The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Via Visual Economics, we learn Its Google’s planet — we just live on it:

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http://www.visualeconomics.com/2010-02-03-planet-google-from-philosophies-to-market-shares/

There is a huge front page article in the NYT discussing what we already know — that AIG extracted billions from AIG before ($5.9B) and after ($12.9B)their collapse.

We know that Goldie got paid 100 cents on the dollar post-bailout.But what insured party gets to set their own valuation of losses? According to the article, GS nabbed closer to 300 cents on the dollar pre-collapse of losses.

AIG balked, but the matter never seemed to be settled.

Lucky for Goldman we didn’t do an official reorg for this. Consider what the judge would have rightfully done in what should have been a very complex bankruptcy instead of a smash and grab.

Here’s the TImes:

“By July 2007, when Goldman demanded its first payment from A.I.G. — $1.8 billion — the investment bank had already taken trading positions that would pay out if the mortgage market weakened, according to seven former Goldman employees.

Still, Goldman’s initial call surprised A.I.G. officials, according to three A.I.G. employees with direct knowledge of the situation. The insurer put up $450 million on Aug. 10, 2007, to appease Goldman, but A.I.G. remained resistant in the following months and, according to internal messages, was convinced that Goldman was also pushing other trading partners to ask A.I.G. for payments . . .

Later that month, Mr. Cassano noted in another e-mail message that Goldman’s demands for payment were becoming problematic. “The overhang of the margin call from the perceived righteous Goldman Sachs has impacted everyone’s judgment,” he wrote to five employees in his division.

By the end of November 2007, Goldman was holding $2 billion in cash from A.I.G. when the insurer notified Goldman that it was disputing the firm’s calculations and seeking a return of $1.56 billion. Goldman refused, the documents show.”

Now, AIG’s claims that it was Goldman that forced them into collapse, that “the payment demands were a major contributor to A.I.G.’s downfall,” are sheer nonsense. AIG wrote 3 trillion dollars worth of derivatives with precisely ZERO held in reserve. A drunk driver who drives off the road might as well blame the guy who planted those trees 50 years earlier. Given AIG’s massive mortgage exposure, they were going down anyway. GS just happened to be the one who made the opposite bet. In this zero sum game, AIG’s losses were GS profits.

Be sure to click on the graphic to see the full timeline . . .
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Source:
Testy Conflict With Goldman Helped Push A.I.G. to Edge
Gretchen Morgenson and Louise Story
NYT February 6, 2010
http://www.nytimes.com/2010/02/07/business/07goldman.html

OK, that’s an exaggeration — they appear to have done a short sale, not a walk-away.

Ironic Hypocritical Headline of the Day:

Mortgage Bankers Association Sells Headquarters at Big Loss (WSJ)

CoStar Group buys downtown Washington building for $41.3 million, far below the $79 million the trade group said it paid in 2007

Didn’t the National Association of Realtors do something similar last year?

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UPDATE February 8, 2010, 1:54pm

A friend writes to remind me teh MBA CEO is a hypocrite:

Courson, the CEO, was big on underwater borrowers’ responsibility to continue paying on their loans if they could afford to do so.

“What about the message they will send to their family and their kids and their friends by defaulting?’ he said in a late-2009 interview.

- Debtor’s Dilemma: Pay the Mortgage or Walk Away (WSJ)

This chart, via Ron Griess of The Chart Store,  seems to be plateauing at a very high level:

One of the questions I get all the time is about the economics of the book: How much did it sell, what was your advance, what did it cost to produce. I was thinking about this as I prepare for April 15th, so I did a quick run down of costs.

Here is the skinny: The initial advance for Bailout Nation from McGraw Hill was $50k. You get half upon signing, and the other half when there is an “accepted manuscript” by the publisher.

Recall that there was a small problem with McGraw Hill over my treatment of their S&P division and the rest of the criminally corrupt rating agencies (gee, why did they object to that?). My publishing contract with them gave me final edit, so when they balked at what I had written, I exercised my right to buy the back my manuscript. Once I signed with another publisher (Wiley), I was obligated to return the $25k (which I of course did).

The Wiley contract was a $100k advance, plus back end royalties. The old joke is your agent should insure you never see royalties (i.e., get it all up front). I think I need to sell another 40 -50,000 copies before any royalties come in.

Now, $100k sounds like a lot of money, but in Bookanomics terms, its not much at all. There are all sorts of costs, and they come right off of the top. I ended up with about a fifth of that.

20%? How does THAT happen? Well, right off the bat the agent takes 15%. (That’s gross; my next book deal will be net). That takes us down to $85k. I had to return $25k to McGraw Hill, bringing the net to $60k.

Aaron, who was much more of a collaborator than an editor, was paid $15k. I paid my team of researchers over $10k for their work. (That brings us down to $35k).

I paid for all the cartoons in the book ($3,000) The artwork for the cover (under $1,000), and a few other small incidentals (also ~$1,000).  That doesn’t include all of the blog readers who contributed research, artwork, ideas, notes, editing, reading drafts — all for free.

The final tally:

Revenue:
Advance $100,000

Costs:
Return prior advance $25,000
Agent $15,000
Editor $15,000
Research $10,000
Artwork $4,000
Other $1,000
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Pretax net: $30k
After tax: ~$20k

Pretty astonishing when you see it in black and white.

Now consider this: Over the course of the year, I spent nights, weekends, vacations, and towards the final deadlines, days in the office working on this. My best estimate is I put in about 20-30 hours a week for 15 months (not counting promotional tour, which adds another few 100 hours). Let’s ballpark it and say ~2,000 hours.

So, my pay scale for writing what has been called the best reviewed book on the bailouts is a little better than the current minimum wage.

And a few other writers tell me how lucky I am, that very often, its a break even proposition or worse.

Of course, there are other benefits — People who otherwise wouldn’t have thought twice about you (Him? He’s an idiot!) suddenly start to take you seriously. You become “the guy who wrote the book.” Your speaking fees double, your regular business benefits. Other publishers start pitching you book ideas. In general, your personal brand becomes more valuable. My friend (and book agent) Lloyd Jassin says you write a book to “Build your Brand.”  And their is much truth to that.

There are many intangible benefits as well (book groupies!). In my case, it was cathartic, as it was a productive outlet for all the righteous fury that had built up watching the whole disaster unfold in slow-motion. It helped to “quiet down the voices in my heads.”

But Bookonomics means that making a living writing books is something very few people seem to be able to do . . .

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UPDATE: February 6, 2010, 2:37 pm

As several readers observed, the 1st advance/return was a wash (+$25k -$25k = 0). They are correct.

But as noted above, I am thinking in terms of this years taxes — since I already paid tax on the $25k in 2008, the $25k that went back in 2009 comes off the top of the income statement for this April 15th for 2009.

Ignoring the different years tax consequences for a moment, the total income for the book increases if you offset the $25. That makes the gross $125k, leaving me $55k after costs, with a net after NYS and federal taxes a gain of about ~$33k, which is better than a sharp stick in the eye.

This raises my pay scale from under $10 to to $16 per hour.

Dinner Guest: How can we all have died at the same time?
Grim Reaper:  The Salmon Mousse!
Host: Darling, you didn’t use canned salmon, did you?
Wife: I am most dreadfully embarrased~!

-Monty Python’s The Meaning of Life Part VII: Death

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In his column today, Floyd Norris asks “Can the world be made safe for the return of securitizations?”

To a degree, that is the wrong question.

While some people have become focused on securitization, what we should really be looking at is the step prior in the process — the actual underwriting standards of the mortgage loans that were bundled and resold. It was the abdication of lending standards by the “lend-to-sell-to securitizers” business model that caused so much of the trouble (yes, there were subsequent errors, but they came after the lending standard failures).

Were the the dinner guests in the Monty Python film killed by whipping ingredients in a food processor until they were creamy smooth? That is a similar question to the issue of securitization — the primary problem was not the process, but rather, the ingriedients that went into the process.

The securitization process simply amplified the poisonous underwriting, and fed it to the world. Canned Salmon — Garbage In, Garbage Out.

The way to fix securitization is to fix lending in general — develop standards, enforce them, educate borrowers, halt predatory lending.

Back to Norris:

“Can the world be made safe for the return of securitizations?

That is a question of great importance to those like John C. Dugan, the comptroller of the currency, who say they believe that the banking system on its own is unlikely to have the ability to provide enough credit to sustain an economic recovery in the United States.

“We need a vibrant, credible securitization market to help fund the real economy going forward,” Mr. Dugan said this week. He was preaching to the choir — a meeting of the American Securitization Forum — but it is an opinion widely held in financial markets.

It is possible to question that thesis. Securitization grew as a way for banks to get around capital rules, not because of any profound desire by investors for such assets or any real unwillingness by banks to make the loans. But since it was more expensive to hold capital against the risk if the loans were not securitized, they were securitized. That also opened the market to new players, who neither wanted to, nor could amass, the capital to hold onto loans.”

It wasn’t that the non-bank lenders could not amass the capitasl — that wasn’t their business model. Instead, their inventory was cash, and the greater they turned over their inventory, the more profits they made.

That is, until they went bankrupt. As of the most recent count by mortgage imploder, ~ of these lenders have gone belly up

Norris concludes:

“There are several essential elements to any fix. The underlying loans have to be of better quality. The investors have to believe that is the case and that they are being compensated for risks that were much higher than they previously believed. Another 30 percent collapse in home prices is unlikely, but it will be a while before anyone’s models deem such a thing impossible.”

That seems about right . . .

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Previously:
Paul Krugman is Wrong About Securitization (March 28th, 2009)
http://www.ritholtz.com/blog/2009/03/krugman-is-wrong-about-securitization/

Source:
Seeking a Safer Way to Securitization
FLOYD NORRIS
NYT, February 5, 2010
http://www.nytimes.com/2010/02/06/business/06secure.html

Here’s something I haven’t been able to say for 40 years –

“I’m really looking forward to checking out the new Jimi Hendrix album.”

As it turns out . . . come March 1, there will be a new Hendrix disc of some unreleased material — Valleys Of Neptune.

For you young ‘uns out there who might not be familiar with Jimi — he was the genius guitar player who combined R&B, psychedelia distortion/feedback-laden electric leads. You can still hear his influence in music today.

Hendrix released but 3 albums during his short lifetime: Are You Experienced (1967) is probably the greatest debut rock albums of all time (Rolling Stone ranked it #15 on their 500 Greatest Albums of All Time). The next disc was Axis: Bold as Love (1967) and Electric Ladyland (1968).

He was 27 when he died in London on September 18, 1970.

Valleys Of Neptune track by track listing (with descriptions) after the jump . . .

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UPDATE:

Wow, terrific comments. I put the full run of reader suggested Hendrix videos here.

Read the rest of this entry »

Once again, we see the 10,000 level is not worth much as support — or resistance. Its a tv talking point but little more.

As we noted back in October, we have crossed this line repeatedly — this makes the 27th or so time!

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Save the hat– you’ll get more — probably a lot more — use out of them in the future!

Friday’s amuse bouche: The resignation tweet of Sun Microsystems CEO Jonathan Schwartz, in Haiku form:

Financial crisis

Stalled too many customers

CEO no more

There is something terribly amusing about a centuries own form of Japanese poetry being the format a of technology firm’s tweet in light of a merger.

I will respond with a haiku of my own:

Crisis — or new boss?

Ellison Runs Oracle

Time to say Buh-Bye

UPDATE: February 8, 2010, 11:00am

Please note this event is now sold out . . .

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