Defenestrating Thoughts from the Bivouac

Everyone’s got banks on their mind nowadays. And Friday another couple of banks failed:

Regulators shut down Houston-based Franklin Bank and Security Pacific Bank in Los Angeles on Friday, bringing the number of failures of federally insured banks this year to 19.

The Federal Deposit Insurance Corp. was appointed receiver of Franklin Bank, which had $5.1 billion in assets and $3.7 billion in deposits as of Sept. 30, and of Security Pacific Bank, with $561.1 million in assets and $450.1 million in deposits as of Oct. 17.

Wait a sec? Assets and deposits look great, why did they go under? Because in the wonderful upside down world of banks, assets are bad and liabilities are good:

[A bank's] primary liabilities are deposits and primary assets are loans and bonds. (Wikipedia)

Huh?

Here’s what’s going on: if someone deposits $100 in a bank, then the bank really owes them $100. Therefore, a deposit is considered a liability for the bank. But instead of being straightforward about this it, the press and banks call it “deposits” and not “liabilities”.

Now when the bank loans out $100, the banks is owed $100. So this is a considered an asset as the bank is holding an IOU.

You gotta love that framing: bad is good! Good is bad!

So now that we understand the language, let’s go back to the article. Franklin Bank had $5.1 billion in assets (money owed to them) and $3.7 in deposits (money they owe). So they have $1.4 billion more owed to them then they owe. Why did they fail then?

They failed because the people that owe them money don’t have the money to pay them back! The banks made stupid loans and are now suffering the consequences.

Not only are people unable to pay back home loans and car loans, credit card loans are now basically worthless:

Credit card companies were shut out of the market for bonds backed by customer payments in October for the first time in more than 15 years, as investors shunned the debt amid the global credit freeze. (Bloomberg)

(Basically this means no one wants to buy the IOUs that the credit cards have even at rates at 4.75% over the Libor! Of course, this is partly due to the moral hazard the Treasury is supporting, but that’s a discussion for a different post.)

So back to the the article. Franklin Bank had $5.1 billion in assets (money owed to them), but people can’t pay it back and are defaulting on their loans. So while the bank says on paper that their assets are worth $5.1 billion, in reality its probably worth 10 to 25 cents on the dollar. This is what similar assets are selling for on the open market.

The “paper” value of $5.1 billion is determined by “mark to model”, while the “real” value of 10 cents to 25 cents is called “mark to market”. The former is “what the owner thinks it’s worth” and the latter is “what someone would pay for it”.

To someone like me, “mark to model” is a fiction, while “mark to market” is the truth. To the idiots on Wall Street and Washington, they think “mark to model” is correct.

So finally, if we use the real value of the assets as an indication of it’s worth, Franklin really had between $510 million to $1.275 billion in “assets” and $3.7 billion in liabilities. That’s why they failed.

That’s why “mark to market” is a reflection of reality and “mark to model” is basically fraud. Understanding the difference between the two will help you understand what’s happening in the financial market today.

Why exactly are the banks allowed to loan out more money then they have? Shouldn’t that be illegal?

Sadly not. “Mark to model” is very much legal. As is fractional reserve banking, where a bank can lend out $50 for every $1 they have!

Both of these are at the root of the cause of our current economic collapse. And no real recovery is possible until these are eliminated.

So obviously I’m very excited about this “misallocation of capital/talent/etc” concept. It’s really useful.

And some new government guidelines in England are a clear example of “misallocation of effort”; or more specifically, “Doesn’t the government have anything better to do?”

”A new washing machine or [potted] plant comes with instructions, currently most pets do not. We think the new codes of practice will improve animal welfare and prevent animal suffering through education.”

Here are some of the guidelines for interacting with pets:

• A dog should not be disturbed when eating as this can cause “food-related aggression”.
• Dogs should not be fed at the table as this can lead to begging
• “Curious” animals such as cats should be kept away from windows or tumble dryers
• Don’t take a dog for a walk during the hottest part of the day or feeding it less than an hour before vigorous exercise in order to avoid “bloating”
• Owners should groom dogs with long hair at least once a day
• Dogs should have teeth cleaned with dog chews or canine toothpaste as part of routine care
• Training of dogs should be done through “positive reinforcement” rather than punishment
• Cats are not vegetarians and adults do not need bowls of milk

Yikes. Obviously these are good things to know. But does the government have committees and forums to come up with this? Isn’t this known or at least easy to learn when you get a pet?

I have to agree with the folks that said the “over the top” rules “take people for fools”.

Part of the justification is the rules will ensure that “no one will be able to claim ignorance as an excuse for mistreating any animal.”

Really? Ignorance is never an excuse for a committing a crime.

And if the laws and guidelines get longer and longer, people will be able to say, “Well you had 200 pages of guidelines on how to treat animals and it didn’t mention not using mayonnaise to brush the animal’s teeth.” And the stupid courts will say, “That’s true, we need to update the guidelines, you’re free to go.”

If the system treats people as stupid, eventually you will get stupid people. And that’s not good.

Yes, this isn’t exactly breaking news. All politicians and their sycophants live in alternate reality.

I think an impartial observer would say that a big part of this election was a referendum on the Bush administration. And their wars, economy, state of civil liberties, cronyism, etc were pretty much sufficient to sink anyone with an R next to their name.

At least that’s what I would expect people to say when asked “What happened to the Republican party Tuesday? Who’s to blame?”

But here’s what a panel of National Review Online Symposium had to say:

• “The liberal wing of the GOP has caused the collapse of the Republican party.”
• “[Republicans] relied too much on raw exertions of power and too little on the power of persuasion”
• “We lose elections when we cut deals in the name of pragmatism or try to out liberal the liberals.”
• Voters went for “hope’n’change mush” because it’s “the dominant vernacular of the age.”

Wow, those neocons are really in denial.

I came across an article from the Consumer Reports about overnight shipping costs and since I just wrote about shipping last week (and 2 years ago), I thought I’d share some thoughts on the article.

Let’s start with the conclusion of the article. Based on two tests, Consumer Reports determines that the Post Office is the cheapest by far. Of course, this isn’t a fully conclusive test. They didn’t test multiple start and end points, package weights or formats (box, envelope, etc).

Anyway, aside from Consumer Reports lack of understanding of the scientific method, there are some interesting things in the article.

Asked how the Postal Service, an independent part of the U.S. government’s executive branch, can deliver overnight shipping for less, a spokeswoman, Yvonne Yoerger, said: “We have an infrastructure in place and letter carriers everywhere. We’re simply adding package delivery to a network that already exists.”

This supports my earlier assertion that the Post Office package delivery is heavily subsidized by their federal government mandated monopoly on first class mail. First class mail provides all the revenue they need to have the “infrastructure in place and letter carriers everywhere”. Adding packages, then, have a low marginal cost.

If you need a letter or package delivered faster than next-day, FedEx and UPS have the edge. Both offer same-day service and delivery first thing next morning. All the Postal Service can do is promise delivery by sometime the following business day, depending on destination and shipping time.

This part interesting because it gives us insight into the infrastructure that the companies in place. UPS and Fedex can schedule each leg of delivery. Each truck driver is given a specific itinerary of when to make pickups and deliveries. On the other hand, the post office’s final leg of delivery is not customizable. The mailman will always run his normal route and as necessary drop off a package.

Anyway we can’t forget the intangibles. There’s a rarely a line at FedEx or UPS; the Post Office on the other hand? It’s an exercise in patience. :-)

It’s election day and given all that I’ve written on the topic, I guess I should say something…

Of course, we don’t know the results yet, but I’m already very disappointed.

America ended up electing a guy who:

• Voted to re-authorize the Patriot Act
• Voted to fund the Iraq War
• Never voted for or authored a bill that would end the Iraq War
• Voted for telecom immunity
• Voted for the $850,000,000,000 bailout (including $150,000,000,000 of pork) which banks are using to pay bonuses and make acquisitions

It’s sad that with all the information we have available to us, people didn’t take 5 minutes to investigate beyond the rhetoric and look at the actions. Sure your guy says good things, but he does the opposite, consistently.

I guess we do indeed get the government we deserve.

Because of the recession, I’ve seen a lot of lists and articles about stalled construction projects. For the most part, they were dry and boring statistics; after all I never really new the area and couldn’t understand the impact.

While I was in Seattle, I was always amazed at the amount of construction happening; especially in the downtown Bellevue area (you’d always see 15 or so construction cranes building skyscrapers). As an impartial observer (I didn’t own property in the area and was moving away), I always felt that there was a lot of over-building.

Now I found this list of stalled construction projects (from the Seattle Times, scroll to the bottom to see Bellevue) and I find it fascinating since I know the area very well.

I fully expect that this list will grow much longer.

A big question for me is whether the construction sites will be torn down or abandoned mid-construction? I assume the projects don’t have reserve funds to clean up the mess they made, so the city (e.g. the people) will foot the for tearing down all the partially built buildings.

If so, the “allure” of downtown Bellevue is going to drop significantly. There’s nothing like abandoned construction projects to make a city look ugly.

A few people have sent me this Letter to the Editor from the Chicago Tribune and I thought it was funny enough to warrant sharing:

On my way to lunch recently, I passed a homeless guy with a sign that read “Vote Obama; I need the money.” I laughed. In a restaurant my server had on an “Obama 08″ tie. Again I laughed. Just imagine the coincidence. When the bill came, I decided not to tip the server and explained to him that I was exploring the Barack-Obama-redistribution-of-wealth concept. He stood there in disbelief while I told him that I was going to redistribute his tip to someone who I deemed more in need—the homeless guy outside. The server angrily stormed from my sight. I went outside, gave the homeless guy $10 and told him to thank the server inside as I’ve decided he could use the money more. The homeless guy was grateful. At the end of my rather unscientific redistribution experiment, I realized the homeless guy was grateful for the money he did not earn, but the waiter was pretty angry that I gave away the money he did earn even though the actual recipient deserved money more. I guess redistribution of wealth is an easier thing to swallow in concept than in practical application.

—A. Hart, Forest Park

Of course, I doubt this is a true story. It’s very unlikely that a restaurant owner would let his employees wear politically themed clothes.

It does however provide a real world example of the implications of wealth redistribution. Generally, while it may sound good on paper, in practice taking resources from the working and giving them to the non-working is a good way to encourage people not to work.

My blogging program, Wordpress, added a nice Flash based uploader (multi-select and progress bars!), and I needed an excuse to try it out.

So, here are some of the more amusing cartoons and pictures I’ve seen about the bailout:

(from http://www.investors.com/)

(from the Chattanooga Times Free Press)

(via a different Vijay)

Of all the companies out there, I really admire UPS and FedEx. Here are two companies that went against a government sanctioned and heavily subsidized monopoly, and armed with private capital and their own smarts, they are winning.

The US Post Office has a government granted monopoly on first class mail. This monopoly advantage basically gives them all the facilities, trucks, and personnel they need to run package delivery services; essentially a large chunk of the US package delivery service is subsidized by the taxpayer.

And against these odds, UPS and FedEx are able to be profitable entities. Amazing.

So when Fred Smith, the FedEx CEO, was featured in a recent WJS article entitled “Washington is the Problem“, I read it with interest.

It’s worth reading the whole article, but I’ll mention a few parts that I really liked.

First he talks about how the tax structure and regulations give preferential status to banks. For example, for a company to raise money (i.e. get loans), they need to have a dollar of assets for 10 cents of “risk”. Banks, however, have one dollar of assets and $25 ot $50 of risk!

That means for every dollar in the bank, the bank lends out around $25 to $50!

With leverage like that, of course the banks can make great returns for short periods of time — until it all crashes down and the tax payer is forced to bail them out. As a result, the pay the banks offer attract the best and brightest.

So what happens is a misallocation of talent. Instead of our smartest kids going into production engineering to build factories, they go to Wall Street and move money from point A to point B. They don’t actually produce anything valuable, they just build Ponzi schemes.

The second point he made is that we’re at the point in this country where fewer people pay income taxes than don’t. And since the non-paying majority can just vote to take the money from the productive part of society, you have a problem for the overall economy.

I like Fred Smith. I don’t agree with him on everything, but the fact that his company employs 290,000, has $38 billion in sales, and owns 300 jet airplanes in face of competition that’s heavily subsidized, you got to take him seriously. :-)

I finally ditched Coppermine and switched over to Picasa. Since I work very closely with the Picasa team, I figure if I have any problems I know who to ask. :-)

All my shared photos now live here. The sidebar links are updated too.

I also put up some pictures from my family’s recent trip to India.

Enjoy!