Bank of America- status of write downs

Supposedly US home values have reduced in value by 7-9 trillion dollars since their peak.

Now, we should bear in mind that it isn’t a literal loss in value any more than when prices were artificially high there was a literal gain in value. Smoke and mirrors in both directions, and the higher housing prices are, the worse for the economy in the long term.

You only gain that value if somebody else loses it by paying the asking price. That’s 7-9 trillion dollars more (after factoring in mortgage interest payments, more like 14-18 trillion dollars) that the next generation of home buyers will have to spend in other areas of the economy.

But the smoke and mirrors have consequences for balance sheets.

I probably wrote this before, but there isn’t any harm in writing it again, after the new 2008 SEC rules that do not require banks and other entities to write down the value of collateral to reflect current market value, there is no incentive for banks to keep honest books reflecting the 7-9 trillion drop in US home values.

While not all of the homes would have mortgages so not all of that drop is a loss of collateral, my guess is that the amounts of write downs are nowhere near the actual level.

And once you engage in that type of SEC endorsed fraud, how far can it go? If the premise is that you shouldn’t have to write down due to a fleeting change of value due to a sudden spike down, does that mean that there is a time when you do have to write it down? Is three years where the price hasn’t recovered enough to say, this is the real price of the home now and that should be the figure in the books?

Historians are going to look back at the new SEC accounting rules as one of the ten worst ideas/ decisions of the 21st century.

Sooner or later somebody is going to have a problem where the true value of their assets and collateral comes out, and when that happens, use the SEC guidelines as a complete defence to what would previously have been (probably criminal) fraud.

When that happens, any US corporations that could be using the same rules are going to be radioactive. Nobody will want to invest in them because of unknowable exposure. Capital will flood out.

The point of an SEC is to send the message that if you cook your books you go to jail, not to hand out recipes for doing it.

NYPD intelligence unit kaffufle shows deep incoherence in US policy

Apparently NYPD is using some CIA methods such as using ethnic officers on the force to quietly check out hot spots in their communities:

Now, I would have assumed that they were doing that already. Maybe not in CIA textbook fashion, but doing something.

For reasons that are not wholely clear to me some people have a problem with that and there are even laws preventing some agencies, such as the FBI, from gaining even basic information that a civilian can obtain without warrant or breaking any law.

For instance, the so-called “Mosque crawls”.

If there is an open service, anybody can just walk in off the street.

How is it different if a police officer just walks in off the street plainclothes? The sermon is meant to be heard. The imams know that there could be an off duty cop in the audience. There isn’t a trespass. How does something legal become illegal because a police officer is doing it?

Interpreting first amendment rights as giving people the right to NOT be heard when speaking in public, is just taking that way too far.

Meanwhile, the government has still got disappeared people from Guantanomo and still engages in dubious monitoring of conversations that are intended to be private.

These are two sides of a coin.

Impede law enforcement from doing even pedestrian, obvious intelligence gathering and it will eventually lead to unjustifiable encroachment in other areas because the agencies lack more legitimate options.

It is crucial for intelligence gathering to have eyes on the pavement. If you just sit by the phone waiting for tips to come in you are going to get too much information, much of it paranoid or spiteful nonsense which wastes resources to follow up on.

The idea that you can’t listen to what people say in public without breaching their constitutional rights, but you can have goons throw a bag over the head of somebody and disappear him or monitor private communications on the thinnest of premises, those positions in combination are just utterly bizarre.

Memphis 3 and Alford plea- yuck

When a no-contest plea is entered to release people from prison, there’s something wrong with that.

When the plea is that the prosecution has enough evidence to convict, when the prosecution in fact has no evidence, I would have expected a judge to reject that.

I can see why the defendants might be attracted to such a plea in such a case- the prosecution, instead of simply agreeing to release and dropping charges as is the custom in such cases, was headed for a new trial, still without evidence, and keeping the defendants locked up in the meantime.

Presumably the prosecution’s intention was to do a different version of what they did the previous time- try to drag the reputations of the men through the mud in lieu of evidence and see if they could make them unlikeable enough to get a conviction.

Echols in particular I am sure had no appetite for that. The last trial was all about how he was psychologically disturbed, notwithstanding a lack of any history of violence.

I would have been angling for a no-evidence motion so it would never go to a jury.

But if it did go to a jury, there wasn’t evidence last time, and a bailiff had leaked to the jury behind closed doors that a co-accused in a separate trial had confessed. He knows as well as anybody that a lack of evidence is not an insurrmountable barrier for an unethical prosecution.

Casey Anthony’s acquittal is an unusual result in the American south in this kind of case.

And then there could be potentially years of appeals.

The Arkansas AG has irresponsibly said that he thinks the three are guilty. On what evidence?

Echols may have been a disturbed teenager that listened to heavy metal music, but there must have been a million of them within range of the killings. The only reason his name came up was some junior probation officer with animosity towards him suggested at the time of the crime that he had done it.

The first person that I would have looked at is the probation officer that brought up his name, who had no business going way out of his way to be trampling on a crime scene, which had nothing to do with his job, and suggest suspects. He seemed highly motivated to misdirect the investigation.

It is also the kind of job that would be attractive to a predator, with coercive power over teenagers.

The Alford plea has the unfortunate effect that it will be impossible to pursue the state for civil liability. Those three deserve millions for what they went through based on a bad faith prosecution.

It is also unfortunate that this will prevent any investigation into whoever did the killings and make it almost impossible to ever prosecute the real killer(s) for it.

Doing this Alford plea to protect the jobs of the people that screwed up the investigation is weaselly. A lot of people already know what happened.

If this were another kind of investigation I would wonder if the real perp was connected.

Talk of demise of the personal computer in favour of tablet ignores economic drive of pornography and other visual effects

The inherent limitation of tablets and iphones and even laptops is their size.

People watching movies on 2 inch by 3 inch screens is not the wave of the future. Projecting movies onto the wall from a phone like some gizmos do isn’t the wave of the future either. The size difference results in inferior quality that is not fixable.

The possibility that you could watch streaming movies on the bus [probably for the ultimate monthly cost of having your own wheels] is only going to be a draw for complete schmucks.

And then there is the omnipresent issue of pornography, which will not be openly mentioned in people’s stuffy economic reports even though it is the elephant in the room.

Advances in media in recent years have been driven by pornography as much as any other force.

If ordinary movies are unappealing on a small screen, I am sure that the deleterious effects on visuals of more prurient interest will be even more unappealing.

A medium isn’t going to die while it is the most effective form of accessing pornography, until a better form is developed, or the total failure of the electrical grid. You can call that Ciappelletto’s Law.

And who is going to be accessing porn while on the bus, stuck in traffic or in the coffee shop, or any other place between work and home?

The iphones, smart phones and the like cater for the most part to a narrow and dedicated segment of the population with OCD who will pay anything to ensure that they don’t spend a second away from social media.

The rest of the population may not be as profitable, but the other 95% of the population are a market too.

If the margins are too small, add value so you can charge more. The most OCD element of the population are prepared to pay preposterous costs for something that caters to what they want. What do other slices of the population want?

Corporations don’t seem to want to think anymore. They want to put out generic MacProducts from an assembly line and ding the customer for anything more than the basic product as an expensive upgrade.

Want photoshop and wordprocessing products? To now get a product that is no better than products that we used to get 30 years ago for free with the computer, we might have to spend as much as the computer itself.

That is just a direct transfer of money from the computer manufacturers to software providers. With vertical integration they could have more profit.

One logical step would be to install Open Office on every new machine.

Vertical integration could go the other way too. Microsoft is one of the expenses strangling the PC market, which is not in the interest of Microsoft. If people have to budget for Microsoft Office that will affect what they can pay for the computer. The high cost of Microsoft undermines the health of the organizations that Microsoft needs to survive.

While I’m here trash talking, who needs cloud computing?

It has some narrow utility in specific situations and for social media.

On the whole though, are you going to trust that your data all be kept on some server that, for all you know, could be in Tibet?

Do you know who is in charge of securing the data? For all you know you could be uploading secrets directly to drives owned by a competitor.

Leaving pictures of your holiday trips on the net is one thing, leaving anything more sensitive out there is dubious.

When you can have 2 terrabytes sitting on your desktop, the availability of 2 gigabytes on the web, unless you want to post your holiday pictures, is a solution without a problem.

Are PCs done? No, just catering to the stupid is more profitable

I just read this bit of silliness:

Here is the reality:

1. We need personal computers
2. We don’t need little gizmos that you can play farmville on.

There will always, always be a market for computers with a keyboard large enough to type on.

Most people prefer a large screen to a small screen.

If as we are told desktops are dead, why is the market so good for huge screens?

Because small screens suck.

Only OCD freaks who can’t bear to be away from texting for 30 seconds really “need” to have those idiotic gizmos.

It is being mocked in TV commercials because the majority of people think that people who can’t stand to be away from social media for 30 seconds are freaks.

The number of people who actually need instant, detailed messages for a real purpose, and can’t wait until they get home or to the office, are precious few.

The real issue here is economics.

The competition on personal computers is vicious and the margins are thin.

It isn’t that people don’t need them, it is that there is so much competition that corporations don’t make much money, or not as much as they would want.

Texting? I’ve read that some corporations are charging up to 100,000 times the real cost to the corporation of the text.

We didn’t need texting five years ago because it didn’t exist, and we don’t need it today.

The greedy bastards running corporations are the ones that need these useless, expensive gizmos to be hip, and convince everybody that they are the wave of the future, because they represent lots and lots of pure profit.

Why would you want a computer with a tiny screen that you have to squint at and a cramped keyboard that you can’t type on? Because you’re an OCD freak.

Desktops provide a service, laptops a more limited but more flexible service if you travel, and because they provide an actual service they are long term.

Whether stupid gizmos with 100,000 applications [use ten new ones per day and you might get through them in your lifetime] will stand the test of time remains to be seen.

Although I’m not a fan of Microsoft I have to side with Microsoft with their analysis that real computers will be around in the long term.

Whether Apple wins in the long term remains to be seen.

Just because a product is useless doesn’t mean it will fail.

The creator of Fed Ex got panned at Harvard with his business proposal because nobody needed next day delivery.

But both the student and the teachers were right. It is true that almost nobody needed next day delivery, but then nobody ever went broke catering to OCD freaks.

Find something that freaks like to go OCD on and you are set for life. Your product can be useless. It doesn’t even have to work. If the OCD types obsess over it you will make a mint.

What remains to be seen though is what happens when OCD freaks get tight on cash.

The next stage in the second great depression is underway. Don’t lose sight of the fact that the first great depression didn’t happen in one “black friday” or tuesday or whatever the hell it was. That was just when a bunch of stock broker parasites threw themselves out of windows, which was probably a net improvement. The bottom wasn’t until 1933, 4 years later.

Would you bet your corporation that OCD freaks are so OCD that they will keep operating their highly expensive, useless gizmo rather than eat?

Will OCD freaks choose Fed Ex over snail mail rather than eat?

Will OCD freaks choose their gizmos over having a roof over their heads?

Will OCD freaks choose Fed Ex over snail mail rather than have a roof over their heads?

Most of them will already have access to a computer anyways.

I like Warren Buffett’s pick of Kraft. I bet people will eat. I bet people will increasingly move to cheap food as their wallets get thinner.

Unless Kraft digresses into unfamiliar areas in the manner of GE or Virgin or gets entangled in derivatives or other financial nonsense, Kraft looks like a fairly safe bet. They would have to do something exceptionally stupid to get into any trouble. Just make cheap food. No nuclear power plants. No moon rockets. No financial instruments nobody understands. Just stick to your core business which is something people need and you understand.

Not that I’m saying that Apple would fail- although Steve Jobs is in shaky health and Steve Jobs is Apple. When he was pushed out before Apple was run into the ground.

But would you bet your business that people will keep buying something they don’t need? It could be a fad, it’s too early to tell.

Will there still be enough people in two years who will be able to afford it, and keep buying next generation useless gizmos? Too early to tell.

Will there be vicious competition just like with computers in a few years and the margins will disappear? Too early to tell.

The short term profits are great..for business. But would you bet your business on a product that nobody needs?

Underlying problems with the banking structure and mortgage financing

For years the US and world economies have had excess stimulus caused in large part by escalating home prices.

The excess “equity” would be cashed out and spent on vacations, big screen TVs, college education for the kids, etc.

As previously mentioned, one of the reasons this is a problem for economic stimulus is that if you spend X amount of money from credit now, that is X amount of money plus interest that you won’t be putting into the economy later.

In terms of cash flow, that only helps banks.

If you look at the basic structure of the transactions though, the banks are actually losing.

The whole home equity situation is something like a ponzi scheme for banks.

The old purpose of mortgages was that they were to be ultimately paid off.

When mortgages are instead something more like a line of credit, the structure of the situation changes.

If the mortgages are never really intended to be paid off, the banks require some other bank to buy out their mortgage.

To fully understand the dynamic you have to look at all banks together.

If they are all making huge loans on property, which could never be paid out in 30 years, they are collectively moving more and more money away from more or less the same pool of “equity”.

I hate that word, “equity”, because stripped down it is usually relativistic balderdash.

The equity of a thing doesn’t necessarily have anything to do with the value of a thing.

What is a house? Slowly rotting sticks in the ground.

The only objective measure of value is the collective number of man hours that it took to put it together, including the production of the materials, or the same figure for what it would take to replace it.


Equity is betting your company that there will always be another buyer and company out there that will pay more for rotting sticks in the ground.

Because beyond the value, all you have is a social convention that somebody else will always buy you out at the same price or greater. That social convention isn’t enforceable as even a handshake agreement. It disappears as soon as nobody can afford to buy you out.

A house should be a bad investment, from a purely investing point of view.

Like gold, the house doesn’t produce anything.

Worse than gold, it is an asset where the primary source of objective value is constantly depreciating due to wear and tear and requiring a higher proportion of upkeep.

Unlike gold, it provides for a basic human need- a roof over your head.

But like gold, viewed over the long term and over the maximum number of parties, housing is always a net loser as an investment.

It is true that the savvy investors can make a killing. But in assessing the value of a practice you can’t look at just a successful few in isolation.

And if any investment that doesn’t produce anything keeps inflating in relative price, you will without variation have the same structure as a ponzi scheme, whether the practice is legal or not.

Suppose ten banks have 10,000 properties mortgaged. They adopt a practice between them of ever increasing prices of the homes and letting people borrow agains them.

If the average price of those 10,000 homes quintiples in price in 10 years and he average mortgage quadruples in price, does that mean that the banks are in better shape or more secure?

Not necessarily, because at base they have the same 10,000 homes as collateral staked against four times the debt.

If that debt in turn reflects debts the bank owes to others, what you have is fixed exposure and variable collateral.

Quite apart from the ponzi aspects of mortgages that are never intended to be paid out, what happens if 1,000 of those 10,000 homes go into foreclosure? If moving those homes means dropping the average price to only triple the price it had been 10 years before, now the banks are painted into a corner and whatever they choose is wrong.

If they move on the homes in foreclosure they destroy the value of all their other collateral by increasing the supply on the market.

The only way out is to go into the renting business.

And if they keep allowing the debt on the homes to spiral ever higher, aren’t they going to reach a point where all of the money of the banks is tied up homes and the banks can’t afford for the prices to go either higher or lower?

The things that the homeowners may spend those draws on equity on don’t inherently help the banks. It goes to the people that give education, or provide vacations, or make big screen TVs.

Meanwhile, the homeowners that have been taking out larger and larger mortgages have less and less money to spend on other things, which can kill the economy, such as happened to the Japanese when they got two generation mortgages. Any sector that swallows up all of the population’s disposable income will ruin the economy because there won’t be money for anything else.

It is a lose-lose-lose proposition- the banks ruin the homeowners while destroying their own “equity”.

“Equity” is easy to destroy because it doesn’t, and has never, existed. All it is, is a kind of game, a human convention of allowable moves like chess or backgammon, with no real connection or existance in the real world.

If you have a Picasso, you might sell it for a hundred million dollars to the right buyer.

If I have an apple, and I say that I will give you this apple for a hundred million dollars, and you give me a hundred million dollars for it, the apple is worth a hundred million dollars.

That is “equity”.

As a species we are caught up in head games, and so much of our lives are now about understandings, institutions and conventions about things that do not literally exist.

If your dog or cat can’t see it, it is because it isn’t there.

The net beneficiaries of what might be called the equity scam are hard to trace, but with a net import economy there will be net wealth headed offshore.

How do we avoid this problem?

By turning mortgages back into mortgages.

Make it illegal for a mortgage to be issued that is not paid in full at the end of the term of the mortgage.

If a bank issues a “mortgage” of $400,000 for five years with $10,000 per year to be paid in combined interest and principal, that isn’t a mortgage in the old sense, it is a bet.

At the end of the term, you are betting that either the buyer will be able to renew or that some other institution will be able [and willing] to buy you out.

At that rate it would take a lifetime to pay off the mortgage- it doesn’t make any economic sense. It is a 2 generation mortgage by another name.

When you have so-called mortgages that are never intended to be paid in the regular course, things go off the rails.