Year: 2009

Regulatory Arbitrage

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Remember the PPIP program, where the US government is going to subsidize the purchase of financial toxic waste in an attempt to clear out banks’ balance sheets?

Well, Sheilah Bair just said that banks will not be allowed to purchase their own toxic assets, which is a good thing, as it it turns the program into little more than a corrupt subsidy program to shake down the taxpayer…..Make than an even more corrupt subsidy program to shake down the taxpayer.

If you had told me 18 months ago that the most responsible member of Obama’s economic team would be a Bush holdover, I would have wanted whatever it was that you were smoking.

H/T Calculated Risk.

Sestak to Challenge Specter in Primary

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TPM has broken the story that Rep. Joe Sestak intends to challenge Arlen Specter in the Pennsylvania Senate primary:

Rep. Joe Sestak (D-PA) is privately telling supporters that he intends to run for Senate, TPMDC has confirmed.

It appears that all that is left is discussions with his family, who I figure are pretty much onboard, or it would not have gone this far.

I think that the family thing is largely a smokescreen for him pulling out if Rahmbo (Barack) pushes too hard.

This is an interesting race. Sestak is by no means a particularly liberal Congressman, but his pressure has already pushed Specter closer to the Democratic mainstream.

I support his bid for a number of reasons:

  • Spector is a weasel, and a primary challenge will force him to appeal to the Democratic Party base, particularly to labor.
  • Spector is a weasel, and even if he weren’t this “clearing the decks” for incumbents is bad for the party and for the nation. It creates a sense of entitlement among incumbents.
  • Specter is a weasel.

In any case, I have added the “Draft Sestak” fund campaign to my Act Blue Page.

Our Economic Masters are Completely Insane

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A profile of Brooksley Born, who ran the CFTC, and warned of the risks that unregulated derivatives posed in the market, has a profile in the Washington Post, which calls her the, “Cassandra of the Derivatives Crisis”.

I’ve related this story before, but this anecdote just shows how completely delusional Mssrs. Greenspan, Rubin, and Summers were:

Born’s baptism as a new agency head in 1996 came in the form of an invitation. Federal Reserve Chairman Alan Greenspan — routinely hailed as a “genius,” the “maestro,” the “Oracle” — wanted her to come over for lunch.

Greenspan had an unusual take on market fraud, Born recounted: “He explained there wasn’t a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him.”

This made no sense to her. She’d spent much of the 1980s defending clients caught up in a vast conspiracy by two wealthy brothers, Nelson and William Hunt, who duped investors while trying to corner the world silver market.

“After all,” Born said, looking back, “I’m a lawyer, and I think the existence of fraud prohibitions is critically important.”

But Greenspan was insistent, she said.

Finally, he said, “Well, Brooksley, I guess you and I will never agree about fraud.” (Greenspan did not respond to requests for comment. Daniel Waldman and Michael Greenberger, both top aides of Born’s, were briefed on the lunch at the time and independently confirmed Born’s recollection of the conversation.)

(emphasis mine)

Seriously, this is beyond ideological. This is quite literally completely detached from reality, and Alan Greenspan was viewed as a genius of unparalleled proportion at that time.

Economics Update

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So, it looks like the ratings agencies are beginning to do their job.

Of course, this is at absolutely the worst possible time for the economy, because it means that Standard & Poor’s is considering downgrading a large portion of the best quality commercial mortgage backed securities (CMBS):

As much as 90 percent of so-called super senior commercial- mortgage backed bonds sold in 2007 may be affected as the ratings firm changes how it assesses the debt, New York-based S&P said today in a report. About 25 percent of the bonds sold in 2005, and 60 percent of those sold in 2006 may be cut.

(emphasis mine)

This, among other news, is driving rates up on CMBS, though rising rates on treasuries, despite the best efforts of the Fed to hold rates down are a contributing factor.

Basically, people believe that we will be seeing higher interest rates in the near future, which drives rates up, particularly longer term rates, which is why the spread between the 2-year and the 10-year treasury have hit a new record.

It’s why mortgage rates are on the rise, driving down new mortgage applications.

In other banking news, the FDIC’s problem bank list is now more than 300, the highest number in fifteen years.

Meanwhile in energy and currency, oil is up on Saudi statements that the world economy can “handle” $75-$80/bbl oil, and the dollar rose on concerns about bad housing data.

Zimbabwe Update

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Well, it’s been about a month, so it’s time for another update on Zimbabwe.

Basically, things are still screwed up, and it’s all thanks to little Bobby Mugabe.

While, the IMF is offering technical assistance to the government again, most of the potential donor nations are unwilling to provide aid until the see evidence that the government has gotten it’s sh%$ together.

The lofty phrase used is, a “Commitment to economic stabilization, restoration of the rule of law, respect for property and human rights, and freedom of expression,” but it basically comes down to the fact that everything that ZANU-PF touches becomes a miasma of corruption and incompetence.

What they are really saying is that Reserve Bank of Zimbabwe governor Gideon Gono has got to go, after creating the hyperinflation that made multi-trillion $Z banknotes necessary, and also the stealing from private accounts.

Finance minister Finance minister Tendai Biti has accused the RBZ of operating illegally, and he’s probably right.

Meanwhile Gono has complained to Prime Minister Morgan Tsvangirai about the “attacks” against him.

Dude, in any sane world, a the word to describe a central banker who engineered a 516,000,000,000,000,000% inflation rate, prices doubling every 2 days or so, would be unemployed.

Just be glad that they are not trying to throw you in gaol…Yet.

Gono is where he is because he is a ZANU-PF loyalist who manages to create enough money to keep the ZANU-PF cabal satisfied.

This has led various aid agencies to take measures to avoid the government, and government agencies when distributing aid.

The MDC has called for his removal, see here and here, and have called for international intervention to remove him, see here, here, here, and here.

This has, of course, upset the delicate sensibilities of ZANU-PF officials, and Mugabe has dug his heels in on this too, probably because he needs him to, “pay the entourage.”

What a damn mess.

Auto Industry Update, GM Bankruptcy Imminent Edition

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Well, it looks like GM could not get enough of the bond holders to agree to the deal. The deadline passed without the requisite 90% buy-in.

My guess is that a lot of the speculators who purchased this debt at around 10¢ on the dollar had already purchased Credit Default Swaps (CDS) on the face value, so they had no incentive to settle.

This is yet another example of how the complex derivatives and swaps system is broken.

The UAW has been far more accommodating, with the CAW cutting a deal in the great white north, and the UAW cutting a deal down here, which I guess is the great uninsured south.

Meanwhile, the Obama administration apparently already has the bankruptcy “i”s dotted and “t”s crossed, so we may see a filing sooner, rather than later.

It looks like the new GM will be 70% government owned, though there are many sources saying that they will take no role in how the company is run.

This is bullsh#@….Not the government ownership, but the constant assertion that when the taxpayer buys a company, that they should have no voice whatsoever in how that company is run.

Government ownership should have 2 goals:

  • An unwinding of this ownership sooner, rather than later with terms favorable to the taxpayer.
  • An active involvement in the operation of the concern, to ensure that it is run for the long term benefit of the taxpayer.

The idea that the government should have no say in things like, location of manufacture, executive compensation, etc. when the taxpayer owns the firm is simply stupid ideological crap.

Meanwhile, there are a number of bids for GM’s Opel division, and Fiat is by no means the front-runner there.

Economics Update

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The economic press is touting the fact that consumer confidence hit an 8 month high.

More accurately, they are touting that the jump from 40.8 to 54.9, is the biggest in 6 years….Only, of course, the index is bench marked such that 1985=100, so the number is still crappy.

It’s the same as the Chicago Bank of the Federal Reserve’s April National Activity Index, which is up (Yay!), but this does not mean expansion, it means contraction, just not quite so fast (Awww!).

You know, maybe we can wait to call a recovery until we have a month where the year over year Case-Shiller housing price index does not fall by 18.7%.

Consumers will not spend under these circumstances, and the economy, which is/was 70%+ consumer spending, will not recover.

In any case, be glad we aren’t German, and not just because that means that we aren’t German, because Germany’s GDP fell by 3.8% for the quarter and 6.7% year-over-year, as their export driven economy sputtered.

Meanwhile, in energy and currency land, oil was up on the consumer confidence figures, and the dollar rose as people freaked over the DPRK conducting another nuke test.

If I could predict the actions of the North Koreans, I would make a killing on the futures markets.

Sotomayor for Scotus

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Obama has chosen Sonia Sotomayor to replace David Souter on the Supreme Court.

I don’t have enough legal knowledge to know her qualities as a jurist, but from what I’ve read, notwithstanding some “what about some white guys whining” from TNR, is that she is a first rate legal mind and is qualified for the court.

I have some concerns:

  • I believe that some of the members of the supreme court should come from some other walk of life than federal judge. Until 20-30 years ago, that was the case, with justices being governors (Earl Warren), William O. Douglas (SEC Chairman), Felix Frankfurter (Academic and Solicitor General), Hugo Black (Senator), Robert H. Jackson (Attorney General), Thurgood Marshall (Chief Council of the NAACP), etc.
  • Her age and health. At 54, she is a bit older than Republican nominees, and she is a type I diabetic, which likely shaves a decade off her life expectancy.

I think that getting some non-judges on the court, and getting some younger appointees, would be a very good thing for the Dems.

Additionally, I think that the Ivys are overrepresented on the court, but Barack Obama, Harvard Law, is not likely to be the guy who does this.

Reading Between the Lines: FDIC Assessment

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Props to Margaret Chadbourn at Bloomberg, who sees a change in policy and recognizes its significance.

Specifically, she notes that the FDIC will be assessing an emergency assesment on banks in order to shore up their insurance fund, and she sees a real change in policy:

U.S. banks will pay an emergency fee based on their assets to rebuild the Federal Deposit Insurance Corp.’s reserves, putting a greater burden on large banks to replenish the fund amid the fastest pace of failures since 1994.

The FDIC voted 4-1 today to impose a fee of 5 cents per $100 of assets, excluding Tier 1 capital, backing away from a proposal of 20 cents per $100 of insured deposits. Local bankers said the fee on deposits could erase more than half their 2009 earnings. The fee will rebuild the fund that started the year at $18.9 billion, the lowest since 1994’s first quarter.

(emphasis mine)

Fees have traditionally been assessed on deposits, not assets, but the problems with bank failures, particularly among the giant banks are dodgy asset problems, so it serves to hit the big banks harder, who are less well capitalized on the basis of deposits.

It adds cost to risk, and it is a significant, and I hope permanent, change.

Company Claims Throttlable Solid Fuel Rocket

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A company called Digital Solid State Propulsion claims to be able to throttle a solid state rocket electronically. (See vid below).

This has a number of potential applications, such as variable blast bombs and thrusters for satellites.

To my mind, one of the applications would be for an air to air missile, where the motor would be on continuously for short/medium range flight, but for longer range, it would coast much of the way to the target.

Neat tech.

Thielert Reenters Aero Diesel Engine, Diamond Pursues Their Installed Base

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Thielert (top picture), and Diamond (bottom picture) are now both aggressively competing for market share for aircraft diesel engines. (paid subscription required)

Both engines are based on the same Mercedes diesel engine block, so the real differences are design philosophy and corporate history.

In terms of design philosophy, Diamond’s engine, the AE300, is somewhat heavier, and it is implied, more robust.

In terms of corporate history, Thielert went into bankruptcy, largely driven by the warranty costs on their engine, production ramp-up issues, and financial irregularities, and the trustee basically tried to shake down the installed base by demanding ruinously expensive service and parts.

They have since returned to a going concern status, though their warranty terms are now far less generous, and their engine division has been rebranded “Centurion”.

Diamond aircraft, as Thielert’s best customer, was left in a serious lurch by this, and so developed its own engine, which has now been certified by the EASA, and they are using it on their new build aircraft.

The two main draws of Aero-Diesels are better fuel economy, and the ability to run on Avjet fuel, as opposed to the increasingly expensive and hard to find, particularly in austere locations, Avgas.

I think that for Theilert to compete, it needs to get a handle on reliability, as is evidenced by the line from the article, “By year-end, the company hopes to have doubled the service life of the two vital components to 600 hr,” (emphasis mine) which means that they were operating at a 300 hour life (!!) (IIRC, it’s the reduction gear and clutch).

By comparison, the TBO (time between overhaul) on the 0-360 is 2000 hours.

Both diesels are pushed harder to get their power than current commercially available engines, with he competing Avgas is something like the Lycoming 0-360 (whose origins are more than 50 years old) generating 180 horsepower out of 5.91 liters (361 cubic in) at 2700 rpm, while the Theilert gets 135 hp at (it’s been certified for 155 hp) out of 1.9 liters at 3700 RPM, and the AE300 gets 166 hp out of 1.9 liters at 3800 rpm .

Note also that the prop speed on the diesels is 2300 RPM, while on the direct drive Lycoming it remains 2700 rpm, so propulsive efficiency per hp should be a bit better for the diesels, and their fuel consumption is on the order of ½ that of the gasoline engine.

Israel May Drop JSF

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So, we now have a report that Israel may order the semi-stealthy “Silent Eagle” if it does not get technical data on the computer for the F-35 JSF.

The claim is that they need to be able to repair the systems under combat conditions, but the counter claim by the US that they will have sufficient spares to swap them out seems to be convincing to me, so I think that there may be other issues.

First is the price. With an order of 75 aircraft, and a price of up to $20 billion, the cost of the aircraft is $266 million each (!), and that is simply not affordable.

Heck, the good old USA can’t afford more F-22s at a mere (!) 185 million each.

More significant, however, is that without this access, the Israelis will be unable to qualify their own systems on the aircraft.

This means that they cannot configure their own weapons, or their own avionics in such a system, means that, for example, they could not make adjustments to the AESA radar in order to jam some new sensor that was fielded, or install a dedicated jamming system on the aircraft.

I think that idea that they would be at the mercy of Lockheed-Martin for timely software upgrades to counter a new weapons system that the Russians or Chinese ship to the Syrians scares the hell out of the IAF.

Pakistan Is Expanding Nuclear Arsenal

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Admiral Mike Mullen, chairman of the JCS, has testified that Pakistan is expanding its arsenal to Congress: “WASHINGTON — Members of Congress have been told in confidential briefings that .

While his response in public testimony did not contain any detail, we are talking at a significant increase in capability, including the creation of new reactors which can create bomb grade plutonium, which would allow for significantly more compact and weaponizable bombs.

The Danger Room has a satellite pic showing the expansion of its facilities.

Seriously, we have a borderline failed state, a civilian government that is failed by most criteria, and they are building more nukes….Delightful.