does appear that everything in the world relates to everything else. I believe I latched onto this thesis from Brand Blandford (sp.), philosophy professor at Yale in one of those large lecture courses in Woolsey Hall.

Genny lives in Manila and our last trip there raised huge questions of Why the Philippines? I just finished reading The Imperial Cruise, by James Bradley, 2009, Little, Brown. If you want an eye-opener that will change your view of the history of Americca in the far east, America in WWII, even; America today, even, get this hardbound book.

This cruise, by Teddy Roosevelt's daughter star, Alice, later Alice Longworth, and with Wm Howard Taft, serves as the vehicle to expose the tour-de-force racist thinking of Teddy and also the simplistic, disastrous, secret dealing with the Japanese, also based on cocamamie racist theories, that "gave" Japan permission to take over Korea, and a lot of other things.

OK, so that's Teddy.

Now I re-realize that Teddy's grandson Kermit, perhaps thinking along the Rooseveltian imperial lines, was the almost-equal disastrous CIA "meddler" in our country's history, in 1953 single-handedly -- he had been told to come home after things didn't go right with Mohammad Riza Shah -- overthrowing Mohammad Mossadegh, putting spine in the Shah, and setting up our troubles in the Middle East which continue today.

So, two people. Two related people. Two Roosevelts. All "caused" the world to shift on its axis not once but twice! And I haven't even thought about Franklin! Or the Bush's.

Now I remember the book I was raving about six years ago or so: All the Shah's Men, An American Coup and the Roots of Middle East Terror, by Stephen Kinzer, 2003, John Wiley & Sons, Inc.

Monday, March 22, 2010

Trading Again

(c) 2010 F. Bruce Abel

This is a portfolio I am comfortable with, at this moment. But as you can see, still losing in dribs and drabs. Note, however, the matched July call positions in AAPL which would double in value if AAPL goes above 230 in the next week, and have a maximum loss of $2550.

Symbol Qty Close $ Current Price Name Market Value Cost Basis Cost per Share P/L $ P/L $ per Share Bracket Sec Type Exp Strike Under

AJL 07/17/2010 230.00 C
CALL APPLE INC$230 EXP 07/17/10

PG 04/17/2010 60.00 C

AJL 07/17/2010 220.00 C
CALL APPLE INC$220 EXP 07/17/10



Sub-Total $27,132.00 $27,528.66 ($396.66)

Cash $18,519.01

Total $45,651.01

Exported from™ for account xxxxxxxxx on 3/22/2010 at 8:27 EDT

The Big Short

(c) 2010 F. Bruce Abel

Readers of this blog will recognize that when I use both names for a "Label," this person is special! They also know that I have more entries for Michael Lewis and "Liar's Poker" than almost anything else. And I started doing this years before the crash.

Herein is a brief review of his new book. If it is as good as "Liar's Poker" I will fill up another room with copies I will buy on the used-book market, as I did for many years, giving them to everyone I met.

Genevieve and Me

(c) 2010 F. Bruce Abel

Oh, Genny, you must read!

Friday, March 19, 2010

David Brooks Today -- And For All Time

To try to maintain his readership Brooks "balances" in a way that I despise. But can he write! Can he conceptualize! "Communitarian," for heaven's sake. But it's so right on.

Op-Ed ColumnistThe Broken Society

Published: March 18, 2010
The United States is becoming a broken society. The public has contempt for the political class. Public debt is piling up at an astonishing and unrelenting pace. Middle-class wages have lagged. Unemployment will remain high. It will take years to fully recover from the financial crisis.

Read All Comments (273) »
This confluence of crises has produced a surge in vehement libertarianism. People are disgusted with Washington. The Tea Party movement rallies against big government, big business and the ruling class in general. Even beyond their ranks, there is a corrosive cynicism about public action.

But there is another way to respond to these problems that is more communitarian and less libertarian. This alternative has been explored most fully by the British writer Phillip Blond.

He grew up in working-class Liverpool. “I lived in the city when it was being eviscerated,” he told The New Statesman. “It was a beautiful city, one of the few in Britain to have a genuinely indigenous culture. And that whole way of life was destroyed.” Industry died. Political power was centralized in London.

Blond argues that over the past generation we have witnessed two revolutions, both of which liberated the individual and decimated local associations. First, there was a revolution from the left: a cultural revolution that displaced traditional manners and mores; a legal revolution that emphasized individual rights instead of responsibilities; a welfare revolution in which social workers displaced mutual aid societies and self-organized associations.

Then there was the market revolution from the right. In the age of deregulation, giant chains like Wal-Mart decimated local shop owners. Global financial markets took over small banks, so that the local knowledge of a town banker was replaced by a manic herd of traders thousands of miles away. Unions withered.

The two revolutions talked the language of individual freedom, but they perversely ended up creating greater centralization. They created an atomized, segmented society and then the state had to come in and attempt to repair the damage.

The free-market revolution didn’t create the pluralistic decentralized economy. It created a centralized financial monoculture, which requires a gigantic government to audit its activities. The effort to liberate individuals from repressive social constraints didn’t produce a flowering of freedom; it weakened families, increased out-of-wedlock births and turned neighbors into strangers. In Britain, you get a country with rising crime, and, as a result, four million security cameras.

In a much-discussed essay in Prospect magazine in February 2009, Blond wrote, “Look at the society we have become: We are a bi-polar nation, a bureaucratic, centralised state that presides dysfunctionally over an increasingly fragmented, disempowered and isolated citizenry.” In a separate essay, he added, “The welfare state and the market state are now two defunct and mutually supporting failures.”

The task today, he argued in a recent speech, is to revive the sector that the two revolutions have mutually decimated: “The project of radical transformative conservatism is nothing less than the restoration and creation of human association, and the elevation of society and the people who form it to their proper central and sovereign station.”

Economically, Blond lays out three big areas of reform: remoralize the market, relocalize the economy and recapitalize the poor. This would mean passing zoning legislation to give small shopkeepers a shot against the retail giants, reducing barriers to entry for new businesses, revitalizing local banks, encouraging employee share ownership, setting up local capital funds so community associations could invest in local enterprises, rewarding savings, cutting regulations that socialize risk and privatize profit, and reducing the subsidies that flow from big government and big business.

To create a civil state, Blond would reduce the power of senior government officials and widen the discretion of front-line civil servants, the people actually working in neighborhoods. He would decentralize power, giving more budget authority to the smallest units of government. He would funnel more services through charities. He would increase investments in infrastructure, so that more places could be vibrant economic hubs. He would rebuild the “village college” so that universities would be more intertwined with the towns around them.

Essentially, Blond would take a political culture that has been oriented around individual choice and replace it with one oriented around relationships and associations. His ideas have made a big splash in Britain over the past year. His think tank, ResPublica, is influential with the Conservative Party. His book, “Red Tory,” is coming out soon. He’s on a small U.S. speaking tour, appearing at Georgetown’s Tocqueville Forum Friday and at Villanova on Monday.

Britain is always going to be more hospitable to communitarian politics than the more libertarian U.S. But people are social creatures here, too. American society has been atomized by the twin revolutions here, too. This country, too, needs a fresh political wind. America, too, is suffering a devastating crisis of authority. The only way to restore trust is from the local community on up.

Monday, March 15, 2010

Medicaid and Root Canals in Michigan, Etc.

(c) 2010 F. Bruce Abel

Here we go.

And deciding on health care for aging parents:


(c) 2010 F. Bruce Abel

Gretchen Morgenson, she's always good and clear. And she worked for a brokerage 20 years ago so she knows the game.

This from last week, on how derivatives ate your village.

Friday, March 12, 2010

Et Tu Brute?

(c) 2010 F. Bruce Abel

I'm Globing & Mailing this morning.

Italy, meet Greece. Or come to lunch with Goldman Sachs.

Ian Simpson
Milan — Reuters Published on Thursday, Mar. 11, 2010 10:56AM EST Last updated on Thursday, Mar. 11, 2010 11:28AM EST
Financial markets are gripped by the role derivatives have played in Greece's debt crisis, but Italy also has a derivatives time bomb, and hundreds of cities are in the €24-billion blast zone.
Many local governments eager to cut financing costs for years rushed to sign up for complex derivatives contracts, even when the terms were in English. But some cities, facing big losses when interest rates go up, are now trying to pull out of derivatives and suing the international and local banks that arranged the deals.
In a test case, a judge in Milan will decide in coming weeks whether to try 13 people and four banks – UBS, Deutsche Bank, Germany's Depfa and JPMorgan Chase & Co – on aggravated fraud charges. The case stems from a derivatives swap over a €1.68-billion 30-year bond, the biggest issued by an Italian city.
Milan, Italy's financial capital, is facing a €100-million loss on the deal, city officials say. Milan is also suing the banks for €239-million in overall liabilities.
In the southern region of Puglia, prosecutors are seeking to bar Merrill Lynch, a unit of Bank of America Corp, from government contracts for two years. The move stems from derivatives losses from €870-million in regional bonds.
JPMorgan, UBS and Deutsche have denied wrongdoing, and Depfa has declined comment. Merrill has not commented.
Almost 500 small and large Italian cities are facing mark-to-market losses of €2.5-billion on the contracts, according to the Bank of Italy. Analysts say that figure will balloon when interest rates go up.
Most of the contracts involved switching fixed rates on loans to variable ones with banks.
“With the economic crisis, the problem has been lessened a bit (with lower rates) ... But in fact with a rate rise it becomes an even worse problem,” said Fabio Amatucci, an expert on local government finances at Milan's Bocconi University.
The European Central Bank is expected to start hiking rates at the end of this year or early next year.
U.S. and European officials are looking into how U.S. investment bank Goldman Sachs Group Inc. may have helped Greece disguise the size of its budget deficit through the use of cross-currency derivatives in 2001.
The Italian deals differ somewhat from the Greek case since the instruments were usually for switching rates on loans, but Italy stands out because of the vast number of cities, regions and public entities – even a theatre association – that turned to them from 2001 to 2008.
The Bank of Italy put the notional value of derivatives contracts at €24.1-billion in June 2009. However, Il Sole 24 Ore business newspaper on Thursday cited Treasury data to put the overall figure at €35.5-billion – a third of local governments' debt – when wider criteria were used.
Although central bank figures show 467 local governments had derivatives contracts at the end of September, Mr. Amatucci believes the real number could be around 3,000 as more deals emerge.
The government banned new contracts in 2008 pending new rules. Economy Minister Giulio Tremonti has said there is “no effect” from derivatives held by local governments.
Local governments rushed into derivatives in part because they helped ease the rigidity of a 2001 law that bars taking on new debt except to finance investment.
But another big draw was the upfront payment many cities got in advance for signing revamped agreements, usually done without a bidding process, analysts said.
Renegotiated deals shoved back payment and costs in a “political manipulation” of signings, said Giampaolo Gialazzo with the Tiche consultancy in Treviso.
Revised deals also carried increasingly restrictive terms and higher costs for municipalities and other local governments.
“Greece did nothing more than get itself money right away and then pay it back slowly. Local administrations in Italy did the same thing,” said Massimiliano Palumbaro with CFI Advisors in Pescara.
Pescara, a southern Italian city, itself took out a total of €108-million in interest rate swaps and is suing UniCredit SpA and BNL, a unit of France's BNP Paribas, over them. UniCredit had no comment, while BNL had no immediate comment.
When rates are low, as they were when many contracts were agreed to, local authorities using a variable rate could find their costs shrinking. However, when rates rose, officials would find themselves owing more money.
Milan has argued, as have many other local administrations, that the contracts were murky, carried hidden costs and banks had failed to explain them.
However, a source close to the issue said Milan could not argue that it was ignorant about derivatives since the 2005 swap replaced a contract that had been renegotiated repeatedly.
The city also has wide securities markets experience given its joint control of listed utility A2A, the source said.
With banks putting in place a complex deal that had to be overseen for 30 years with hefty back-office costs, “the city could not expect that the banks were going to take that position for free,” said the source.
Despite the court cases, Milan is still interested in derivatives. The city council said on Wednesday it was studying a switch from a variable rate on the contract to a fixed one.

Lehman -- From Globe & Mail

(c) 2010 F. Bruce Abel

From Globe & Mail for a change.

Emily Chasan
New York — Reuters Published on Thursday, Mar. 11, 2010 10:11PM EST Last updated on Friday, Mar. 12, 2010 10:21AM EST
Lehman Brothers Holdings Inc. used accounting gimmicks and had been insolvent for weeks before it filed for bankruptcy in September 2008, a court-appointed examiner found.
In a 2,200-page report made public on Thursday, examiner Anton Valukas, chairman of law firm Jenner & Block, reported the results of his more than year-long investigation into the firm's collapse, which deepened the global financial crisis.
The examiner said that while some of Lehman's management's decisions “can be questioned in retrospect” and the firm's valuation procedures for its assets “may have been wanting,” those responsible for the firm had used their business judgment and were largely not liable for the firm's collapse.
He said, however, that the bankruptcy estate, which is now being liquidated for the benefit of Lehman's creditors, could have claims against former Lehman chief executive Dick Fuld and chief financial officers Chris O'Meara, Erin Callan and Ian Lowitt.
The examiner said there was also sufficient evidence to support a possible claim that the firm's auditor, Ernst & Young , had been “negligent” and that Lehman could pursue claims against the firm for “professional malpractice.”
He did not find that Lehman's directors had explicitly violated their fiduciary duty. But he said some top executives may have not lived up to professional standards.
Mr. Valukas also said actions by rival banks JPMorgan Chase & Co. and Citigroup that restricted Lehman's liquidity in its final days may have worsened the bank's downward spiral.
The long-awaited report contains explosive allegations about a gimmick, known as “Repo 105,” that was used for the sole purpose of manipulating Lehman's books, contributing to the firm's demise.
The examiner concluded that the gimmick, which dated back to 2001 and was used without telling investors or regulators, gave the appearance that Lehman was reducing its overall leverage levels in 2008 when in reality it was not.
An attorney for Lehman's former chief executive said in a statement on Thursday that Mr. Fuld “did not know what those transactions were.”
“He didn't structure them or negotiate them, nor was he aware of their accounting treatment,” lawyer Patricia Hynes said, noting that the firm's outside auditor and legal counsel had not raised any concerns about the transactions with him.
The examiner also said a claim could be based on Ernst & Young's failure to abide by professional standards relating to communications with Lehman's audit committee.
A spokesman for Ernst & Young did not comment, saying the firm had hadn't reviewed the findings.
The report was allowed to be unsealed by U.S. bankruptcy Judge James Peck on Thursday.
The examiner said Lehman could be found to have been insolvent as far back as Sept. 2, 2008, even though it did not file for bankruptcy until Sept. 15.
The report, which details the harrowing days of September 2008 before Lehman filed the largest U.S. bankruptcy in history, also revealed the roles that the firm's Wall Street rivals played in its collapse.
The examiner said JPMorgan made mounting and increasingly aggressive calls for collateral in the days before Lehman's Sept. 15, 2008, bankruptcy filing.
On Sept. 11, JPMorgan executives met and decided that the collateral Lehman had posted “was not worth nearly what Lehman claimed it was worth,” the report says.
The next day, JPMorgan asked for an additional $5-billion in collateral.
About that time, JPMorgan discovered that one of the securities posted by Lehman, an asset-backed security known as Fenway, was “worth practically nothing as collateral.”
JPMorgan declined to comment and a Citi representative had no immediate comment.
In the report, the examiner detailed an interview with JPMorgan CEO Jamie Dimon where Mr. Dimon said he told Mr. Fuld in every conversation “that he did not want to harm Lehman.”
The examiner found Lehman could have potential claims against JPMorgan Chase & Co and Citibank in connection with demands for collateral and certain changes made to guaranty agreements in Lehman's final days that hurt its liquidity.
“Lehman's available liquidity is central to the question of why Lehman failed,” Mr. Valukas wrote in the report.
The report described how Bank of America executives backed away from a deal to buy Lehman that lacked U.S. government aid.
Bank of America's due diligence team concluded Lehman's commercial real estate valuations were too high, and identified $65-billion to $67-billion in assets the bank “would not have wanted at any price,” the examiner's report states.
And Barclays PLC has received some assets improperly when it ultimately took control of Lehman's core U.S. brokerage in a hurried bankruptcy court transaction, Mr. Valukas said in the report.
Barclays declined to comment and Bank of America representatives were not immediately available.
Under U.S. bankruptcy law, an examiner can be appointed in any bankruptcy case if someone requests it and the court finds the company's debts exceed $5-million.
Lehman, which had more than $600-billion in assets when it filed for bankruptcy, is planning to file a reorganization plan later this month that will explain how the firm intends to complete its bankruptcy and the examiner's report has been viewed as integral to that process.
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Two Columns and Hope

(c) 2010 F. Bruce Abel

Two columns give me great hope today: Brooks and Krugman. Both in the NYT.

Op-Ed Columnist
Health Reform Myths
comments (5)
Published: March 11, 2010
Health reform is back from the dead. Many Democrats have realized that their electoral prospects will be better if they can point to a real accomplishment. Polling on reform — which was never as negative as portrayed — shows signs of improving. And I’ve been really impressed by the passion and energy of this guy Barack Obama. Where was he last year?
Times Topics: Health Care Reform
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But reform still has to run a gantlet of misinformation and outright lies. So let me address three big myths about the proposed reform, myths that are believed by many people who consider themselves well-informed, but who have actually fallen for deceptive spin.
The first of these myths, which has been all over the airwaves lately, is the claim that President Obama is proposing a government takeover of one-sixth of the economy, the share of G.D.P. currently spent on health.

Well, if having the government regulate and subsidize health insurance is a “takeover,” that takeover happened long ago. Medicare, Medicaid, and other government programs already pay for almost half of American health care, while private insurance pays for barely more than a third (the rest is mostly out-of-pocket expenses). And the great bulk of that private insurance is provided via employee plans, which are both subsidized with tax exemptions and tightly regulated.
The only part of health care in which there isn’t already a lot of federal intervention is the market in which individuals who can’t get employment-based coverage buy their own insurance. And that market, in case you hadn’t noticed, is a disaster — no coverage for people with pre-existing medical conditions, coverage dropped when you get sick, and huge premium increases in the middle of an economic crisis. It’s this sector, plus the plight of Americans with no insurance at all, that reform aims to fix. What’s wrong with that?

The second myth is that the proposed reform does nothing to control costs. To support this claim, critics point to reports by the Medicare actuary, who predicts that total national health spending would be slightly higher in 2019 with reform than without it.
Even if this prediction were correct, it points to a pretty good bargain. The actuary’s assessment of the Senate bill, for example, finds that it would raise total health care spending by less than 1 percent, while extending coverage to 34 million Americans who would otherwise be uninsured. That’s a large expansion in coverage at an essentially trivial cost.
And it gets better as we go further into the future: the Congressional Budget Office has just concluded, in a new report, that the arithmetic of reform will look better in its second decade than it did in its first.
Furthermore, there’s good reason to believe that all such estimates are too pessimistic. There are many cost-saving efforts in the proposed reform, but nobody knows how well any one of these efforts will work. And as a result, official estimates don’t give the plan much credit for any of them. What the actuary and the budget office do is a bit like looking at an oil company’s prospecting efforts, concluding that any individual test hole it drills will probably come up dry, and predicting as a consequence that the company won’t find any oil at all — when the odds are, in fact, that some of the test holes will pan out, and produce big payoffs. Realistically, health reform is likely to do much better at controlling costs than any of the official projections suggest.

Which brings me to the third myth: that health reform is fiscally irresponsible. How can people say this given Congressional Budget Office predictions — which, as I’ve already argued, are probably too pessimistic — that reform would actually reduce the deficit? Critics argue that we should ignore what’s actually in the legislation; when cost control actually starts to bite on Medicare, they insist, Congress will back down.
But this isn’t an argument against Obamacare, it’s a declaration that we can’t control Medicare costs no matter what. And it also flies in the face of history: contrary to legend, past efforts to limit Medicare spending have in fact “stuck,” rather than being withdrawn in the face of political pressure.
So what’s the reality of the proposed reform? Compared with the Platonic ideal of reform, Obamacare comes up short. If the votes were there, I would much prefer to see Medicare for all.
For a real piece of passable legislation, however, it looks very good. It wouldn’t transform our health care system; in fact, Americans whose jobs come with health coverage would see little effect. But it would make a huge difference to the less fortunate among us, even as it would do more to control costs than anything we’ve done before.
This is a reasonable, responsible plan. Don’t let anyone tell you otherwise.

Wednesday, March 10, 2010

Trading Notes

(c) 2010 F. Bruce Abel

OK, got into NICE, with shares, not options as before. Still losing each day on the whole.


PG 04/17/2010 60.00 C





The Alternate Reality Investors Are In

(c) 2010 F. Bruce Abel

This article has a number of important concepts to dwell on. Many of them are topics we have focused on in the past two months.

The great investment imponderable: where to put money in this new era of distrust. It isn't just a question for the individual.

Many pension funds have concluded, as I have, that the traditional stock market is a casino and nothing more. Or worse, a crooked casino.

If they feel it's the former, they say "let's gamble; we don't have a choice."

Monday, March 8, 2010

No Hot Air Today

Mar 07, 2010
New world,old world. This world, next world
Why aren't we hearing more about shale in Europe? We've always thought that people are operating as far under the radar as they can get, and the behaviour of US companies back home says why:

(c) 2010 F. Bruce Abel

This from No Hot Air

The wide range of lease and royalty rates being offered to landowners has led to some concern, particularly among those who signed for lower rates.

One example is Oglebay and Wheeling parks. Last year, the Wheeling Park Commission got Chesapeake to pay $750 per acre and 14 percent production royalties for drilling at the two parks.Last month, the Marshall County Board of Education signed rights to 177 acres in Sherrard to Chesapeake for $2,800 per acre and 18.75 percent production royalties. Another Marshall County resident, Kerry Foster, has not yet signed with a company because he is holding out for better offers on his 69 acres.
"In 2008, CNX wanted to give me $5 per acre for it," he said of his land. "Now, the highest offer I have gotten is $2,800 (per acre) and 18.75 (percent).
A Weirton resident who owns about 50 acres in Marshall County requested to not be identified. He said a CNX representative initially offered him only $250 per acre for a lease..At first, this guy wanted me to sign for $250. Then, he went straight up to $1,250

God does work in mysterious ways, and although some may look to the future, members of a Hare Krishna community in West Virginia are happy to take the money in their current incarnation:

Members of the New Vrindaban Hare Krishna Community in Marshall County can attest to that, as they are set to gain roughly $10 million in lease payments from AB Resources.

With Ohio-based AB Resources set to pay the community a lease rate of $2,500 per acre for about 4,000 acres - and 18.75 percent production royalties if the company begins pumping natural gas - community member Gabriel Fried said he believes now is the time to sign.

"We could wait two years to see if the price goes to $5,000 per acre. But we wanted to get the production going because the royalties are the real source of revenue," Fried said.

God also takes care of those who take care of themselves. Here in Europe, land and mineral rights are far more complex than in the US to start off with, but producers have an advantage in that no one has heard of shale gas. Who is going to tell them if not regulators or their own governments? They won't learn it from expro companies, and they won't read about it in the papers.

That suits those like the US company we know who is on public record as paying a whole 55 cents an acre and 1% royalty in Poland.

Back to the Hare Krishnas. Next time someone complains about any alleged ecological impact of shale drilling, remember this:

The lease agreement includes $2,500 an acre and 18 3/4 percent of the gas royalties. The money also will be used to improve the community’s organic garden. Terry Sheldon manages the Krishna’s small farm training center.
“Some of these monies will be used to promote apprentice programs and the presence of cows in a farm community means guaranteed fertility in a community and when you have fertile soil you have social security so the money will be used to create housing and infrastructure enhance our cow protection program,” said Sheldon.
Fried said the Krishna’s plan to plant hundreds of nut trees on their property. Future plans even include building a holistic health clinic with the royalties. The Krishna agreement also includes drilling 400-feet below where the community pulls its water from.

In the mid 1980’s, there were more than 600 Hare Krishna members living in the New Vrindaban community. Today, that number is about 200.

International Society for Krishna Consciousness is one of the more obscure and unexpected links NHO has ever had, and boy have we had some left field ones.

Posted at 04:32 PM in Current Affairs, Energy Prices, Shale Gas Permalink

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Saturday, March 6, 2010

Trading Notes

(c) F. Bruce Abel

Much fretting over little, little, big, little losses in the new year. After a break-even year where I was for sure putting money into Schwab's hands over a lot of $8.95 low commissions, and a few higher ones involving options, $8.95, plus $0.75 per contract, I took a few swings on options in January (upside) and my account is down a few thousand. With my confidence level accordingly.

OK. I've found my perfect balance for (now) in my $46,500 Schwab account:

5 April 60 P&G calls

500 TIVO

The rest cash.

The five calls are under water but I started the week with 10, then briefly 20 (and used a secret vodoo procedure to try to force the market) and got out of 15 of them as I could not stand the press. So I'm comfortable going down with the ship on the five Procters in April. And sleeping at night.

Never owned or traded TIVO before, I believe. Having appreciated and heavily-used their thrilling system at home, I've been waiting for TIVO stock to shine, without studying the patent case which made the stock shoot up this week. So, no, I did not share in the shoot-up and I am in at a greedy $18.08 (premarket Thursday I believe).

But with this two-pronged position I think I can keep calm and not check the market 20 times a day. Which leads to overtrading, if there is such a thing.

I really want to build up a position of 1000 TIVO but after placing test orders below the market premarket for another 500, I pulled the orders and got busy during the day on legal things -- I'm a litigator -- and didn't complete the purchase.

Wednesday, March 3, 2010

British Gilts

(c) 2010 F. Bruce Abel

Article by Landon Thomas on the British Gilts has a key glitch in paragraph three.

Saying the yields on the 10-yr British gilt "slipped" is the opposite of what happened. A slipping yield would mean the 10-year gilt would have gone up in value.

This mistake reveals the problem with financial reporting: articles are written by people without the proper experience. But a lot of semi-experienced people get things wrong when it comes to bonds. Otherwise the story would have been an important one. And those of us who do understand bonds can glide over the story without much problem, other than to wonder what else might be wrong with the reporting.

Tuesday, March 2, 2010

Andrew Ross Serkin and The Buffett Annual Letter to Shareholders

Buffett Casts a Wary Eye on Bankers

Published: March 1, 2010
“Don’t ask the barber whether you need a haircut.”

Daniel Acker/Bloomberg News
In his annual letter, Warren Buffett took a shot at Wall Street and the incentive system for corporate “advice” on deals.

That little nugget was buried in Warren E. Buffett’s annual letter to Berkshire Hathaway shareholders published over the weekend. It was his thinly veiled dig at Wall Street bankers and the perverse incentive system for corporate “advice” on mergers and acquisitions — namely that bankers are paid only if a deal is completed. (Bankers typically earn nothing if a deal is abandoned or collapses, giving them little reason to recommend against pursuing a transaction.)
It was a timely note from Mr. Buffett — Monday ushered in more than $50 billion worth of merger announcements — and it resurrected an age-old debate on Wall Street about how bankers are compensated for their counsel to corporate boards.
And it’s an issue that resonates far beyond Wall Street. Just think of all the other parts of life where people offer only encouraging words — “You should do this!” — because that’s the only way they get paid (real estate agents, stock brokers, the list goes on).
And Mr. Buffett has trained his sociologist’s eye on this phenomenon more broadly, too. In his 1989 letter to shareholders, he famously wrote about the “institutional imperative,” which describes, among other things, how an entire organization can rise up to help a boss justify some deal he’s inclined to do, regardless of its merit.
It’s nice to think some things can change, but the deal incentive for bankers probably isn’t one of them.
“You shouldn’t earn a lot less by keeping your client from doing something stupid, but that’s the way it is,” Felix Rohatyn, the financier and elder statesman of Wall Street, told me. “The majority of fees are conditional.”
Mr. Buffett’s letter made a bold suggestion that isn’t sitting well with the establishment.
“When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion,” he wrote. “Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through.”
Of course, acquirers often hire more than one banker to advise a board, to act as a check on the other. But all too often, both banks are given the incentive to recommend the deal.
Since 2008 in the United States, in 131 of the 230 deals that were worth over $1 billion, the acquirer hired more than one bank, and in some cases more than five. Those banks were paid an estimated $3.3 billion for advisory services, according to Thomson Reuters and Freeman Consulting.
The problem, as Mr. Buffett explained when I called him on Monday, is that the system is skewed. Companies are willing to pay advisers a supersize fee when they do a deal because then it is merely a rounding error, a tip on a lavish, celebratory meal.
It would be hard to justify a big payment if there were no deal, so the system has evolved into an all-or-nothing game. Banks are willing to play it, because the rewards are so high, and they are not shy about offering attaboys and go-get-em’s to help make it happen.
When Berkshire recently acquired Burlington Northern, Goldman Sachs and Evercore Partners — which advised Burlington — were paid almost $50 million for what equated to only a couple of weeks of work.
Mr. Buffett, of course, did not use an investment banker.
“If we need advice for a deal, we probably shouldn’t be doing it,” he said with his trademark chuckle. He told a story about how First Boston (now Credit Suisse) tried to gin up interest in the mid-1980s for Scott Fetzer, a hodgepodge of small businesses based in Cleveland. It called on 30 firms to help make a sale, but failed to find a buyer.
Mr. Buffett then called Scott Fetzer’s chief executive himself and negotiated the deal face to face. Just as they were about to sign the deal, a banker for First Boston said that the bank was still entitled to a $2 million fee. The banker asked Mr. Buffett’s partner, Charlie Munger, whether he’d like to read the firm’s analysis of Scott Fetzer. Mr. Munger replied, “I’ll pay $2 million not to read it.”
That’s not to say that Mr. Buffett won’t ever pay investment bankers. “If someone brings me a deal, I’m more than willing to pay them,” he said, referring to his favorite banker, Byron Trott, a former managing director at Goldman Sachs, who helped broker deals including Berkshire’s investment in the $23 billion Mars-Wrigley merger and its acquisition of Marmon Holdings. However, Mr. Buffett insists that typically, “I don’t think we’ve ever paid for advice.”
Mr. Buffett’s biggest gripe is not just that bankers are given improper incentives, but he thinks their advice is suspect, especially when valuing stock-for-stock deals.
He had some experience this past year with such deals when Berkshire bought Burlington (he issued 80,932 Class A shares and 20 million B shares). He was also uncharacteristically vocal with his criticism of Kraft for paying $19.6 billion for Cadbury, much of it in stock (he’s a big Kraft shareholder).
He thinks that too much attention is paid to the value of the company that may be acquired, and not enough attention is focused on the value of the stock that the acquirer is shelling out.
“In more than 50 years of board memberships, however, never have I heard the investment bankers (or management!) discuss the true value of what is being given,” he wrote in his letter.
“Charlie and I enjoy issuing Berkshire stock about as much as we relish prepping for a colonoscopy. The reason for our distaste is simple. If we wouldn’t dream of selling Berkshire in its entirety at the current market price, why in the world should we ‘sell’ a significant part of the company at that same inadequate price by issuing our stock in a merger?”
Despite hearing from some of Wall Street’s biggest names about Mr. Buffett’s critique of their profession on Monday, most were circumspect in their reply.
“As usual, Mr. Buffett has an interesting point,” said Joseph Perella, one of the deans of the deal business and the co-founder of Perella Weinberg. He said he was happy to report that some clients had begun paying flat quarterly fees for advice, regardless of whether his firm recommended for or against a deal. However, he acknowledged, “most clients aren’t doing that.”
When I invited Mr. Rohatyn to critique Mr. Buffett’s view of his profession, he replied, as so many in the business did: “Warren is Warren,” is all he would say.

I will once again be in Omaha for Berkshire Hathaway’s annual meeting on May 1 asking questions of Mr. Buffett and Mr. Munger. If you have questions for either gentleman, please send them to (Let me know if I can identify you by name if I ask your question. Also, please tell me if you’re a Berkshire shareholder.)
The latest news on mergers and acquisitions can be found at

John Lanchester's Excerpt -- From "I.O.U."

(c)2010 F. Bruce Abel

It's the Woody Allen (response to Christopher Walken) quote that I like so much:

Here's the excerpt:

Annie Hall is a film with many great moments, and for me the best of them is the movie's single scene with Annie's younger brother, Duane Hall, played by Christopher Walken, the first of his long, brilliant career of cinema weirdos. Visiting the Hall family home, Alvy Singer — that's Woody Allen — bumps into Duane, who immediately shares a fantasy:
"Sometimes when I'm driving . . . on the road at night . . . I see two headlights coming toward me. Fast. I have this sudden impulse to turn the wheel quickly, head-­on into the oncoming car. I can anticipate the explosion. The sound of shattering glass. The . . . flames rising out of the flowing gasoline."
It's Alvy's reply which makes the scene: "Right. Well, I have to — I have to go now, Duane, because I, I'm due back on the planet Earth."
I've never shared Duane Hall's wish to turn across the road into the oncoming headlights. I have to admit, though, that I have sometimes had a not-too-distant thought. It's a thought which never hits me in town, or in traffic, or when there's anyone else in the car, but when I'm on my own in the country, zooming down an empty road, with the radio on, and everything is moving free and clear, as it hardly ever is with today's traffic, but when it is, I sometimes have a fleeting thought, one I've never acted on and hope I never will. The thought is this: what would happen if I chose this moment to put the car into reverse?
When you ask car buffs that, the first thing they do is to give you a funny look. Then they give you another funny look. Then they explain that what would happen is that the car's engine would basically explode: bits of it would burst through other bits, rods would fly through the air, the carburetor would burst into fragments, there would be incredible noise and smell and smoke, and you would swerve off the road and crash with the certainty of serious injury and the high probability of death. These explanations are sufficiently convincing that I find that the thought of putting the car into reverse flits across my mind only very temporarily, for about half a second at a time, say once every two or three years. I'm sure it's something I'll never do.
For the first years of the new millennium, the whole planet was zooming along, doing the equivalent of seventy on a clear road on a sunny day. Between 2000 and 2006, public discourse in the Western world was dominated by the election of George W. Bush, the attacks of 9/11, the "global war on terror" and the wars in Afghanistan and Iraq. But while all that was happening, something momentous was taking place, not quite unnoticed but with bizarrely little notice: the world's wealth was almost doubling. In 2000, the total GDP of Earth — the sum total of all the economic activity on the planet — was $36 trillion. By the end of 2006, it was $70 trillion. In the developed world, so much attention was given to the bust in dot-com shares in 2000 — "the greatest destruction of capital in the history of the world," as it was called at the time — that no one noticed the way the Western economies bounced back. The stock market was relatively stagnant, for reasons I'll go into later, but other sectors of the economy were booming. So was the rest of the planet. An editorial in The Economist in 1999 pointed out that the price of oil was now down to $10 a barrel, and issued a solemn warning: it might not stay there: there were reasons for thinking the price of oil might go to $5 a barrel. Ha!
By July 2008 the price of oil had risen to $147.70 a barrel, and as a result the oil-producing countries were awash with cash. From the Arab world to Russia to Venezuela, the treasury departments of all oil-producing countries resembled the scene in The Simpsons in which Monty Burns and his assistant, Smithers, pick up wads of cash and throw them at each other while shouting "Money fight!" The demand for oil was so avid because large sections of the developing world, especially India and China, were undergoing unprecedented levels of economic growth. Both countries suddenly had a hugely expanding, highly consuming new middle class. China's GDP was averaging growth of 10.8 percent a year, India's 8.9 percent. In fifteen years, India's middle class, using a broad definition of the term meaning the section of the population who had escaped from poverty, grew from 147 million to 264 million; China's went from 174 million to 806 million, arguably the greatest economic achievement anywhere on Earth, ever. Chinese personal income grew by 6.6 percent a year from 1978 to 2004, four times as fast as the world average. Thirty million Chinese children are taking piano lessons. Two-fifths of all Indian secondary school boys have regular after-school tuition. When you have two and a quarter billion people living in countries whose economies are booming in that way, you are living on a planet with a whole new economic outlook. Hundreds of millions of people are measurably richer and have new expectations to match. So oil is up, manufacturing is up, the price of commodities — the stuff which goes to make stuff — is up, the economy of (almost) the entire planet is booming. Who knows, optimists think, with the global economy growing at this rate, we can perhaps begin to think seriously about meeting the United Nations' Millennium Development goals, such as halving the number of hungry people, and of people whose income is less than $1 a day, by 2015.1 That seemed utopian at the time the goals were set, but with the world $34 trillion richer, it suddenly looked as if this unprecedented target might be achieved.

Monday, March 1, 2010

Investing Question of the Century

(c) 2010 F. Bruce Abel

The investing question of the century is Who knows what he's doing?
After the crash that we had recently this is an almost unknowable thing. Herein the beginnings of an answer.

The computer knows what it's doing.

Why not a person? Because a person:

(1) has to get up to go to the bathroom;
(2) gets bored;
(3) gets panicked;
(4) knows certain things but not all things.

Today for example. My only position is 10 April 60 calls on P&G. They were purchased a couple of weeks ago at $429.00.

Missing March at School Didn't Hurt Her

(c) 2010 F. Bruce Abel

Well, she went to Wellesley and graduated the year after I graduated from Yale. Then she married this guy Goldstein.

Tracking Si Burick's Daughter -- She Who Wrote the Great Spring Training Article

(c) 2010 F. Bruce Abel

She must be Mr. Steven Goldstein of 55 Park Avenue, New York. Here's an article in the New York Times about the birth of her son.

At first I thought the 55 Park Avenue referred to that street in Oakwood, Dayton, Ohio, and Si Burick was a Dayton writer. But then I realized it must be New York City.

Anyway, click on "Burick" and scroll down and you will find her very good article about going to spring training every year as a child, as Si was covering the Reds.

A Great Spring (Training)!

(c) 2010 F. Bruce Abel

The Enquirer's Paul Daugherty will speak to The Glendale Lyceum April 15th!


(c) 2010 F. Bruce Abel

Walking Friday night (to meet Jerry Springer's Democratic fundraiser next door), from the old parking garage at 3rd and Vine, through the Central Trust Annex, into the Central Trust bank lobby, and through the front door out to 4th Street, and left to "McAlpins," now a luxury condo building, gave me frisson. The prime of my working life was in 2208. Goodbye Bartlett, Bill Herron, Jim Ryan, Charles Tobias, Bob White. Goodbye Jerry the corner newspaperman. Goodbye lunches at the old McAlpins. Goodbye trips to Harrisburg, Columbus, Frankfort, even D.C., Pittsburgh.

Exactly what is the prime of one's life? Has it occurred yet?


(c) 2010 F. Bruce Abel

Reading the blog No Hot Air led me back to my back yard here in Ohio.

Gearino, for the Columbus Dispatch, is the best source out of Columbus. This article augers well for the anti-aggregator camp.

Columbia Gas
Did gas company leave money on the table?
Analysis shows old pricing plan hurt customers
Thursday, February 25, 2010 2:54 AM
By Dan Gearino

How would you like an extra $450 in your pocket?
That's the amount that a typical Columbia Gas household could have saved from 2005 to 2009 if the company had used the purchasing practices that it will begin in April, according to a Dispatch analysis of newly available pricing data.
The figure is the estimated difference between Columbia's past prices and what the prices would have been under a new system that includes an annual auction and rates tied directly to changing commodity prices.

"There could be something systematically wrong," said Ken Costello, chief of the natural-gas section of the National Regulatory Research Institute, after reviewing the data. "The numbers suggest that the company was consistently paying more than the market price for gas."
Critics of Columbia have long said that the company's pricing was uncompetitive. Now, at the moment when that system is ending, this evidence supports the critics' case.
The new system is an improvement on one that did not create enough incentive for utilities to seek the best prices, said Ohio Consumers' Counsel Janine Migden-Ostrander.
"We're very pleased that it has been done now, especially in this economy where customers need the savings," she said.
Columbia Gas objects to looking at how the new system would have affected past prices, saying that each time period has its own unique market conditions.
"We just can't know with any certainty what the (results) would have been" in previous years, said company spokesman Ken Stammen.
Columbia has long set its pricing using a process called "gas cost recovery," in which the company estimated its costs for each month, then did an adjustment in subsequent months to account for the difference between the estimate and the actual costs. The gas purchasing was done in-house by Columbia.
Under the new system, called a "standard service offer," outside wholesalers bid for the right to supply Columbia with natural gas. The price has two components. First is a service fee that is set through a reverse auction, meaning the lowest bidders win. Second is the price of gas on the New York Mercantile Exchange on the last trading day of the previous month.
In essence, the price is set by the market, rather than how it was before when Columbia had more control.
The first auction for the new system was held on Tuesday, and the amount of the service fee was set at 19.3 cents per 100 cubic feet of gas. That price will remain in effect for the next year. The PUCO approved the result yesterday.
Based on the current NYMEX price of gas, 49 cents per 100 cubic feet, plus the service fee, the cost for customers would be 68 cents. The NYMEX price is unusually low right now because of the economic downturn, and it could be higher or lower by the end of March when the Columbia price is set.
The prices do not include taxes and fees, which are the same under the old and new systems.
In the short run, this new system likely will lead to a price increase for Columbia customers, who are paying 42 cents this month and will pay 44 cents in March. Columbia's price has been artificially low for the past few months because of low commodity prices and quirks from the changeover to the new pricing method.
And yet, a longer view shows that the new approach is a dramatic improvement over the past system. From 2005 to 2009, the new system would have yielded a better price in 36 out of 48 months.
Based on average monthly usage during those four years, the price differences meant that a typical household paid about $450 more than it would have under the new system. For Columbia's territory as a whole, this adds up to hundreds of millions of dollars.
There are some significant caveats to this analysis. Most important is that the service fee, now 19.3 cents, will change every year, and there is no way to know what it would have been in past years.
However, even if the fee was much higher - say, for example 23.5 cents, which is the highest the fee has ever been for any of the three Ohio utilities that use this system - it still would beat the Columbia price in 32 out of 48 months.
The price differences only apply to customers who buy their gas from Columbia. More than 45 percent of customers in the territory, which includes 1.4 million households, get gas from unregulated providers called gas marketers. Marketers offer a variety of rate plans that may be more or less than Columbia's price.
Regulators and consumer advocates are praising the results of Tuesday's auction, which they say will lead to lower prices in the long run.
"The auction netted a positive result with the new retail price adjustment and demonstrated that the natural gas market will provide a better commodity price for Columbia customers," said Alan Schriber, PUCO chairman, in a statement.
Dave Rinebolt, executive director of the consumer advocacy group Ohio Partners for Affordable Energy, thinks the new system is good for customers. He is reluctant, though, to criticize Columbia's practices.
"They erred on the side of caution," he said.
By that, he means that Ohio's regulatory system placed a premium on stability of service and pricing, rather than holding companies accountable to outside benchmarks.
And stability may be one thing that is lost, or at least reduced. Columbia's old system allowed it to spread out cost increases over several months. Now, the volatility in the commodity markets will pass right through to customers.
Looking further ahead, this new system is scheduled to last for only two years. The next auction will be held next year at this time. Then, in 2012, the PUCO plans to change the system again to what is called a "retail auction," which would mean that the outside suppliers are directly serving customers, rather than merely serving as wholesalers to Columbia. Columbia would continue to transport the gas and handle billing.
Some observers, including Migden-Ostrander, think the current wholesale auction is the best method for customers and oppose the proposed change to the retail auction system. The PUCO will monitor the wholesale auction system for the next two years and decide whether to move ahead with its plans.
While all this is happening, customers will likely notice few changes. Their bills will still come from Columbia. Their gas will come from the same pipe. The only difference is the method used for the pricing.