beaten with brains

Foreclosing on the Home ATM

2009-06-08T15:13:00.002-05:00

Homeowners who treated their houses like cash machines, tapping the equity as home values rose, are among the most likely to end in foreclosure, even more than those who bought at housing’s peak, a new study finds.

Full Story

Myths of the Great Depression

2009-06-07T21:20:00.004-05:00

Jim Puplava of the Financial Sense Newshour had a good interview with Robert Murphy summarizing some of the big picture points described in his book The Politically Incorrect Guide to the Great Depression and the New Deal.

Far from getting us out of the depression, Roosevelt’s “new deal” made things much worse. In fact, his “deal” wasn’t even new. He campaigned against Hoover by calling him “the biggest spendthrift in history” (which, in terms of American political history, was true). Then after he was elected, he proceeded to enact a supercharged version of many of the same, failed Keynesian pump-priming measures that Hoover tried (along with a few new and even worse ideas). Giant deficit spending, public works, wage and price controls, attempts to hold up agricultural prices, and the list goes on and on. The myth that Hoover was anything like a free market sympathizer goes hand in hand with the myth that Roosevelt “got us out of the great depression.” Instead, both Hoover and Roosevelt turned a recession into a great depression with a slew of interventionist policies, many of which were precisely the opposite of what should have been done.

Those sympathetic to Roosevelt sometimes describe his methodology as throwing all kinds of things against the wall to see what sticks. This would be bad enough if it were true as it would show that Roosevelt had no idea what he was doing. But it was actually much worse than this as described in painstaking (and painful to learn) detail by John T. Flynn in 1948 in The Roosevelt Myth.

Anyway, useful interview with Murphy to cover some of the big picture basics.

How Science Becomes Common Knowledge

2009-05-22T11:48:00.003-05:00

From PhD Comics

You Can't Drink Yourself Sober

2009-05-15T07:57:00.001-05:00

"You can't drink yourself sober... You can't leverage your way out of excess leverage and you can't borrow your way out of too much debt."

Thugonomics

2009-05-15T07:52:00.003-05:00

http://zerohedge.blogspot.com/2009/05/foia-disclosure-busts-paulson-geithner.html

Judicial Watch, which lucked out majorly on a FOIA request to the Treasury, has received several hundred pages of stunning revelations, among which are that Hank Paulson essentially used the same tactics that he used on Ken Lewis on a group of nine bankers at the October 13 meeting which apportioned government investments to the various "critical" banking institutions. The major disclosure was captured in a memo called CEO Talking Points, which delineates the continuous use of strongarming tactics by not just Paulson, but by Tim Geithner, and Sheila Bair, who were also present at the meetings. According to one of the Talking Points:

“If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance. We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed.”

Opting out would also implicate the banks that didn't opt out as being in worse shape thus exposing them to possible runs (either the kind of "silent run" that hit Continental Illinois in 1984 or something more overt). Put all the banks in the same boat and you make it less likely that money will run from the bailout queens to the ones that opted out. Not exactly the kind of openness and disclosure we were promised.

Meanwhile…

http://finance.yahoo.com/tech-ticker/article/248205/%22That%27s-Not-the-American-Way%22-Chrysler%27s-Bailout-and-the-Road-to-Ruin

Chrysler's plan to close about 25% of its dealers is the natural outcome of a series of very unnatural events surrounding its bankruptcy, says Howard Davidowitz, chairman of Davidowitz & Associates.

Specifically, Davidowitz was speaking about how the Chrysler bankruptcy was "hijacked" by the Federal government, which allegedly threaten creditors "if they didn't go along with the fiasco of turning the company over to the unsecured lenders."

Barack Obama's plan is to "sustain the union" in an effort to secure future votes in five key Midwestern states, Davidowitz says, without hesitation. "We the taxpayers are bailing out the union [and] bailing out Chrysler, which is an inefficient company that shouldn't survive and can't survive in the long run, anyway."

[…]

By propping up inefficient companies and keeping zombie banks alive, Davidowitz says "we are exactly on the same path as Japan," which is now two decades into its economic malaise.

But there's one key difference between the U.S. and Japan: While they had about $16 trillion in savings and a 19% savings rate when their bubble burst in 1989, the U.S. savings rate was negative a year ago, a now a relatively meager 4.2%.

"You know what we need to fix it: pain! We need 12-13% unemployment… Then in two years you can start to recover. We're never going to recover because the debt doesn't go away."

Hussman on the Relaxing Stress Test

2009-05-14T07:37:00.002-05:00

Full article

Last week, financial stocks enjoyed a powerful advance and short squeeze on the announcement of the results of the “stress test” of major banks. It is important to begin by noting that this was not a regulatory procedure with teeth. It was initially a response to Congressional demands to introduce greater objectivity into the use of public capital for these bailouts, and gradually morphed into nothing more than a “confidence building” exercise. And keeping with the emphasis on keeping the numbers happy, as opposed to providing full and fair disclosure, the Wall Street Journal reported on Saturday, “The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation's biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining. In addition, according to bank and government officials, the Fed used a different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits.”

To some extent, it is not possible to get full and fair disclosure using the method that regulators used in the first place, since it relied on banks' self-estimates of their potential losses in a further economic downturn. These of course being the same banks that made the bad loans, and have already proved themselves vastly incapable of loss estimation and risk management. Moreover, the Fed only asked for loss estimates for 2009 and 2010, not beyond – “Each participating firm was instructed to project potential losses on its loan, investment, and trading securities portfolios, including off-balance sheet commitments and contingent liabilities and exposures over the two-year horizon beginning with year-end 2008 financial statement data.” This period specifically excludes the window where we can expect the majority of “second wave” mortgage losses to be taken, as it does not capture any losses that will emerge as a result of mortgage resets from mid-2010, through 2011, and into 2012.

The “stress test” procedure also conveniently excludes any potential mark-to-market losses during 2009 and 2010, as banks “were instructed to estimate forward-looking, undiscounted credit losses, that is, losses due to failure to pay obligations (‘cash flow losses') rather than discounts related to mark-to-market values.”
Now, just think of this for a minute. Even if you assume that the “risk-weighted assets” of the banks are about two-thirds of their total assets (as the stress-test does), we're still looking at $7.8 trillion in total assets at risk in these banks, and despite being on the edge of insolvency only weeks ago, we are asked to believe that they will need less than 1% of this amount – $74.6 billion – of additional capital even in a worst case scenario. How do the stress tests arrive at this conclusion? 1) They underestimate potential losses by minimizing the horizon over which the losses would have to occur, excluding potential mark-to-market losses and restricting the loan losses to “cash flow” losses only; 2) They define capital well beyond tangible sources, to include about double what is available as Tier-1 common; 3) They include $362.9 billion in “resources other than capital” – essentially pre-provision net revenue expected to be earned by the banks over the coming two years to absorb potential losses; 4) They report the capital buffer that would be required after massive dilution in the common stock of these banks has already occurred.

As an example, Citigroup comes in with $119 billion in capital ($22 billion as Tier-1 common). Total assets are over $2.1 trillion, but the stress test assumes “risk weighted” assets of less than half that. Citi projects losses in 2009 and 2010 of $104.7 billion in a scenario where the unemployment rate reaches 10.3%. Citi assumes that it will earn $49 billion during that period which would partially absorb those losses, and that it will obtain $87 billion in Tier-1 from other capital sources, presumably including $33 billion of preferred that it would be willing to convert to common. Of course, Citi's entire market cap is only $22 billion, so the “$5.5 billion” that Citi is reported to need under the stress test is what it would require after a 5-to-1 dilution in its common stock (87+22/22). Essentially, we've got a company with a common equity buffer of just over 1% of total assets, that just 8 weeks ago was on the verge of receivership, and investors are urged to believe that there are enough voodoo dolls in the vault to make the company solvent even in a further weakened economy.

Taxpayers Getting Hosed Yet Again

2009-05-12T12:19:00.003-05:00

Fannie and Freddie will be money sink holes in 2010.

The Office of Management and Budget released a report yesterday on the budgets and proposed overhauls of Fannie Mae and Freddie Mac that included the possibility of liquidating their assets. But don't get your hopes up.

The two government run mortgage finance companies have been scandalously costly for tax-payers, costing Americans far more in bailout money than they ever saved in cheaper mortgages. The OMB says that the two companies will need at least $92.2 billion more in fiscal 2010. This is on top of the $78.2 billion in aid they've received since they were taken over by the government in September.

Meanwhile, the auto bailout is $83 billion and counting.

You are a Landfill

2009-04-24T07:17:00.003-05:00

This financial crisis is easy to understand. The irresponsible financial institutions dump their garbage on the Fed, and the Fed in turn dumps it on you.

Bear Stearns, AIG Dumped $74 Billion in Subprime, CDOs on Fed

April 24 (Bloomberg) -- The Federal Reserve took on more than $74 billion in subprime mortgages, depreciating commercial leases and other assets after Bear Stearns Cos. and American International Group Inc. collapsed.

In its biggest disclosure of the securities accepted to stabilize capital markets, the Fed said yesterday it had unrealized losses of $9.6 billion on the assets as of Dec. 31. The bonds, swaps and notes were taken in from Bear Stearns, once the fifth-biggest Wall Street firm by capitalization, and AIG, which had been the world’s largest insurer.

The losses on securities backed by assets such as home loans in Florida and California signal that U.S. taxpayers may be forced to reimburse the central bank through the Troubled Asset Relief Program, according to Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics.

“The numbers basically confirm that Treasury is going to have to take some TARP money and reimburse the Fed,” said Whalen, whose financial-services research company analyzes banks for investors. “It is essentially up to the Treasury to get the Fed out of this.”

The central bank lent $2 trillion to financial institutions and has not disclosed information about most of the collateral backing those loans.

Read the rest

The Treasury Bubble

2009-04-22T12:37:00.003-05:00

Bloomberg reports that a soaring U.S. budget deficit will mean billions in bond sales.

With spending on unemployment insurance and other safety- net programs rising, the deficit is already at a record $956.8 billion six months into the fiscal year. To help close that gap, the Treasury Department has more than quadrupled borrowing, pushing the government deeper into debt.

“Tax receipts are just collapsing,” said Chris Ahrens, head of interest-rate strategy at UBS Securities LLC in Stamford, Connecticut, one of 16 primary dealers required to bid at Treasury auctions. The need to sell more debt “is a big issue in the Treasury market and it is ongoing. The surging budget deficit is the primary cause.”

The government will have to sell $2.4 trillion in new bills, notes and bonds in fiscal 2009, according to UBS. From October through December, the Treasury sold a record $569 billion, up from $82 billion in the same period a year earlier, and auctioned another $493 billion in the last quarter, up from $156 billion. That helps to make up for the drop in tax receipts, pay for the rise in spending and refinance maturing debt. Along with the principal, the sales add additional interest costs to the deficit for years to come.

At some point, the Treasury will find it more and more difficult to find enough buyers for all of its debt. This comes at a time when primary treasury dealers are already holding a record amount of treasuries.

The amount of Treasuries held by primary dealers has reached a record as the Federal Reserve buys U.S. debt to combat the recession and bring down consumer borrowing costs.

The bet on higher prices means that if prices fall, the move to bigger yields will be “violent,” according to UBS Securities LLC. UBS is one of the 16 primary dealers that trade directly with the Fed.

[…]

“If this alteration in dealer positions represents a secular change in balance-sheet risk management” it will be another case of unintended consequences, UBS strategists led by William O’Donnell wrote in a note to clients yesterday. “In striving to drive market rates lower, the Fed may have created the conditions for a more violent rise in yields.”

It won't happen any time soon but eventually the economy will start to turn around. Perhaps before then, the existing supply of treasuries will be massive and growing while T-bond holders are running for the exits. How much will the Fed be willing to buy when it sees interest rates cranking up?

The Great Inflation Debate

2009-04-15T15:44:00.001-05:00

Here is a good offering in defense of the "nasty inflation will come" position. The big counter argument presented by the "deflationists" hasn't changed. They argue that inflation fears are unfounded because we've already had our inflation. We created nasty asset bubbles and now the air is rushing out in all directions. So no matter how much money the Fed creates, it simply can't create nearly enough to fill the monetary black hole that's opening up as the entire economy delevers from absurd heights. And so the debate rages on.

Stress Test as a Relaxation Exercise

2009-04-06T09:08:00.001-05:00

Geithner's stress test for the banks' balance sheets is quickly being revealed as pollyannaish. Calculated Risk wrote off the baseline scenario and the "highly unlikely" adverse scenario looks far too relaxing as well. What will Treasury say as unemployment (the "official" rate that is) closes in on 10% before the year is out?

Public-Private Money Laundering

2009-04-03T12:16:00.003-05:00

Banks Plan To Bid Up Each Other's Toxic Assets With Taxpayer Money

The tragi-comedy continues.

Mark-to-Massaged-Market: Two Cows Version

2009-04-02T12:30:00.003-05:00

Now that mark-to-market rules have been chastened and sent to bed without supper, Clusterstock has produced the two cows version of the new accounting rules.

You borrow $200 to buy two cows. You pay $100 for each cow. You write that down.

Lightning strikes one of your cows, an unlikely event that should only happen once every 10,000 years.

Lightning strikes the other cow.

You notice the cows are on fire.

Your paper still says $100.

Fortunately, mark to market has been suspended so you don't have to pay attention to the fire.

Your cows look dead.

Your paper still says $100.

Fortunately, mark to market has been suspended so you don't have to pay attention to the fact that the cows look dead. They're probably just sleeping.

You notice that you aren't getting as much milk as expected, so you adjust the model and mark the cows down to $98. You are confident, however, that the dislocated stream of milk revenue will quickly revert to expectations once the cows wake up.

You need to borrow some money so you ask investors for a loan against the cows. The investors tell you the cows are dead, and you already owe them $200 dollars you borrowed to buy them in the first place. You show them the paper that says the cows are worth $98 each and say the cows are just sleeping.

They light your paper on fire.

You ask the government to buy the sleeping cows at $98 each.

Tim Geithner tells you about the public-private investment partnership, which will encourage BlackRock and Pimco to buy the dead cows. Pimco puts in $5 and the Treasury puts in $5, and the FDIC lends $60 to a new entity called Pimcows, LLC. They buy the cow for $70. Tim whispers that he expects you'll buy a new cow with the $70.

You have two dead cows, $70 and $200 in debt to your investors. You have no plans to buy new cows.

My Manhattan Project

2009-03-31T12:45:00.002-05:00

How I helped build the bomb that blew up Wall Street

I have been called the devil by strangers and “the Facilitator” by friends. It’s not uncommon for people, when I tell them what I used to do, to ask if I feel guilty. I do, somewhat, and it nags at me. When I put it out of mind, it inevitably resurfaces, like a shipwreck at low tide. It’s been eight years since I compiled a program, but the last one lived on, becoming the industry standard that seeded itself into every investment bank in the world.

I wrote the software that turned mortgages into bonds....

South Park Reveals True Geithner Plan

2009-03-27T08:01:00.002-05:00

Finally, someone takes us behind the veil to reveal Treasury's true methodology for addressing the financial crisis.

From Dealbreaker

Mark-to-Market Again

2009-03-26T07:29:00.004-05:00

We now have yet more evidence that MTM accounting is hardly the problem here. Not only are the big banks not being forced to write their assets down to fire sale prices, they are barely writing them down at all. Zero Hedge refers to a Goldman Sachs report that shows banks carrying most of their assets at 90% of face value or better (oops, that's face value - last 12 months charge-offs - reserves). How long will it be before the market will actually pay that much? The banks may try to hold much of this to maturity and hope defaults going forward are low. In addition, these numbers wouldn't necessarily look crazy if the banks already had huge loss reserves built up but I wouldn't bet good money on that.

Federal Debt Soars Like Icarus

2009-03-23T13:37:00.003-05:00

Frontline will be looking at the federal debt this week. Should be worth watching. Of course, they may be having some trouble keeping up as witnessed by the show's title: Ten Trillion and Counting. In the time it took them to produce the show, the federal debt ripped passed $11T.

Mark-To-Monkey-Business Accounting?

2009-03-21T11:37:00.002-05:00

The subtitle for this post: Is FASB channeling the ghosts of Arthur Andersen? The answer to these questions would be ‘yes’ according to two recent writers.

Recall that in the first installment of the mark-to-market soap opera, we distinguished between assets that required marking (i.e., pricing) to some current and active market, marking to financial models (“mark-to-model”), and marking to management’s rough estimate (“mark-to-myth”).

It now appears that the assault on the old ways may be bearing some rotten fruit.
In the Next Round of Bank-Based Appeasement, a Seeking Alpha writer unloads on three potential accounting changes.

First:

Consider the bill sponsored by Representative Ed Perlmutter of Colorado - the "Federal Accounting Oversight Board Act of 2009." It fairly bristles with the kind of rewards the banking industry would love: better than bonuses, it could give them the kind of regulation they want. The bill would transfer the SEC's oversight of the FASB to the new "Federal Accounting Oversight Board." Look at its mission - it's a banker's dream come true:

(1) APPROVAL OF ACCOUNTING POLICY- The FAOB shall approve and oversee accounting principles and standards… the FAOB shall consider--

(A) the extent to which accounting principles and standards create systemic risk exposure for--

(i) the United States public;
(ii) the United States financial markets; and
(iii) global financial markets;

[…]

(C) whether certain accounting principles and standards should apply to distressed markets differently than well-functioning markets;

(D) the balance between investors' need to know a value of a company or financial institution's balance sheet at any given time versus financial regulators' responsibility to examine a company or financial institution's capital and value on both a liquidation and going concern basis;

[…]

(G) the need for accounting principles and standards to take into account the need for financial institutions to maintain adequate reserves to cover expected losses from assets held by such institution

[…]

It's downright Orwellian: to protect the public, this "oversight body" would blind them from the mistakes made by financial institutions by making accounting less transparent. The body has right to determine "the balance between investors' need to know a value of a company's balance sheet ... versus regulators responsibility to examine capital?" Doesn't that mean that the actual owners of an institution take a back seat to the regulators' decision to keep them in the dark about its true condition?

Truly incredible stuff. This bill wouldn't just turn the asylum over to the inmates; it would arm them with pistols and napalm, too.

Something does smell a little off in the state of Denmark. Could this be an accounting murder most foul? Point 1A is curious with its emphasis on ‘create.’ It seems to me that the real focus here should be the extent to which accounting principles and standards expose the foolish systemic risk taken on by financial institutions and subsequently dumped onto the public. Create or expose? I guess it depends on whose ox is being gored. Point 1G seems postmodern enough. Financial institutions get levered up to Pluto so that a small drop in (illiquid) asset values wipes out reserves. Do we fix this problem by requiring more reserves? Pish posh! We just need make sure accounting principles and standards “take into account” this massive leverage. What solvency issue?

Second:

On Tuesday the FASB released two exposure drafts that tinker with the edges of fair value reporting.

[…]

First up: FSP FAS 157-e, "Determining Whether a Market Is Not Active and a Transaction Is Not Distressed," which is intended to help preparers and auditors determine when a financial asset's trading price is affected by illiquid markets or a distressed transaction. It provides a list of indicators of illiquid markets; upon reviewing, if the preparer judges the securities in question to be trading in an illiquid market, it must take a second step.

That second step is a presumption that the price is associated with a distressed transaction; it's a presumption that can only be overcome by evidence that sufficient, usual and normal marketing activities occurred for the asset before measurement date, and that multiple bidders existed for the asset. If those conditions aren't met, then the asset must be valued using a valuation technique other than one that uses the quoted price without significant adjustment.

Bottom line, this will grease the skids for the expansion of "Level 3" valuations.

Mark-to-market, mark-to-model, or mark-to-monkey-business? Po-tay-toe, po-tah-toe.

Third:

Next: FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, "Recognition and Presentation of Other-Than-Temporary Impairments." This tweak will create a broad class of new long-term corporate investors in both debt and equity securities. Why? Because a firm will not recognize an other-than-temporary [OTT] impairment charge through earnings if it does not intend to sell an impaired security, and it is more likely than not that the firm will not have to sell it before the recovery of its cost basis. Therefore, we will likely witness an outbreak of "patient capital."

[…]

Net result: if OTT impairments ever do occur, the hit to earnings will be less than they are now, all else equal. Accumulated other comprehensive income will take a blow for the non-credit loss charges - but financial institutions won't mind because it won't affect regulatory capital. Charges through the income statement definitely affect regulatory capital, and they'll decrease. And earnings will be so smooth, they'll make a baby's bottom look like 20 grit sandpaper.

In more accessible language, here’s what a Bloomberg commentator has to say on this one in his colorfully titled Accounting Brothel Opens Doors for Banker Fiesta.

This week, the Financial Accounting Standards Board unveiled what may be the dumbest, most bankrupt proposal in its 36-year history….
Here’s what the board is floating. Starting this quarter, U.S. companies would be allowed to report net-income figures that ignore severe, long-term price declines in securities they own. Not just debt securities, mind you, but even common stocks and other equities, too.

All a company would need to do is say it doesn’t intend to sell them and that it probably won’t have to. In most cases, it wouldn’t matter how much the value was down, or for how long. In effect, a company would have to admit being on its deathbed before the rules would force it to take hits to earnings.

[…]

A FASB spokeswoman, Chandy Smith, confirmed my understanding of how the rule change would work.

[…]

Under the current rules, securities get differing accounting treatments depending on how they are classified on the balance sheet. When labeled as trading securities, they must be assigned marked-to-market values each quarter, with all changes flowing through to net income. Otherwise, changes in value don’t hit the income statement, unless the securities have suffered what the accountants call an “other-than-temporary impairment.”

While the term may be cumbersome, the idea is that companies need to show losses in net income once they no longer can pretend that an asset’s plunge in value is only fleeting…..

The board’s proposal tosses the old principle aside. Even if a loss is deemed not temporary, companies still would be allowed to keep it out of net income. There’s one exception: If a company holding debt securities concludes some of the decline is due to credit losses, that portion would need to be included on the income statement. Otherwise, the losses stay off.

You just know how this will turn out: Debt holders will say their losses almost always are due to something other than credit losses, such as liquidity risk, because it’s impossible to prove their judgments wrong. So the dents to net income will be minimal. That’s exactly what the FASB is trying to accomplish.

The saga continues…

How Bad Will It Get?

2009-03-20T11:13:00.002-05:00

To help shed some light on this question, Carmen Reinhart and Ken Rogoff (former chief economist at the IMF) produced a short but useful paper a few months ago: The Aftermath of Financial Crises.

The authors looked at major financial crises (as opposed to looking at "garden variety" recessions) from the past in terms of five key macroeconomic indicators: real home prices, real equity prices, unemployment, real GDP, and real government debt.

Reinhart and Rogoff (2008a) included all the major postwar banking crises in the developed world (a total of 18) and put particular emphasis on the ones dubbed “the big five” (Spain 1977, Norway 1987, Finland, 1991, Sweden, 1991, and Japan, 1992). It is now beyond contention that the present U.S. financial crisis is severe by any metric. As a result, we now focus only on systemic financial crises, including the “big five” developed economy crises plus a number of famous emerging market episodes: the 1997–1998 Asian crisis (Hong Kong, Indonesia, Malaysia, the Philippines, and Thailand); Colombia, 1998; and Argentina 2001. These are cases where we have all or most of the relevant data that allows for thorough comparisons. Central to the analysis is historical housing price data, which can be difficult to obtain and are critical for assessing the present episode. We also include two earlier historical cases for which we have housing prices, Norway in 1899 and the United States in 1929.

The results from the paper, along with the current US numbers, are as follows.

The average peak-to-trough decline in real home prices for these financial crises is 35.5% with an average duration of about 6 years. The US Case-Shiller composite 10 index is currently down 28.3% from its peak in June 06 and the composite 20 index is currently down 27.0%. Given what we know about what's still out there and given where we are now, it looks like we'll exceed the average decline.

The average historical decline in equity prices is 55.9%. The average decline lasts 3.4 years. The S&P 500 recently fell to a low that was 57% below its Oct. 2007 high. It is currently about 50% down after the last week's bear market rally. S&P is currently estimating 2008 operating earnings to be $50/share. I've seen a number of level-headed analysts predict $40/share for 2009. Assuming a generous (for a crisis) P/E of 15, this puts the S&P 500 at 600 (the low so far has been 676). A more plausible P/E of 12 puts the S&P at 480. An S&P of 600 puts the Dow somewhere in the neighborhood of 5,800 while an S&P of 480 could put the Dow around 4,600. Pretty scary numbers and well below the historical average calculated by Reinhart and Rogoff.

The third indicator looked at by the authors is the unemployment rate. Granted, the current official methodology for calculating unemployment is lousy and the official number significantly understates the real problem. But the authors used official numbers so we'll go with that. The average total increase in the unemployment rate is 7 percentage points over a period of 5 years. Currently, the US rate has risen from 4.1% to 8.1% –- a four percentage point increase. It looks like we're headed for an official number that could top 11 percent.

Next up is real GDP. On average, this indicator fell a whopping 9.3% over an average timeframe of two years. The US real GDP has just begun to fall (it peaked in Q2 2008 and it's only fallen about 1%) so there's not much of a comparison here yet. But a 9% drop in GDP would make the current situation look like a cake walk.

Finally, we come to real government debt. On average, this value rose 86%. The authors say this about debt:

Reinhart and Rogoff (2008b), taking advantage of newly unearthed historical data on domestic debt, show that this same buildup in government debt has been a defining characteristic of the aftermath of banking crises for over a century…. As Reinhart and Rogoff (2008b) note, the characteristic huge buildups in government debt are driven mainly by sharp falloffs in tax revenue and, in many cases, big surges in government spending to fight the recession. The much ballyhooed bank bailout costs are, in several cases, only a relatively minor contributor to post–financial crisis debt burdens.

If we start with the federal debt at the end of FY2008 -- $10.0T -- then this indicator is the most disturbing of all. An 86% increase in the federal debt is a scary number and when (not if) interest rates push back up near 10%, rolling that mountain of debt over into pricier notes will send the federal interest payment well north of $1T per year. Combine that with the rising cost of social services such as Medicare and Social Security and this looks like a thundering freight train with very wobbly axles. Obama's budget forecasts -1.2% GDP growth this year followed by 3.2% in 2010, 4% in 2011, and 4.6% in 2012. These numbers are beyond laughable. Part of the problem is the administration's crazy unemployment estimate which it puts at 8.1% for the whole of 2009. But it already hit 8.1% in February and it's rising quickly.

By contrast, the consensus of forecasters surveyed by Blue Chip Economic Indicators in February predicted that the GDP will fall by a larger 1.9 percent this year and then increase at weaker rates of 2.1 percent in 2010, 2.9 percent in 2011 and 2012 and 2.8 percent in 2013.

[…]

For 2010, when the administration is forecasting the deficit will decline to $1.17 trillion, the administration is forecasting that the rebounding economy will boost revenues by 8.9 percent. Based on the stronger growth, the administration is forecasting steadily declining deficits in coming years with the deficit dropping to $912 billion in 2011, $581 billion in 2012 and $533 billion in 2013.

These GDP numbers still look quite optimistic to me (economists have consistently underestimated the extent of this crisis and even pessimists and bears have had to revise down their early estimates). These deficit numbers are fantasy. In reality, federal tax receipts will tank while federal spending explodes. How bad will it get? We are not a responsible nation and we are in the midst of a self-imposed world of hurt. The non-doctored math looks ugly.

(end of post; ignore continue reading statement below)

Double (Non-)Indemnity

2009-03-14T10:17:00.004-05:00

No, I'm not talking about Billy Wilder's excellent film noir adaptation of the James Cain novel. I'm talking about the non-insurance provided by AIG and the FDIC. In each case, the real insurer is the taxpayer.

Actually, the vast majority of AIG was a well-run company. We're really talking about the small, London-based AIG Financial Products division. This is the group that trashed the company by writing a mountain of CDS contracts with zero capital backing them up. At any rate, Gretchen Morgenson explains that AIG is now the place where taxpayers' dollars go to die.

Meanwhile, Michael Kranish informs us that thanks to Congress, the FDIC didn't collect insurance premiums from banks for years.

The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.

The Federal Deposit Insurance Corporation, which insures deposits up to $250,000, tried for years to get congressional authority to collect the premiums in case of a looming crisis. But Congress believed that the fund was so well-capitalized - and that bank failures were so infrequent - that there was no need to collect the premiums for a decade, according to banking officials and analysts.

[…]

But if the FDIC suddenly had to take over a giant bank such as Citigroup or Bank of America, the fund would be drained "in a flash," said Cornelius Hurley, director of the Boston University law school's Morin Center for Banking and Financial Law.

[…]

Bair said yesterday that the agency's failure to collect premiums from most banks "was surprising to me and of concern." As a Treasury Department official in 2001, she said, she testified on Capitol Hill about the need to impose the fees, but nothing happened. Congress did not grant the authority for the fees until 2006, just weeks before Bair took over the FDIC. She then used that authority to impose the fees over the objections of some within the banking industry.

"That is five years of very healthy good times in banking that could have been used to build up the reserve," Bair, a former professor at the University of Massachusetts at Amherst, said in an interview. "That is how we find ourselves where we are today. An important lesson going forward is we need to be building up these funds in good times so you can draw down upon them in bad times."

[…]

Then, a booming economy left banks flush with cash, and by 1996 the insurance fund was considered so large that it could grow through interest payments and fees charged only to banks with high credit risk. Congress agreed that premiums didn't need to be collected if the fund was sustained at a level that was considered safe. Thus, about 95 percent of banks paid no premiums from 1996 to 2006, including some new ones that did not have to pay a premium, the FDIC said.

Congress mandates that the insurance fund must stay between 1.15 percent and 1.5 percent of all insured deposits. The reserve ratio on Dec. 31 was 0.40 percent, down from 1.22 percent at the end of 2007.

And so of course the taxpayers get to pay even more than they would have paid if the premiums would have been collected. I don't like the concept and existence of the FDIC even if it's done well. But a 1.5% capital ceiling? The only insurance outfit with a smaller capital reserve may well have been AIG Financial Products.

Remember why the FDIC was set up (at least purportedly). It was put in place after the 4,000 or so bank failures (along with bank runs) of the 1930s and it was meant to protect against a similar disaster in the future. The FDIC's mission is not to close a few banks here and there in a normal year. That's chump change that could be addressed in any number of ways. Rather, it is supposed to provide catastrophe insurance against a second Great Depression-like banking fiasco and stop massive bank runs. In that sense, it is much like AIG's CDS contracts which only insured the assets in question in the event of default. "No need for all of you people to make a run on your banks; you are insured by the FDIC. You can all sleep well knowing that your deposits are safe and secure."

But 1.5% is a joke. It is miles away from protecting against the kind of systemic collapse of the 1930s which means that the insurance it provides, much like AIG's CDS contracts, is a mirage. The real raison d'être of FDIC insurance is to give depositors the illusion of safety in order to keep them docile and convince them that a stampede is not necessary. FDIC insurance is herd control provided by one man with a dime store slingshot. If the herd ever figures out that he can't protect them from anything more savage than a single, toothless wolf with one bad leg, they'll flatten him. The FDIC would be crushed by even a smallish bank run (e.g., a run on 3% of deposited assets). But of course, the FDIC will run to the treasury as it is doing now. So in reality, it is once again the taxpayers who are the real insurers (this time insuring themselves). AIG and the FDIC are two peas in a pod. Both have written massive checks that only the taxpayers' bodies can cash.

(end of post; ignore continue reading statement below)

The Mark-to-Market Debate

2009-03-13T11:24:00.005-05:00

Early this week, someone asked me about the mark-to-market (MTM) debate. Was there some validity to the idea that a significant part of the financial crisis is being caused by the MTM requirement. I said that I didn't think so and thought about writing something up. I'm glad I didn't because David Reilly at Bloomberg has now made the case against MTM reform for me.

First some background. The banks assets are categorized into 3 classes: Level 1, Level 2, and Level 3 assets. Level 1 assets are fully liquid and are actively traded in a market. Thus, they have well-known prices associated with them. These are MTM assets. Level 2 assets are also known as "mark-to-model" assets. They are illiquid and don't have active markets associated with them. From Minyanville, they "have quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model derived valuations in which all significant inputs and significant value drivers [are - D.O.] in active markets." Level 3 assets have been called "mark-to-myth" or "mark-to-make-believe" assets. They are very illiquid and their prices can't even be estimated by decent models because inputs to the models would be unknowable and/or inadequate. They have no or few "observable inputs" and are therefore priced by the management's "best guess."

Markets for liquid assets tend to be rather volatile and right now, they have beaten rather low. The complaint against MTM is that many of these assets are worth more than the beaten down markets are claiming. After all, we know that in a recession (especially a significant one), equity markets for example tend to over-correct on the down side. So it would be unfair to force these banks to mark these "troubled assets" to market prices when we know that as the economy recovers (actually before), these markets with bounce back up.

But Reilly shoots big holes in the movement to "reform" MTM requirements.

Of the $8.46 trillion in assets held by the 12 largest banks in the KBW Bank Index, only 29 percent is marked to market prices, according to my analysis of company data. General Electric Co., meanwhile, said last week that just 2 percent of assets were marked to market at its General Electric Capital Corp. subsidiary, which is similar in size to the sixth-biggest U.S. bank.

What are all those other assets that aren’t marked to market prices? Mostly loans -- to homeowners, businesses and consumers.

Loans are held at their original cost, minus a reserve that banks create for potential future losses. Their value doesn’t fall in lockstep with drops in market prices.

Yet these loans still produce losses, thanks to the housing meltdown and recession. In fact, bank losses on unmarked loans are typically bigger than mark-to-market losses on securities like bonds backed by mortgages.

For most big bank assets, MTM simply isn't relevant because the assets are either mark-to-model or mark-to-myth. At this point, one might call them mark-to-broken-model. Nevertheless, they aren't Level 1 assets. Further, there is the transparency problem.

These investors already believe banks are underestimating just how bad losses will be on their unmarked loans. GE investors, for example, fled the stock due to concerns over its corporate loans and lending to Eastern Europe.

If investors could get a better sense of the losses actually facing GE, they might have more confidence in its financial strength. In other words, we need more mark-to-market accounting, not less.

On top of this, there is the banks' problematic business model of borrowing short and lending long.

This makes banks very different than, say, a homeowner who borrows a lot of money. In most cases, the homeowner has locked in funding. So long as the homeowner makes payments and doesn’t need to refinance, market prices aren’t that important.

Banks must tap debt markets for new money all the time. Investors buying that debt want to know how much the bank’s assets are worth. That tells them how much of an equity cushion the bank has to absorb losses.

For those investors, the current value of an asset, not what management thinks it will be worth, is vital. After all, their biggest concern is getting paid back in the event of default.

If they can’t gauge that likelihood, they stop lending. Banks then can’t finance themselves.

So why all the fuss over MTM.

So why is mark-to-market such an issue? It is being used as a scapegoat by banks and others to dodge two big issues -- their reckless use of borrowed money to boost returns and their inability to make sound loans and investments.

I would add one more point. The idea that we can fix a significant part of the crisis by fiddling with accounting regulations presupposes that this is a "liquidity crisis" and not a solvency issue. But this is what banks always assume when the levered scat hits the fan. "We're fine. Our business model is fine. All we need is a little more short-term cash to get us through the next few months." But this mess is hardly a short-term shortage of liquidity. It isn't even a garden variety recession. These assets are the product of a gigantic, unsustainable, cheap credit, debt-fueled bubble. Trying to re-blow the bubble is a terrible idea but it doesn't matter because it's not going to happen. And for assets like houses, they are still somewhat overpriced when compared to historical data (even after the big hit they've already taken).

Housing prices are not going to bounce back any time soon and may not stop falling for quite a while. These assets are not getting a big haircut from the market because the market is over-correcting. They are getting hammered because they have been massively overvalued. CDOs based on credit card, auto loan, and other non-mortgage debt were also unsustainable. Thus, these assets are not going to return to normal after bouncing off of an artificial market floor. Instead, the market is currently trying to push them back down to normal after bouncing off of an artificial and unsustainable ceiling. The banks are not in a liquidity crisis, they are in a solvency crisis.

The mark-to-market debate is a red herring. The big banks are levered up to Pluto with now-crappy assets bought using borrowed money during a period of massive debt bubble expansion (i.e., a Ponzi economy). And as sure as the purge must follow the gluttonous binge, the bubble is now in full deflationary mode. The big banks ate too much. Way too much. That yakking sound you hear is not an accounting fiction. It is quite real as is the smell of regurgitated CDOs.

(end of post; ignore continue reading statement below)

The Failure of Economic Models

2009-03-12T07:44:00.009-05:00

The Financial Crisis and the Systemic Failure of Academic Economics is an interesting exercise in self-flagellation by a far-flung group of academic economists. In this paper, the authors lament the poor state of mathematical modeling in the fields of economics and finance. While they don’t seem to consider or acknowledge that such models may never be adequate for many of their purported tasks, they nevertheless make a number of good critiques of the modeling world in economics. This is an academic paper so it’s filled with jargon and references to models that no one but other academics have heard of. But there are plenty of good points worth highlighting.

In fact, if one browses through the academic macroeconomics and finance literature, “systemic crisis” appears like an otherworldly event that is absent from economic models. Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon. In our hour of greatest need, societies around the world are left to grope in the dark without a theory. That, to us, is a systemic failure of the economics profession.

[…]

Much of the motivation for economics as an academic discipline stems from the desire to explain phenomena like unemployment, boom and bust cycles, and financial crises, but the dominant theoretical model excludes many of the aspects of the economy that will likely lead to a crisis. Confining theoretical models to ‘normal’ times without consideration of such defects might seem contradictory to the focus that the average taxpayer would expect of the scientists on his payroll.

It’s very difficult to model black swan events so the models usually leave out such events and assume that life is always ‘normal’ (in both the casual and statistical uses of the term). And yet, such events aren’t all that rare so there are numerous ways in which the models can and do break down.

Many of the financial economists who developed the theoretical models upon which the modern financial structure is built were well aware of the strong and highly unrealistic restrictions imposed on their models to assure stability. Yet, financial economists gave little warning to the public about the fragility of their models; even as they saw individuals and businesses build a financial system based on their work. There are a number of possible explanations for this failure to warn the public. One is a “lack of understanding” explanation--the researchers did not know the models were fragile. We find this explanation highly unlikely; financial engineers are extremely bright, and it is almost inconceivable that such bright individuals did not understand the limitations of the models. A second, more likely explanation, is that they did not consider it their job to warn the public. If that is the cause of their failure, we believe that it involves a misunderstanding of the role of the economist, and involves an ethical breakdown. In our view, economists, as with all scientists, have an ethical responsibility to communicate the limitations of their models and the potential misuses of their research. Currently, there is no ethical code for professional economic scientists. There should be one.

Here is a point that applies throughout economics. It is often thought that the field itself is and ought to be amoral. Like Dr. Mengele, human social interaction is reduced to an object of study and experimentation. Moral requirements and proscriptions are rarely seen as relevant.

For structured products for credit risk, the basic paradigm of derivative pricing – perfect replication – is not applicable so that one has to rely on a kind of rough-and-ready evaluation of these contracts on the base of historical data. Unfortunately, historical data were hardly available in most cases which meant that one had to rely on simulations with relatively arbitrary assumptions on correlations between risks and default probabilities. This makes the theoretical foundations of all these products highly questionable – the equivalent to building a building of cement of which you weren’t sure of the components. The dramatic recent rise of the markets for structured products (most prominently collateralized debt obligations and credit default swaps - CDOs and CDSs) was made possible by development of such simulation-based pricing tools and the adoption of an industry-standard for these under the lead of rating agencies. Barry Eichengreen (2008) rightly points out that the “development of mathematical methods designed to quantify and hedge risk encouraged commercial banks, investment banks and hedge funds to use more leverage” as if the very use of the mathematical methods diminished the underlying risk. He also notes that the models were estimated on data from periods of low volatility and thus could not deal with the arrival of major changes. Worse, it is our contention that such major changes are endemic to the economy and cannot be simply ignored.

This is consistent with the formula that was used to rate the risk of MBS tranches. The data behind the model were very thin, of dubious relevance, and came from a few years when houses were shooting up in value. Thus, the use of the model to justify pouring billions of dollars into illiquid securities was bound to end badly.

There are some additional aspects as well: asset-pricing and risk management tools are developed from an individualistic perspective, taking as given (ceteris paribus) the behavior of all other market participants. However, popular models might be used by a large number or even the majority of market participants. Similarly, a market participant (e.g., the notorious Long-Term Capital Management) might become so dominant in certain markets that the ceteris paribus assumption becomes unrealistic. The simultaneous pursuit of identical micro strategies leads to synchronous behavior and mechanic contagion. This simultaneous application might generate an unexpected macro outcome that actually jeopardizes the success of the underlying micro strategies. A perfect illustration is the U.S. stock market crash of October 1987. Triggered by a small decrease of prices, automated hedging strategies produced an avalanche of sell orders that out of the blue led to a fall in U.S. stock indices of about 20 percent within one day. With the massive sales to rebalance their portfolios (along the lines of Black and Scholes), the relevant actors could not realize their attempted incremental adjustments, but rather suffered major losses from the ensuing large macro effect.

Not only did Long-Term get so big that its models’ relevance bent under the hedge fund’s weight, it also suffered from “synchronous behavior” that neither the models nor Long-Term’s partners accounted for. Most of the big banks and numerous hedge funds were making many of the same trades as Long-Term (e.g., bond arbitrage, interest rate swaps, Russian bonds, equity vol.). The partners thought that there would be others who would pick up those trades if and when they had to bail but in fact, the opposite occurred. When the other big rats started to jump from the sinking ship, the weight transfer only made the ship sink faster. The partners could only watch helplessly as their illiquid assets plunged in value and the hedge fund quickly burned through its puny capital.

This leads to a related and well known example of synchronous behavior that the models don’t account for: the near truism that in a financial crisis, “all correlations go to one.” In such a situation, portfolio diversification is nearly impossible because even completely unrelated assets fall in lock step with each other. This is because they aren’t completely unrelated. Even though the assets themselves may be unrelated, they are owned by the same parties – hedge funds for example. And when such parties are forced to sell (due to margin calls for example), they can’t be too picky about what they sell. In such cases (which are quite common in crises), unrelated assets get nuked in parallel as the various parties try to raise capital by selling whatever will move. All correlations go to one and the models’ accuracies go to pot.

A somewhat different aspect is the danger of a control illusion: The mathematical rigor and numerical precision of risk management and asset pricing tools has a tendency to conceal the weaknesses of models and assumptions to those who have not developed them and do not know the potential weakness of the assumptions and it is indeed this that Eichengreen emphasizes. Naturally, models are only approximations to the real world dynamics and partially built upon quite heroic assumptions (most notoriously: Normality of asset price changes which can be rejected at a confidence level of 99. 9999…. Anyone who has attended a course in first-year statistics can do this within minutes). Of course, considerable progress has been made by moving to more refined models with, e.g., ‘fat-tailed’ Levy processes as their driving factors. However, while such models better capture the intrinsic volatility of markets, their improved performance, taken at face value, might again contribute to enhancing the control illusion of the naïve user.

The assumption that asset prices are normally distributed was also a major problem with Long-Term’s models even though the error of this assumption was known at the time. Life is full of “fat tails.” In other words, the supposed “once-in-a-thousand-years perfect storm” seems to show up, in one form or another, about every decade or so.

Many economic models are built upon the twin assumptions of ‘rational expectations’ and a representative agent. ‘Rational expectations’ forces individuals’ expectations into harmony with the structure of the economist’s own model. This concept can be thought of as merely a way to close a model. A behavioral interpretation of rational expectations would imply that individuals and the economist have a complete understanding of the economic mechanisms governing the world…. Leaving no place for imperfect knowledge and adaptive adjustments, rational expectations models are typically found to have dynamics that are not smooth enough to fit economic data well.

Technically, rational expectations models are often framed as dynamic programming problems in macroeconomics. But, dynamic programming models have serious limitations. Specifically, to make them analytically tractable, researchers assume representative agents and rational expectations, which assume away any heterogeneity among economic actors. Such models presume that there is a single model of the economy, which is odd given that even economists are divided in their views about the correct model of the economy….

The major problem is that despite its many refinements, this is not at all an approach based on, and confirmed by, empirical research.5 In fact, it stands in stark contrast to a broad set of regularities in human behavior discovered both in psychology and what is called behavioral and experimental economics. The corner stones of many models in finance and macroeconomics are rather maintained despite all the contradictory evidence discovered in empirical research. Much of this literature shows that human subjects act in a way that bears no resemblance to the rational expectations paradigm and also have problems discovering ‘rational expectations equilibria’ in repeated experimental settings. Rather, agents display various forms of ‘bounded rationality’ using heuristic decision rules and displaying inertia in their reaction to new information. They have also been shown in financial markets to be strongly influenced by emotional and hormonal reactions (see Lo et al., 2005, and Coates and Herbert, 2008) Economic modeling has to take such findings seriously.

Mathematical models of human action which contain dehumanizing assumptions that fly in the face of real world experience? Who’d of thunk it. But the illusion of control has a nasty bite to it.

Going Long on Torches & Pitchforks

2009-03-11T08:15:00.002-05:00

Barry Ritholtz takes a bite out of faux capitalists who love "free" markets when their levered profits are huge but run to the taxpayer when the house of cards tumbles.

The fear of 'nationalization' (which can mean about 10 different things) is both too late and a non sequitur. Not only are the big banks currently being nationalized in fits and starts, we already nationalized their potential losses (which are now be realized) years ago when we allowed them to gamble with more credit-money than the entire financial system could support.

(end of post; ignore continue reading statement below)

Bailing Out the FDIC

2009-03-06T12:14:00.004-06:00

Last September, Bloomberg reported that the FDIC's puny, underfunded [my assessment] insurance fund would probably need a big cash injection courtesy of taxpayers. Too many banks would fail for the FDIC to keep up. But the FDIC immediately shot back:

Bloomberg reporter David Evans' piece ("FDIC May Need $150 Billion Bailout as Local Bank Failures Mount," Sept. 25) does a serious disservice to your organization and your readers by painting a skewed picture of the FDIC insurance fund. Let me be clear: The insurance fund is in a strong financial position to weather a significant upsurge in bank failures. The FDIC has all the tools and resources necessary to meet our commitment to insured depositors, which we view as sacred. I do not foresee – as Mr. Evans suggests – that taxpayers may have to foot the bill for a "bailout."

Strong financial position. Ahem.

Last week, the FDIC proposed raising its insurance assessment fee for all insured banks in order to raise dough for the fund. This would of course transfer money from the competent banks to the incompetent banks (or technically, to their depositors and debt holders).

The Independent Community Bankers of America put out a statement Friday saying that its members are disappointed with the decision, and arguing that community banks and regional banks didn’t participate in the high-risk practices of Wall Street, yet they and their customers are being asked to “pay for the sins of Wall Street,” said Camden Fine, president and chief executive officer of the Independent Community Bankers of America, in a prepared statement.

“How ironic that on the same day that Citi is getting its third bailout from the government in six months, community banks are being kicked in the teeth by sharply higher FDIC assessments. The largest financial institutions are the ones that destabilized our economy,” Fine said.

Two days ago, we learned that the FDIC can't keep up with the supply of dying banks and that Sheila "Bair Says Insurance Fund Could Be Insolvent This Year."

And now we find that at the urging of the FDIC and others, Senator Dodd is looking to supply the FDIC with a "loan" courtesy of the taxpayers for up to $500 billion.

Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department.

The Connecticut Democrat's effort -- which comes in response to urging from FDIC Chairman Sheila Bair, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner -- would give the FDIC access to more money to rebuild its fund that insures consumers' deposits, which have been hard hit by a string of bank failures.

Last week, the FDIC proposed raising fees on banks in order to build up its deposit insurance fund, which had just $19 billion at the end of 2008. That idea provoked protests from banks, which said such a burden would worsen their already shaken condition. The Dodd bill, if it becomes law, would represent an alternative source of funding.

Mr. Dodd's bill could also give the FDIC more firepower to help address "systemic risks" in the economy, potentially creating another source of bailout funds in addition to the $700 billion already appropriated by Congress.

[…]

In an interview, she stressed that all insured deposits were already backed by the "full faith and credit of the United States government."

The full credit of the United States ~~government~~ taxpayer. But its only a loan you understand. We'll get all of it back with interest. Sure, the S&L bailout ended up costing the taxpayers $125B. But that was a weird, 6 sigma aberration. Our current situation is nowhere near as dire. Besides, the FDIC is in a strong financial position.

And the bailout (gravy) train rolls on…

(end of post; ignore continue reading statement below)

The Public Pension Bomb

2009-03-05T12:08:00.004-06:00

Hidden Pension Fiasco May Foment Another $1 Trillion Bailout

Taxpayers, get ready to pony up some more loot for public (black hole) coffers.

"The misleading numbers posted by retirement fund administrators help mask this reality: Public pensions in the U.S. had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30 percent less than that, at $2 trillion."

[...]

"'There are accounting gimmicks in pension land which create economic fictions and which disguise the severity of the real problem,' Kramer says. 'Unfortunately, pension board members don’t have much of an appetite for disclosing inconvenient truths.'"

[...]

"'It’s pitiful, isn’t it?' says Frederick "Shad" Rowe, a member of the Texas Pension Review Board, which monitors state and local government pension funds. 'My experience has been that pension funds misfire from every direction. They overstate expected returns and understate future costs. The combination is debilitating over time.'"

(end of post; ignore continue reading statement below)