[Insert Number] Days/Weeks/Months [Strike As Appropriate] To Save The Euro

George Soros is widely quoted today as saying there are only three months to save the Euro.

I have no idea whether he is right or wrong.  In fact, I have no better idea than the next man.  And it turns out the next man is full of ideas, all different.

6 weeks: In September 2011, George Osborne thought we had only six weeks to save it.

10 days: At the end of November last year, a leading EU monetary chief thought we had only ten days.

2 days: In December, some commentators thought we had as little as two days to make the save.

The one thing we know about predictions is that if you keep predicting something, it will eventually become true.  Except when the prediction is wrong.

Where Does HMV go from here?

As HMV issues its third profit warning in a year – revising its profit forecast last given only a month ago from £38m to £30m (£8m profits lost in only 4 weeks?) – I wonder where it goes from here. Apart from into the dust.

I’m doubtless one of the causes of its slow-motion demise. Years ago I would regularly visit HMV to buy CDs, DVDs and video games. Years ago.

I hadn’t been in an HMV (or any equivalent store) in at least 5 years, probably nearer 7, until last week when I needed to buy a DVD box set for a friend who wasn’t well. HMV had one copy – a 7 year old TV series – priced at £60. Amazon had the same item at £12.95. I asked at the cash desk if there was some kind of mistake – they told me that if I came back next Monday (it was Wednesday), there would be a sale on and I’d be able to buy it for only £25. Needless to say, I bought what I needed from Amazon whilst standing in the store, and got delivery the next day. Happy me, happy friend who tells me he has already raced through the first series and is on to the next boxed set.

HMV doesn’t have a model. Nor do Dixons or PC World (Dixons shares are 90% lower since December 2007 when the current CEO took over). They look like they’re going to zero. They didn’t move aggressively enough into online media when they had the chance and so their online brands rank far below those of Amazon and others. The change to Channel Islands VAT might give them a brief boost perhaps but it will be that of a dead cat.

They’re going the way of the corner store, milk deliveries and the fax machine.

The Spending Challenge


HMT are going to be working hard over the next few weeks … they say they’re up to 18,000 suggestions for the Spending Challenge.

Whilst reluctant to suggest a Downing Street Petitions type site (much as I loved it), fearing too many votes for “Abolish tax”, “Pay Ministers Nothing” or “Scrap the Department of X” … But …

This kind of idea volume could be dealt with through the over-used crowd sourcing with the best couple of hundred ideas being worked up by whoever wants to work on them, aided by government insiders (who would know the data that would be needed), leading to ideas that were implementation-ready far sooner than they might otherwise be. And, perhaps, a ready and able gang of volunteers who could help manage and monitor them through the delivery process.

Anyway, I submitted that idea under the label of “not really a cost save …”

Have You Been Goldman’d – Part 2

The US Government’s pursuit of Goldman Sachs for allegedly mis-selling Collateralised Debt Obligations (or perhaps for taking both sides of a trade to the advantage of itself and just one of its clients). I wrote a little about the background to this a month ago. Goldman Sachs were certainly not first in to the Global Financial Crisis (shouldn’t that be written all in caps?) but they were almost certainly first out – via a little Federal money and a rejigging of their banking status, some money from Warren Buffet and the benefit of money on loan at a rate of virtually zero that could be invested at leverage ratios that, whilst not as high as in the go go years, were certainly greater than one.

Goldman were but one player in a long list as I said in the first post on this topic:

The chain of people involved in this crisis is long and distinguished – involving everyone from individual home owners, to local banks, to big syndicating banks, to international buyers, global insurance sellers, regulators in each and every country, rating agencies, the media and others, including you and me

I thought i’d explore what was going on in the market in the years leading up to the crisis. I combed several sources and found many US federal sources and some private sector ones that had copious amounts of data. Here is some of what I found.

Here are two graphs showing, first, how vast the mortgage market has become over the last 50 years and, second, how dramatic growth in the volume of refinancing appears to be a leading indicator in increasing foreclosure rates some 3 years later, just as interest rate adjustments kicked in and increased borrowing costs:

US Mortgage debt outstanding, 1952-2008, Home Mortgages only


Data sourced from the Board of Governors of the Federal Reserve System. Figures in actual US$, not discounted for inflation.

Mortgage Originations (Purchase and Refinance) versus Foreclosure (Entering and Already In Foreclosure)


Source: Mortgage Bankers Association of America, Washington, DC

Those home loans were turned into asset backed securities – and the growth in this graph inevitably maps closely with the growth in origination and refinancing in the previous graph. The fall off maps, in the same way, with the huge growth in loans either in or entering foreclosure.


Source: Thomson Financial, Bloomberg, SIFMA

If the previous graph showed issuance, this graphs shows outstanding securities (the big section in the middle is credit card debt)


Source: Thomson Financial, Bloomberg, SIFMA

The graphs above paint a picture of an economy growing at a huge speed fuelled by debt pulled down from the equity within a house (with that equity often put into another house, so reducing the available supply and pushing up prices) and also by credit card debt (which spiked highest in the period when home loans were reducing – that is, when house prices were already falling and taking equity from the house wasn’t an option, but credit cards were).

Looking at the instruments that Goldman is alleged to have used inappropriately, here are two graphs showing the same dataset for CDOs, split by currency and by purpose. There are two obvious conclusions:

1) The vast bulk of CDOs were issued in US dollars (covering US originated loans) with Europe lagging US growth by at least a year

2) If the second graph is right, then the purpose of CDOs is to arbitrage. Or perhaps speculate?

CDOs by Currency (2000-2010)


Source: SIFMA

CDOs by Purpose


Source: SIFMA

The cliff all of the issuance graphs fall off in 2006/7 coincides with the sudden leap in foreclosure rates.

The big question for those chasing down Goldman is:

If you were sitting inside a bank, a financial institution, a pension provider or a hedge fund in February 2007, would you have known that that was the time to get out? The TIME TO SELL?

Here’s another graph showing asset backed security issuance in 2007, quarter by quarter


Source: SIFMA

Would that have been enough? In February 2007? To my eye, it looks like it would have been tough to see until sometime after the Q2 figures were in. Some smart people saw it earlier than that of course – they saw those foreclosure rates start to climb in 2006 and made their bets.

Did Goldman mislead? I have no idea. Doubtless they – and other Financial Institutions – will be negotiating settlements now where no fault or liability is admitted.

But every market ever traded is asymmetric. Someone always has more information than someone else – or they think they do. For every seller there has to be a buyer. For every buyer, a seller. Often there is both a buyer and a seller, sitting in the middle making the trade.

Part 3 of this blog will be on this very asymmetry.

This is the second part (of three). The first part was published here a month ago.

Stop! Don’t Print That Page (In Colour)

Many government departments have issued an edict to stop using colour printing to aid towards saving costs (not to mention the green upside). Email footers saying “save a tree, think before you print” will now change to “black print good, no print better” (on the basis that whilst it’s always referred to as printing in “black and white” the only printing done is in black).

Gartner say print costs run as follows:

Ranges are presented for four classes of printers.

1. For desktop monochrome laser printers, consumables can be expected to range from 2.5 cent to 6 cents per page, assuming a 5 percent coverage area.

2. For color laser printers, consumables can be expected to range from 5 cents to 12 cents per page, assuming a 20 percent coverage area. Color printers require four sets of supplies — cyan, yellow, magenta and black — to produce a multicolor document. Hence the 20 percent area coverage represents 5 percent of each color. On many documents, especially PowerPoint slides, area coverage often exceeds 20 percent.

3. For personal and workgroup inkjet color printers, consumables can be expected to range from 9 cents to 20 cents per page, assuming a 20 percent coverage area.

4. For workgroup, departmental and centralized monochrome printers, consumables can be expected to range from 1 cent to 2 cents per page, assuming a 5 percent coverage area.

As validation for those figures, here are figures for one printer

HP Officejet K5400 has an estimated cost per page of black ink of 1.4 cents, and color is 5.9 cents per page.

Even if these costs were pennies rather than cents … it’s going to take a lot of not printing in colour to make a dent in the budget deficit.

At 20p a page (taking the max of workgroup colour printers from Gartner)

530,000 civil servants in UK government (the ONS estimates for civil service headcount in Q3 2009 say 533,140)

10 pages per day per person … that would be 5,300,000 pages at a cost of £1,060,000 a day.

Say 220 working days in the year and there might be as much as £233,000,000 spent each year on printing (not to mention initial purchase costs and then costs of replacement, disposal of printers and the environmental impact of building them, installing them and servicing them).

To save the £6.5bn total required, that would be 28 years of not printing. Or, alternatively, 32.5bn pages would need not to be printed at all to reach the government’s initial cost save target. If we arbitrage cost of colour versus cost of black and white, then we could be looking at anywhere from 5 to 20x those amounts.

All of these numbers, except the Gartner ones and the HP cost per page are made up of course – I was just interested in what it might look like. I wonder how many pages are actually printed per day across government?

Have You Been Goldman’d?

201004251100.jpgSmart money, dumb money: Buy housing, sell housing. Buy bonds, Sell bonds. Buy banks, Sell banks.

Smart money, dumb money: Sell housing, buy housing. Sell bonds, buy bonds. Sell banks, buy banks.

What was smart is dumb. What was dumb is smart. The trouble is, at the time, everyone thinks they’re smart. People forget there’s always a fool at a poker table, and if you can’t see who it is, it’s you.

With the most recent market gyrations, initially caused by subprime mortgages, I’m reminded of M.C. Escher’s famous picture, from 1961, titled, simply, “Waterfall” – what goes down, must go up. Until it goes down again.

Now the famously smart money, Goldman Sachs, is being pursued what many had previously labelled the dumb money (Madoff, Stanford, Moody’s), the Securities and Exchange Commission. Did the smarts just get dumb, or are the dumbs smart again?

Doing God’s work indeed.

Subprime bonds were packaged in tranches (a more positive way of saying layers which would imply some kind of hierarchy where if you’re at the bottom, you don’t want to be). Tranches were weighted in letters essentially from A to Z, but rather than say it that bluntly, special codes were created where AAA was exactly what you’d imagine it was (originally the lowest risk, where risk was relative rather than absolute) and BBB or BBB- was a much higher risk (how much higher is again a relative term – in this case it was much like sticking your feet in concrete as it was setting and just as the steamroller was firing up the engine. You could tell bad things were going to happen, but it wasn’t going to be quick).   

The real art in the subprime market was packaging tranches that were originally BBB or worse into new tranches that magically – David Blaine kind of magic – were suddenly AAA. Classic three card monte. Find the lady, watch her fly, where’d she go? Oh I see, she ran off with your money.

The dumb money, thinking they were making a bet in a one way market, thought they were buying AAA yet they were buying BBB. In many cases, they weren’t even buying the bonds themselves, but selling insurance that those same bonds wouldn’t default. For a few million for every hundred million you wanted insured, they’d sell you a policy – a binary bet: if the bonds defaulted, they’d pay you face value, if they didn’t, you’d keep paying your insurance premium.

The insurance premiums payable were calculated on two simple things

1) The risk weighting of the bonds. Given the diversity of the US property market, and keeping it simple, the risk models assumed that if you owned the mortgage on a house in Florida and one in San Diego, the odds of them each defaulting were independent, that is, there was no correlation. Multiplying that across all states of the USA (where nearly all of these mortgages originated), the correlation was assumed to be even lower. You soon learn that whenever someone brings algebra and applied mathematics into investing, you need to keep your wallet closed.

2) The one way moves in house prices over the prior years meant that market volatility was low (that is to say that prices hadn’t bounced up and down but had only moved up in the previous 10 years) and so the risk premium was further lowered.

The oddest thing about the insurance market for such bonds was that you didn’t actually have to own anything to buy insurance.

– You didn’t have to be the house owner taking a bit of insurance in case your freshly bought house suffered a loss in value.

– You didn’t have to be the banker who had sold the mortgage taking additional insurance in case your client couldn’t pay.

– And you didn’t have to be the eventual buyer of the securitised loan tranches that had been painstakingly assembled

This is much the same as me being able to buy a fire insurance policy on an allotment shed and then being able to throw a can of petrol and a match into it – without anyone knowing that you were going to be the beneficiary of the insurance policy.

Actually, the people buying these insurance policies didn’t need any petrol. They had studied the market and decided that the unvarying ascent of house prices couldn’t go on and so they’d decided to bet against it – that is, to go short.

In stock markets, if you want to go short you have to find someone to lend you the stock (you then sell it for them, promising to buy it back and deliver it back to whoever you borrowed it from). This has the neat effect of meaning that you can only go short what is out there – you can’t find twice as much stock as exists to go short. It is also self-regulating – the more stock that is borrowed, the more risk there is that a sudden spike in the price driven by a news event can financially cripple those going short.

Those shorting the subprime market didn’t need to own any of the bonds, didn’t need to borrow them from anyone, they didn’t even need to know how many were out there. Entirely synthetic (i.e. made up) transactions could be created that mimicked the behaviour of the real bonds. And they could be made up in huge volumes – far higher volumes than existed of those bonds. $1 of bonds could be insured once, ten times or a hundred times. Worse still, the lack of a central clearing house and a liquid market meant that everything was priced individually – there was no easy way to get a price for what you were buying (or selling) other than from whoever had their hands on it at the time. This was Michael Milken and Drexel’s junk bonds all over again.

With the housing market moving up, those buying insurance were widely thought of as the dumb money. Insurers were happy to collect a couple of million on a $100 million portfolio every year. After all, housing was strong, the economy was strong, house prices hadn’t gone down in 10 years and it was easy money. All money in such instances is easy. Until it isn’t. We’ve been here before – the South Sea bubble, the LTCM crash, the dotcom bubble and so on.

And as everyone surveys the global wreckage and now that the money has been spent to prop up the banks, the regulators are going after the perpetrators. They have, though, started in an interesting place. Goldman Sachs, the poster child for banking profitability (and one of the few banks left standing largely on its own two feet after the crisis). Others will follow – it looks like Morgan Stanley is already next in line. This feels a bit like the Martha Stewart prosecution – go for the highest profile victim, hope to get a quick settlement and sizeable fine and then use that to scare everyone else into paying up without a fight. Martha resisted for a long time and went to jail for her trouble. It seems likely that Goldman will resist too.

The chain of people involved in this crisis is long and distinguished – involving everyone from individual home owners, to local banks, to big syndicating banks, to international buyers, global insurance sellers, regulators in each and every country, rating agencies, the media and others, including you and me. It’s important, I think, to look at the role each of those played in creating this monster of a market, but concluding on the guilt and innocence of the chosen target, Goldman Sachs/

As Escher himself said:

“So let us then try to climb the mountain, not by stepping on what is below us, but to pull us up at what is above us, for my part at the stars; amen”

This is Part 1 of 3.