Subprime Mortgage Crisis Revisted on Film

Will US citizens wake up when they see the new film, “The Big Short,” which describes the origins of the subprime mortgage crisis?

The mortgage crisis as primarily the fault of mortgage originators and mortgage securitization financiers, aided and abetted by the executives of the largest banks.  At the heart of this story is a court case in California where the defense successfully proved financial fraud was not committed by mortgagors induced by mortgage issuers to sign “lairs loans” paper work.  Why? Because they were compensated for writing mortgages and securitizing them, not for the quality of the mortgages for repayment.  The perverse incentives built into the system created the crisis.  The “liars” were often victims of a Pied Piper system to which they were susceptible because of their financial naivety.

he securitization process put purely junk mortgages into AAA-rated securities based on the assumption that only 1% (the historical limit) would default.  When several times that previous limit occurred AAA-rated securities defaulted.

mortgage-default-rate-history

When One Job Isn’t Enough

Many people have to work two jobs to get by in US.  At present, multiple jobholders account for around five percent of civilian employment. The survey captures data for four subcategories of the multi-job workforce, the current relative sizes of which are illustrated in a pie chart below. The distinction between “primary” and “secondary” jobs is a subjective one determined by the survey participants.  Multiple job holders as a percentage of total employment have declined by more than 20% since the late 1990s.

Multiple Job Holders

Multiple Job Holders 1194 to Present in US

Is a Climate Deal Here?

Is a climate deal good to go?  The European Union has formed an alliance with 79 African, Caribbean and Pacific countries in a final push for agreement at the climate summit COP21.  The new alliance has agreed a common position on some of the most divisive aspects of the proposed deal.  They say the Paris agreement must be legally binding, inclusive and fair – and be reviewed every 5 years.  The EU will pay €475 million ($522 million) to support climate action in the partner countries up to 2020.  The alliance has also agreed that the Paris text must include a “transparency and accountability system” to track nations’ progress on their climate pledges, and share best practice.

Global Warming

Are Economists Responsible for the End of Liberal Democracy?

Part of the reason for the rise of extremism is economics; the failure in recent decades to generate real income gains for workers and the financial collapse of 2007-2008. Economists argue about the causes for these developments – skill-biased technological change, globalization or political capture (a wealthy elite funds politicians who then devise policies that help the elite). If the first two factors are to blame, then we really need to worry since there is little we can do about it (read The Rise of the Robots, the book that won the FT Business book prize if you want to get depressed).  On the most pessimistic view, one can see such diverse trends as the rise of Le Pen in France, the debate over free speech in American universities and the challenge of Islamic fundamentalism as signs that liberal democracy is in remorseless decline. But history suggests it is more likely to commit suicide (by electing a party that does not believe in it) than to be murdered by outsiders. In the end, one has to hope that the broad mass of the public will turn away from the extremes when faced with the prospect of them getting into government. But someone, somewhere, may even now be finishing the first draft of “The Strange Death of Liberal Democracy”.

End of Liberal Democracy

Raqqua’s Rockefellers Smuggling Oil for ISIS

Ben Taub writes:

One of Russia’s nine deputy defense ministers, said that recently collected images constitute “hard evidence” that there is “a single team acting in the region, composed of criminals and Turkish elites,” who are buying oil from ISIS “on an industrial scale.”

Russian President Vladimir Putin announced, “We have every reason to think that the decision to shoot down our plane was dictated by the desire to protect the oil-supply lines to Turkish territory,” specifically, those funding ISIS.

A defense minister went a step further.   “This illegal business involves the country’s senior political leadership, including President Erdoğan and his family members,” he said. “Maybe I’m being too blunt, but one can only entrust control over this thieving business to one’s closest associates.”  Erdogan’s son-in-law had recently been appointed minister of energy and natural resources. “Of course, the dirty oil money will work,” he added.

In fact, one of Russia’s satellite photographs showed a very familiar place. I first walked through the Bab al-Salama border crossing in April, 2013, and lived within sight of it for the next two summers. Then, too, trucks often lined the road leading down to the border gates, many of them parked for hours while drivers napped in an olive grove nearby, waiting for inspectors to finish checking the vehicles ahead of them. On the Turkish side, fourteen thousand Syrian refugees lived in a container camp nestled against the border. Beyond the Syrian gates, a comparable number of civilians lived at a transit camp under wretched conditions. A system of hoses transported clean drinking water from Turkey into huge tanks at the Syrian camp, but there was no way to dispose of waste, and it gathered in puddles next to the road and ruts in the mud. Both camps sprang up from nothing, out of necessity, as people from Aleppo and the villages to its north tried to escape the war. (Fleeing didn’t always help; in June, 2013, a Syrian jet strafed the transit camp, killing seven refugees.) Both camps are plainly visible in the Russian satellite pictures..

The practice of smuggling at the Turkish-Syrian border is decades older than the war. Aleppo once belonged to the Ottoman Empire; when it was cut off from Turkey, in 1924, after the Treaty of Lausanne established most of the modern border, locals continued transporting all manner of goods from the cheaper side to the more expensive side.

Syria’s most potent oilfields are in the Deir Ezzor province, largely under ISIS control. The group earns most of its money by taxing locals and confiscating valuables at checkpoints, but oil sales still account for hundreds of millions of dollars of revenue.

Last year, the journalist Mike Giglio found that much of the oil was coming through a smuggling post and originated in ISIS territory, many miles away. It was transported by middlemen to a nearby area in northwest Syria. In Besaslan, traders received the oil through a network of buried pipes, while spotters looked out for police. They filled drums and sold them to local Turkish businessmen, who, in turn, cut secret deals with gas stations or set up illegal filling stops.

The Turkish government maintains murky alliances with a number of Islamist rebel groups in Syria. In January, 2014, three trucks escorted by the intelligence services were found to be transporting huge quantities of ammunition to a camp frequented by rebels with connections to Al Qaeda, according to an arrest order for one of the drivers. The Turkish newspaper Cumhuriyet published a video of the trucks, and last week its editor-in-chief was arrested on charges of collecting and revealing secret documents. Erdoğan insisted the trucks were carrying “humanitarian aid” for Turkmen in Syria, and personally accused the Cumhuriyet editor of “attempting to overthrow the government” of Turkey.

Raqqa's Rockefellers

 

Entrepreneur Alert: Diamonds are A Girl’s Best Friend?

Prices of diamonds have been lackluster for a while.   In Botswana, the second largest diamond yet discovered, plucked from the earth’s depths by machines, will probably fetch a very good price.  It may even be sold on its own at auction.

The only larger stone discovered to date was in 1905 in South Africa.  It is part of the British crown jewels.

It is projected that Global diamond production is expected to peak in 2017, when 164 million carats of diamonds are forecast to be produced, according to McKinsey & Co. After that, production is expected to go into a long-term decline, unless significant new discoveries are made, McKinsey’s forecasts show.  Is there room for an entrepreneurial move here?

Botswana Diamond

China Exercises Financial Muscle

How does China flex its muscles:

1.  Foreign reserves. China’s foreign reserves are values at $3.53 trillion, more than Japan, Saudi Arabia, 19 Euro nations, the UK and the US rolled into one.

2.  South China Sea activity has increased military spending by 167%.  US military spending by contrast increased 0.4% in the same period.

3.  Now in the top 3 contributors to the United Nations, topping Japan and Germany.

4.  The Pan Asian Bank.

Together these factors make China a potent factor in the world financial markets.

CHINA-policies

Udanchoo or Yahoo has No Value?

Key points of note re intrinsic value estimates  Udanchoo is a Hindu phrase for flyaway or disappear

Venkat Subramaniam writes: I have calculated the intrinsic value of the operating assets using a DCF method, with source information from company financials (please see at appendix for the intrinsic value calculation for Alibaba, Yahoo Japan, and Yahoo’s Core Business).

The debt, cash, and non-operating assets have been taken from the most recent earnings reports available.

I have applied a 2% discount to Alibaba and Yahoo Japan’s intrinsic value to account for the fact Yahoo Inc’s stake is trapped inside a corporate structure and cannot easily be crystallised. In the Yahoo Inc Consolidated column, I have added up the net value of equity based on Yahoo Inc’s share of equity (15.4% for Alibaba, 35.5% for Yahoo Japan, and 100% for the Core Business).

The value of employee stock options has been calculated using information available from the company financials, and using Black Scholes method.

In conclusion – my value of intrinsic value for the Alibaba and Yahoo Japan business is comparable with the Market Cap for those business; and, after adding Yahoo’s Core Business value, it appears that the market is pricing a 32% discount to intrinsic value. This discount needs to be compared with the estimated tax liability in order to identify any mispricing in the Market.  Yahoo’s Value

Yahoo! ????

Too Big to Jail? Jail the Little Guys?

Bankers too big to jail, so jail the small players?

Matt Levine writes: Richard Choo-Beng Lee, who cooperated with prosecutors in their long-running investigation of insider trading at and around SAC Capital Advisors, was sentenced to 21 days in jail, which is not a particularly long sentence as insider-trading sentences go, but which was still rather a shock to him since other insider-trading cooperators have normally avoided prison. I guess now that the Newman decision has more or less killed thehedge-fund-insider-trading crackdown, there is less reason to make cooperation appealing.

In related news, “The Securities and Exchange Commission’s case against hedge fund billionaire Steven Cohen is moving forward again, after prosecutors Monday withdrew their request for a two-year freeze imposed while they pursued criminal insider trading charges against his employees.” That case is a civil failure-to-supervise case connected with insider trading, and one fact that may be relevant to SAC’s supervisory culture is that Richard Choo-Beng Lee is one of two SAC Capital traders named Richard Lee who pled guilty to insider trading and cooperated with the government.

Meanwhile in England, poor Tom Hayes is appealing his barbaric 14-year prison sentence for Libor manipulation. “Hayes ‘Didn’t Invent’ Libor Rigging, Lawyer Says in Appeal Fight,” is the Bloomberg headline, and while I am sympathetic, no one appeals a murder sentence on the grounds that he didn’t invent murder.

In Switzerland, Hervé Falciani, a former HSBC private bank employee who leaked secret documents led to revelations “that HSBC’s Swiss banking arm turned a blind eye to illegal activities of arms dealers and helped wealthy people evade taxes,” was sentenced to five years in prison for his troubles. “He is currently living in France, where he sought refuge from Swiss justice, and did not attend the trial.”

And in Brazil, is Andre Esteves too big to jail? I mean, he’s in jail, but that is creating nervousness at his investment bank, BTG Pactual, and in the Brazilian financial system more generally.

Too Big to Jail

Chan Zuckerberg Maxing Out?

TNe consequences of the Zuckerberg birth announcement.

Matt Levine writes:  The Chan Zuckerberg Initiative, to which Mark Zuckerberg and Priscilla Chan have pledged to donate 99 percent of their Facebook stock, is not a charitable foundation, but just an LLC. That is, it’s just a pot into which Zuckerberg and Chan can put their money, and out of which they can give money to charities, or for-profit investments, or political advocacy, or whatever.

One upshot of this is that they won’t get a tax deduction for putting money into that pot, because it is not a charitable foundation. This is of course not at all important to them, because they don’t have that much taxable income (Zuckerberg is paid $1 a year, and most of their wealth is in unrealized capital gains). Also, they are planning to give away 99 percent of the shares that make up the bulk of their fortune, and giving away 99 percent of your money to shield yourself from income taxes on the other 1 percent is economically nonsensical.

But a surprising number of people are making a claims like this: There’s an almost overnight financial benefit, too: The Facebook founder will deduct the fair value of his gift to his foundation from his taxable income in the year he makes the donation. A donor like Zuckerberg could realize a tax benefit equal to about one-third of the value of his gift.

Nope! No foundation, no tax benefit.

Elsewhere, Dylan Matthews has some ideas for what Mark Zuckerberg should do with his money, including giving it to his college roommate or spending it on monetary policy lobbying. (These are mostly not jokes, though who’s to say what a joke is really.)

David Auerbach asks, Can We Trust the Hacker Philanthropists?
Here’s the truth: No matter how good their intentions, the net result of most such efforts has typically been neutral at best, and can sometimes be deeply destructive. The most valuable path may well be to simply invest this enormous pool of resources in the people and institutions that are already doing this work (including, yes, public institutions funded by tax dollars) and trust that they know their domains better than someone who’s already got a pretty demanding day job. That may not be as appealing to the cult of disruption within the tech echo chamber, but would be exactly the kind of brave and unexpected move that might offer Max a great example of how to engage with the real world that the rest of us live in.

stork-1