The 2.8 Million-to-One Winning Bet

A heartwarming story of a man who bet 50p on the horses and won £1 million. Except the odds were actually 2.8 million to one, which means he should have won

£1.4 million, and he’s short to the tune of $787,000: his bookmaker, William Hill, caps its payout at £1 million, which I’m sure is not something this chap knew when he made his bet.

The way I see it, he didn’t really bet 50p at all, he bet 36p, which is the maximum he was allowed to put on that particular accumulator, and William Hill simply pocketed the extra 14p. I think if they’re going to refuse to pay him £1.4 million, they should at least return his unbet money and pay out a million pounds and fourteen pence. No?

(Via Abnormal Returns)

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Chart of the Day: US Box Office Receipts

This is the best chart I’ve seen all year, it’s a bit like the NameVoyager for movies. It has time along the x-axis and weekly box-office receipts along the y-axis, which means that box office grosses are reflected in long and wavy areas. Truly it’s a thing of beauty.

The chart is great in the print edition, but it’s even better online, where it goes all the way back to 1986. Just look at the longevity of Top Gun, from that year: no blockbuster behaves remotely like that any more. The turning point seems to be the summer of 1989, when the opening-weekend blockbuster as we know it today starts to make its mark: Indiana Jones and the Last Crusade, Batman, Ghostbusters II. There are still long-runners after that point (Ghost, Titanic), but by the time we get to the present day, it’s all over: the graph is a series of spikes.

I do wish that clicking on any given film would break out the box-office numbers used to generate the chart rather than just link to a NYT review. And I also wish that the online version would include some of the information in the print version, like the fact that of the 100 top-grossing films of 2007, only six peaked in their third week or later; four of those six are nominated for Best Picture tonight. But this is a great achievement, and is a fantastic showcase for the abilities of the NYT’s graphics team.

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Manhattan Real Estate Datapoint of the Day

Josh Barbanel reports on a sale at Trump World Tower to Chinh Chu of the Blackstone Group:

According to several people briefed on the deal, Mr. Chu paid an extra $5 million to buy a 1,200-square-foot outdoor space on a part of the roof above his apartment.

I do understand that outdoor space is nice. But $5 million – $4,167 per square foot – for a middling-size chunk of roof? That’s almost double the $2,144 per square foot that he’s paying for his duplex penthouse. (To put all this in perspective, you can paper an area with $100 bills for less than $900 per square foot.)

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Extra Credit, Weekend Edition

Monolines: Breaking up is hard to do, yet Bond Insurer Plans a Split to Protect Ratings

Outdated Prices Blamed in Credit Suisse Error

Real Choices: Why TIPS are attractive even at low yields. But I’m not sure I like the methodology of using backward-looking inflation figures as a proxy for the future 10-year inflation rate.

Counterparty Risk in CDS contracts

U.K. Treasury Acquires

All Northern Rock Shares: Although it’s still far from clear how much shareholders will receive.

CBO Report: The Real Story: Nat Keohane defends cap-and-trade over a carbon tax. "If the amount of emissions has a predictable cost, then it makes sense to base policy on price. But this is not the case in a climate system subject to tipping points. If we exceed our "carbon budget", the costs could become astronomical."

Chasing the Neutral Rate Down: Financial Conditions, Monetary Policy, and the Taylor Rule: Pimco gives us 3,500 words – and quotes Ozzy Osbourne, no less – on why the Fed should cut rates.

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Credit: The Bandwidth-and-Hamsters Analogy

I’m not entirely sure what to make of Yvette Kantrow’s column today. On the one hand, I’m the only person she’s remotely nice about (I’ve "done a decent job," she says) in her review of the way the credit crunch has been covered by the financial press. But on the other hand what she really seems to want is someone to ride in with a clear-cut heroes-and-villains story which will "how these complex markets and products fit together and why anyone should care about them". And that’s clearly not going to happen. But maybe I can help a little, by talking about hamsters.

Kantrow does have something of a point. If you look at the coverage of the credit crunch, the overwhelming majority of it is written by financial sophisticates for financial sophisticates. This, for instance, appeared today not on some credit wire but in the New York Times:

Pay-as-you-go swaps do not involve a one-time payment to cover a default on a corporate bond, a pool of mortgages or some other debt instrument. Instead, they involve the payment of ongoing obligations on debt instruments that, because of their terms, may not be subject to a clear default trigger.

One can argue about how clear or how helpful this is. But there’s no doubt it’s utter gobbledegook to the overwhelming majority of the NYT’s readers. And there are lots of Market Movers posts, too, which would be similarly incomprehensible to most readers of any general-interest newspaper. (This is where having a blog comes in handy: you can have more of a niche readership.)

So why has the press been so bad at giving people the view from 30,000 feet? I think it’s mainly because although people use credit all the time, almost nobody outside the finance industry thinks of it as a product. If I loan you ten bucks till Tuesday, I don’t think of myself as owning a receivable worth (more or less) $10. Well, maybe I would, ‘cos I’m weird that way. But you wouldn’t, and most newspaper readers wouldn’t. And similarly, when someone spends money on a credit card or gets a car loan or takes out a mortgage, they just think they’re borrowing money: they generally don’t think of themselves as buying a financial product which has real value to the lender.

On the flip side of the coin, how many people consider their checking account to be a low interest or interest-free loan to their local bank? Precious few: if they borrow $100 from the bank, that’s now their $100 and they can do what they want with it. But if they lend $100 to the bank deposit $100 into their checking account, that’s still their $100.

Anybody coming in contact with the banking industry has a weird moment of cognitive disconnect somewhere at the very beginning: from a bank’s point of view, loans are assets, while deposits are liabilities. It’s a point of view which takes a bit of getting used to, and until you internalize the idea of loans-as-assets (and most people never will), you’ll never really understand what on earth is going on with the credit crunch.

If you do understand the idea of loans as assets, however, I think I can give you a big-picture view of what the credit crunch is and why it matters. Consider a product you consume unthinkingly every day: let’s take bandwidth as an example. Now, let’s assume that bandwidth is created by having a whole bunch of high-tech hamsters spinning in a whole bunch of high-tech wheels. Over time, the technology going into those hamsters gets more and more sophisticated, which means that a whole multi-billion-dollar industry of bandwidth-dependent products springs up, from YouTube to video on demand. And now imagine that, one day, the high-tech hamsters simply break. There are still a few low-tech hamsters still going, but they’ve mostly been replaced, and now they’re massively overburdened because the high-tech hamsters aren’t doing their jobs. The entire bandwidth-dependent economy simply grinds to a halt: no more YouTube, no more video on demand, no more Rhapsody.

You see where I’m going with this. Credit, in the US and indeed global economy, has become a taken-for-granted commodity, and the amount of it has been growing very fast, thanks to all manner of clever financial innovation. But those high-tech financial inventions (the RMBSs and CDOs and CDSs and monoline insurers and SIVs and auction-rate securities and on and on ad nauseam) have broken. There are still a few old-fashioned banks around, but all too many of them jumped onto the high-tech bandwagon so they’re as hurt as everybody else. There just isn’t enough credit to go round any more, which means the whole economy – and all advanced economies are built on credit – is going to, well, crunch.

I don’t know whether Kantrow’s Aunt Mary will be happy with this explanation, but it’s the best I can do. And now we’ll return to our regularly-scheduled programming of counterparty risk arbitrage opportunities.

Posted in bonds and loans, Media | Comments Off on Credit: The Bandwidth-and-Hamsters Analogy

Development: The Good News

Bill Easterly, in a nutshell, says that we’ve spent $2 trillion on aid over the past 50 years and have nothing to show for it. Charles Kenny says he’s entirely wrong, in a new paper saying that if you look at "nearly everything that matters" – nearly everything which isn’t money, in other words – the developing world, Africa included, has improved dramatically over that time.

This remarkable progress has been truly global. Africa has benefited as much as Asia or

Latin America. Countries that have seen no economic growth have seen almost the same

levels of progress on broader indicators of development as have countries that grew

rapidly.

This success should give us confidence in our abilities to overcome the many and

considerable development challenges which remain, and suggests a different, or at least

additional, strategy for attracting resources for that fight…

Suggesting that the governments, donors,

businesses and NGOs that have long struggled to deliver the services required for

improved outcomes have failed so miserably over the last thirty years that we remain in

crisis surely suggests more resources to these same actors would only be a waste -that if

there is still a crisis, development actors have only themselves to blame.

It is clear that there is a good deal that developing countries and the development

community could do to better deliver basic services. But these all too often corrupt and

usually inefficient organizations have nonetheless played a role in a widespread,

unprecedented revolution in the quality of life of people worldwide over the last fifty

years. Governments and donors have been key in expanding educational opportunities, in

improving access to infrastructure, in providing basic health care. This success, rather

than continued failure leading to crisis, is surely the reason that developing country

governments and their development partners deserve continuing, growing support that

would have us reach the 0.7 percent aid target.

I’d love to know what Bono thinks of this. His scolding paid off with Bush in the White House; maybe the soaring rhetoric of hope will fit better into the Obama worldview.

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Why All Consumer Magazines Should be Free Online

The Christopher Leinberger article in the Atlantic which I plugged at the beginning of last week is finally online. I moaned about such delays this morning, and got an email asking why exactly they’re so bad. I replied that Choire Sicha’s Observer article on a Vanessa Grigoriadis article in Rolling Stone is a good place to start in answering that question:

Rolling Stone didn’t even publish the piece online–just its first 606 words. This changed the project, a bit, from journalistic endeavor to Internet link-baiting; there is a sense of emptiness at the Web site, whereas the magazine piece is incredibly satisfying.

“I think we thought, why post the stuff for free when people buy it?” said Will Dana, the mag’s executive editor…

“Who’s to say they would have gotten 10 million page views if they put the whole thing up?” asked Eric Gillin, Web editor of Esquire, of the Grigoriadis piece…

“The studies show that–this is all going to seem very counterintuitive, bear with me!–the studies have shown, 80 to 90 percent of people that visit the Web sites for magazines neither buy nor subscribe nor have anything to do with the print publications,” said Mr. Gillin.

So, publishing the whole article on the Web won’t ruin newsstand sales, because the people who buy on the newsstand don’t look at the Web site anyway!

Hrrm. “I honestly don’t know if it would result in fewer sales or not,” said Mr. Dana.

“Well, we have an interesting test of this,” said James Meigs, editor of Popular Mechanics. “A little over a year ago, we had a big cover story on biofuels. … We put the whole story up online. We got just, I don’t recall the exact numbers, the best traffic we’d ever gotten… It turned out to be one of our best-selling issues of the year even though we’d given away the story for free online.”

The really depressing quote here is the one from Will Dana saying that he had absolutely no idea whether or not truncating pieces online results in fewer print sales, but that, well, he does it anyway. Clearly, if truncating pieces doesn’t cannibalize print sales, then it’s a no-brainer to publish everything in full online. And there’s no reason to believe that such cannibalization actually happens, in the magazine world. And yet editors still willingly give up very real web traffic for the sake of protecting imaginary marginal magazine sales which may or may not be lost as a result.

Publishing in full isn’t just about maximizing web traffic, either: it’s also about not pissing off your readers. When I read a great article in the Atlantic, I want to blog it; many other people in my position will at the very least want to be able to email it to their friends and colleagues. None of that is really possible unless and until it’s online. And since the internet thrives on the new, and hates the old, people want to link to you when the magazine comes out. No one wants to link to you weeks later, when it’s old news.

And for all that the web is constantly new and changing, it can take a very long time indeed to shrug off a reputation as a web-unfriendly magazine. Just look at the Economist: if it had been free online from the day it went live at economist.com, it would be an order of magnitude more popular than it is. People don’t visit it now just because they think it’s all hidden behind a subscription firewall.

Indeed, magazines in general have been so bad at going online that readers automatically assume there will be some kind of firewall in place. When I moved this blog from felixsalmon.com to portfolio.com, I got more than one comment along the lines of "oh, that’s a pity, I loved being able to read you for free". Portfolio.com is very much on the side of the angels in most of these debates – no firewalls, no delays in putting up magazine material, nothing in the magazine which isn’t online, no registration, no truncated RSS – but that’s still rare in the magazine world. It’s not just specific magazine brands which are tarnished in terms of their web reputation, it’s also magazines as a whole, who as a group seem hell-bent on crippling the user experience and turning their websites into little more than teasers used to sell new subscriptions.

Eventually, magazine publishers will wake up and realise that they have three sets of readers. The first, and largest, is the online-only readers, who would never read the magazine. To maximize their numbers you want to put up as much content as possible in as timely a manner as possible. The second, and smallest, is the people who read the magazine both in print and online. These are your very best and most loyal readers: you want to treat them as well as you can, which once again means maximizing the value of the website and not needlessly crippling it. Finally, in between, there are the old-fashioned readers of the print product, who either subscribe or who buy it at the newsstand, and who then read it in an armchair or on a train or in a waiting room. This is not the kind of activity which can easily be replaced by a website.

Yet who are these publishers worried about? Some tiny and possibly nonexistent group of readers who, on being given the opportunity to subscribe or to buy the magazine at the newsstand, will do so if the magazine isn’t online, but who will not do so if it is. This sorry band has a grip on publishers’ thinking far stronger than their minuscule market share would ever suggest. And they’re not even particularly brand-loyal readers, either.

Remember the first rule of consumer journalism: you’re not selling content to readers, you’re selling readers to advertisers. Anything which increases your readership and makes your readers more loyal is a Good Thing. This is not rocket science. Why don’t editors and publishers get it?

Update: Aaron Schiff makes a good point. What online content do magazine publishers think that they’re competing with? Their own, or everybody else’s?

Posted in Media | 1 Comment

Ethanol’s Not Green

How did I miss this, when it was published a couple of weeks ago?

Almost all biofuels used today cause more greenhouse gas emissions than conventional fuels if the full emissions costs of producing these “green” fuels are taken into account, two studies being published Thursday have concluded.

Naturally, Paul Krugman saw it: today he says that ethanol is "bad for the economy, bad for consumers, bad for the planet". And he also uses the relative freedom of his NYT blog to reveal a lede he wasn’t allowed to use in his column:

Before the State of the Union address, there had been hints and hopes that President Bush would offer a serious plan to reduce our dependence on imported oil. Instead, however, he took refuge in alcohol.

Clever man, that Krugman.

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Lloyds TSB: Not an Insurer

Let me be the second (after Carrick Mollenkamp) to congratulate Eric Daniels of Lloyds TSB on sidestepping the credit crunch and reporting 2007 profits up 17%.

I am a bit confused however why Mr Mollenkamp chose to illustrate his blog entry with this picture, calling it the Lloyds TSB headquarters, when in fact that building is the headquarters of insurer Lloyds of London. Maybe it’s because the Lloyds TSB headquarters are much more forgettable.

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Counterparty Risk in CDS Auctions

Diana Henriques has a piece in today’s NYT about CDS auctions. There are opaque auctions, like one recently held for something known as "pay as you go" credit default swaps; there are also transparent aucions, held by Creditex and Markit. But in a market which is increasingly worried about counterparty risk, how can CDSs simply be assigned to the highest bidder? As I understand it, CDSs are bilateral contracts which can only be assigned with the consent of the other counterparty. If the other counterparty doesn’t know who the winning bidder is, how can they give their consent?

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A Plea

Can everybody please stop talking about this being "the worst housing crisis/recession since the Depression"? It’s the only housing crisis/recession since the Depression, at least if you exclude purely regional episodes. Thank you.

Posted in economics, housing | Comments Off on A Plea

Chart of the Day: Stock-Bond Divergence

gschart.jpg

This is from a Goldman Sachs research report dated yesterday. The details:

We compare the investment grade CDX spread to the implied

volatility of a 25 delta put of an equal weighted basket of the stocks represented in the CDX

index.

No, I’m not entirely clear on what a 25 delta put is, either. But the bigger picture is clear enough:

Indicators of equity and credit risk have diverged dramatically over the past

month. In our view, this divergence is caused by technical factors in the credit

market. They also reflect a more negative view on recession, write-downs and

funding issues that we believe equities have not yet recognized.

In other words, equities aren’t looking so hot right here.

Posted in bonds and loans, stocks | Comments Off on Chart of the Day: Stock-Bond Divergence

Magazines Still Don’t Get the Web

“We don’t hire editors anymore,” says Meredith publishing president Jack Griffin. “We hire content strategists.” As someone who gloried briefly as an official Content Strategist myself, I had to smile: it’s one of those titles which anybody with an iota of irony simply cannot say with a straight face.

Still, you can see why Griffin is going there. Larry Dobrow says that "85% of magazine websites are way out of their depth when they turn their attention to video," while Choire Sicha this week does a great job of excoriating Rolling Stone for massively truncating their Britney Spears profile when they put it online.

All newsstand magazines should put all their content online for free the day the magazine gets distributed, if not before. Magazines like Rolling Stone and the Atlantic are shooting themselves in the foot by not doing so. It’s just a pity they still need a "content strategist" to make such decisions, well over ten years since most magazine websites first went live. If you can’t get that one right, the chances of doing something like video well are minimal.

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Credit Losses: The Good News

Where are the hedge-fund losers in the credit markets? That’s what Option Armageddon is asking, via an email from a friend in the hedge-fund industry:

There have been some nice fortunes made from the spread widening (Paulson, Hayman, Blue Ridge, Lone Pine, etc.) but I have yet to see where the fortunes are being lost on the other side of those trades…

Within six months it’s possible the term “counter-party risk” will have become almost as colloquial as “subprime” has.

I’m not convinced there’s another big shoe to drop here. It’s possible, yes. But we actually have seen fortunes being lost on the long-credit, protection-selling side of things. Merrill Lynch, anybody? Citigroup? UBS? IKB? Northern Rock? Not to mention, of course, the monolines, the buyers of CPDOs and other structured products, and just about anybody invested in CDOs, especially CDOs of CDSs.

And there were hedge funds, too, which blew up when spreads gapped out, the two Bear Stearns funds being the prime example. Add it all up, and I think it’s easy to see how losses match profits.

What’s more, I can’t imagine there are many hedge funds who made big spread-tightening macro bets over the past couple of years. Yes, there was money to be made on the spread-widening side. But the hedge funds writing protection and taking the other side of those trades weren’t in it for the long haul, and surely stopped out long before now.

Or that’s the optimistic view, anyway. Ask me again on Monday, I might have changed my mind.

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House-Price Momentum: The Good News

John Authers looks at what drives house prices:

Tim Bond of Barclays Capital points out that once house prices start to accelerate, people expect them to keep on rising at that rate. All other factors are swamped. As he says: "After a period of strongly rising prices, the expectational component comes to the fore and becomes the key factor determining real house prices."

If people see house prices rising, greed trumps everything else. In the short-term, this is a self-fulfilling prophecy.

The interesting thing is that this mechanism does not work in reverse. The unique thing about bull markets in housing is that fear and greed both mitigate in favor of higher prices. The greedy want to make money, like they always do. But the other huge factor is the fearful – people who are watching prices rise inexorably and who feel that if they don’t buy now, at any price, they’ll never be able to afford something.

In a bear market, by contrast, fear of falling prices is a very small factor in house-price depreciation. Once someone owns a house, it’s very uncommon for that person to sell just because they think prices are going to fall. Meanwhile, there are still speculative buyers out there – people who think they can use the current weakness in the markets to pick up bargains, often out of foreclosure.

Which is why there’s every reason why house prices rise in a bull market, and fewer reasons why house prices fall in a bear market: foreclosures and oversupply are the main technical reasons for price drops. In turn, that might help explain why Manhattan seems to be immune from the housing bust (for the time being): neither is a factor here.

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When “Underwater” Isn’t the Same as Negative Equity

The NYT has one of its big 2,000-word pieces on the housing market today, this time concentrating on the phenomenon of negative equity. The estimate the article cites is very high, and was greeted with some skepticism by Calculated Risk:

With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater. That is more than double the percentage just a year ago, according to a new estimate of the damage by Moody’s Economy.com.

But if you read the piece more closely, it doesn’t quite say that "underwater" is the same thing as having a mortgage worth more than your house. Instead, consider the three homeowners it cites as grappling with this problem:

  • Stuart Breakstone, who had to write a check for $65,000 when he sold his custom-built house for $170,000. He and his wife, who between them earn more than $250,000 per year, now have a $670,000 mortgage, which is "perhaps more than the house itself is worth".
  • Collie Tuttle, who bought her house for $270,000 with no money down; she has since paid the mortgage down to $248,000. One potential buyer is willing to pay $269,000 for the house – 8.5% more than the mortgage, but not enough to cover the mortgage plus brokers’ fees plus closing costs.
  • Jane and Kevin Naus, who have a $192,000 mortgage on a house they’re not living in; they have cut the asking price from $239,000 to $220,000. That’s not only more than the mortgage: it would even cover all the costs of selling and leave them with $6,000 to spare. They’re willing to continue paying the $1,400 monthly mortgage payments on an empty house for the time being, but they’re not willing to cut the price any further (or, seemingly, to rent out the house and cover the mortgage payments that way).

So we have one rich couple who lost money on a custom-built house but seem reasonably comfortable. There’s one woman who is more or less breaking even. And there’s one couple who probably could have sold their empty home by now and paid off the mortgage with the proceeds, but who for unclear reasons haven’t. If this is what is meant by "underwater", just wait until the United States starts suffering from real negative equity.

As for the graph accompanying the piece, it’s frankly worthless. It shows that in mid-2009, one in four homeowners in the West will have zero or negative equity in their homes – but it doesn’t say what kind of price appreciation or depreciation that projection is based on. Given that the number is pegged at about 10% now, one has to assume that there’s quite a lot of house-price depreciation being assumed over the next year or so – enough to put just about anybody who’s bought a house in the past few years underwater. It would be polite, I think, to tell us what that depreciation number is, so that we can judge for ourselves how realistic the negative-equity numbers really are.

Posted in housing | Comments Off on When “Underwater” Isn’t the Same as Negative Equity

Extra Credit, Friday Edition

Pimco to run World Bank fund for bonds: Developing local markets and making money at the same time.

Is there useful work in economics? Dani Rodrik thinks so.

Peace through Superior Football: A proposal that Israel and Palestine should jointly host the 2018 World Cup.

Economicindicators.gov to Stay Open

Credit Default Swaps, a hedge funder’s view

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Michelle Leder is a National Treasure

Roberta Yafie explains today how US bankruptcy judge Robert Drain slashed an $87 million bonus plan for Delphi executives to "just" $16.5 million. But don’t think they haven’t hidden all manner of other egregious overpayments in their 10-K:

CEO Rodney O’Neal, who was supposed to get a $5.3 million bonus before the Judge raised his objections, could end up with a whopping $63.8 million following a change in control, according to yesterday’s filing. But it may be even more since the footnotes to the footnotes are a bit confusing and it’s unclear to me whether O’Neal could receive an additional $10.1 million…

All told, the various payments add up to $168.6 million for five executives. Now if the Judge had a problem with $87 million going to 560 executives, wouldn’t you think a pot that’s double that, but only going to five people, would warrant even greater scrutiny?

Well, yes, but probably only if there’s an eagle-eyed observer like Michelle Leder around to catch these things.

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Crowds: Stupid

Paul Kedrosky said this morning that he was thinking about "the anti-wisdom of crowds". I wasn’t sure what he meant, until this afternoon:

The sort of things people want government to do to help the U.S. economy — cut imports! halt immigration! drop/raise taxes by 100%!, etc. — would pretty much take us into the Great Depression 2.0. Asking people for economic ideas isn’t the solution, it’s part of the damn problem.

Could Kedrosky be setting himself up as the new Bryan Caplan?

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Carbon Tax Arrives in British Columbia

Many congratulations to British Columbia and its finance minister Carole Taylor, who has introduced a revenue-neutral carbon tax. The sums involved are not insignificant: The carbon tax will start at a rate based on $10 per tonne of carbon emissions and rise $5 a year to $30 per tonne by 2012. Even so, the effect on gasoline prices is small. It’s 2.4 Canadian cents per litre at the beginning, rising to 7.2 Canadian cents per litre at the end: that’s the equivalent of 8.9 US cents per gallon at the beginning and 26.8

US cents per gallon at the end. No wonder "most drivers at a Vancouver downtown gas station told CBC News they’re not opposed to the higher price for gasoline when they can contribute to saving the Earth."

(Via Carbon Tax Center)

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Zimbabwe Datapoint of the Day

zdollars.jpg

Brian Latham reports:

The currency slumped to 20 million per dollar, from 6 million yesterday, traders including John Tonganyika said in interviews today from the capital, Harare. It’s the biggest drop since Zimbabwe gained independence from Britain in 1980, said John Robertson, an independent economist based in Harare.

Looks like I bought my Z$ virtual real estate at far too high a price!

Related: The Price of Life in Zimbabwe

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Chart of the Day: Oil and Gasoline Prices

oilgas.jpg

Are you ready for a 40% hike in gasoline prices? According to Barbara Kiviat, if the red line converges up to where the black line is now, that would put gas prices at about $4.23 a gallon, or 40% higher than where they are now. The effect on the number of times that presidential candidates talk about "pain at the pump"? Incalculable.

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TIPS: Great, or Terrible?

Min Zeng, on page C2 of today’s WSJ:

With oil prices above $100 a barrel and countries from China to the U.S. reporting sharp gains in consumer prices, now may be the time to buy inflation-protected securities.

Big bond investors, including Pacific Investment Management Co. and American Century Investments, favor buying Treasury inflation-protected securities, or TIPS, which will outperform their euro-zone counterparts, as the Federal Reserve’s hefty rate cuts fuel inflation pressures.

Brett Arends, on page D4 of today’s WSJ:

Inflation’s a big risk to your savings. But inflation-protected bonds are an even bigger risk these days…

As fresh data showed yesterday, consumer prices are rising faster than expected, even while the economy sags. Many investors, and their financial planners, are reacting to the danger by rushing into what they think is a safe haven: Treasury inflation-protected securities or TIPS.

It’s a bad move.

The bidding frenzy has sent TIPS prices soaring. The bonds have become wildly overvalued and now offer a terrible long-term bet.

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How to Help Both Homeowners and Lenders, at No Public Cost

I really like this idea from the Office of Thrift Supervision: it looks like it can reduce foreclosures and help provide liquidity to struggling mortgage lenders at the same time. Here’s how it works: take a borrower who’s underwater, with a mortgage for more than their house is worth. Refinance the mortgage so that it comes down to the value of the house, and then give the lender a tradeable warrant for the difference. Mortgage payments come down, because the mortgage has come down, and the lender, if it needs cash, can simply sell the warrant on the secondary market. If the house gets sold for more than the value of the new mortgage, the excess goes in the first instance to the warrant holder; the homeowner makes money only if the house is sold for more than it was bought for.

The big problem, as I see it, is securitization – the legal obstacles to doing this with a securitized loan are huge. But they may not be insurmountable, especially if this scheme is shown to work for mortgages held by a lender.

Bob Lawless is more skeptical: his problem is that the homeowner has very little incentive to maximize the sale price on the property. I have three responses to him:

  1. If you’re under water on a non-recourse mortgage, you already have no incentive to maximize your sale price. This changes nothing.
  2. The homeowner does share in the upside, so long as the house is sold for more than it was bought for.
  3. In any event, the whole point of this plan is to prevent people from putting their houses on the market in the first place, and rather to find a way to help them to stay in their houses.

I reckon this plan is definitely worth a try. If it catches on, it could be very helpful indeed. And the great thing about it is that it can all be done unilaterally: there doesn’t need to be any legislation first.

Posted in housing | Comments Off on How to Help Both Homeowners and Lenders, at No Public Cost

Monolines: Ackman’s Latest Plan

Has anybody not seen Bill Ackman’s latest plan for what should happen to the monolines? It’s been doing the email rounds for a couple of days now, but finally it’s hit the web: if you want to download the full 14-page presentation, it can be found here. (Thanks to Todd Sullivan for the link.) It’s interesting, but the reaction from anybody who isn’t massively short the monolines has been so unanimously negative that I’m pretty sure it’s not going to go anywhere.

Update: For a more informed take on the Ackman plan, see Yves Smith. Money quote:

If the capital (technically, reserves, that’s the name for the cushion at the insurance subsidiary level) is insufficient for the combined entities, merely splitting them cannot suddenly make things better. In fact, the boundary condition is that the reserves needed to properly capitalize the combined book of risks is less than or equal to the reserves needed to insure them separately.

Posted in insurance | Comments Off on Monolines: Ackman’s Latest Plan