Randy Miller

Is Dubai's Default a Black Swan Event?

It's a black swan if the herd says it's a black swan. CNBC's ratings go up everytime there is some financial crisis, just like the weather channel's ratings go up every time there is a big storm. The difference is that the weather channel's coverage never made a storm bigger.

Watching CNBC's coverage today is fascinating. Every hour they are rehashing the same information over and over, just with different talking heads. If you give them too much credence, they will sew the seeds of panic, along with certain investors, blowing the story out of proportion. Given the choice between downplaying the story vs overplaying, they will always overplay, because that is where the ratings are, and they get more attention that way.

October 2008 Henry Paulsen, Avi, CNBC, and the other talking heads were all telling us to panic. Rarely the responsible thing to do.

More AIG Controversy: Maiden Lane III

One more thing. CDS has to be subject to gaming laws. IF somebody makes money on a naked CDS, they should have to pay an exorbitant tax rate. Even if they have the underlying asset, they should be taxed highly if they profit, as opposed to just being made whole.

For example. Company A sells B an asset valued at $1 million, B paying A that amount. The asset happens to be a package of mortgages in Des Moines Iowa.

B purchases Default protection. The mortgages perform, and B over the following 2 years, receives $100,000 in interest, and $100,000 in principal. The remaining balance on that mortgage pool is $900,000. On January 1 of year 3, Des Moines suffers a shock in their housing market, and everyone defaults on their loans. The foreclosure value of the homes is now $500,000, so B has lost $400,000 in market value.

IF the provider of default protection pays B $400,000, he is now whole, no tax liability. IF B purchased default protection from 2 different companies, and is paid $800,000, he has profited from this adverse event, and should be taxed heavily on the $400,000 profit he made from the unfortunate events in Des Moines.

IF C had no stake in the Des Moines market, and purchased default protection, and received $100,000 from counterparties, that should be taxed heavily, because he was purely betting on the failure.

We should also look at put options on securities.

Why all this? Because it is possible for someone to profit from unfortunate events, and in some cases, they can influence those events. IF B had the power to force the mortgage holders into default, and did so, he should not profit by that. It would be no different than if I bought insurance on my neighbors house, and when it started to burn one night, I failed to call the fire deparatment. I should not profit from my action in that case, or lack of action.

I have read through the SIG's report, and we still don't know how much of the CDS was naked. If the Fed really did end up with the underlying CDO's in toto, maybe none of it was naked.

More AIG Controversy: Maiden Lane III

One word: Clawback. GS and the other big financials profits and resulting bonuses are in the billions because of this sweetheart deal. Get the money back, and then see what their bonuses are. Sanctity of contracts? Are these the same guys who voided union contracts and 200 years precedence in paying secured debtors first? What a crock.

Quit whining like wimps and victims. Get the money back.

Financial reform should say:

THe US government will never again guarantee the existence of a private company or guarantee its debts. No implicit guarantees , no explicit guarantees. Companies must be allowed to fail, so better companies can absorb their human and physical resources, and put them to better use.

Rating agencies should be held accountable for their ratings, eliminate conflict of interest inherent in the company holding the rated bonds paying the rating agency. IF the ratings agencies had done their jobs, they would have rated those super senior CDO traunches correctly. Remember, the real panic last fall was that no one knew what anything was worth.

Too Big to Fail Banks: A Simple Solution

Create a statute that says the US government shall not guarantee the existence of any firm.

The TBTF mentality of the last year has led to increased concentration of financial power, at exactly the time we should have been dispersing power. Why have the government hand Bear Stearns resources to Chase? Why hand Merrill Lynch to B of A? Why Not let other firms bid for those resources, so those resources might be allocated to the best team?

Require all financial institutions to be transparent to rating agencies.
Federal regulators should audit those agencies vigorously, and if there any clouding of the picture, enforce enforce extreme criminal penalties.

Let everybody know that everybody else can fail. So, if you depend on them, if you are interconnected with them, they can take you down with them. So protect yourself accordingly.

Does anybody really believe that AIG would be at $36 if they were not a government guaranteed firm?

Geithner to Blame for Outrageous Goldman Bonuses

I cannot say it enough times. GS profited greatly from the AIG bailout, in that they did not take a loss on their AIG exposures. And if somebody says to you, "but GS had their AIG exposure hedged", turn to them and say "would GS have gotten 100 cents on the dollar if AIG had defaulted, because if you believe they would have, you are a fool or a liar."

The taxpayer paid GS 100 cents on the dollar on their AIG exposure, an amount they would not have gotten if AIG had gone under. Why do I say that? Because whoever GS's counterparties were with the AIG hedge, those same entities were probably also counterparties to everybody else who was exposed to AIG. There was no combination of counterparties who could come up with the $85 billion the government paid to AIG. Therefore GS, and a lot of other Big Financials, would have gotten pennies on the dollar.

And why is AIG stock in the forties?

How Regulation Will Force ETFs to Evolve

What is the purpose of a free market? It is to make sure goods and services flow in directions where they will have the most value. Speculators have a role in that market when they provide liquidity, not volatility.

There is an aggregate limit on how much land you can buy in the US. The same piece of land cannot have two owners. IN commodities, we need aggregate limits. Last October oil futures markets contracts far exceeded the amount of oil that would actually move in that month. At that point, the market is just moving chips on a casino table, and pricing is not real world. There need to be aggregate limits on all commodities, and then you have to put a position limit on individual participants so they cannot manipulate the market.

What GM Can Learn from Toyota

Both Toyota and Ford owe us an apology in one particular area, and that is they are not selling diesel cars in America. The Ford Fiesta diesel is very popular in Europe, will get over 60 mpg, but Ford refuses to sell it in America. I talked to a Toyota dealer about diesel, and they are putting all their eggs into Prius technology.

Once again car companies are doing poor market research, and using that market research to justify timidity. Somebody like Volkswagen, with the Jetta TDI , is going to start selling a lot of diesels in the US, and everyone else is going to be years behind. Remember how the Rabbit started selling like hot cakes in the US, and the Big Three started buying Rabbits and reverse engineering them.

Do this with your market research, Ford and Toyota. Ask the American people if they would buy a reasonably priced 60 mpg vehicle with an engine that will run for over 200, 000 miles. When they say yes, tell them it is a clean burning diesel. They may hesitate, but they will certainly take a good hard look at it.

Bank of America's Gain Is Taxpayers' Loss

Read Niall Ferguson in this week's Newsweek. He makes a lot of sense about Congress and the WH not having the political will to break up the Big Financials. To allow the BF's to go forward with an implicit government guarantee is what I find infuriating.

Create true resolution authority for the BF's. If one of them is failing, FDIC or something similar takes them over and liquidates them, making sure the innocent get their deposits back.

But we should all be just as furious about AIG, and I see very little coverage on that. Goldman Sachs gets paid 100 cents on the dollar from AIG, then turns around a has huge profits and the bonuses that go with it. What if GS had gotten 10 cents on the dollar? What would their profit be? Yes, they had an AIG failure hedged, but, (and here is the 185 billion dollar question) if AIG had failed, would those counterparties have been able to pay GS 100 cents on the dollar. I very strongly suspect that GS would have gotten a much smaller payoff. The writer who can prove that gets a Pullitzer, because it looks to me like Goldmans profits, and most of the profits of the big Financials this year, came from the US Treasury.

The CFTC Is Needlessly Breaking Good Products

An investor plants seed money with hopes that an organism will grow, and he will harvest the fruits of that organism. I am not sure your "investors" are true investors in that sense, or speculators. Some speculators in agricultural commodites have value, they give the market needed liquidity. But it appears the further the speculator gets from actually holding the physical commodity, the closer he is to being a gambler.

CFTC Belatedly Discovers the Speculative Oil Bubble

Somebody show me a valid price elasticity of demand calculation that would show me how a very small percentage reduction in crude demand could produce an 80 percent price drop, from $147 bbl to $32 per bbl.

This is all about bubbles, herd mentality, and who has better information. Everyone perceived that GS and Morgan Stanley had better information, so when they came out with price projections showing oil going higher and higher, the herd believed them, and stampeded to long contracts, creating the bubble.

So.... are the Nigerian rebels blowing up any pipelines this year? Are the Israelis planning any air strikes into Iran?

One of the factors driving up prices was the fear that the Israelis would strike Iran, Iran would close the straits of Hormuz, and we would lose 20 percent of the world's oil supply. A GS spokesman could obliquely refer to that to drive up the price, and one of Goldmans US government insiders would already know that the Bush administration had put the kibosh on any Israeli overflights over Iraq to Iran. Is GS really any smarter, or do they just have better contracts?

A free market only works correctly if all participants have access to the same information. The winners will do a better job of analyzing that information and make money. But, there is no free market without transparency in all markets, so why isn't Larry Summers effectively pushing transparency?

Two Economies, And One Must Die

OK Northstar, if nobody goes to jail, what should happen to Cassano and his henchmen? They sold insurance on derivatives and bonds, and did not have the money to back it up. That is fraud.

The Casino economy is based on speculation, just as somebody bets on the 40 to 1 shot at the track. If you want to curtail speculation, tax the profits on it at 90 percent.

A Balanced View of Oil Prices, The Economy and Speculation

Hamilton's Econbrowser website is usually interesting. All during the runup in oil and gasoline prices last summer, he and some of his brethren on that site kept saying, no this is not caused by speculation, it is caused purely by supply and demand. I just read through the section of his Brookings Institute paper about speculation. He starts out by saying it is hard to deny that this was a bubble that burst, and spends the rest of the section denying that it was the primary cause.

I will agree that the long term trend from January 2005 ($42/bbl) to August 2007 ($68/bbl) could be almost totally explained by supply and demand factors. The price of oil in 2005 was too low to cover replacement cost of extraction. When the replacement cost of the last incremental barrel pumped is around $60, how do you justify $96 oil, let alone $148?


According to data from the EIA website showing crude oil stocks, stocks only went down 2/10ths of 1 percent between Aug 2007 and Aug 2008. For prices to double in the time period could only be explained by a true shortage, (which was not the case as shown by that infinitesimal drop), speculation, or panic buying.

Think back to 2008.

Every time the Nigerian rebels blew up a pipe line, the media trotted out some expert who would tell us of the downward impact on oil supplies. That would be followed by some "expert" from Goldman Sachs or Morgan Stanley telling us the impact on price. And the price would rise.

A week or two later, the Israelis would threaten military action against Iran. Some expert would give us a dire forecast on the supply impact if the Iranians closed the straits of Hormuz. Then the experts at GS or MS would predict another price rise. Lo and behold the price would rise.

Then there was one day the price went up $10 per barrel. This time the honest smart money said no, that was not supply in demand, that was short sellers covering their positions, and had to pay anything to cover their bets. The following week, the price receded about $5.

The price exploded because of PERCEIVED SHORTAGE AT SOME FUTURE TIME. The same things happened in the grain markets. The huge runup in the grain markets led to the slaughter of large cow herds, and our national cow herd dropped to its lowest levels since the fifties. Hog farmers in this part of Iowa aborted pig litters because they could not profitably feed them at those inflated prices.

In oil and grain, projected shortages enabled speculators to run up prices. Supply and demand had some effect, but those shortages never really materialized, and prices of oil and grain dropped. By that time, the agricultural sector had over compensated, and we will be feeling the effects for years.

So, when Hamilton and others cling to their supply/ demand paradigms, and rule out speculation as a primary cause, they do damage. That damage is caused when some legislator quotes them saying this was all about supply and demand, therefore we should not take any action to penalize speculation.

Action items: First, quit calling speculators investors. An investor is someone who wants to improve the true VALUE of an asset, instead of just the price. A speculator is someone who wants to hold an asset to realize price gain and sell it at a speculative profit, or someone who short sells for speculative profit.

Second, use the tax code to reward genuine investors and entrepreneurs with low capital gains taxes, and set the tax rate for speculative profits at 90 percent.

The Up-Tick Rule Reimplementation Is Bad for Markets

If a speculator short sells 1,000 shares of GE, for instance, do hea and the broker have to list the particular shares they are shorting? I would think that if the speculator was required to do that BEFORE the transaction is completed, it would eliminate naked short selling. And if his motivation is to expose the weakness of a stock, I think he could wait for the list. We have computers that can do that, I would hope.

One other point on short sellers. Some of the spikes in the oil price last summer were caused by large numbers of short sellers having to cover their position. They lost a lot of money, but they also created the false perception that the high prices were economically justified, which disrupted the market to everyone's disadvantage.

The Market As Regulator

Eric, get out of Wall Street, and work around some people who just try to do a good job, take care of their customers, and have faith they will be rewarded accordingly. You guys are so brainwashed that money is everything.

The trick with regulation is to keep it simple. Don't ban short selling, but enforce the rules against naked short selling by using technology to insure transparency. No naked CDS. Require the creators of new financial instruments to make them understandable and transparent.

Very few people criticize the entrepreneurs for risking everything they have and getting rich, because they realize that most fail. The Wall Street types like Cassano, who took out millions at no risk to themselves......that is the other end of the spectrum. Remember Mr Falkenstein, there are smart prosecutors out there too, so Cassano and people like him can run and hide for a long time, but eventually justice will get him. When Cassano said he did not see how AIG could pay a single dime on CDS, that is fraud. Either he lied when he said that, or lied to the people who he sold CDS when he convinced them they needed it. And...stupidly, he was arrogant about it.

The emperor has lost his clothes, the emperor being Wall Street speculators who had everyone convinced they were the best and brightest. That would appear not to be the case.

My suggestion is for them to learn humility, and realize that their compensation will sink to the traditional level where bankers and brokers used to be , as opposed to that false perception that they were worth more just because they could make things seem complicated.

Congress' Handling of AIG Bonuses Is Shameful

We have to sort out the propaganda, coming from Wall Street, some in the government. etc

Henry Paulsen used fear to stampede Congress into the original TARP plan, and Barney Frank helped him. Even today, Bernanke keeps saying things would have been much worse if there had been no bailout.

Liddy reads death threats to plant fear that Congressman will be culpable if names were released.

Liddy and others planting the fear that only the guys who made the mess could straighten it out. And that we are cutting our own throats by criticizing the current crowd at AIG.

So, what if, instead of TARP, Congress had passed a law giving FDIC authority of AIG and other large companies, as Geithner proposed today. FDIC could have stepped in on a Friday night in October, split off the genuine insurance side of AIG, the strong viable parts, and said they would be open for business on Monday morning with temporary government ownership until those units could be sold. They could have frozen the Financial Products division, and re-written the contracts to say that the government would use the proceeds from the sale of healthy units to pay the counterparties WHEN THEY ACTUALLY HAD A DERIVATIVE FAIL TO PERFORM.

That is the one pertinent fact that seems to be ignored. I think it was the head of OTS who said last week in Congressional testimony that not one of the the super senior traunches that AIG FP insured has gone into default. Their value may be lower, but they are still performing. IF AIG FP had just re written the CDS contracts to say that we will pay up if the insured derivative actually fails to perform, they would not have needed to send one dime to Goldman Sachs, the French banks, the German banks, etc. In some cases AIG has used taxpayer money to buy some of the CDO's , etc, which will be fine as long as they keep paying. The value of the counterparty CDO had gone down, and because of the way AIG FP wrote those contracts, AIG had to pay up to cover the lowered value. The banks in particular were using the value of the insured CDO's as capital for regulatory purposes, so when the CDO value went down, their capital base shrunk, and they were going to have problems with their regulators. If the governments had just said, even though these CDO's have lost value, they have still not defaulted, so list them in your capital statements at par, in this one special case. You would be telling the actual holders of those CDO's that they would be made whole in the event of a default, which is what insurance is supposed to do.

Of course the speculators holding naked CDS would be hosed. We need to know how much AIG money went to those speculators. A month ago I was concerned we would never know. One value of the populist outrage is that it drew public attention to AIG per se, so the good reporters could say yes, the bonuses are bad, but look what has been going on in the back room. Instead of distracting us from those back room dealings as has been charged, the outrage brought more attention to them.

The way the contracts were originally written would be like writing fire insurance for a house in the woods, and during a forest fire AIG would have to pay money just for the fire approaching the house, even though the fire never gets there or damages the house. This was not a contract written in the best interests of anyone but a small group of people.

But... Cassano still got his fees, and put them in the bank.