Germans realize their banking system is in trouble

Credit Writedowns tells us that

"On Friday, the German daily Süddeutsche Zeitung (SZ) leaked a bombshell - a confidential report by Bafin, the Federal Financial Supervisory Authority, found that German banks were sitting on over 800 billion euros in toxic assets...This new account has been all over the news in Germany because Germans are becoming quite frightened about the health of their banking system and are angry because the German economy was largely absent from the bubbles of the past decade. Germans are beginning to ask quite openly why banks like Commerzbank and the state-owned land banks as well as institutions like Hypo Real Estate are being rescued with taxpayer money."

If the populace is just beginning to demand answers they are a long way from resolution of the problem. Perhaps the alleged absence of bubbles in the German economy was actually reckless lending preventing precipitous decline in the health of Germany's economy. German banks have been highly leveraged...as I have mentioned here several times.

Virtual think tanks?

Found at Haft of the Spear:

THE THINK TANK IS DEAD
Long Live the Think Tank

By Michael Tanji

Whither the brick-and-mortar think tank in an age of free information and globally accessible intellectual discourse? Very well, thank you. While virtual intellectual efforts are taking place on-line, the "virtual think tank" that is able to compete with its physical-world brethren is still in beta release. This is not, however, a situation that will remain static. Early efforts that assembled people virtually for intellectual pursuits have produced promising results, and as people become more comfortable working in virtual environments such successes are likely to grow. Virtual think tanks have distinct advantages and disadvantages over traditional think tanks that extend beyond the technical and into the political and social, and it will take more than a generational shift to bring about meaningful change. The immediate future is likely to produce a synergy between traditional houses of public policy production and the emerging "Think Tank 2.0" approach.

See Calculated Risk and offshoots for an example of what Tanji is talking about.

Factoid of the day

" In 2002, the total number of undergraduate degrees granted in Arabic in all U.S. colleges and universities—yes, all of them—was six."

Bizarre...that would make doing business in the Middle East for US companies rather difficult.

On the other hand, there's this(from the same link):

"In 2003, two alleged Iranian agents caught photographing the No. 7 subway line beneath the East River were surprised to find themselves confronted by a cop who spoke fluent Persian. They quickly left the country. In 2003, a young undercover officer born in Bangladesh penetrated a small group of angry young immigrants, two of whom had started plotting to blow up targets in Staten Island and the subway station at Herald Square.

When it comes to disrupting potential terrorist plots, cops can use simple techniques out of bounds to the CIA or even the FBI. Cohen's detectives, for instance, might follow a suspect onto a subway and have a uniformed cop collar him for an infraction as minor as sitting on two seats at a time. Once he's taken down to the station, he may be faced with the threat that his friends will find out he was there and think he's talked. "Mostly, we don't hear from those guys again," says one of Cohen's senior operatives."

Crisis in the making?

CDC says too late to contain U.S. flu outbreak

"WASHINGTON, April 24 (Reuters) - The U.S. Centers for Disease Control and Prevention said on Friday it was too late to contain the swine flu outbreak in the United States. CDC acting director Dr. Richard Besser told reporters in a telephone briefing it was likely too late to try to contain the outbreak, by vaccinating, treating or isolating people. "There are things that we see that suggest that containment is not very likely," he said. He said the U.S. cases and Mexican cases are likely the same virus. "So far the genetic elements that we have looked at are the same." But Besser said it was unclear why the virus was causing so many deaths in deaths in Mexico and such mild disease in the United States."

Essentially, US cases could turn deadly any time...people with weakened immune systems will be at great risk.

Foreign holders of US Treasuries - Feb 2009

Here is a list derived from the US Treasury's data at the above link(in billions):

	Feb
Country	2009
	------
China, Mainland	744.2
Japan	661.9
Carib Bnkng Ctrs	189.1
Oil Exporters	181.7
Brazil	130.8
Russia	130.1
United Kingdom	129.1
Luxembourg	92.3
Hong Kong	76.3
Taiwan	72.6
Switzerland	68.2
Germany	56.6
Ireland	54.5
Thailand	39.7
Singapore	39.4
Mexico	37.9
India	34.6
Korea	33.3
Turkey	32.4
Norway	21.1
Egypt	19.1
Israel	17.4
France	16.8
Italy	16.5
Netherlands	16.1
Chile	15.2
Belgium	14.5
Sweden	12.7
Philippines	12.6
Colombia	11.4
Canada	10.9
All Other	173.4
Grand Total	3162

It's fairly remarkable how heavily the holdings are concentrated in a few countries, while other countries such as Germany, France, and Canada with large economies have relatively trivial holdings of US Treasuries.

Interesting exchange at Calculated Risk regarding Indian culture

Bob Dobbs

" El Cliffo wrote on Mon, 04/20/2009 - 9:49am.
Headline in the UK Telegraph: Indian business students snap up copies of Mein Kampf .

"Sales of Mein Kampf, Adolf Hitler's autobiography and apologia for his anti-semitism, are soaring in India where business students regard the dictator as a management guru."

Well, that explains tech support."

"I have a friend, a retired lawyer-turned-mediator who lived in India for a couple of years. Year before last he and his wife were invited to return and give a couple of workshops on mediation techniques in Bangalore and another town -- one to a chamber of commerce, another at a law school. He noted after that "trying to see the other guy's point of view" was considered weakness by most Indian males! Who would say so openly in class. A couple of women came up to him afterwards and said "We've been waiting years for this!"

http://www.talesfromthecoast.blogspot.com

--------------

It would appear that certain aspects of 20th century history are missing from the Indian educational system, at least in some places. Not to say that the US doesn't have its share of neo-Nazi's; but Hitler's written words aren't getting mainstream publication.

The second anecdote is worth noting if you might be doing business in India.

Dropping prices

This website is reporting that

"As the annual iron ore negotiation cranks up, it seems Japan, China, and South Korea steelmakers are expecting a 30%, 40%, even a 50% price cut respectively from the world’s three biggest iron ore miners."

That would result in a significant drop in dollar imports for China should the price cuts take place; which the article indicates is likely. Also, theoretically Japanese carmakers could reduce prices for their product in the near future as a means of increasing unit sales. There is a lot of iron tied up in auto inventory sitting in ports around the world.

Availability of credit in the US

The New York Federal Reserve Board released earlier this week it's Empire State Manufacturing Survey:

Most respondents cited little or no difficulty obtaining financing for either long-term commitments (capital investment) or short-term needs (operating expenses). Moreover, fewer than 10 percent of those surveyed indicated that problems obtaining credit had adversely affected their production or sales.

So credit is available to businesses that can demonstrate a capacity to repay...

Sandpile model of earthquakes and economic instability

Dr. Steve Keen discusses this here and gives a clear description of a power law distribution:

"The pattern of movements you get from such a process can look superficially like a Normal distribution–the famous Bell Curve–but it differs from it in two fundamental ways. Firstly, there are many more movements near the average; secondly, there are also many more movements way, way away from the average–so many more that, in what is known as a pure “Power Law” distribution, the standard deviation is infinite: any scale event can occur, and will occur given enough time."

The standard deviation is infinite...here's a picture of what this looks like from Wikipedia:
The main point is that if you are using a normal distribution to model something that is actually is a power law distribution, your model is going to give incorrect results. Key to the normal distribution is the idea that factors contributing to the frequency of results are independent. The dice rolling example is commonly used because it's obvious that each roll of the dice doesn't have any influence on the next roll of the dice. The financial results of companies listed on the NYSE are definitely not independent of each other; for example most are dependent on a relatively small number of banks for routine financing.

Also, generally 68% of values drawn from a normal distribution are within one standard deviation σ > 0 away from the mean μ; about 95% of the values are within two standard deviations and about 99.7% lie within three standard deviations. This is called the "68-95-99.7 rule" or the "empirical rule." That's clearly different from the power law distribution.

More background on Larry Summers

This is from the NY Times editorial page:

"I was less shocked by the White House’s disclosure of Summers’s recent paydays than by a bit of reporting that appeared deep down in the Times follow-up article on that initial news. The reporter Louise Story wrote that Summers had done consulting work for another hedge fund, Taconic Capital Advisors, from 2004 to 2006, while still president of Harvard.

That the highly paid leader of arguably America’s most esteemed educational institution (disclosure: I went there) would simultaneously freelance as a hedge-fund guy might stand as a symbol for the values of our time. At the start of his stormy and short-lived presidency, Summers picked a fight with Cornel West for allegedly neglecting his professorial duties by taking on such extracurricular tasks as cutting a spoken-word CD. Yet Summers saw no conflict with moonlighting in the money racket while running the entire university. The students didn’t even get a CD for his efforts — and Harvard’s deflated endowment, now in a daunting liquidity crisis, didn’t exactly benefit either.

Summers’s dual portfolio in Cambridge has already led to one potential intermingling of private business and public policy in his new White House post. He tried — and, mercifully, failed — to install the co-founder of Taconic in the job of running the TARP bailouts. But again, Summers’s potential conflicts of interest seem less telling than the conflict of values that his Harvard double-résumé exemplifies."

Double standards...

Explosive

This is really amazing...quant finds job at Harvard after Enron collapse, blows whistle, gets fired. You can't make this stuff up:

"A former quantitative analyst at Harvard Management Company, the university’s once-vaunted endowment manager, tells the Harvard Crimson she was fired for voicing concern to then-university president Larry Summers’ chief of staff about the money manager’s risky use of derivatives the traders didn’t understand.

The episode dates back to 2002, when analyst Iris Mack, whose website identifies her as the second African American woman to earn a Harvard PhD. in applied math (and someone who likes primary colors) joined the much-venerated Harvard Management Company, which invests the university’s then $18 billion endowment, to find what she termed a “frightening” state of affairs.

“The group I was working for had no background whatsoever to be working on [derivatives],” Mack says, adding that, to her knowledge, several of her colleagues were not licensed securities traders. “Sometimes the ways they handled even basic Black-Scholes models [widely used to price stock options] were puzzling.”So Mack took inventory of the abuses — high employee turnover, lax risk management practices and a “low level of productivity in the workplace” were among others, and detailed them in an email to Marne Levine, Summers’ chief of staff and a Treasury staffer on the Obama Transition Team. (Summers was the only person to whom Meyers reported, and according to a recent Forbes story he personally ordered the university’s biggest derivatives trade, a purchase of interest rate swaps that cost the university billions this year.)

A month after sending her email, Mack was fired after a meeting in which the endowment fund’s then-chief furnished her the emails and castigated her for making “baseless accusations.” She later sued for wrongful termination and settled out-of-court with the university. But she claims the practices “shocked” her, and — the punchline is — she had joined the company from Enron.

Which is also to say, lest you dismiss Mack as an opportunistic snitch capitalizing on Summers fateful opposition to regulating the derivatives that wreaked havoc on the financial system, she had a pretty valid reason to believe in the importance of whistleblowing.

“I’m not trying to pretend I’m omniscient or anything, but a lot of people who were quantitative traders, in the back of our minds, we knew a lot of these models were just that: guestimates,” Mack says. “I have mixed feelings, on the one hand, I wasn’t crazy, I knew what I was talking about. But maybe if more and more people had spoken up, the economy wouldn’t be the way it is now.”Mack is doing her part to affect change: she’s a vociferous advocate of better math education for minorities and like FDIC chairman Sheila Bair, the writer of a children’s book. It’s called Mama Says Money Don’t Grow On Trees (sequel idea: *…Unless You Are A Monstrously Overleveraged Bank With Access To The Federal Reserve Discount Window!).

If Mack’s allegations are true Harvard certainly paid the price for its recklessness: Summers’ swaps sowed the seeds for a financial disaster at HMC:

It doesn’t feel good to be borrowing at 6% while holding assets with negative returns. Harvard has oversize positions in emerging market stocks and private equity partnerships, both disaster areas in the past eight months. The one category that has done well since last June is conventional Treasury bonds, and Harvard appears to have owned little of these. As of its last public disclosure on this score, it had a modest 16% allocation to fixed income, consisting of 7% in inflation-indexed bonds, 4% in corporates and the rest in high-yield and foreign debt.For a long while Harvard’s daring investment style was the envy of the endowment world. It made light bets in plain old stocks and bonds and went hell-for-leather into exotic and illiquid holdings: commodities, timberland, hedge funds, emerging market equities and private equity partnerships. The risky strategy paid off with market-beating results as long as the market was going up. But risk brings pain in a market crash. Although the full extent of the damage won’t be known until Harvard releases the endowment numbers for June 30, 2009, the university is already working on the assumption that the portfolio will be down 30%, or $11 billion.

Mack’s boss at HMC, Jack Meyer, parted ways with the university in 2005. His bets were still paying off but his relationship with Summers had reportedly cooled — among other things, over alumni outcry led by the university’s Class of 1969 over the hedge fund-sized bonuses being awarded to employees of a supposed nonprofit. But if there’s anything we’ve learned from the past year, gratuitous compensation and gratuitous risk go hand-in-hand.

“The events of the last year show that the whole procedure of rewarding people so handsomely based on increases on paper value of the endowment was deeply flawed,” says a spokesman for the [Class of 1969], which recently sent a letter to the Harvard president suggesting HMC staffers return $21 million of their latest bonuses. “Even now we don’t really know how well it has done in the last ten years.”"

Credit Writedowns is where I found this...

Analysis of gas price trend

The EIA's analysis this week:

"the bottoming of the gasoline market in early winter, with very low or even negative margins between gasoline and crude oil prices, led refiners to bring forward maintenance activity and cut their operating rates to minimize surplus inventories. At the same time, those prices were low enough to generate a rebound in demand, even as the economy struggled.

Along with rising crude prices, the tighter balance between supply and demand in the gasoline market brought retail gasoline prices from the mid $1.60s to above $2 per gallon. Retail gasoline prices approaching $3 per gallon, however, are probably not reachable, let alone sustainable, this summer due to continuing surplus refining capacity and the continuing effect of the economic downturn on fuel demand.

Furthermore, with over 4 million barrels per day of excess crude oil production capacity, any surge in demand on a recovering economy could be met by increased production, mainly from OPEC countries. So, while gasoline consumers may be irked at paying over $2 per gallon for much of this summer, it doesn't look like 2009 will produce a spike in prices that comes anywhere close to what occurred last summer."

Adjusted for inflation, $2 per gallon is still a fairly low price for gasoline.