Morning Report: Incomes rise, spending not so much

Vital Statistics:

S&P futures4,184-19.8
Oil (WTI)63.53-1.47
10 year government bond yield 1.64%
30 year fixed rate mortgage 3.20%

Stocks are lower this morning on no real news. Bonds and MBS are flat.

Personal incomes rose a whopping 21% in March, driven by stimulus payments. Personal spending rose only 4.2%, which is another indication that people are saving their stimulus checks, not spending them. Saving includes debt payments, which is probably what people are doing with the money.

The Personal Consumption Expenditure price index rose 2.3% in March. Ex-food and energy it rose 1.8%. This is the inflation index the Fed pays the most attention to, and it is really the core index (excluding food and energy) that the the Fed focuses on. Note the “market based” index, which is a supplemental index that excludes some other bootstrapped readings, rose 1.6% ex-food and energy. Bottom line, inflation remains below the Fed’s target rate, and that means policy is going nowhere for the time being.

The employment cost index rose 0.9% in the first quarter and 2.6% on a year-over-year basis. Wages and salaries rose 2.7%, while benefits costs rose 2.5%.

Pending Home Sales rose 1.9% in March, according to the National Association of Realtors. Year-over-year contract signings were up 23%, however they were unusually depressed last year due to COVID. NAR projects that existing home sales will increase by 10% to 6.2 million in 2021, and home prices will rise about 9%. They see housing starts rising to 1.6 million in 2021 and 1.7 million in 2022. That might not be enough to meet demand however.

New Construction accounts for a quarter of homes for sale, according to a study by Redfin. This is due to both increased homebuilding and fewer existing homes for sale. “New construction has typically been a good option for buyers who don’t want to deal with bidding wars because builders don’t usually set deadlines for offers. Buyers also like that they can often buy a new home for what it’s actually listed for rather than having to offer way over the asking price to win,” said Melanie Miller, a Redfin real estate agent in Houston. “However, inventory for new construction is very low and prices are now rising for many new and pre-construction homes because lumber prices have gone up. I had one buyer who came to terms with a builder at a certain price. The builder called us the next day and said they can’t do that price anymore because their suppliers just increased prices.”

The soaring costs of sticks and bricks are a big reason why new home costs are rising so much. For anyone who has swung by the Home Despot to work on a home improvement project, lumber costs are through are up almost fivefold over the past year:

46 Responses

    • The UK treats a total return swap the same as a long position as far as reporting purposes goes. I never understood why the US didn’t do that.


    • Taibbi:

      (I just realized how long this is…sorry. It may be TLDR territory, but I haven’t done this in a while.)

      …while the collapse of Lehman’s portfolio of bonehead deals sent them into bankruptcy and helped trigger a global chain reaction of losses that cost Americans $10 trillion in 2008 alone.

      Taibbi, like too many others, gets this exactly backwards. Lehman’s collapse did not trigger the 2008 finaincial crisis. It was simply one of the first outward signs that a crisis had arrived. In other words, the crisis caused Lehman’s collapse, not vice-versa.

      And this error (driven by a seemingly preternatural need to blame Wall Street for All Bad Things) causes him to misread the Archegos situation. It is, as he suggests, an indication that there are plenty of dumb people on Wall Street, but it is not, I don’t think, “deja vu all over again” or a sign of another brewing financial crisis. There are all kinds of relevant differences.

      I think it is important first to understand the mechanics of the deals that Archegos was likely doing, and not get confused by Taibbi’s framing of them. (I say “likely” because I have no first hand knowledge and am just making suppositions from what I have read, including what Taibbi is reporting). For example, Taibbi says that Archegos “was able to borrow gargantuan sums — billions — from the world’s biggest banking institutions”, but that is a deceptively simplistic framing of what went on, and strictly speaking it is an outright falsehood. Archegos didn’t actually borrow anything, although it is true that to some degree the effects were similar to if they had.

      What is appears that Archegos was doing was what are called Total Return Swaps (TRS) or Contracts for Difference (CFD), which are each contracts with a payoff of the difference between the price of a referenced asset at the start and end of the contract. Essentially the buyer and seller are just betting with each other on whether the price of the referenced asset is going to go up or go down over the course of the contract period, and at the end of the contract, if the price has gone up the seller pays the buyer the amount of the increase, and if the price has gone down, the buyer pays the seller the amount of the decrease. And all of this is done independently of the referenced asset itself, meaning that no one is actually buying the asset. It is just an agreement regarding the movement in market price of that asset. Thus, both the buyer and the seller have exposure to the asset price without actually purchasing/selling the asset itself.

      It appears that Archegos was buying TRS/CFDs on equities from the likes of Goldman. But of course, Goldman et al don’t really want the other side of Archegos’ bet, ie they don’t want short exposure to those equities, so they go out and hedge themselves by actually buying the assets. Thus, the seller’s position is now covered. If the value of the stock goes up, they will owe Archegos on the TRS, but they will have gained on the underlying equity. If the value of the stock goes down, they will have lost on the underlying equity, but they will make it back from the Archegos TRS.

      So ultimately, then, the expsoure that Goldman et al is credit exposure to Archegos, but importantly it is credit exposure that is also tied to the value of the underlying equity. As the value of the underlying equity decreases, Archegos owes them more money and their credit exposure to Archegos increases.

      So as I said, Archegos has not actually borrowed money from anyone. But the overall result of the TRS/CFDs combined with the hedge transactions done by the sellers is not entirely dissimilar to if the sellers had lent Archegos the money to buy the equity themselves, and then accepted the equity back as collateral against the loan. In both cases, as long as the value of the equity stays flat or goes up, Goldman et al (the sellers/lenders) are fine. But as the value of the underlying equity decreases, they begin to accrue essentially the same credit exposure to Archegos, in one case because Archegos owes them on the TRS contract, and in the other case because the collateral Archegos posted on the loan no longer covers the value of the loan.

      However, Goldman et al do not just ignore this credit exposure and hope for the best. Indeed a lot of the regulation that came out of the 2008 crisis was designed specifically to regulate this type of risk. Goldman et al will have had (and not least because the law will have required them to have) a Credit Support Annex (CSA) with Archegos regarding their TRS contracts. The CSA actually requires both Archegos and Goldman to post both Initial Margin and subsequent variation margin, ie collateral to cover daily moves in the value of the TRS. So for example, as the underlying referenced equity began to drop, Archegos would have been required to post, each day, the value of that drop. Ultimately this reduces the ability to accrue credit risk to any one counterparty on a derivative contract to no more than a one day move in the value of that derivative.

      This is another way in which Taibbi’s framing is most likely somewhat misleading. He says that:

      No matter how it happened, within a day after Bakish moved to sell those 20 million shares at $85…the banks began demanding Hwang post more collateral.

      Again, I have no direct knowledge of the details of trades or collateral agreements that anyone had with Archegos, but it is almost certainly not the case that Goldman could, even if it wanted to, suddenly just up and “demand” more collateral. The amount that Archegos would have been required to pay as collateral would have been dictated by the value of its derivative contracts, which in turn would have been determined by the price of the underlying referenced stocks. And payment of that collateral would have been required every day, not just out of the blue at the whim of Goldman et al.

      What is more likely is that Archegos was, over the course of many days, finding it increasingly difficult to post its required daily collateral, and that the drop in price caused by the sudden sale of 20 million shares that Taibbi mentions, pushed its collateral calls to a point that it could not meet. Goldman, seeing the writing on the wall sooner than anyone else, was probably the first to declare Archegos in default for failure to post collateral, and started to liquidate the hedges it had covering its derivatives exposure with Archegos. That in turn pushed the referenced equity prices down even further, causing Archegos to owe even more collateral to its other counterparties, and things just spiralled from there. In this scenario, the last of the Goldamn et al group to declare Archegos in default would have been the worst off. Goldman, being the first (but of course!), was the least hurt.

      (As an aside, and as something that Taibbi didn’t consider but surely would have mentioned had he thought of it, it is also possible that Goldman itself helped precipitate Archegos’s collapse if, in seeing the writing on the wall first, it not only unloaded its own hedges, but then even carried on selling those stocks short, helping to push the price even further against Archegos but putting itself in a position to reap the rewards when everyone else finally realized that Archegos was in trouble and had to dump their own hedges at even lower prices. This would have helped Goldman keep its losses to an “immaterial” amount, and is an entirely plausible conspiracy theory worthy of Taibbi.)

      It is also worth pointing out that Taibbi paints Archegos’s use of derivatives to bet on equities as a way to “evade” SEC reporting requirements for equity investments. But that betrays a fundamental misunderstanding of the purpose of the relevant SEC regulation. In fact those reporting requirements exist not to provide transparency around exposure to movement in stock prices, but rather to provide transparency around the degree to which any given investor is gaining a controlling interest in a public company, especially with regard to potential corporate takeovers. Specifically, they were enacted so as to provide a signal to “every large, rapid aggregation or accumulation of securities, regardless of technique employed, which might represent a potential shift in corporate control.” TRS/CFD contracts do not give or enable anyone to gain any corporate control at all of the referenced company, so there is no reason to think that they ought to be reported under those regulations. It is just wrong to claim that erivatives are allowing anyone to “evade” SEC regulations. Indeed, it was Goldman et al that, by hedging their Archegos positions, would have actually been accruing larger and larger equity stakes in these companies, and would have had to report those stakes. Which is presumably why, as Taibbi quotes someone saying, they should not have been surprised that Archegos was doing the same thing with lots of other places, because “they could see each other’s increasing holdings.”

      Taibbi also claims that “some analysts think the total loss in market value due just to this episode might ultimately be as big as $100 billion”, with a helpful link to a Bloomberg article ostensibly substantiating the claim. But if you click on the link you will find that the reference to $100 billion was talking about the total value of Archegos’s positions, not the market loss on those positions. That Archegos had positions with a market value of $100 billion does not imply that its collapse will produce a market loss of that entire value. Indeed, it would be absurd to say such a thing. If positions with a market value of $100bn held by a firm with $10bn in capital suddenly dropped to, say, $80bn, the firm itself would have lost all its capital and be wiped out, but the net loss to the market would still only be $10bn ($20bn – $10bn in capital). Archegos’s positions did not drop to zero. They just dropped below the point at which their capital could sustain the loss.

      Which brings me back to my original point, namely that Taibbi’s misdiagnosis of the 2008 crisis leads him astray here. The 2008 financial crisis was not triggered by demon derivatives. It was triggered by the fact that every bank in the world, big and small, was making the same irrational bet that real estate values could not drop. When they did, it created a crisis. So even if the Archegos losses were sustained on the back of derivatives contracts, it isn’t just a replay of 2008. Bank losses on the Archegos contracts were, ultimately, credit losses. And while it may have been stupid of these banks to take a view on Archegos credit without knowing/understanding all the risks Archegos was taking on at other institutions, the stupidity was a) not systemic across the entire banking system (as it was in 2008) and b) the credit risks were ultimately well within the ability of the banks to sustain, even if it was painful, as evidenced by the fact that none of the individual banks, much less the financial system as a whole, are actually at any risk of collapsing as a result.


      • That was a superb presentation, Scott. I really appreciated it. It left me wondering about the economic utility, if any, of Contracts for Difference. They are banned now, correct?


        • Mark:

          Thanks. My expertise is in fixed income derivatives, so I have to confess that I don’t know all the ins and outs of equity derivatives, especially regarding US regulation, so I may not have this exactly right. My understanding is that CFDs are not allowed in the US, but that equity swaps and TRS are. The only difference from what I understand is that CFD’s are a straight, single payment bet, while equity swaps/TRS contain two legs, one pay one receive. They are structured differently, but basically amount to the same thing, so I can’t say I understand why CFDs are not allowed.


      • 2008 happened because we had a residential real estate bubble. Not because we had CDO-squareds.

        Residential housing bubbles are the Hurricane Katrinas of economies, and as Japan, China, and Norway can attest they can happen without derivatives.

        The government let itself off the hook by not asking why we had a bubble.


        • Brent:

          The government let itself off the hook by not asking why we had a bubble.



      • Suggestion – If you have actually subscribed to Taibbi, leave this as a comment for him.


        • jnc:

          Suggestion – If you have actually subscribed to Taibbi, leave this as a comment for him.

          Yeah, in fact I did do that a few hours ago. After I posted here I noticed he had a comments section, so I broke it down into several different comments and altered a few lines, but essentially copied and pasted it there.


        • Looks like a couple of the other informed commentators made the same point you did about the SEC regulations being about takeovers, not swaps.


      • BTW, this is great and informative! Could have been a blog post on its own!

        That being said, did you see signs of the real estate bubble ahead of 2008? Were you saying to yourself: this is going to explode? I’m assuming Brent did! 😀


        • I had a Bernard Baruch moment in 2006 when I moved to the suburbs and bought a car. The car salesman was basically putting down deposits in the new Trump building in Stamford CT with the hope of selling them to someone who wanted to buy an apartment there.

          Two years later, I think the Trump building was maybe 75% vacant.


        • KW:

          That being said, did you see signs of the real estate bubble ahead of 2008? Were you saying to yourself: this is going to explode?

          Unfortunately not. I bought a house in July of 2006 in CT. Look at any graph of the housing market and I am pretty sure the peak of the graph will be, you guessed it, July 2006. Got crushed. I was dumb.


        • My very good friend of 52 years standing who is both an MAI and REA certified appraiser is the only person in my circle of acquaintances who saw this coming – beginning in 2006! He would report to our Monday night men’s group meetings that pricing was growing unreasonably and that banks were pressuring appraisers for higher valuations. As this accelerated through 2007 he quit appraising for banks and concentrated on farm and ranch valuations for estates [where conservative appraisals were appreciated]. He told us in 2007 that it was not just Austin and that his whole profession was being asked to invent numbers based on a speculative bubble, and that it would burst.

          I do believe that fundamentally Brent is correct that the residential real estate bubble was the cause. I also think the effect was exacerbated by tertiary derivative trades [bets based on unsecured high flying valuations] as opposed to traditional Fannie Mae MBSes. As in the game of musical chairs, someone had to come up empty when the bubble burst, and it was the financial institutions that were under capitalized for the volume of bets. Thus the collapse was deeper and wider than it could have been. Correct?


        • Mark:

          Thus the collapse was deeper and wider than it could have been. Correct?

          If you are talking about the collapse of the housing market, no, it isn’t correct. Derivatives contracts had literally no impact on either the creation or bursting of the housing market bubble.

          Think of it this way…suppose you and I make a bet with each other over the future value of your next door neighbor’s house. We agree on a base value today, and we agree that at the end of every month for the next 5 years, an assessor will give us a valuation of the house, and if it has gone up from the previous month, you will pay me the amount it has increased, and if it has gone down, I will pay you the amount it has decreased. This is essentially a derivative contract.

          Do you think that the mere fact of our contract, our bet alone, has any impact at all on the valuation of your neighbor’s house? No, it won’t, because neither of us is adding to or taking away from the pool of money chasing real estate.

          Now imagine that we make the same bet with each other on every house in your town. And imagine further that I have made the exact same bets not just with you, but with 200 other people. Still, those bets will have no impact whatsoever on the actual valuation of all the houses that have been bet on. Because the existence of those bets does not add or take away one single dollar to/from the actual housing market, chasing property and driving up or pushing down values.

          Now, if and when the housing bubble does finally collapse, it is going to be a huge problem for me, because I have leveraged up my exposure to the housing market by making the same bet with everyone, all without ever actually buying any property. And I may end up defaulting on my obligations to you and everyone else because I don’t have the capital to pay out. But that doesn’t mean that my bets have either helped create the bubble or made the collapse deeper than it otherwise would have been. Indeed, there is no mechanism by which my bets could have done either.


        • Mark:

          BTW, just to be clear, the derivatives that were relevant during the 2008 crisis were not explicit bets on housing valuations like the hypothetical bets I described above. They were instead bets on the credit quality of residential mortgages. But the point is the same. Just as in our hypothetical bet, there was no mechanism by which these bets could have effected the actual market for residential mortgages. They weren’t actually providing or withdrawing credit to/from anyone. They were simply bets on how well the credit that was already being provided would perform.


        • Would the pressure to assess stuff at higher prices come from sectors who would profit from prices going up? Or would the number of people placing bets on prices going up impact that upwards pressure? I honestly don’t know but I can see why lay persons would suspect those betting on prices going up might influence the market at some point.

          Would also guess that it might encourage lower quality loans (that then get bundled and securitized). So I don’t know how connected all that was to the bubble but I get why folks would feel it had some relationship.


        • KW:

          Or would the number of people placing bets on prices going up impact that upwards pressure?

          There are two sides to every derivatives contract. For every person who bets that prices will go up, there is someone else betting that prices will go down. Besides which, there is no mechanism by which the bet itself can pressure the market for the underlying asset. Only actual buying/selling can do that.

          Would also guess that it might encourage lower quality loans (that then get bundled and securitized).

          Derivatives can always be (and only be) written on already existing loans. You don’t need new loans to make a derivs contract. The demand for bundled and securitized loans, ie the actual assets themselves, might encourage both lower quality loans and higher assessed values. But not derivatives contracts.


        • That was my take as well Mark. Leverage wasn’t the cause, but it made it worse. Also the inability to figure out who owned what made it harder to liquidate. See all the problems with actually executing foreclosures if the servicers couldn’t prove ownership.

          Steve Pearlstein was the only person I remember in the MSM going on about this realtively early.


        • jnc:

          Also the inability to figure out who owned what made it harder to liquidate.

          This had nothing to do with derivatives or leverage. As I pointed out in my Taibbi comment, derivatives don’t involve ownership of the referenced asset.

          I think the problem you are talking about derived from the structure involved in packaging and securitizing loans in the form of Mortgage Backed Securities (MBS) and Collateralized Debt Obligations (CDO), and specifically the selling of them to investors in ratings-related tranches. But again, those had nothing to do with derivatives (although derivatives were indeed written either referencing or mimicking such MBS/CDOs).


        • Investors in MBS were done in by one important assumption, that diversification would bail them out.

          The figured you might see declines in some states, but not all. And that is where it all went wrong.

          People got careless about credit because they thought the collateral would keep increasing in value, or at least hold steady.

          We had seen real estate declines before, especially in TX in the 1980s, but the rest of the country was fine, and MBS performed ok.

          But, if you had not securitized these loans and left them on the balance sheets of the banks, you would have had the same result.

          This is what Taibbi (and most of the financial press) cannot understand about derivatives: conservation of risk. Risk is not created nor destroyed by derivatives; it is just transferred.


        • “If you are talking about the collapse of the housing market, no, it isn’t correct. Derivatives contracts had literally no impact on either the creation or bursting of the housing market bubble.”

          No, I’m referencing the perceived need to bail out the banks as a result of said collapse.

          One other Taibbi commentator noted that difference, namely that with Archegos there’s no indication whatsoever that the Fed would even contemplate a bailout. Losses are actually being taken this time.


        • I think another problem with this whole discussion is that CDOs, which did help inflate the housing bubble and are often pointed to as a contributing factor in the 2008 crisis, are usually described as “derivatives”, but this is deceptive. CDOs are actual assets. If you invest in a CDO, you become the actual owner of a bunch of collateralized loans that have been bundled together. You don’t just have a side bet with someone on how well those loans will perform. You have to buy the CDO with hard cash up front, and you actually own the loans.

          But recall that one of the primary criticisms of derivatives more broadly is that they allow someone to leverage up their exposure to some particular type of risk. In my hypothetical bet with Mark, I was able to amass large exposure to the housing market by many multiples, without ever having to put the money down to actually buy any housing. But that is not the case with CDOs. Again, when you invest in a CDO, you are plonking down actual cash, and you actually own the asset (the collateralized loans bundle). There is no leveraging going on.

          Now, there are ways to leverage CDO exposure, and that is by using credit default swaps (CDS) to create what are called synthetic CDOs. A credit default swap is essentially a form of insurance, in which the buyer “swaps” a regular fixed payment to the seller in exchange for the promise of the seller to pay out a stipulated default amount should the underlying referenced credit ever default. If the underlying referenced credit is a bunch of packaged mortgages, it essentially mimics the performance of a CDO, but without having to have actually invested any money up front. If you have ever watched or read The Big Short, this is what those guys were doing in order to essentially short the housing market. The Big Short guys were buying CDS.

          And to put the value of the derivative bets vs losses in actual housing market loans in some perspective, Michael Burry (played by Christian Bale in the movie), who was the first person to recognize the bubble and, as far as I know, made more than anyone out of shorting the market via derivatives, made $2.7 billion. That means that whoever was on the other side of those derivatives lost that much. The TARP bailout of Fannie Mae and Freddie Mac, both of which lost their money simply underwriting bad mortgage loans and had nothing to do with writing CDS, came to $190 billion.

          AIG, who was the primary writer of CDS insurance and the poster boy for bad derivatives exposure, ended up getting $68 billion in TARP funds. But, while it is impossible to know the precise ratio, it is likely that most of AIG’s CDS exposure came from writing insurance to people who had actually invested in CDOs and were simply using CDS to hedge their exposures, rather than (as Michael Burry did) using it to create an outright short position. In other words, most of the exposures that AIG ended up with already existed, and just happened to end up on their balance sheet rather than somewhere else because they were writing the insurance. Which is one of the main reasons the Fed was worried about a cascading credit event if AIG failed.

          BTW, as an aside, wholly apart from AIG’s derivatives CDS exposure, and probably at least as relevant to its ultimate need for a bailout, is that in search of greater yield, it had placed a large portion of its cash into those same illiquid MBS that it was writing insurance on. When the housing market collapsed and the loans started to default, not only was AIG losing money on the investment, but it couldn’t even liquidate to get out whatever value was still in them, because there was no market for them anymore.


        • I was referring to swaps as derivatives and I thought I recalled that there were swaps on swaps so to speak, or secondary and tertiary derivatives, all non collateralized. Yes, I understand that the housing bubble was not affected by the swaps, but the financial markets collapse was wider than a confined real estate bust in the USA, it engulfed the interdependent world markets.

          Commercial banks seemed to believe that home prices would rise forever, just like S&Ls did in Texas in 1983, but in Florida and Las Vegas and AZ and other places as well, and actually less so in Texas in 2007, so what my friend was seeing in cenTex in 2006 must have been much worse in FL, for example.


        • I do come back to wondering what economic purpose non-collaterized swaps serve? They do not bring more funds into investing in businesses or savings and seem just like racetrack gambling.


        • Mark:

          I do come back to wondering what economic purpose non-collaterized swaps serve?

          They provide corporations with easy and effective ways to manage the economic risks inherent in their businesses.

          For example, in my business, fixed income derivatives, we provide interest rate swaps and options to companies, infrastructure projects, real estate vehicles, etc on a non-collateralized basis to help them manage their risks associated with funding operations.

          Commodity swaps allow companies like airlines to manage their exposures to things like oil prices.

          Currency swaps (also something we do) help international corporations manage the currency risks inherent in having income streams and funding in one currency and expenses in another.

          Virtually all derivatives were originally created in order to enable businesses to manage the various financial risks they face in the course of running their business. And by “manage” what that means is to transfer that risk to someone else who is in a better position to hedge/manage it. That is what derivatives do, and is precisely what Brent was talking about when he said “Risk is not created nor destroyed by derivatives; it is just transferred.”


        • @Brent and Scott:

          That is helpful. Thanks.


        • Mark:

          That is helpful.

          One thing I think I should be more clear about, which you may have picked up on already, but just in case…

          You asked about what kind of economic purpose these derivatives serve, and I hope it is clear that they are a vital risk management tool for corporations to use to manage the financial risks inherent in their operations. However, what should also be clear (and I didn’t say it explicitly) is that the very same swap that can be used to hedge/mitigate risk that is inherent to your normal operations can also be used to take on risk if that risk is not already inherent to your normal operations. In other words, swaps can be used to both speculate and to hedge.


        • Mark:

          I thought I recalled that there were swaps on swaps so to speak, or secondary and tertiary derivatives, all non collateralized.

          I genuinely don’t know what that could be, swaps on swaps. All I can think is that it refers to synthetic CDOs. That is, if you classify a CDO as a derivative, then a synthetic CDO might be called a secondary derivative, or a derivative on a derivative.

          And I suppose that some of them may have been uncollateralized, but to be honest it was the obligation to post collateral that actually precipitated the immediate liquidity crisis 2008. AIG is the perfect example. AIG’s problem wasn’t that all the referenced mortgages referenced in its CDS contracts had suddenly defaulted and it had to pay out on the contracts all at once. It’s problem was that the securities it had written insurance on were all getting downgraded, meaning that the mark-to-market of its CDS were growing increasingly negative, causing it to have to post more and more collateral. Without having to post collateral, whatever losses that were embedded into its CDS contracts would have been realized over the course 20 or 30 years. But because it had to post collateral on the MTM value, it basically had to come up with the cash to cover those losses immediately. And worse, because the market for the securities had essentially disappeared, any attempt to find a price for them in order to mark them to market was always going to result in a much lower value than the actual fair value, causing them to post even more collateral than they should have had to post. Had they not had to post collateral, they would have been able to hold out without a bailout for much longer, and perhaps wouldn’t have needed it at all. At least not with regard to their CDS contracts.


        • I do come back to wondering what economic purpose non-collaterized swaps serve?

          There was a lot of demand from hedge funds who wanted to either hedge a portfolio of loans or speculate on falling prices. There was more demand to buy protection than sell protection.

          From AIG’s perspective, selling protection was a synthetic way of being long the bond. Mechanically, it is the same as a leveraged position in bond. If they simply held the difference between the up-front premium and notional in cash, it would have been no different.


        • Thanks for taking the time to do these write ups. Very informative.


        • jnc:

          Thanks for taking the time to do these write ups.

          More than happy to do it. I just hope I am making things clearer rather than more confused. Since I swim in this stuff every day, a lot of things seem obvious to me that may not be to an outside observer.


        • They are not obvious to an outside observer but you explain them well.


  1. I was going over a company conference call where the company spent a couple minutes talking about all of its ESG do-goody things, and then complain about the new tax bill.

    All I could think was “serves you right for thinking you could appease the left”



    Basecamp decides their main business is no longer woke politics and forbids political discussions on company communications channels. Also ends benefits and incentive programs designed to make employees better/woker people. A good sign.

    Apparently the 1/3rd of employees who were trying to turn Basecamp into a company that was all about woke—and not the things that made money—quit. Ultimately I think that’s a positive as now they can hire people who want to work on the products rather than spend the day fretting over social justice issues.

    I note a lot of “head of x” people quit—and were offered severance packages to do so.

    So while the exodus is being painted as a bad thing for basecamp I’m wondering if a lot of these folks weren’t people they kind of wanted to get rid of.


    • Wow. That’s a major return of sanity.

      Although, they probably should never have had a “funny names for customers” thread in the first place.


      • They should not have—but the criticism of it should have also been based on reality. That is, it’s a bad idea to do something like that that might get back to customers, and keeping such a list is really not profit generating so … the correct response is “hah that’s funny now stop doing this and delete it. And get back to work!”


      • That didn’t last long:


        • From the Verge article:

          Meanwhile, employees at those companies have recoiled at what appear to be transparent efforts to prevent their workplaces from becoming more diverse, equitable, and inclusive.

          A pretty clear indication that “diversity, equity and inclusion” means nothing more than unquestioning acceptance of the claim that “white supremacy” rules everywhere and everything. To deny it is to demonstrate it. Amazing.

          We are quickly falling into an anti-rational, anti-enlightenment age.


        • Sort of proves their point that allowing political debates in your company doesn’t make things better. And they don’t seem to be interested in changing the policy. Although they also don’t seem to be great managers.


        • “Although they also don’t seem to be great managers.”

          Example one is providing no strings attached 6 months severance for anyone who wants to quit (not get laid off or downsized) so that all the employees with an axe to grind can get paid and then go out and bad mouth the company, on the record.

          That money should have been spent for retention bonuses for those who didn’t quit and now have to pick up all the extra work to get through the fall out.

          I think one of the best decisions I made was to veto bringing this software into our organization at the start of the pandemic. It brings the toxicity of Twitter and other social media into the workplace under the guise of collaboration & communication.


  3. Another thing I’ll cop to being wrong about was the need to stick with Kavanaugh’s nomination. These tactics have to be fought.


    • I agree but there needs to be more of what Greenwald is doing: calling it out. Identifying the strategy and the people doing it. Media complicity. At no point should any of it be treated seriously without hard evidence. Shit that was 30 years ago and just now is coming up should be dismissed out of hand and everyone trying to make hay with it should be called out for their cynical political attacks and misinformation.


  4. The Republicans should find this sort of shit easy to run against:


    • You would think.

      Not holding my breath.

      If it has an impact it will be because progressives are doing more and more to actively alienate everyone whose not in the cult, and so they vote for the people who seem furthest away from the cult. The GOP might benefit from that without actually doing much to make a case to the general public.


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