What worth a CDO is?

Collateralized Debt Obligations (CDOs), the securities backed by mortgages in America which are the root cause of the current financial crisis on Wall Street, posed an acute problem of valuation so far. ( http://en.wikipedia.org/wiki/Collateralized_debt_obligation ) JJ Cramer and many market analysts have been lamenting that unless there is a credible number attached to what is a worth of these CDOs we are unlikely to get out of this mess. That reasoning is correct. As Fed increased interest rates starting in mid-July of 2006 and American Economy failed to hold steady / increased income for inflation battered Americans; everybody started to realize that Americans will start defaulting on their mortgages. Very soon, indeed. So naturally CDOs which are backed by these mortgages started to loose their values. The problem has been to determine the extent of value loss – 10 cents per dollar or 20 or 30? Initially folks started to say reduction in CDO valuation will be proportional to the underlying mortgage default rates. Even though mortgage defaults started to spike; the traditional number of less than 5% defaults would go at the most less than 15% or 20%. But the financial wizardry of behind these CDOs is so ingenious that these CDOs loose value much more than the underlying mortgage default rate. This means market realized that CDO loss will be for surely more than 15% to 20%. But how much? And that was the literally multi-billion dollar question on the Wall Street till today.

With Merrill Lynch selling its CDO portfolio of $30.6 Billion CDOs for paltry $6.7 Billion; the whole world has got the answer to this valuation question, seemingly the basic key to move beyond the current mortgage crisis. The answer is these CDOs are worth 22% of their original face value! Incredible destruction of value peddled by these so called Masters of Universe. When will we gullible public realize that Wall Street is nothing but a giant casino created to enrich CEOs and CDO creators but to dupe pennies and houses from all other common Americans? Will we have a righteous sermon from the high priest of Capitalism - Wall Street Journal - admonishing mandarins of Wall Street and articulating a system which is not so value destructive? Probably not. That is not in the tradition of these ‘self-help style American’ custodian of Capitalism. It is symptomatic of so many Conservatives, pro Capitalist folk who on most occasion calls GOP as their home. Can one dare to say ‘Wall Street and American Capitalist System gone wild’ here? Barack, do you have any solutions here? Anyone stepping forward to articulate a clean and right solution of supervision / regulation to avoid such mess in future? The parade of culprits in this supply chain of ‘CDO crack drug’ includes:
- Realtors and property appraiser who in the first place brought the froth to residencial market along with the high flying home builders.
- Next we got banks offering millions of dollars to NINA (no income no assets) mortgages.
- Then comes the ever eager class of Wall Street Investment Banks – Bern Stern, Merrill Lynch, Citibank of the world who bundled these mortgages into CDOs.
- Finally rating agencies like S&P, Moody played their crucial part of this great endeavor: offering ratings of high credit worthiness to these CDOs even though the mono-line insurance cover offered by likes of Ambiac, PMI have way too inadequate for these financial papers.
It has been total collusion and abdication of responsibility by all these players. Of course, while this has been unfolding SEC, CTFC, Fed and Treasury Department and even Congress; were all busy in ‘serving’ Americans. Folks, we have got one heck of a regulatory system in our country.

Meanwhile, we will start seeing balance sheets of CDO holders destroyed with reduced valuation ranging from 15% to 30% of the original CDO face value. This means so far $400 Billion write downs which have come on Wall Street will not be enough. In short, more misery and more grinding of all retirement portfolios of common people.

As they say in finance, the only silver line here is finally we are likely to see some handle on how toxic these CDOs are and that is always the first step – to know exactly how deep we are in the hole. As a trader on ‘TheStreet.com’ Robert Marcin writes:

“Cramer can rant all he wants, but it's futile. Uncle Ben can't stop the Great Unwind, neither can Hank. Nor can Comrade Obama if elected president. The delivering [sic] of the global economy is a powerful force that most underappreciate [sic], including the 30 x's levered bozos running brokerages. Stay liquid.”

That seems to be only truth with which we commoners have to live with. Everything else is Mirage on Wall Street and misery in the reign of King George Bush continues unabated.

Spanish Winning Streak

Carlos Sastre continues the golden summer of Spanish sports – after Euro Soccer and Wimbledon; here is another Spanish athlete with the win of Tour de France under belt (third Spaniard in row). Spain has always been a power house of cycling, so this is all fitting in their great tradition.

Question is will they have now equally scintillating Beijing Olympics. As of now host China is expected to overcome American dominance. Some speculations are China winning around 42 gold medals to 39 of Americans and overall medal count at 86 to 85 in favor of China. Dominance of USA, Russia, China, Germany and Australia is not expected to change; just the ranking within top 5 nations. All nations nowadays go with specialty. There in lies glory for nations like Spain in focusing on specialties like cycling. Can not wait any longer for the most expensive sports extravaganza starting in next two weeks.

Drug Lord Karzai?

Thomas Schweich, an American anti-drug official, writes a blistering article in NYT detailing complacence and protection offered by Afghan President Karzai to drug lords in Southern Afghanistan, the vote bank of Karzai. It is a classic example of how votes distort the ability of a state to undertake long term beneficial policies.
(http://www.nytimes.com/2008/07/27/magazine/27AFGHAN-t.html?hp )

The article is detailed and quite impressive. Will anything change? Looks like until both America and Afghanistan get their presidents elected again; this war on drug (really the flip side of war on terror in the context of Afghanistan) will have to wait. Sadly Democrats in Congress are not particularly helping the matter too.

Dr. Singh’s Victory

With the crucial trust vote win under his belt, Indian PM Dr. Singh has got badly needed political tonic. It will benefit Congress politically. More importantly, chances of Indo – USA Nuclear Accord going forward increase.

The key question is whether India will be able to get IAEA and NSG accords in time for the final approval by American Congress before it becomes ‘lame Congress’ (post election). It is doubtful whether the lame Congress would pass this bill. Somewhere it indicates lack of democratic principles if it requires the lame Congress to pass this accord. This means the best bet is to get it passed before American elections. Considering that around mid September the Congress would adjourn, we are talking only a month effectively for Dr. Singh’s Government to get approval from the two international institutes. With the vigor of today’s win and earlier ground work by his able old hand Foreign Minister Pranab Mukharjee, there are realistic chances of those approvals falling in places by August end. Sticky points are still ‘aggressive and ambiguous’ wordings by India in this proposal. But again, with today’s win Sr. Singh will more have wiggle room to adjust the text.

The other sticking point is the requirement of American Congress needing to be in session for continuous 40 days or so; before the Congressional approval is possible. This is what Sen. Joe Biden pointed out recently. But he was quick enough to point that the Congress may find some way out to approve if India has completed formalities of IAEA and NSG. In fact with the aura of staking his government for this Accord and then by winning it; it now becomes imperative for American leaders to make all the necessary arrangements to pass this bill.

This win by Dr. Singh is of far more strategic importance to India. He has effectively sealed his legacy here. Whichever way one cuts it, Economic Liberalization in the first term under Premiership of Narasinha Rao and strategic nuclear accord with USA in his second term as PM; Dr. Singh has made fundamental, lasting and colossal contributions to Indian Republic. He is wise enough to ignore if many Indians may not recognize his service. It is noteworthy that it is BJP which bursts Nukes, but it is the Congress which makes the peace. Hard choices of war (the way Indira Gandhi won Bangladesh war) or the peacemaker Dr. Singh; it seems there are no political forces as competent as Indian National Congress party to deliver lasting foreign policy contributions. This is big deal.

Congratulations to Dr. Singh and Indian Democracy to withstand narrow minded and misguided political postures and working hard for true national interests. Dr. Singh and Congress Party are entitled to reap political advantages of ‘tremendous aura and good will’ generated among electorates by this win. Congress party may even opt for early elections and hope to improve it’s strength in Parliament, if not big but at least by few extra seats. Mulayam Singh’s SP will be firmly in the ‘lap’ of Congress. This bodes well for UPA coalition with the Congress party as the anchor. All in all it is a positive political development for the Congress party and India with prodigious potential to improve Indo-USA relations further.

Ezra Klein – Crate and Barrel Theory of Iraq war

It is worth echoing what Ezra Klein says here after Iraqi PM’s statement to concur with timely withdrawal of American forces from Iraq:

“The long-standing moral blackmail of “we broke it, now we have to fix it” just dissipated. The Crate-Barrel theory is finished: The proprietors just told us to leave the store.”

(http://www.prospect.org/csnc/blogs/ezraklein_archive?month=07&year=2008&base_name=maliki_and_public_opinion)

So right on. Can we move on to next topics which concern America and the world?

Obama’s Iraq War Contribution

Charles Krauthammer in Washington Post laments that Obama has not contributed anything to advance America’s foreign policy interest and hence it is way too arrogant for him to ask for the Brandenburg speech. Well, I guess Kruthammer will have to get used to ‘burn by jealousy’ for many more years regardless of whether Obama becomes president or not. Democratic party has coalesced around Obama not for nothing. Obama will carry the ‘cross’ for Dems and he is doing good. Sure, the fun will be how these Neo-Cons get frustrated over the years and surely will understand then what happened to those who were advocating progressive or even centrist agenda under Bush regime. Soon it will be Neo-Cons turn to suffer.

The basic contribution Obama doing here is to stick to his policy theme of reasonably rapid return of American forces from Iraq. What that has made it possible is for Iraqi’s openly side with that idea – look for Iraqi PM’s latest statement in Der Spiegel that he agrees with Obama’s idea of quicker time line for returning forces. Not only that, effectively that has forced Bush to agree for the timeline business now, after resisting for so long. Obama kept the pressure here. Relative calm brought by ‘surge’ made the political space for Iraqi’s to think about life after Bush. Obama on their side along with such a tremendous grass root support all across America made Iraqi’s to nudge Bush falling in the line. This is Obama’s contribution and no matter how much Kruthammers of this world berate him for missing the surge judgment; here is the real value.

Obama Campaign may ponder over how to ‘cash’ this. That is their electioneering problem; essentially made quite easy by the misguided and ‘out of phase with Iraqis’ policy of John McCain. One of finest commentaries about how politically untenable McCain has been on Iraq is from Daniel Larison in ‘The American Conservative’ .

(http://www.amconmag.com/larison/2008/07/19/who-cares-what-the-iraqis-think/ )

Meanwhile for Americans, we want Obama to continue his realistic positions on Iraq without any hesitations.

America’s Iraq War – Where we are

Michael Yon is right America is done with Iraq war. It may not be exactly a win for USA in very clear terms, but at least it is not a defeat.

(http://www.michaelyon-online.com/index.php?option=com_content&view=article&id=1690:success-in-iraq&catid=34:dispatches&Itemid=55)

Bush’s surge policy worked. But let us go back in time when the ‘surge plan’ was born. At that time with earlier five years of disastrous war management by Bush, no sane person in the world would have backed for one more ‘gamble’ by Bush. In 2006 mid-term election when GOP lost control of both chambers of Congress, clearly the mandate from American people was to wind down the war. Hence, there was opposition from liberals and Democrats at that time to the plan of ‘surge’. In a sense, it was right to oppose to the ‘surge’ even if people who opposed turned out to be wrong.

So the question is what Bush did – in spite of tremendous public and political opposition he literally pulled America in the ‘surge’ – was it prescient call and hall mark of heroic leadership? Well, neither History nor American public will mind George Bush to have his day in sun while being mindful that there are still lingering issues in completing objectives of ‘surge’. Democrats and war critic like Obama turned out to be ‘wrong’ about the surge – so what? Big deal.

The reality is Bush played his last ‘double down gamble’ and it worked in this case. That does not erase the history of ‘the whole series of gambling’ and ‘from gut’ style policies he has followed in last eight years. Surge success or not, the question is do America wants such ‘instinctive’ politics? One positive result out of such gambling does not change America’s current predicament and it’s disposition towards going away from ‘gung ho’, Neo-conservative, guts based (my ‘balls’ are bigger than yours) politics as practiced by Bush.

Of course, McCain does not get any ground to tom-tom his leadership instincts here – he was disastrously wrong to back Iraq war in the first place and worst of all kept on advocating ‘all high staked’ war strategy all along. He kept on criticizing Bush from Right – why not more forces; without any credible political solution to the whole gamut of Iraq occupation problems. He is even more ‘war monger’ than Bush; surely not the kind of leader what America needs now.

We have to go back to the July of 1945, when Britain went away from the war winning leadership of Winston Churchill with full realization that his job was done, his utility was over. Same with Neo-conservative foreign policy of America in 2008 – notwithstanding recent success (it better come since already it is too late); time has come for America to move on.

McCain is not offering that choice to move on but rather to perpetuate the same outlandish Bush Foreign policy. He is still in 2002. Obama is the choice to ‘move on’ with, even if there is sufficient reason to fault his (and his supporters like me who were not enthusiastic about surge too) judgment in this regard. But what do we want – a leader who is right in the first place to oppose unwarranted war but missed one tactical (sure Obama and Dems did have their tactical alternatives to ‘surge’ too) step subsequently in cleaning up the mess which he for sure would not have created; or the guy who got one tactical call correct in the ‘clean up’ but who is all belligerent with long laundry list of missed judgments? A rational person would argue – it depends on what is the extent of ‘clean up’ job left. If the state of Iraq war is such that more such ‘tactical clean up’ calls are to be made; then sure McCain candidacy will be of interest to America. But we are past 2004 when John Kerry paid precisely that price – ‘let us not change the horse midway in the river’ even if that meant re-electing moronic George Bush again in order for him to clean up the mess. However, today we are in 2008 and the clue is listening to the music played by Iraqi Prime Minister Maliki – Iraq does not want American forces any more. Yes, that is right; folks we are done in Iraq and that is the perfect evaluation of McCain victorious judgment – America does not need John McCain when all he is looking for is to have hundreds of thousands of American forces stationed in Iraq for decades to come.

Obama, beyond the Iraq war, offers a compelling vision of sound Foreign Policy.

(http://www.realclearpolitics.com/articles/2008/07/a_new_strategy_for_a_new_world.html)

That is more than a reason to make him President than a clueless alternative. One tactically not so perfect call – America can surely live with that deficiency in her leader. That deficiency does not offer prizes to GOP when for all eight years they have been overdrawing credit of American public’s stretched support. If they have got something now in the end (surge success), may be Americans can decide to move on without vendetta against GOP. But in lieu of that success to ask for Bush’s Third Term as consolation prize, that one is beyond America’s stomach for war monger policies of McCain Republican party.

What if Cramer is Right?

Fannie Mae and Freddie Mac bailout is old news. Not that those financial institutes will not burn again, but there is more urgent fire now. The question is after Indy Mac which is the next bank. Washington Mutual? National City? Who else? FDIC’s own report says around 150 out of 7000 or plus American banks are at risk. It may not be lot compared to Savings & Loan crisis of 1989 when Congress bailed out few hundred thrift banks at the cost of around $190 Billion at inflation adjusted today’s price. But if for Indy Mac only FDIC has to put minimum $4 Billion at works out of it’s corpus of $53 Billion; one wonders how long FDIC money can last. This is because Congress is already on hook to spend around hundreds of billions for these two GSEs.

If one reads or hears James Cramer (JJC) of TheStreet.com; it is clear that FDIC will not have sufficient money to bail out, leave alone 150, but even 50 banks at this rate. Now, try figuring out consequences and experience your own shiver down the spine.

No doubt, mouths of JJC like commentators are loud, shrill. But unfortunately for so long these are the precise ‘doomsday’ scenarios which are coming to fruition in today’s America.

American Media, Congress and political punditry; all are behind curves. Just imagine who will care even for Iraq; when banks are falling like rats in plague while Messers Bernanke, Paulson, Bush and Congress have no idea what has struck American Financial System. In any case, Americans are ‘done’ with Iraq. It hardly matters whether ‘surge’ has worked or not or Bush has proved to be right when we have monumental failure on hand with American Financial System.

It is laughable to read all these passionate debates about Iraq or still incomplete Housing Bill (for which WSJ ran an excellent article explaining how it may not really solve the problem of housing delinquencies) or standard political topics; when these experts have no idea whatsoever about what devastation in American Economy is unfolding.

So what happens if JJC is right? Will we have a day after?

Capitalism – Are we at the end?

E J Dionne writes an excellent article about how foundation of American Economic Story – Wall Street led Capitalism – is facing serious challenges.
(http://www.realclearpolitics.com/articles/2008/07/ailing_capitalism.html)

Also Mark Gilbert writes an apocalyptic version of end of Capitalism.
(http://www.bloomberg.com/apps/news?pid=20601039&sid=a11PeBn6TV8A&refer=home )

These are not some kind of academically argued papers, but for sure these are newspaper columns. Nevertheless, these are thought provoking columns and essentially capturing the zeitgeist.

Sure enough, tomorrow or over week end we will get Wall Street Journal running articles singing paeans of Capitalism. Well, WSJ did so when some criticized starting of Iraq war too… But I am digressing. Point is we all know this now - all that was to be unfolded from Regan era Economy orthodoxy, it is unfolded including misery and there is nothing left.

When a simple non-politico upstages presidential candidates by way of offering Pickens Energy Plan ( http://www.pickensplan.com/ ); we know that both party candidates are missing any intellectual capacity to address the tsunami of economic bad news unfolding. One just has to compare how Obama campaign seemed to suck all oxygen from Media when it was engaged in extremely competitive primaries. Now that primary elections are over and both candidates have their tables full by daunting challenges of today’s America; both these candidates and their billion dollar campaigns look ‘pygmy’ - incapable to provide any leadership or ability to lay a path to navigate America through difficult times. Worse, both seem at times clueless and criminally engaged in celebrating their nomination success (how big should be the crowd at my coronation or which is the most sexy European place to give my next speech). May be we should not confuse winning the election and solving our problems. These two candidates will do what it takes to win the election – any problem solving of America is just incidental!

Which means, somewhere deep down, Americans need to come together on their own to find ‘light’ from today’s pitch darkness. Our politicians – well, not a good stock; it sinks and stinks.

Oil Prices – Speculation Cause?

One more research paper examines the issue of Oil Price and various reasons for the same. ( http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1154686 ) The paper is by Stevans and Sessions and it contains refutation of Paul Krugman’s argument.

In short the paper contends that eliminating six month futures contract would help reduce impact of speculation on oil prices. Contention is that is one possible remedy for policy makers.

Any takers?

Spaniards on Tear

First it was European Championship. Now Nadal win over Federer at Wimbledon in epic battle. Nadal win is follow up to French Championship. So one can understand Spaniards would be on moon.

Wall-E

No doubt, very impressive movie. Long, long time I saw anything like this one. Exceptional. It is amazing with essentially just two stages or story places (Wall-E's home / desolate planet as shown somewhere near New York and the space ship Axiom) and the first hour or so without any human dialog; so much can be created and so much meaningful can be said.

In the summer of 2008 in America, intellectual taste and social sensitivity of a person are brandished by writing a review or critique of this movie. On couple of occasions I was tempted to write one review, but then with a rare bout of 'holding a mirror to oneself' I realized my limitations and decided to spare occasional readers of my blog. So, the real critique and review I liked is by our usual ultra-caustic, uber-commentator Frank Rich of NYT. Here is his review, as usual very incisive, sharp and pointed:
http://www.nytimes. com/2008/ 07/06/opinion/ 06rich.html? hp

Andrew Sullivan at The Atlantic says - any civilization which can make a movie technically and aesthetically as sublime as Wall-E is NOT doomed for failure or extinction. I guess it is quite a strong statement. But Andrew Sullivan is not known for any restrained reactions.

My daughter liked 'Kungfu Panda' more than 'Wall-E'. She found the latter bit serious. In a way the movie is more for adults than for kids. May be where it grows it is not consumed - in California many kids may be like my daughter (age 6+) finding Wall-E so so; whereas those kids in New York who watched along with Frank Rich seem more receptive to the political message of the movie.

Or may be I have more work to do on 'parenting front'!

Speculating Oil Price Speculation

Starting from Bush’s Chief Economic Cheer Leader Treasury Secretary Paulson, laud mouth on Web - JJ Crammer, of course Oil Company Executives and any sundry Neo-Con; we have all of these voices getting down us telling that there is ‘no speculation’ in oil prices and it is all about fundamentals. Even Paul Krugman chastises those are who are searching speculation in oil prices. Now we have Economists saying that too.

But what about Congressional testimonials by Mike Masters and expert commentary by Daniel Dicker? (http://www.thestreet.com/p/rmoney/oil/10423562.html) Why does any one not want to give at least some serious try to drain out any speculation which might be there? If some honest efforts are done and if it is demonstrated that it still does not have any impact on oil price; then the issue will resolve once for all. If it needs co-ordination across multiple futures markets in many countries; so be the case. It is worth a try. And which country in the world would not like to see low oil prices, except Oil Powers? Meaning, it should be easier to forge any co-ordination needed to adopt measures to control speculation simultaneously across many futures markets.

Congressional leaders and those politicians who want to do something positive about high oil prices (say why not Presidential candidates?) should come out and disregard this ‘cacophony of no speculation’. It is the question of credibility of the political class – whether it wants to do anything or whether it can do anything for this man-made crisis. Once these actions are attempted and if it still does not reduce oil price in any sensible way; then these politicians should come forward and tell public about other ways to move beyond ‘fossil energy sources’ way of life.

We need political leadership which throws away pressures by ‘oil lobby’. It is bad enough that American Congress and Obama are ‘in pockets’ of Iowa ethanol boondoggle. World Bank is out with it’s study of how diverting corn to ethanol is contributing to 75% of global food price increase and it is not more eating mouths in India or China neither draught in Australia which contribute so much to food price increase. Of course, credibility of World Bank is no better; but such a study does point that – conventional economic wisdom is not sufficient in getting to the root cause of many economic problems. So why do people buy the conventional wisdom of ‘no speculation’ in oil prices?

Economists as professionals have done poor job too. There is no high degree of coherence among economists in nailing down ‘speculative’ component in oil price. It reminds one of IPCC and their heroic efforts in getting high degree of intellectual agreement among 2000+ leading scientists about global warming and causes of the same. No such unanimity or high degree of collective confidence among Economists. What good are those Nobel Prizes in Economics, if common public on street does not get answers to simple questions like – how much speculation is there in oil prices and if there is, what can be done to stop it?

Useless Adherence to Ideology Terms

Doug Saunders writes in Globe and Mail that if Obama wins American election, quite likely he will be the only left leaning leader in a block traditionally referred as West.
(http://www.theglobeandmail.com/servlet/story/RTGAM.20080705.wreckoning0405/BNStory/International/home?cid=al_gam_mostview)

So what? What is the point? This whole article is one more useless exercise of attempting to use so called academic terms to describe political realities without any value addition. Starting with Neo-Con Bush and Labor Blair, post world war America-Europe relations are full of examples where leaders have co-operated despite coming from competing ideologies.

In today’s complex world, most of the world leaders are aware that pragmatic foreign policy instead of ideology driven world views is order of the day. Bush has been one of the rare breed of politicians who is much more ideology driven than the norm. With the end of Bush term, such extreme politics will be gone. By that comparison mainstream European leaders across the political spectrum are quite Centrists and hence well disposed to co-operation with new American President. And what about compulsions of contemporary world where China, Russia, Brazil, India and Oil Exporting countries are dominating world affairs? Barack or McCain, Europeans of all hues will work that president, unless the European leader is Neo-Nazi, extreme Right wing nut case.

And what of Post-Partisan Politics of Obama, Schwarzenegger and many other leaders attempting to move beyond Left and Right divide? Views expressed by Saunders are quite narrow and ignore the emerging reality where many leaders all across world are trying to go beyond divisive way of politics. Seems like that observation is lost on Saunders.