Back in the High Life Again

It only took him 11 years, but Junior is back playing in October. Thanks in part to a Jim Thome home run and this play by The Kid, the Chicago White Sox defeated the Minnesota Twins, 1-0, in a single game playoff to determine the 2008 AL Central Champion. 

The White Sox will now move on to face the Tampa Bay Rays in the AL Divisional Series Playoffs.

Is it too early to hope for a Crosstown Classic... a Expressway Series... a Windy City Showdown... White Sox vs. Cubs... The Kid vs. Sweet Lou...? Ehh, maybe it's just a little too soon to be punching that ticket. Still, as Andy Dufresne once wrote in a letter to his friend Red,

"Hope is a good thing, maybe the best of things..." -The Shawshank Redemption

So maybe I'll just cross my fingers and hope for the best anyways.  As for you Kid, you just keep playing your heart out and always remember, REFUSE TO LOSE...

-dunkie

Behavioral Finance, Confidence, and the Bailout...

Behavioral finance is the study of social, cognitive, and emotional factors in order to better understand/explain stock market anomalies. Some theories that exist in behavior finance include; the media effect, herding instinct, and market psychology. For the most part, these theories are somewhat self-explanatory, but if you are interested in learning a little bit more about them, it is readily available here.

What we are currently seeing in the US economy is the direct result of some of these theories in behavior finance. To better explain this, let's examine the closing values of the Dow Jones Industrial Average Index (DJIA) over the last week, as well as what headlines dominated the news.

Monday, September 22, 2008 - 11,015.69
Lawmakers Battle Over Rescue Plan -WSJ
New world on Wall Street -CNN

Tuesday, September 23, 2008 - 10,854.17 (-161.52)
Doubts on Rescue Plan Spur Fall In Dollar, Leap for Oil -WSJ
Bailouts will lead to rough economic ride -CNN

Wednesday, September 24, 2008 - 10,825.17 (-29)
Rescue Plan Stirs Calls for Deeper Regulation -WSJ

Thursday, September 25, 2008 - 11,022.06 (+196.89)
Bailout Pact Gains Momentum Amid Push for Tough Controls -WSJ
Dollar higher on bailout hope -CNN

Friday, September 26, 2008 - 11,143.13 (+121.07)
Bailout Negotiations in Disarray -WSJ
Dollar mixed on bailout strife -CNN

Monday, September 29, 2008 - 10,365.45 (-777.68)
'No' vote on Bailout Hammers Stocks -WSJ
No Love for Bailout -CNN
U.S. Stocks Battered As House Rejects Bailout -FOX
Bailout failure throws banks into disarray -MSNBC

Tuesday, September 30, 2008 - 10,850.66 (+485.21)
Hope for New Plan Rallies Stocks -WSJ
Senate: Stop 'blame game' over bailout failure -CNN
White House Says Mortgage Rescue Plan Remains n Track -FOX
McCain, Obama urge financial rescue action -MSNBC

Note: I tried to draw headlines from multiple media outlets, but as you can see, there are fewer headlines from last week as I was somewhat lazy in searching for them...

To summarize...

Last week's news of the bailout brought some small fluctuations in the market, and by small I mean not the 300 point swings we have been seeing more and more often. Still, having no hard evidence on which way the bailout vote would go, investors entered somewhat of a holding pattern and the DJIA remained still.

By Thursday, news of an agreement in principal on a bailout proposal was announced, which resulted in a small boost to investor confidence. This boost was continued on Friday as it appeared that the bailout would pass during the following week.

On Monday, news hit that the bailout bill has failed to pass the House of Representatives. With no other plan of action in sight, this caused widespread panic in the US financial market and the DJIA fell over 770 points.

Today, as reports come in that new life has been given to the bailout, the DJIA rebounded 485 points. It is now likely that we will witness another holding period where we will see smaller fluctuations in the market as investors react to small bits of news, in anticipation for the bigger news on whether or not the bailout will pass on the second go around.

The point...

All of this is a prime example of behavioral finance, at the root of which is investor confidence. If anything, a bailout will inspire the confidence needed for the market's rebound. As news trickles down, people will stop panicking and the wheels of the US financial markets will start moving again. Deposits will stabilize, liquidity will increase and banks will continue to make loans. In turn, this will encourage economic growth and improve the health of the US economy. All because of confidence.

At this point, a $700 billion dollar bailout is not as much a matter of provisions, oversight, or even amount. Right now, a bailout is about creating confidence in the US economy and removing the underlying cause for fear in the financial markets (sub-prime mortgages).

Some will most surely point out that confidence is a pretty weak argument to stand on. Granted that may be the case, it is a lack of confidence that caused the US market to lose $1.2 trillion dollars yesterday.

As of right now, the only confidence that exists in our economy is the overconfidence of many Americans who believe that our financial markets will fix themselves without the aid of Congress. It is this overconfidence that prevents them from seeing the negative impact that every American will feel as a result of inaction and the continued reliance on the inefficient tools that the Treasury, Fed, and FDIC currently have at their disposal to combat this crisis.

In closing...

All in all, confidence is a silly thing. Yet somehow, this emotional state of mind has the power to alter so many things in our lives, be it an athletic competition, an interview, a relationship, or even our economy. It is my hope that during the next few days a bailout will be passed and that some confidence will be restored to the US economy and the American people. I hope that you will join me in that hope.

Thank you for listening. May God bless you.

-dunkie, '08 presidential nominee

Something to sleep on...

The Dow Jones Wilshire 5000 Composite Index is a market capitalization-weighted index that aims to capture the total value of all the actively traded stocks in the United States.  Today, that index fell 1,024 points, or 8.3%.  

Q: What does that mean?

It means that today, the stock market lost over $1 trillion dollars.  For the record, that's a 1, with 4 commas, and 12 zeros.

-dunkie

Bailout Update/Rant...

Over the last few days I have tried numerous times to sit down and write a blog update regarding the bailout. Each time I have stopped short of posting something because I have felt that what came out was more of a political rant than anything of value.

Now that the bailout proposal has failed to pass the House of Representatives, I feel like I need to at least write something, even if that something ends up being a rant on the current state of politics in the United States.

Q: Why didn't the bill pass?

A: In what is strictly my opinion,  the bill did not pass due to political bullshit.  In other words, there is an election in 40 days and everyone from Presidential Candidates to House Representatives are employing CYOA (Cover Your Own Ass) politics.

Q: What do you have to support that claim?

A: During the 1st presidential debate the candidates spent 40 minutes talking around a possible bailout. Why did they do this? Because they are playing up to the vast majority of the voting public who are uneducated when it comes to the financial crisis that our country is facing right now. Spending taxpayer money is by no means popular, even if it is the right thing to do.

Speaking of spending taxpayer money not being popular, here is a prime example of that...

The proposal for the bailout broke the authorization of $700 billion into three pieces. The first $250 billion was to be authorized immediately, the second tranche of $100 billion was subject to approval by the President, and the third tranche of $350 billion required congressional approval. Looking beyond the political bullshit, here is what that translates to...

"We realize that authorizing $700 billion to solve this crisis is the right thing to do, but it isn't going to make us very popular. So lets do this, lets all share in the responsibility for the first $250 billion of taxpayer money we spend.

The next $100 billion, well, there really isn't much reason to separate it from the first $250 billion, except we don't responsibility for spending it. So George... err Mr. President, you're going to have to bite the bullet on this one. But since you are already unpopular and don't have to worry about getting being re-elected, you won't mind,right?

As for the last $350 billion, we are only going to authorize that when we know that this is going to work, at which point, we will want the credit for doing what was necessary in order to lead our economy beyond this crisis."

Well, it turns out that there were not enough CYOA provisions in the bill, and it was shot down. If this crisis hit 40 days from now, I suspect that we would be seeing a completely different result of todays vote. Sadly, it seems that members of the House are more concerned with being being re-elected, than doing what actually needs to be done.

Q: Wow, you weren't kidding about this being a rant...

A: Yeah.  I'm pretty pissed off actually.

Q: What happens now?

A: It is likely that politicians will try to breathe new life into the bill and it will be brought before the house again (plus or minus a few hundred billion dollars, along with some provisions).  Even if the bailout passes the second time around, we will most likely see more banking failures, more losses in the US stock market, and possible spikes in inflation before anything happens. When Bush, Bernanke, and Paulson said that we needed to act now, they weren't kidding.

The Treasury will continue to deal with each failing institution on a case by case basis and we will continue to see the patchwork fixes that have have only served to delay the problem instead of dealing with the underlying issues of this crisis.  Meanwhile, the Federal Reserve could lower interest rates to try and provide relief to the credit markets, as well as slow down the effects in the stock market.  This will most likely cause inflation within the US economy.

In the worst case scenario, large commercial banks will fail and no one will have the capital available to buy them.  At this point the FDIC won't be facilitating a bank buyout like in the case of WaMu, but they will be eating the entire cost.  Incase that isn't clear, the FDIC is backed by the Treasury, which is funded by... you guess it, taxpayer money.

So like it or not, taxpayer money will be used to deal with this crisis regardless of congressional approval.  What remains to be seen is if congress is willing to move beyond their political bullshit and allow taxpayer money to be spent in a way that will serve as more than just a stopgap.

Q: Can you please explain the worst case scenario a little more?

A: If commercial banks fail and no one is able to buy them, the FDIC will step in and guarantee deposits up to $100,000.   As these failures mount up, the Deposit Insurance Fund would eventually be depleted, and the FDIC would turn to the Treasury for funds.  So instead of spending $700 billion in taxpayer money (which, under the failed bill, would be completely repaid)  to remove the underlying cause of this crisis, we have opened ourselves up to feeling the direct impact of this crisis to anyone who has a depository account at any banking institution.

Q: Wow, that sucks.  Why didn't anyone say that before this went to vote?

A: Political bullshit...

Q: I have more questions for you and/or completely disagree with you...

A:  Post a comment and respond later.  This MNF game just went into OT and demands my full attention.

Update: Steelers just kicked a field goal in OT to win it.  Also, I don't actually think we will see the worst case scenario come about, mainly because "Too Big To Fail" policy would kick in before then...

-dunkie

The Top 10 Failures in Seattle's History:

Instead of jumping right into the list, I thought I'd say a few things about the honorable mentions that almost made it. First, Frank Gehry, for designing the Experience Music Project. For all the money Paul Allen spent on this building, it sure is ugly. Secondly, Pearl Jam, for every album they recorded after Vitalogy. Granted, that I gave up listening to anything they produced after 2000.

I'm sure there are more things that deserve a spot on this list, or at the very least, an honorable mention, but I've already spent half a day coming up with this list and don't really feel like noodling on it more than that. Feel free to throw in your 2 cents in the comments section. Okay, enough of my rambling. Without further adu...

The Top 10 Failures in Seattle's History:

10. In 2001, the Seattle Mariners tied the major league record for wins in a season, tallying 116 in all. While this could easily be considered one of the greatest successes in Seattle’s history, the Mariners failure to make it past the New York Yankees in the ALCS and into the World Series earns them a spot on this list.

9. Although the season is not over yet, the 2008 Seattle Mariners have also secured themselves a spot on this list. Topping their 116 win season in 2001, the Mariners spent $117 million dollars in payroll this year. With three games left to play, the Mariners have accumulated a staggering 101 losses this season. Currently, this ranks third behind their 103 (1980), and 102 (1983) loss seasons. Regardless of how many losses they end up with, you can chalk up this season as a failure.

8. January 4, 2004. Lambeau Field. The Seattle Seahawks vs. the Green Back Packers in the NFC Wild Card playoff game. The stakes? The right to move onto the NFC Divisional Playoff game. At the end of four quarters of play, the game is tied, 27-27. One word. Overtime.

The referee flips the coin in order to determine who gets the ball first. The Hawks win the toss. Do they want to play offensive or defense first? Matt Hasselbeck leans in towards the microphone and says,

“We want the ball, and we’re going to score!”

What transpired next was a Seahawks drive that ended abruptly when Hasselbeck’s throw was picked off by Packers defensive back, Al Harris, who then took it to the house for 6 points and the OT win. I have one word for you Matt Hasselbeck. FAIL.

7. Following the attack on Pearl Harbor, an internment camp was set up in Puyallup, WA. This camp was given the name Camp Harmony. Japanese-Americans were sent here for fear that they would provide Japan with information that would aid them in future attacks. This act of injustice would rank much higher on this list, except that the camp was located in Puyallup and not directly in Seattle.

6. Whoever is responsible for the poor planning of the transportation in and around the city of Seattle failed miserably at their job. Lucky for them, I don’t know exactly who that person is. If I ever find out their identity, I will be sure to update this list and place a big bag of s*** on their doorstep.

5. On February 10, 2000, Ken Griffey Jr. was traded to the Cincinnati Reds. Over the previous 10 years, The Kid had become the heart and soul of the Seattle Mariners ballclub.

While Junior did ask to be traded, I still need someone to blame for this failure, and that someone is the Seattle Mariners front office. Obviously, Griffey can’t be blamed for his own departure… after all, he is The Kid.

4. In 2006, Howard Schultz sold the Seattle SuperSonics to an Oklahoma City businessman, Clay Bennett. Failure to reach an agreement with the city of Seattle on a new arena for the Sonics then lead to the departure of the Sonics from Seattle in 2008. Along with this departure, Seattle also lost their one legitimate Championship title, as well phenom Kevin Durant and a six first-round draft picks (also, seven second-round picks) over the next three years on which to rebuild the team. A big thanks goes out to Howard Schultz, Clay Bennett, and the city of Seattle for failing miserably in their efforts to keep the Sonics in Seattle.

3. The Battle in Seattle. In 1999 the World Trade Organization convened in Seattle to launch trade negotiations leading into the new millennium. Protest over this event soon followed which eventually escalated into a full scale riot in downtown Seattle. Soon after, the trade negotiations collapsed, leading this event to become one of Seattle’s largest failures ever.

2. On September 25, 2008 the Seattle based thrift bank, Washington Mutual, became the largest bank to fail in the history of the United States. While depositors remained protected by the FDIC and operations were taken over by J.P. Morgan Chase, shareholders of the company were left standing out in the cold. This would rank as the number one Seattle failure of all time if it wasn’t for the fact the Washington Mutual was first created in 1889 in order to help the city of Seattle recover from…

1. The Great Seattle Fire. On June 6, 1889, in the carpentry shop of owner John Bachs, an overturned glue pot lead to a fire that decimated the city of Seattle. Over thirty-two city blocks went down in flames, as well as every railroad in the city, and all but four of the city’s piers. It is estimated that this disaster cost the city over $20 million dollars (remember, this was 1889…) and over 5,000 people lost their jobs. All because of a pot of glue...

While the Seattle Mariners did manage to make this list three times, I must say that The Great Seattle Fire still edges them out for the most EPIC FAILURE in the history of Seattle. So congratulations to John Bachs for causing this failure and taking home the Biggest Goat Award. Kerry Killinger (a.k.a. the former CEO of WaMu), Matt Hasselbeck, and the Mariners entire front office thanks you.

-dunkie

Washington Mutual... FAIL.

This just in... Washington Mutual has been seized by federal regulators and a deal has been struck with J.P. Morgan Chase to sell them the bulk of WaMu's existing operations. Can we say... FAIL?

Before we jump into the Q & A it is important to note that Washington Mutual is/was a thrift bank and the largest thrift bank at that. This is much like a commercial bank, except that it deals with consumers and not corporations. As a result of this, they are much more intrenched in the mortgage market. Also, like commercial banks, thrifts are still dependent on customer deposits that allow them to lend out money. Okay, now that we have all that out of the way...

Q: Why did Washington Mutual fail?

A: Too much of WaMu's operations was caught up in the mortgage mess. As things began to unravel over the course of the last few months people who had money deposited at WaMu became nervous and decided to move their money elsewhere. What was once considered a stable base of deposits, saw a dramatic decrease, ending with the departure of over $16 billion worth of deposits in the last 10 days.

Q: How does losing deposits cause a bank to fail?

A: Resulting from the departure of so much cash, WaMu was unable to meet short-term cash obligations. To explain this better lets use an example:

Note: If you have been paying attention, you know that commercial banks and thrifts rely on deposits that allow them to make loans.

Imagine that The Bank of "Your Name Here" has $100 dollars in deposits. Due to regulations, this means that your bank/thrift can lend out $1000 dollars, which would give you a debt/equity ratio of 10. This is the basis on why commercial banks are still standing, and investment banks are not.

Now, imagine that you lose half of your deposits overnight. You still have $1000 dollars loaned out, which means that all of a sudden your debt/equity ratio has jumped to 20. Right now you should be thinking to yourself "Crap. The Bank of "Your Name Here" is in deep s***. We don't have enough money to meet our short-term debt obligations. We failed."

(If you are still confused on why WaMu failed, then you just died... that is, if this was a choose your own adventure book. But no worries, just go back and read my blog about Wall Street and then continue on your merry way.)

Q: Okay. I get it. Washington Mutual failed. Federal regulators stepped in. What now?

A: Thankfully, federal regulators were also able to line up a buyer for WaMu. J.P. Morgan Chase will now purchase the deposits and branches of WaMu for the price of $1.9 billion.

Q: How will that effect people who use or have money at Washington Mutual?

A: With J.P. Morgan Chase stepping in, WaMu's operations will continue and the branches will still be open for normal operations. While all deposits are backed by the FDIC (up to $100,000), it is pretty safe to say that the FDIC won't have to step in and even people with over $100,000 don't have to worry about losing their money.

Q: What about people who own Washington Mutual stock?

A: Over the last year, the price of WaMu stock has gone from over $30 per share, to just over $1 per share. It is expected that the failure of WaMu will result in shareholders being completely wiped out... meaning they will be left holding stock certificates with a value of zero.

Q: Wow...

A: Yes... "Wow" is one of the many acceptable one word responses to a failure of this size. My condolences to anyone who owns large positions in Washington Mutual.

Q: What's next? Will commercial banks start to fail now?

A: Commercial banks are not nearly as wrapped up in the mortgage crisis as investment banks and thrift banks are. That being said, if you had asked me a year ago if the investment banks would fail, I, as well as many people, would have laughed.

Q: That really isn't the answer I was looking for...

A: Sorry. That's the best I can give you. If I knew what would happen next I probably wouldn't be spending my Thursday evening writing blog posts for my 1, maybe 2 readers. So yeah, I don't really have an answer for you on what will happen next.

Keep in mind that this JUST happened tonight. I'm sure that more details will be available tomorrow when the markets open, at which point I will try to answer any additional questions that I have for myself.

-dunkie

Breaking Down the Bailout

As of this afternoon, the

"Congressional Republicans and Democrats came to an agreement on principles for the Treasury's Troubled Asset Relief Program that they will take into final negotiations with the White House." -Phil Izzo

The following is a breakdown of the "Agreement on Principles" for the "Treasury's Troubled Asset Relief Program" (aka... the bailout of the United Stated Economy) as well as my 2 cents...

Note: The details of this bailout plan can, and most likely will, change before all is said and done. I will provide updates as those changes are made.

Q: What is being done to protect taxpayers?

1. Taxpayer Protection

a. Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies

b. To minimize risk to the American taxpayer, requires that any transaction include equity sharing

c. Requires most profits to be used to reduce the national debt

A: In regards to executive compensation, WAY too much energy has been put into this discussion. A $50 million golden parachute is about half a day’s interest on $700 billion. Can’t we just pay these people to get them out of the way, rather than have them in the center of trying to fix the things that they screwed up in the first place?

Equity sharing will add an additional layer of protection to American taxpayers and give them more assurance of actually getting the $700 billion back. As for reducing the national debt with any profits from this venture, that seems a little like a black hole. If profits were redistributed in the form of tax breaks, that would boost consumer spending, and ultimately the economy. But hey, what do I know?

Q: Who will be monitoring this process? Not that we don’t trust our own Government…

2. Oversight and Transparency

a. Treasury Secretary is prohibited from acting in an arbitrary or capricious manner or in any way that is inconsistent with existing law

b. Establishes strong oversight board with cease and desist authority

c. Requires program transparency and public accountability through regular, detailed reports to Congress disclosing exercise of the Treasury Secretary’s authority

d. Establishes an independent Inspector General to monitor the use of the Treasury Secretary’s authority

e. Requires GAO audits to ensure proper use of funds, appropriate internal controls, and to prevent waste, fraud, and abuse

A: This is a biggie. Oversight is very much necessary. However, as is so often the case, this could also slow the process of things down significantly. Still, it is a price that must be paid given what is at stake.

Q: Will this help the people that were “victimized” by mortgage companies?

3. Homeownership Preservation

a. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure

b. Requires loan modifications for mortgages owned or controlled by the Federal Government

c. Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America’s housing needs

A: First off, many of these people are hardly victims. If anything, they are victims of their own stupidity. That aside, preservation of homeownership will be a key factor in the return to a healthy U.S. economy. One way to do that would be to allow judges to change the terms of mortgages. Beyond that, I'm not quite sure what could, or should be done here.

Q: How much money are we spending here?

4. Funding Authority

a. Treasury Secretary’s request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed

b. final $350 billion is subject to a Congressional joint resolution of disapproval

A: Congress is, somewhat understandably, trying to tip-toe into this. The $100 billion check upon “certification” might have well already been cashed.

As for the second half of the $700 billion bailout, Congress wants the power to pull the plug if things don’t quite work out. Realistically speaking, this check is already cashed also. Members of congress are just hoping that they won’t have to be the ones directly responsible for cashing it.

It will be interesting to see what the initial market reaction will be to the tip-toe funding plan that has been agreed upon (in principle) by Congress. The markets have been in somewhat of a holding pattern this week awaiting the details of the bailout. I suspect that the response will be positive, followed by a period in which everyone stops for a second, looks around, and says “wait… do we even know that this will pass?” At which point we will probably resume the holding pattern until this gets past the house.

-dunkie

Sports: The Business of Caring

There are many types of Sports Fans in this world, each of which have their own unique way of enjoying sports. While some of these fan types have less "fan integrity" than others, there is one factor that every fan is able relate to; whether you are a die-hard fanatic, a bandwagon jumper, a homer, an alumnus, or even just a casual fan. That one factor, as Roger Angell put so eloquently in his book Five Seasons, is "the business of caring."

"It is foolish and childish, on the face of it, to affiliate ourselves with anything so insignificant and patently contrived and commercially exploitive as a professional sports team, and the amused superiority and icy scorn that the non-fan directs at the sports nut (I know this look -- I know it by heart) is understandable and almost unanswerable. Almost. What is left out of this calculation, it seems to me, is the business of caring -- caring deeply and passionately, really caring -- which is a capacity or an emotion that has almost gone out of our lives. And so it seems possible that we have come to a time when it no longer matters so much what the caring is about, how frail or foolish is the object of that concern, as long as the feeling itself can be saved. Naivete -- the infantile and ignoble joy that sends a grown man or woman to dancing and shouting with joy in the middle of the night over the haphazardous flight of a distant ball -- seems a small price to pay for such a gift."

For some, the business of caring will encompass a lifetime, tracing back to a youthful memory such as a first trip to the ballpark. Others may only find themselves in caring for short periods of time, be it for the two hours of tailgating leading up to a big sporting event, or the last two minutes of a close playoff game.

Some of us may care because our pride demands it, while others care simply because they were given a free ticket to a game. It may be the case that the only reason a person cares is because for some unfathomable reason that they will never understand, the emotional well being of a loved one rests solely on the outcome of the next play, and for that reason and that reason only, they give care.

In the end, it matters not who or why we even care. What matters most is that for some moment in time, no matter "how frail or foolish" it was, we took a second and cared about something.

-dunkie

Refuse to Lose

Tonight, if only for one night, the Seattle Mariners fought off the best team in Major League Baseball, the Los Angeles Angels of Anaheim, coming back from a 6-2 deficit in the 6th inning to win the game with a final score of 9-6.

In doing so, the Mariners not only ended a 12 game losing streak, but also prevented themselves from becoming the first 100 loss team since the Tampa Bay Devil Rays and Kansas City Royals both "accomplished" this feat in 2006.

With five games to go in the season in is more likely than not that the Mariners will eventually reach the 100 game mark. But for at least one night, the Mariners showed that they still have a little SODO MOJO left in their gas tank. And for this Seattle Fan, that is all the fuel needed.

"Right now, the Mariners looking for the tie. They would take a fly ball; they would love a base hit into the gap and they could win it with Junior's speed. The stretch and the 0-1 pitch on the way to Edgar Martinez; swung on and lined down the left field line for a base hit! Here comes Joey! Here is Junior to third base, they're going to wave him in! The throw to the plate will be... LATE! The Mariners are going to play for the American League Championship! I don't believe it! It just continues! My oh My!" -Dave Niehaus, "The Double" - Game 5 of the 1995 ALDS

Okay... so maybe I needed a little more than just one late inning comeback win to make me feel better after this terrible season and horrific year in Seattle sports. Can you blame me? REFUSE TO LOSE.

-dunkie

Where did "Wall Street" go?

Here is my summary of what happened to "Wall Street." There are probably a few hundred questions that aren't tackled here, so if you have any, please feel free to post them in the comments section and I will try my best to address them.

Q: What is going on here?
A: Up until a few weeks ago there were four main Investment Banks in the United States. Those being: Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs. Essentially, these four financial institutions made up the bulk of “Wall Street”. As of today, this number has effectively been reduced to zero.

Q: What happened to the Investment Banks?
A: September 13, 2008: Lehman Brothers declares bankruptcy .
September 14, 2008: Merrill Lynch is acquired by Bank of America.
September 22, 2008 Morgan Stanley and Goldman Sachs agree to convert from investment banks into commercial banks.

Q: What’s the difference between an Investment Bank and a Commercial Bank?
A: A bank is a financial institution that acts as an intermediary for people who want to borrow and lend money. The main difference that applies here lies within where the money (i.e. equity/capital) comes from.

In a Commercial Bank, the money that is used for lending comes from “depository accounts.” Basically, what we are talking about here are savings & checking accounts. It is also important to note that Commercial Banks are regulated by the Federal Reserve.

For an Investment Bank, capital is raised by issuing and selling securities (i.e. stocks/bonds) in the capital market (i.e. the stock market). The primary regulator for this type of bank is the Securities and Exchange Commission.

Q: Uh… that wasn’t very helpful. What does that really mean?
A: Unless we are dealing with a “run on the bank,” the total of all depository accounts does not tend to change much. People need a place to put their money, and it turns out that placing it underneath a mattress isn’t very secure. Also, depository accounts are backed by the FDIC which ensures your deposits up to $100,000. This makes depository accounts very attractive when it comes to creating a solid foundation on which to loan money out. The depositors have assurance that their money will be there when they need access to it, thus preventing a “run on the bank” type situation.

As for security backed lending (again, think stocks and bonds) there is a large chance of having a significant variance in capital, especially in times of turmoil when people are more inclined to sell their riskier assets (and reduce available capital), instead of purchase more (and increase available capital).

Q: Come on, get to your point already…
A: Ok. The big key here lies within the regulation… Commercial Banks are required by the Federal Reserve to keep a “required reserve ratio” of 10. In short, for every 1 dollar of “deposits” they have, they are able to loan out 10 dollars.

Investment banks on the other hand, have no such requirement. To compare to the reserve ratio that is required by the Federal Reserve of 10, Investment Banks were carrying ratios as high as 33. In other words, for every one dollar they had in cash they loaned out 33 dollars. In regards to profits, this WAS a great thing. In retrospect, this was incredibly stupid and many people are now saying "I told you so!"

Q: Ok... So using my superior puzzle skills, what you are saying is that:

Due to very little regulation, Investment Banks loaned out too much money. When s*** hit the fan, people started selling for fear that the securities they had purchased would soon be reduced to a value of 0. At this point the Investment Banks realized that they didn’t have enough capital on hand to pay out. As a result, some Investment Banks declared bankruptcy (Lehman Brothers), while others merged with an existing bank to gain access to additional capital (Merrill Lynch) or in the case of some Investment Banks who hadn’t quite hit the fan (Goldman Sachs and Morgan Stanley), decided to convert to commercial banks, thus giving them access to more secure capital through depository accounts.

A: Exactly, except that I would also add that Commercial Banks can also gain access to short-term capital via the fed funds (i.e. overnight borrowing from other depository institutions) or the discount window (borrowing directly from the federal reserve).

Q: Why didn’t you tell me that before?
A: I guess I forgot. Sorry.

Q: Anything else you “forgot” to tell me?
A: I guess the big takeaway here is that historically “Wall Street” was made up of these large Investment Banks. While they haven’t just disappeared, they have certainly changed form. What we are seeing is a shift from the “Wall Street Model” of Investment Banks, to a new model in which Commercial Banks are one stop-financial shops. Essentially we are talking about institutions like CitiGroup, J.P. Morgan Chase and Bank of America that will now be the face of the “New Wall Street.”

-dunkie

AIG..."Too Big To Fail?"

Lots of "fun" stuff going on in the markets this week. In regards to AIG and the "bailout" by the US Government, here is simplified look at what is happening...

Q: How much money does AIG need to pay out (i.e. short-term debt obligations)?
A: $14,500,000,000... and up to $85,000,000,000 over the next two years.

Q: How much cash does AIG have available?
A: Less than $14,500,000,000.

Q: What would AIG be worth if they sold everything?
A: More than $14,500,000,000... probably close to $85,000,000,000.

Q: How much money is the US Government loaning AIG so they don't have to sell everything to meet their short-term debt obligations?
A: Up to $85,000,000,000 over the next two years.

Q: What does the US Government is get in return?
A: 79.9% ownership in AIG.
11.5% interest on the amount AIG borrows.

Q: If the US Government didn't step in, what would happen?
A: AIG would be forced to sell off assets in order to meet short-term debt obligations. This would snowball until they were unable to do so, at which point they would declare bankruptcy.

Q: So what? AIG should burn in hell for all I care...
A: $85,000,000,000 is a lot of money. If AIG had to liquidate immediately, the market would be flooded with assets would would most likely spell disaster for the financial markets (much worse than we are seeing right now). In otherwords... AIG is "Too big to fail."

Q: Why is the US Government saving AIG and not Lehman Brothers?
A: AIG has the ability to repay the $85 billion dollars they are being loaned. Their loan is "secured" by the assets they own. Lehman Brothers doesn't have nearly enough assets to "secure" a loan the size that would be needed to "bail" them out. In otherwords, the US Government is making somewhat of a good loan, opposed to all the crappy loans that got us into this whole mess in the first place...

Q: Ok... so what does the future hold?
A: It is hard to tell. The most likely outcome is that AIG will be forced to liquidate itself slowly in order to repay the "bailout" from the US Government. Since this will occur over a longer time, the hope is that the financial markets will be able to support it.

Q: I'm still confused. Can you say it all again?
A: Nope... this is pretty much as simple as it gets.

-dunkie

We've Hit Rock Bottom

The Mariners have the worst record in baseball.
The Seahawks are 0-1.

The Huskies are 0-2.

The Sonics are... no longer with us.

The Storm is... a WNBA team.

(AP Photo: May 26, 1995. Ken Griffey Jr. breaks his left wrist crashing into the Kingdome wall while making a game-saving catch.)

Simply put, it doesn't get any worse than this for the Seattle Sports Fan. You can argue that a season-ending injury to one of Seattle's star players would make things worse, but don't kid yourself...

There is nothing beyond last place.
Zero wins divided by any number of losses...
...still equates to a 0.00 winning percentage.
Our one legitimate championship is gone.
The Storm is... still a WNBA team.

I think Lloyd Dobler said it best in the Seattle based 80's classic Say Anything.

"You probably got it all figured out, Corey. If you start out depressed everything's kind of a pleasant surprise."

Things may not fair any better in the foreseeable future for the Seattle Sports Fan, but on the bright side, things can't get any worse than they already are. I for one will continue to be depressed by the current state of Seattle sports and maybe, just maybe, the next time I turn on ESPN I might find myself being pleasantly surprised...

-dunkie

The Subprime Mortgage Crisis

Here is my simplified take on what is going on with the "subprime mortgage crisis." I hope Charles Schulz doesn't mind me using the "Peanuts Gang" to help illustrate my thoughts.

In the beginning...

How this all happened...

What's going on now?

R.I.P. Charles M. Schulz
November 26, 1992 - February 12, 2000

-dunkie

What's this all about?

I think I'll borrow a line from one of my favorite movies as inspiration for my blog and see how far that takes me...

"...Follow your heart kid, and you'll never go wrong." -The Sandlot

So pretty much, I'll be blogging on whatever I feel like.

I hope that reading my blog will be somewhat thought provoking and that what will inevitably become my incoherent ramblings won't cause your head to explode.

-dunkie