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    • Wed Sep 24th 16:01 PM | Rating: 0 0
      Commented on:
      A Peek Under the Wisdom Tree
      Thanks for another really good article... I always learn something when I read your blogs
      View article »
    • Wed Sep 24th 14:58 PM | Rating: 0 0
      Commented on:
      Buffett Enters the Fray
      Buffet is a hypocrite.

      Its fine for the taxpayer to buy $700 billion of crap mortgage securities -- but its not OK for Berkshire Hathaway to buy even $5 billion. BRK instead bought $5 billion of cumulative convertible preferred shares from Goldman Sachs... you know the sort of preferred shares that Henry Paulson adamantly rejects having the taxpayer buy.

      This may be a cruel statement, but its 100% true. Given his age, Buffett will be dead long before the debt for this bailout comes due.

      BRK will collect 10% dividend yield from Goldman, even if the mortgage securities continue to decline. The only risk is if Goldman itself fails, which now that it is a Fed protected bank is a very small risk.

      If Buffet really believed the mortgage securities were such a great deal, he should have bought them directly. Given his (prior) reputation, such a vote of confidence would likely have brought in lots of other players and eliminated the need for a taxpayer bailout.

      Buffett bought cumulative convertible preferred shares for himself while recommending the taxpayer buy all the crap.

      Buffet: "Do what I say, not what I do"
      View article »
    • Wed Sep 24th 14:52 PM | Rating: 0 0
      Commented on:
      Bill Gross on the Bailout Plan
      Bill Gross owns a lot of the toxic paper, so its no surprise he would like to offload it at a profit to the taxpayer.

      Once the taxpayer takes on all the downside risk, Paulson proposes to have various asset management firms like Blackrock (CEO Larry Fink) and PIMCO (aka Bill Gross) manage the assets for a fee

      Surprise! Both Larry Fink and Bill Gross think its a great idea for the taxpayer to pay them huge fees
      View article »
    • Wed Sep 24th 13:46 PM | Rating: 0 0
      Commented on:
      What Paulson Has Against Preferred
      There is a very easy way to make sure the banks participate in the program:

      The Fed needs to stop providing financing for these toxic assets at imaginary collateral prices and at way below market rates. The Fed should provide financing valuing the collateral at mark to market prices and charging market rates of interest -- which is what it should have been doing all along.

      The Fed's foolish "emergency" financing schemes are what prevents banks from participating (can we still call these "emergency" after more than a year?)
      View article »
    • Wed Sep 24th 11:47 AM | Rating: 0 0
      Commented on:
      Caterpillar's Troubling Bond Issue
      There have been a lot of articles in trade publications, and a few academic articles written, about the problems of analyzing companies with "captive finance subsidiaries".

      Consider an extreme example:
      CAT goes and makes a bulldozer for $60K, and "sells" this to the finance subsidiary for $100K, booking a $40K "profit". The finance subsidiary goes and borrows the $100K at 6% (lets say we are looking at this before the credit crisis), and depreciates the bulldozer over 10 years, or $10K per year. The finance subsidiary tries to lease the bulldozer out for at least what it costs them to finance it. Lets look at the case where they are unable to lease it first:

      So year one, the accounting books show:
      machinery and engines: $40K profit
      Finance $16K loss ($10k depreciation + $6K interest)

      And CAT as a whole reports a $24K "profit" even though they didnt sell anything.

      If the finance subsidiary manages to lease the bulldozer for $18K per year, they would make 2% ROA (which would actually be well above average for financing deals). In this case the accounting books say:
      machinery and engines +$40K
      Finance +$2K

      This is roughly speaking what CAT's books are showing right now, which is why some people **think** CAT is a bulldozer company... most of the earnings **appear** to be coming from machinery, with only a small amount coming from finance.

      But what happens if the home builder industry collapses and the finance division cannot lease the bulldozer for all 10yrs? What happens if the cost of financing goes up by more than the lease?

      It quickly becomes obvious that the $40K "profits" on the machinery side is nothing more than an **advance** from the finance division. The actual profitability of producing the bulldozer is completely dependent on how well the financial division can finance their assets vs liabilities.

      In other words, CAT is a bank
      View article »
    • Wed Sep 24th 10:18 AM | Rating: 0 0
      Commented on:
      Does Paulson's Lie Matter?
      I think Paulson's lie matters quite a bit.

      Underlying all the technical details of all the bailouts and "emergency" lending facilities is the need to restore faith in the markets and the people that lead them

      How are people supposed to have faith in leadership that we know is lying to us?
      View article »
    • Wed Sep 24th 00:22 AM | Rating: 0 0
      Commented on:
      Caterpillar's Troubling Bond Issue
      User 251880,

      You can cook the books to make them say anything you want-- you haven't been paying much attention the past 10yrs if you haven't seen that.

      Caterpillar makes its money from finance. GE is another "industrial" company that makes almost 40% of its money from finance (down from 55% a few years ago). GM, another supposed industrial, makes **ALL** its money from Dietech and GMAC.

      Caterpillar provides vendor financing for a majority of its sales -- and they book the "revenue" (which came from themselves) as sales of machinery. The cash, was was booked as a "machinery and engine" sale upfront, trickles in over several years. From an accounting standpoint, you can book this revenue as machinery sales or as financing.

      CAT sold a lot of their accounts receivable, at a discount, which causes the financial products number to be understated. Also, when a customer fails to pay, the cost is assigned only to financial products (which understates financial products) -- the alleged "sale" of machinery / engines is never unwound.
      View article »
    • Tue Sep 23rd 17:56 PM | Rating: 0 0
      Commented on:
      Paulson/Bernanke: $700 Billion at 'Hold to Maturity' Pricing
      There is no such thing as "hold to maturity price".

      If Bernanke knows exactly which home owners are going to default and which will not, he should definitely tell us -- and more importantly tell us where he bought his crystal ball that foresees defaults but somehow fails to warn him about the credit crisis.

      Unless you know who will/will not default -- you have no way of knowing if a mortgage is worth par or zero.

      If he really did earn his PhD, than Bernanke knows this very well and he is deliberately lying to us. Shame on him
      View article »
    • Tue Sep 23rd 17:52 PM | Rating: 0 0
      Commented on:
      Caterpillar's Troubling Bond Issue
      Mr Jansen -- Caterpillar is NOT an industrial company. Yes, I know the SIC code says that CAT makes bulldozers and front loaders and such.

      But their biggest division is Caterpillar Financial.

      They make far more money financing bulldozers than they do manufacturing bulldozers.

      Caterpillar is a bank in drag
      View article »
    • Tue Sep 23rd 17:49 PM | Rating: 0 0
      Commented on:
      Bernanke Gives Up on Reverse Auction Idea
      The more I hear about Paulson's plan, the more I think we need a new Secretary of the Treasury. I know there is only a few months left, but he can obviously do a tremendous amount of damage in only a few months.

      He has misunderstood and underestimated this problem from the beginning. Supposedly he understands the U.S. is a republic -- but he proposes to solve the problem he doesnt understand by naming himself defacto dictator?

      Bernanke is being honest -- although probably not on purpose -- that the Treasury plans to overpay for bad assets. Its just common sense that the banks will not be helped if the taxpayers pay a "fair price" for them.

      Bernanke is clearly lying when he talks about a "hold to maturity price". There is no such thing. If Bernanke knows in advance which home owners are going to default, he should tell us. If we are going to look at this situation like moderately intelligent people, we have no way of knowing who will/will not default -- so we have no idea whether the hold to maturity price is par or zero. I have to think anyone who gets a PhD in economics knows this very well -- shame on Bernanke for deliberately lying to us.
      View article »
    • Tue Sep 23rd 15:25 PM | Rating: 0 0
      Commented on:
      Can Hank Paulson Lead?
      Henry Paulson all too obviously cannot lead. He spent the summer of '07 telling us that subprime issues were "well contained". He spent the summer of '08 telling us that Fannie and Freddie were well capitalized. And he spent most of August / early September telling us that the U.S. financial system was sound and solvent...

      Now Mr "Sound and solvent" is telling us that the sound and solvent system needs to be bailed out to the tune of $700 billion (and counting).

      Mr Paulson clearly has no idea what he is talking about. Either (1) he was just plain wrong about everything he said and really doesnt understand the markets at all; or (2) he doesn't understand leadership and the need to maintain at least a shred of credibility in order to lead.

      A coach can't meet his team in the locker room at halftime when they are down 50 points and claim that they are winning. The players will quite justifiably figure the coach is a moron.

      Well Coach Paulson told us the subprime issue was contained, that FNM/FRE were fine, the financial system was solvent -- and we could all look at the score board and know that simply wasn't true.

      And now he wants us to give him dictatorship powers to spend at least $700 billion of OUR money however he sees fit?

      How stupid are Americans to even consider this plan?

      Apparently we are all dumber than brinks, because we are considering it. And we still have the same out of touch coach running the team. Really embarrassing.

      So we read the plan. First, we are naming Paulson as defacto Emperor, with zero check and balance. Paulson plans to bail all his crony Wall Street buddies out of bad positions-- taxpayers who earned $50K last year (maybe) are asked to bail out traders who made millions. Common sense tells you the banks cannot be made better off than they are now unless the Treasury deliberately OVERPAYS for whatever assets (meaning the taxpayer loses).

      And when the dust settles: the plan solves nothing! Homeowners are still unable to pay their mortgages. The U.S. has another trillion in debt (I am speaking NET of the eventual payments on the mortgage debt), and has no way to pay for it -- we aren't getting a penny of extra revenue.

      And in the end, the most reckless and irresponsible members of society (those who took out liar loans and those who sold them) are rewarded with a huge bailout -- paid for by those who acted prudently.

      How does the U.S. compete globally when we reward our worst players and bench our better/average players? This is the opposite of a meritocracy -- it will make the U.S. far less competitive in world markets going forward.

      And this anti-meritocracy is already spreading. Car companies that are run by people who cannot design a decent car and staffed by overpaid union labor are already lining up for more handouts. Airlines are close behind.

      Whenever a company does something galactically stupid, the taxpayers will foot the bill. Over time, we will continuously transfer wealth from the responsible and prudent to the stupid and reckless.

      Arguably, the government needs to do something at this point -- but there is nothing intelligent about Hank Paulson's plan. Henry Paulson should be fired
      View article »
    • Mon Sep 22nd 11:52 AM | Rating: 0 0
      Commented on:
      Here's the $1 Trillion Question
      Mr Salmon -- while I will readily concede that the Bush administration's execution of most things has been really bad, I don't think your article helps any. You are trying to make this into a partisan issue.

      The facts show that a significant part of this problem was caused by democrats. FNM/FRE lobbying was heavily skewed toward Democrat members of congress who repeatedly thwarted efforts to reign in the GSEs. Democrat efforts to promote "affordable" housing by promoting 10%, 5% or no money down loans was nothing short of irresponsible. Alan Greenspan (appointed repeatedly by both parties) encouraged home buyers to take out adjustable mortgages after lowering rates too far for too long -- practically guaranteeing that resets would be at much higher rates.... and most recently, the three stooges (Bernanke, Paulson and Cox) have taken a really bad situation and turned it into a disaster.

      Your attempts to blame this on one party simply do not hold up. It makes no difference who is in the White House or who the next Treasury Secretary is.

      America has lived FAR beyond its means for decades. We are addicted to debt. Like all addicts, we are now trying to blame the drug dealer, society, OPEC, bankers, short sellers, and a whole telephone book full of boogie men.

      And now you are trying to pin our spendthrift ways on one guy in the Whitehouse who has been there for only 7 years out of the 40 or so that we have been spending way beyond our means. Roughly half the country strongly dislikes Bush, and another quarter (roughly) doesnt approve of his performance -- so how can you argue that we are following his "leadership" into indebtedness?

      We refuse to acknowledge that the real demon is us. We are addicted to debt. We are addicted to spending money we don't have.

      Replacing the idiot in the White House or the three stooges will not change the idiots in the voting booth. We need to grow up and take responsibility.
      View article »
    • Mon Sep 22nd 10:47 AM | Rating: 0 0
      Commented on:
      An Open Letter to Congress on the $700B Paulson Bailout Plan
      Paulson's plan is a disaster.

      Our children are going to pay dearly for our addiction to debt and spending
      View article »
    • Mon Sep 22nd 10:40 AM | Rating: 0 0
      Commented on:
      Treasury's Plan Is Breathtakingly Awful
      Smart, deep pocketed, long term investors-- like Warren Buffet, Blackstone Group, Carlyle Group, etc -- have all chosen to pass on buying these assets at the prices the banks would like to get.

      Merrill Lynch was able to sell a huge pile of their bad assets (prior to the BofA acquisition) at 15-20 cents on the dollar -- proving the assets are liquid at the right price.

      Henry Paulson spent the summer of '07 telling us the subprime debacle was well contained. He spent the summer of '08 telling us that Fannie/Freddie were well capitalized and in no need of a bailout.

      Now Paulson is telling us he is going to buy assets that are clogging up the system.

      (1) if the banks were willing to sell at a price that would yield the taxpayer a reasonable profit, smart money (Buffet, Blackstone, Carlyle, etc) would have already done it

      (2) if Paulson offers a "fair" price (where the taxpayer neither profits nor loses), there is no reason for banks to want to participate. There is already liquidity at these prices

      (3) Paulson will need to drastically overpay for the assets. This is the only scenario in which the banks are "helped". It also results in hundreds of billions in losses to be paid for by the taxpayer.

      And just to add insult to loss, Paulson wants to be named defacto dictator. Able to spend taxpayer money however he sees fit, without any oversight.

      Throughout the history of Wall Street, the "big names" have changed many times -- so I really wasn't worried that, once again, the big names are changing. Its a little scary while it is happening, but in the end it has historically worked out for the best...

      ...but now I am really scared for the markets and for America. We don't need a dictator, period. We don't need an ex-Goldman CEO bailing out his crony friends at taxpayer expense.

      This is a disaster.
      View article »
    • Mon Sep 22nd 09:56 AM | Rating: 0 0
      Commented on:
      Fed Is Likely to Make Money from Its Bank Buyouts
      Mr Delong:

      If this is such a money making opportunity for the government, please explain why deep pocketed, smart, long term investors such as Warren Buffet, Texas Partners, Blackstone LP, Carlyle Group, etc don't leap in and buy these assets?

      What do you **think** you know that all these other people don't?

      Given the government's history of paying $100 billion to bail out Katrina victims without actually doing so, including warehouses that were still filled with ice for New Orleans a year after the storm was over... Given the government's long standing history of paying over a billion dollars for a single airplane, and $10,000 for a coffee maker... given that the government has had a **spending** deficit every single year for 40 years...

      How do you figure the government is going to turn a profit on assets when smart money like Berkshire Hathaway and private equity funds can not?

      There is a reason these people are billionaires and the government is in debt trillions of dollars...

      It is really unhelpful when supposedly learned professors write ridiculous articles such as this one.
      View article »
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