Spitzer's Fault?

Only half tongue in cheek, was Eliot Spitzer a proximate cause of the current economic turmoil?

Consider his weakening of the investment banks (leading them to take on riskier strategies to maintain earnings), targeting of AIG (leading to the ouster of its CEO – the one man who could keep Financial Products in line), and failure to limit mortgage lending fraud and abuses (items more appropriately with a state AG’s mandate).

And then the consequences: Lehman’s bankruptcy, Bear’s bailout, Merrill’s merger, AIG’s nationalization, and today’s frozen credit markets.

sleepless success

There seems to be a strong relationship between success and needing little sleep. The second appears to be a necessary, but not sufficient, condition.

LBIE and Hedge Assets

This sentence from the GLG investor letter (posted on the NYT website) is difficult to understand: "Our assessment of the LBIE exposure is based upon a number of assumptions (including, that amounts LBIE was required to treat for each Fund as client money and not use in the course of its business were and are, in fact, so held and will be released upon repayment by each Fund of all its debt to LBIE)."

I would have thought that, for the most part, repayment of debt to LBIE would effectively release securities held as collateral in margin accounts and NOT cash (because cash would be credited dollar for dollar and so is a wash - no incentive to repay).

If this thought is correct, that means that GLG and its brethren have contingent liabilities equal to (x) the excess of securities held as collateral over (y) borrowings from LBIE. Assuming they were leveraged to the hilt and a meaningful portion of assets were at LBIE and they are a general unsecured creditor of LBIE...

AIG rescue terms

From the NYT website:

"The preferred shares will have an interest equivalent to 79.9 percent of the votes of A.I.G. and be entitled to receive 79.9 percent of any dividends paid by A.I.G. on A.I.G.’s common stock."

Does this mean that dividends are paid roughly 50/50 (44/56) until the preferred is converted?

Balanced Budget = Mistake?

I have been confused about government finances for a while (thinking especially about stadium financing). Most state and local governments have a balanced budget obligation which, I assume, means that inflows (tax revenues and fees) must balance outflows (expenditures and transfer payments). Which sounds fine and reasonable.

Stadium financing proponents often argue in favor of government subsidy by noting increases in local business revenues (which I suspect are simply made up numbers). But I have also wondered whether there should be public support even if the numbers are valid. And thought: "No. Even if the numbers are right, the tax revenues related to that increase in business will be much smaller than the expenditure, even assuming some sort of multiplier effect based on local velocity of money." But I think my reasoning was incorrect. If one thinks of government not as a separate person but rather as a collective spending pool, then an increase in revenues less than the expenditures is an appropriate use of government funds (a collective action/public good theory; ignoring Mills type issues).

Which brings me to balanced budgets. I don't think there is much alternative to balanced budgets as local governments cannot print money. But I do wonder if this limitation results in suboptimal government spending (because the wrong measures are being compared and balanced). And then the kicker - perhaps federal subsidy mitigates this problem AND federalism (at least on the budget side) is a mistake. Yikes.

Nice...

In light of the current Fannie mess, this is intriguing: "Chief Financial Officer [of Capital One] Gary L. Perlin, a former Fannie Mae treasurer, and Chairman and Chief Executive Richard Fairbank have long looked with suspicion on the mortgage business." WSJ page B5D September 10, 2008.

Not that it requires repeating, but Fannie has been rotten to the core for years.

yankees and retail investors

The Yankees' ownership strikes me as similar to a retail stock investor (speculator) - always chasing (and lagging) trends, buying at the top, selling at the bottom, and abandoning shares when they hit bottom. Hope they keep Girardi and lose some of the short-term thinking.