C

The market obviously had a very negative view of what kind of deal might be struck with the government, but Vikram Pandit managed to make a deal that was even worse than expected. Thus the absolute beating taken by the stock today.

Considering how all of Geithner's other pals appear to eat the government's lunch in broad daylight on every deal, this quote from Wall Street comes to mind:

"Guess he's giving lectures on how to lose money. Jesus Christ... if this guy owned a funeral parlor, no one would die! This turkey is totally brain-dead!"

Of course, considering that this morning I purchased more shares thinking that it had already taken the worst hit at the opening, and considering that my purchase turned out to be at or near the intra-day high, well, this quote from Wall Street comes to mind:

The public's out there throwin' darts at a board, sport... because they're sheep, and sheep get slaughtered.

some hastily assembled observations

1. A buddy of mine, who first put in my mind the idea of buying depressed bank stocks, bought some of these bank stocks himself a couple of days ago. Several times a day I get text messages or emails from him which consist of, for example, a dollar sign ("$") repeated like one hundred times, or a series of stock symbols in capital letters along with several dozen exclamation points. And yet the dude told me the other day that he planned to hold these stocks for "the long term". Which brings me to...

2. These stocks are, uh, what you might call extremely volatile. Citigroup, for example, routinely vacillates -- over the course of a single day -- between being up by as much as 30%, then down by as much as 30%, etc. Check out the 5 day chart. It literally looks like a line drawing of a roller coaster that you'd be too afraid to ride on.

3. A commenter in the thread below notes that JPM may be a better long-term investment than Citi. This may be right. I picked Citi only because the share price was the lowest of the major banks, and therefore carries the greatest opportunity for big short(ish) term multiples (while also, of course, being the riskiest of the lot in terms of its likelihood of going to zero at any time).

4. I don't know much about Bobby Jindal. And I didn't watch his speech the other night, but all the accounts I have seen -- including among Republicans -- have been uniformly negative. I don't know how this guy got elected to office in Louisiana (of all places), but I think Republicans ought to be careful making this guy into some kind of standard-bearer for the simple reason that the average Wise County redneck (representative of the Republican "base") probably takes one look at him and says "So I guess the Republicans done gone and got them a darky Secret Muzzlum Terrist theirownselves. WTF is this world coming to?!", and immediately goes to the local pawn shop where they then convert their remaining worldy assets (beer can collection? NASCAR memorabilia?) into guns and ammunition for use in the impending race war.

place your bets

So, yeah, I've been railing about the government giving free money to poorly-run banks in order to prop them up so that their shareholders don't lose their investments. Now, I'm thinking it is time to quit swimming against the tide and just, well, become one of those shareholders.

Especially now that Citigroup is trading around $2.00. It closed today at $2.15. On Friday it was as low as $1.68. This stock is trading at a low price because the market believes the the company may be insolvent. But the recent dip over the last few days is because the market fears that a takeover by government regulators may be imminent. This may be true. Despite many opportunities to do so, the Obama administration has not denied that this is its intention.

Sure, they've made some statements which were intended to downplay this possiblity, but they have all amounted to non-denial denials. For example, here is WH spokesperson Robert Gibbs today: "The president believes that a privately held banking system regulated by the federal government is the best way to go". Well... duh. No one has ever suggested that the country would have anything other than a "privately held banking system". But the FDIC takes over banks in the general course of its operation. It happens rather frequently these days. They come in, seize the bank, and undertake an orderly sell-off of its assets while making good its FDIC-insured liabilities. You might refer to this as "nationalization" of the target bank. But the more usual term is "receivership".

The point is, this is not unusual. What is unusual is for this to happen to a huge institution like Citi or Bank of America. These are companies with lots of political clout and large, influential shareholders. So, rather than treating these banks like HomeTown Bank Inc., the government instead writes 45 Billion dollar checks to them (as with Citi and BoA) while taking in return something called "preferred stock". Preferred stock is somewhat of a hybrid between a bond and a share of common stock, but basically it is a form of note.

In any event, the Treasury department is about to embark on the process of conducting "stress tests" on the 20 largest banks, presumably (because they don't exactly say this) to determine which banks are solvent (and therefore worthy of receiving continued government largesse) or insolvent (and therefore not worthy but rather soon-to-be victims of "nationalization"). The difference between these two possiblities is not as clear cut as it might at first seem. Because, on the one hand, with the "continued largesse" approach, the government may still insist on an equity stake, which will dilute existing shareholders, and might further insist on changes in management, or restrictions on what actions may be taken by management -- essentially acting as a heavy-handed "activist shareholder". And on the other hand, even the "nationalization" approach might not entirely wipe out existing shareholders, and some or all of the existing management might be allowed to remain in place, and the government would surely seek to re-privatize rather quickly whatever parts of the company remain. Which is all to say that there is a wide continuum of various actions which the government might take depending on the results of the stress test, the creativity of those in charge of the process, and, of course, the political considerations involved.

But I said all that to say this: within the last eighteen months Citigroup was trading above $50. Now its at $2. Of course, since it was trading at $50 we've learned lots of bad things about this company. No one knows how much liability it has, but the concensus is: a lot. But even after all the misfortunes came to light in September, the company was still trading at a much higher share price than it is now. On October 1, it was at $23. On November 4 it was above $14.50. It's December high was above $8, and just last month it was still over $7.

And although the government may well take the drastic step of "nationalizing" Citi and zeroing out existing shareholders, there is a significant chance this won't happen. If the government takes some other action (in the best case scenario, leaving the company essentially as-is and giving it lots of free money; in the scenario now being discussed, taking a 40% equity stake and giving the company lots of free money), it is a certainty that the stock will quickly go higher (because the current price reflects the market's nationalization fears -- in financial pundit speak, this is "baked in the cake"). And at the current price, any significant upward move would be a huge gain. For instance, if you buy the stock at $2 and get a favorable government outcome in the next couple of weeks, you might reasonably expect the stock to go back up to its December high of $8 soon thereafter, which would represent a 400% gain in a matter of a few weeks.

This type of risk is something that large institutional investors are highly averse to. For someone like me (a frequenter of casions), it might represent the opportunity to purchase that M3 I've had my eye on.*

*Just kidding. I may be a gambler, but I'm not a degenerate.

atomic wing fail

I got lunch from Wingstop today. Mixed in with my order of the "Original Hot" flavor, I got some that were the "Atomic" flavor. These are awful. I can't imagine why anyone would eat them except under some type of extreme coercion.

I like hot spicy foods. I enjoy eating jalapenos, and I put Tabasco sauce on everything it remotely goes with. So I'm not a pussy about this stuff.

But after three bites of these Atomic wings, my face and head and most of my upper body were covered in sweat. My mouth was completely numb, my nose was running freely, and my throat was sort of locked up in a weird way I can't really describe. This is my body telling me that it has just been poisoned and that I should immediately stop ingesting this substance.

Relatedly, I watched a few episodes recently of a show called "Man Vs. Food". This is a show with a guy that travels around the country, eating at a bunch of local restaurants (usually hole-in-the-wall type places, but sometimes semi-famous places like the Salt Lick in Austin). He will go in the kitchen and have the owner or the cooks show how they make their specialties, then he will stuff them (the specialties) in his mouth and say how good they are. But then for the last part of the episode he will always do an "eating challenge" type of thing, which would be where a restaraunt has a standing challenge for people to eat some huge portion of food (like a hamburger that's a foot in diameter, or 15 dozen raw oysters). But sometimes the challenge he does is eating something really hot. Like this one place in NYC he ate what was supposedly the hottest curry in the world (the cook wore a gas mask while he made it). The dude was sweating so hard while was eating it, and then he accidently mopped the sweat off of his face with the napkin he had been wiping his mouth with, and the guy like practically had a seizure and these big welts popped up all over his face. He finished the curry though. At the end it looked like he was suffering from radiation sickness.

Not sure what the point of this was supposed to be... but I've had this tab open on my browser for what seems like several weeks now. It is a site that sells hot sauce. This page has a scale that shows how hot they are on something called the Scoville Heat Index. The hottest variety of Jalapeno is rated at 5000. But this site sells a sauce that is rated at 16,000,000. Presumably this is intended for use in military applications rather than in any kind of food preparation.

see, there, where it says "eternal hostility"?

It means what it says. So... while I'll surely give due approbation to Obama when he does good, I'm not going to stop being hostile to doing bad just because he's the one doing it. Let's just hope there's more of the former than of the latter.

Case in point: "In his first troop deployment to a war zone as commander in chief, President Barack Obama on Tuesday authorized sending as many as 17,500 additional troops to Afghanistan beginning this spring..."

Now, I haven't studied the Afghanistan situation enough to have an opinion as to whether this is prudent or necessary. I will just note that: (1) pouring troops and other military resources into this particular piece of real estate didn't work out all that well for the Soviets, and (2) though the part of the quoted sentence above represented by the ellipsis reads "a move that appears to mark the formal U.S. troop shift from Iraq to Afghanistan", the fact is that Obama has yet to pull any troops out of Iraq, and though he has confirmed his intention to do so, he has yet to announce any specific plans for getting out -- despite having had 3+ months to develop such a plan.

Ok, though, he's been in office less than a month and I don't really have a strong view yet on the general concept of this escalation.

But: if you read further down in the article you see this: "The Marines and soldiers will be deployed to southern Afghanistan, where U.S. forces are expanding to take on the poppy trade there..." Seriously? Is this really what they plan to use this deployment for? To kill plants? WTF?

On second thought though, this kind of thing has been very effective in Latin America, where it has drastically reduced violence and put a huge dent in the drug trade.

Oh, wait, sorry. I meant to say that this kind of thing has been massively counterproductive in Latin America, where it has drastically increased violence and has had no discernible effect on the drug trade:

Latin America ex-leaders urge reform of U.S. drug war

Former Colombian President Cesar Gaviria said there was no meaningful debate over drugs policy in the United States, despite a broad consensus that current policies had failed.
[...]
Gaviria has joined with former Brazilian President Fernando Henrique Cardoso and former Mexican President Ernesto Zedillo to try to change the debate on drugs in Latin America, where trafficking gangs have killed tens of thousands of people and weakened democracies through corruption.
[...]
They pointed to falling street prices for cocaine and still high levels of consumption in the United States despite decades of policies focused on punishing users and cutting supplies from Latin American countries such as Colombia.
[...]
Organized crime has flourished around drugs and is now threatening the stability of Mexico, where a spiraling war between rival gangs killed more than 5,700 people last year.
[...]
Despite winning power on broad promises of change, drugs policy featured little in U.S. President Barack Obama's election campaign and there are few indications that he will embark on a major overhaul.

Sigh.

Public Enemy #1: Michael Phelps

I'm a bit late to this story, mostly because its lessons seem too obvious: (1) Michael Phelps is a 23 year old who makes his living by swimming in a pool, a set of facts which makes it barely credible that anyone could be surprised that he would take the occasional bong hit, (2) responsible marijuana use is not harmful -- and certainly not debilitating -- as evidenced by the fact that a user can be the most successful athlete in the 100+ year history of the Olympics, (3) it is a colossal waste of resources to investigate and punish marijuana users, and (4) marijuana should be legal.

Obvious, right? Well, not to everyone, apparently:

1. Not obvious to George Vescey, who utilizes his valuable real estate at the New York Times to condemn Michael Phelps, do a bit of name-calling (Phelps is "callow", "dopey", "gangly", and "uneducated"), suggest some additional punishments, and generally act like a self-righteous asshole spewing trite moralisms about pot-smoking before leaving his desk and heading out to the local tavern where he undoubtedly will soak his internal organs in gin and fill his lungs with tobacco smoke.

2. Not obvious to Kellogg, which terminated Phelps' endorsement deal, saying Phelps' actions are "not consistent with the image of Kellogg." Ah yes, the "image of Kellogg". This would be a company founded by a person who campaigned for racial segregation and argued that children should be prevented from masturbating by various forms of torture, including (for boys) affixing "patented cages" around their genitals and (for girls) pouring acid on the clitoris.

3. Not obvious to USA Swimming, which suspended Phelps for 3 months and issued a pompous statement in which it chided him for his irresponsibility and sternly ordered him to "earn back our trust." Please. You asshats run a fucking swimming federation. Keep the algae out of the pools and shut the fuck up.

4. Not obvious to Michael Phelps himself, because he capitulated to all of this bullying by issuing a fake apology and acted oh-so-remorseful for his tragic (Tragic!) lapse in judgment. C'mon, Mike! Show a little backbone, dude.

5. And above all, not obvious to a man named Leon Lott. Mr. Lott is the sheriff of the county where Michael Phelps took the bong hit. He has now issued a fatwah against Phelps and all the local college stoners. In the ensuing jihad to make the world safe for clean-living folks everywhere (with the small side benefit of making himself a national media celebrity), he has ordered his swat team to go around, weapons drawn, kicking down doors and seizing "small amounts of marijuana" from hungover college students in the midst of putting for eagle on the Xbox version of Tiger Woods PGA Tour 2008.

Here's Sheriff Lott, posing with his posse of drug warriors, after conning some federal bureaucrat into funneling several million dollars to finance his Miami Vice fantasies:


Yes, that is an armored personnel carrier with a belt-fed 50 caliber machine gun. Quite appropriate for use in assaults against mortar emplacements or a column of Taliban insurgents. Or, you know, a small-time pot dealer sitting on his couch watching The Price is Right.

Oh, and here's Sheriff Lott posing in his Don Johnson get-up with a Porsche that he confiscated to use as his personal vehicle:


This guy is a piece of work. According to the local newsrag: "Dirty Harry and Sonny Crockett were personas Lott once wore with relish during high-flying days when he drove seized Porsches, sported an 18-carat Rolex, worked choice undercover cases with federal agents in Florida and postured for cameras." There's apparently a long history of Sherrif Lott abusing his position in a similar fashion, including:

a blistering order from a federal judge over the seizure of a new, black BMW convertible during a drug bust.

Judge Clyde Hamilton ordered the car returned to its owner and blasted the U.S. Attorney's office, the FBI and then-Capt. Lott of the sheriff's office. The judge cited "many irregularities" and "questionable motivations" for taking the BMW.

"Captain Lott's testimony raised the possibility that he had sought forfeiture ... for an improper purpose, specifically to serve as his private vehicle," the judge's ruling said. It appeared, Hamilton said, that Lott wanted to drive the care to the FBI Academy in Quantico, Va.

In law school we learned about this type of thing: our professors called it "grand theft", "armed robbery", or "carjacking"; I believe it is normally a serious felony -- unless, I guess, you are a police officer, in which case it is evidence of being a "tough-on-crime" do-gooder -- a valiant and courageous protector of the American way of life.

In Opposition to Alliance with The Cylon Menace

In Why Tom Zarek Was Right, a blogger at Lawyers, Guns, and Money writes "a Letter to the Editor from "Concerned Colonial Citizen", regarding the prospects of a permanent alliance between the Colonial government and the rebel Cylon."

*Spoilers follow*

Clearly there are some aspects of the rebellion initiated by Gaeta and Zarek that I cannot support -- most particularly the cold-blooded murder of The Quorum. This was a bit, er, precipitous, if not wholly unnecessary. From a strategic point of view, the rebellion's security measures leave quite a lot to be desired.

But aside from issues pertaining to the rebellion's specific tactics, I find myself with a substantial degree of sympathy for its broader goals. First, let me associate myself with Item #4 of the blogger's reasons for spurning an alliance:

The Cylon are mass murderers
Four years ago, the Cylon massacred many billions of humans. They rounded up many of the surviving humans and created rape factories on an industrial scale. They pursued remaining survivors in an effort to complete the genocide. After a change in policy, they essentially enslaved the remnant of humanity under their "benevolent" despotism.

It was not fathers or grandfathers of the Cylon who committed these acts. These atrocities were not committed ages ago. These atrocities were not committed by rogue elements; there is no such thing as a Cylon civilian. The Cylons that propose, today, to become Colonial citizens were, just short time ago, planning and executing the almost complete annihilation of humanity. There is no conception of justice that can bear the introduction of these creatures into our society. The "Final Five" excepted, they are each and every one butchers; to excuse them their crimes would render the murders they carried out meaningless. It would destroy the fundamental tenets of our civilization. If we recognize that the rebel Cylon have civil rights, then they surely have civic responsibilities; as such, each and every one of them should fall under the authority of a war crimes tribunal, under accusation of genocide. Somehow, I suspect that these Cylon are not prepared for that degree of integration with Colonial society. If they cannot bear the responsibilities, then they do not deserve the rights.

Just so. Furthermore, Admiral Adama is a heavy-handed autocrat, who has consistently shown a willingness to usurp power from the lawfully constituted civilian authority of the Colonies. He was complicit in fixing an election. He has routinely used a personal, sexual relationship for purposes of arrogating authority and power to himself and away from the citizenry. In short, he sees the non-military Colonial governing establishment not as a power to which he is obliged to give due deference, but as a mere facade -- a propagandistic public relations strategy; a sham, in other words -- to be used to assuage legitimate public fears that Colonial citizens are not a sovereign body from which the power of the government is derived but rather subjects in a military dictatorship.

Also... the President is an annoying bitch whose every word fills me with loathing. I hate that the series has now seemed to make a hero out of what she has become. Didn't she go off her meds and shouldn't she be dying of cancer very very soon?

Infinite un-Jest

I highly recommend this book. It's a book that David Foster Wallace might have written had he not been an insane person. It's been a while since I read Anna Karenina, but aside from the modernist style (or is it post-modern), that's what it reminded me of. Or maybe War and Peace with 400 less pages, if the 400 pages you cut were the ones dealing with peasants and Napoleon.

Wikipedia tells me that the author publicly snubbed Oprah, causing her to disinvite him from her show and remove the book from her book club reading list (a circumstance that, I'm sure, delighted his publisher). If nothing else, that' s a good enough reason to buy the guy's book in my estimation.

YMMV.

Dear President Obama,

Please stop pouring taxpayer money into failing banks.

Thanks,
HHL

p.s. : Is it a good idea to take money from taxpayers and use it to prop up insolvent banks so that shareholders of these horribly mismanaged companies don't lose their investments? Isn't this an insult to these investors? Can't we afford them a measure of respect by refusing to question their knowledge, sophistication, and intelligence? Isn't it disrespectful to assume that they are ignorant, or fools, or dupes? Surely investors understand that when they purchase securities there are two possibilities: gain or loss. Presumably they understand that "gain or loss" does not mean "gain". Loss, you see, is also a possible outcome. We can safely assume, I believe, here in America, in the 21st century, that persons who buy stock ("venture", "speculate", "play the market") realize that it is well within the realm of conceivable outcomes that the stock they are purchasing (yes, even a bank!) might decrease in value rather than increase, resulting in a loss, possibly even, in the worst case, a catastrophic loss. We can, surely, attribute this much intelligence and sophistication to such people, right?

p.p.s. : I once made a lot of money investing in a company that was near bankruptcy. It was called American Airlines. As news spread of its near-inevitable insolvency, its stock price tumbled to a verge-of-bankruptcy bargain. This was when I bought it. I speculated (guessed!) that three things needed to happen to save the company: (1) a renegotiation of its union contracts, (2) a forbearance from its major creditors, and (3) a loan from the government. Within two weeks the company announced that it had renegotiated its union contracts, received a forbearance from its major creditors, and accepted a (small, by today's standards) short term loan from the government. A few weeks later its stock was trading at a 6x multiple of its verge-of-bankruptcy price. If any of these three things had failed to happen, the company would be forced into bankruptcy and I would have lost my entire investment. As it happened, the company stayed afloat, the union members kept their jobs (now slightly less lucrative), its creditors were repaid with only a small haircut, the taxpayers got their money back, and everyone was better off. I bought a car. What is the moral of this story? The government should always act to prop up failing businesses. No. I'm kidding. The moral of the story is that if the unions had refused to renegotiate, if the creditors had refused to forbear, or the government had refused to bail out, I would have lost my money, and rightfully so. I would have been upset, disappointed, sad, and so forth. But I would not have been angry. I would not have considered myself a victim, I would not have cursed the government. I would have been poorer, and yet somehow better off with the knowledge that I was foolish to think that I could predict the mysterious and often apparently random workings of capital markets (or unions or creditors or governments, as the case might have been). It could have gone either way, a roll of the dice. It was pure dumb luck with only the slimmest of edges in my favor (I mean, shit, I read the newspapers, thereby becoming an expert analyst of the transportation sector? Please.). So I don't want to hear Citicorp shareholders crying about their lost money and railing against the government for not propping up a disastrously mis-managed enterprise, a company which apparently bought every worthless piece of shit contractual asset that was ever offered to it, that blew billions upon billions in overpayments to its incompetent employees, that fraudulently mis-stated the value of its earnings and its assets by a factor of, well, infinity, apparently, in order to justify even more billions in bonus payments to its fraudulently irresponsible and inept management. They used to have a word for this: embezzlement. So I don't want to hear these shareholders crying. I didn't hear a lot of crying back when the ol' 401(k) was really growing that wealth, baby! Not much crying then. But I heard a lot of speculation on how many square feet the next house would have, or which German luxury car brand would have better resale value, or how a digital projector makes a better home theater than a high-end plasma, or whether St. Bart's might be less touristy than Maui. Those were the days, huh?! That HELOC seemed like it would neeeever run out, right? Better tap the ol' credit line and buy some more bank stock, cuz that shit is just gonna keep on going up! But on second thought, I don't mind the crying. I sympathize. It sucks to lose money. It feels bad, and probably even worse when it's at least partly your own fault. I've lost a lot of money on investments myself. In the gaming sector. In a casino. At a roulette table in Vegas, with a blood alcohol concentration somewhere in the neighborhood of 0.35. Yeah it sucks. They don't bail you out there, either.