Interesting Reads – 28th Feb

This week I tried out Vilkri’s Budget Planner, which I thought was really good. I have never used a Budget Planner before so I don’t have anything for comparison, but this is certainly much better than the excel sheets I used to maintain. The primary problem with those excel sheets was that I used to lose them too often and get mixed up in multiple copies.

An online Planner will not have the same kind of problems, which brings me to the next topic of interest this week – Cloud Computing. The Intelligent Speculator has a good read about Cloud Computing, which is where I think the IT Industry is headed.

Other Interesting Reads this week:

1.  Your Retirement Savings Account: How To Avoid Tax Problems: This article has very practical and actionable tips on avoiding tax problems with respect to your retirement savings.

2. No Stimulus Check This Year – Pay Yourself First Instead by Cash Money Life: Patrick has got a series of articles on the Stimulus. Be sure to check these out (there will be a section on the right side), I don’t think anyone else has covered the stimulus in as much detail as he has.

3. The Stress of Having a Supersized Lifestyle by MoneyNing: MoneyNing gives a good example from his personal life and explains the pitfalls of having a supersized lifestyle.

4. How To Deal With a Job Loss by Moolanomy: The title says it all on this one.

5. Find Investment Opportunities in Any Business Market Environment by The Digerati Life: SVB lays out what is essentially a road map on how to deal with the current situation and at the same time prepare for times when the situation improves.

6. 20 All Time Favorite Investment Books by The Dividend Guy: This list has a got a good mix of books that will help anyone understand investments better and increase their ROI.

7. Should You Sell Your Gold or Collectibles by DDFD: With gold at all time highs – people are rushing to buy into it. Therefore it is good to stop and ask yourself this question.

8. Brokerages with Free Stock Trading by Investing School: This is a good list of brokerages that allow you free trades.

9. Understanding AGI by M is For Money: This post explains what Adjusted Gross Income means.

10. The Customer Centric Culture by MasterYourCard: Kristy talks about different people being treated differently by businesses because of the money that they are likely to spend.

Finance Carnivals:

Carnival of Investing Strategies at The Penny Daily

Money Hacks Carnival: Bailout Edition at Personal Finance Ology

Securum – Bad Bank of Sweden

Sweden had its own banking crisis in 1993 and at that time – Securum – was created. Securum was structured as an Asset Management Company, rather than a bank to give it more flexibility, but the press and media referred to it as a bank and in a lot of cases, as a “Bad Bank”.

A little history first. Nordbanken was a “too big to fail” state owned Swedish bank, which had a lot of toxic assets on its balance sheet and was considered insolvent. These assets were related to – real estate and were a result of a Sweden’s real estate bust.

Securum was created with a capital of $3.3 billion dollars of Government (taxpayer) money at that time, and took over the dud assets of Nordbanken with an aim to free up – Nordbanken to carry out regular banking activities while Securum acted as a specialized company that reorganized these dud or toxic assets, and tried and extracted maximum value out of them for the taxpayers.

When Securum took over the $8.67 billion dollars worth of Nordbanken assets, overnight, it became the largest property owner in Europe. From office space in Atlanta to hotels in UK — Securum – The Bad Bank of Sweden had it all.

It had also made Nordbanken a much healthier bank overnight and over the course of the next year – Nordbanken was successfully privatized.

Securum Success

Securum was hugely successful as it was able to keep the cost of the bail-out below 2% of GDP, and was able to return about 58% of its initial equity back to the government.

Initially, it was estimated that it would take up to 15 years for Securum to take care of all these assets but it took a significantly lower time for it to do its job.

How did Securum work?

First Securum was staffed with real estate agents, brokers and other specialists from the realty space. There were other staffers but since the majority of its assets were related to real estate, Securum had a majority of people from this sector. It had an independent board and an active management that was also staffed with professionals and not bureaucrats.

Once, it was staffed, the next thing it had to do was to value the assets on Nordbanken’s balance sheet and then buy them off from it and manage them.

Those assets were real companies and not complex derivative instruments (like US today). It then went on to classify these companies as ones that were bankrupt or ones that had a chance of operating normally.

About 70% of Securum’s companies were classified as bankrupt, and were forced into liquidation and receivership.

The other companies, ones that were deemed viable – were re-organized and sold off at a later date when their financial health recovered.

This later date was not 10 to 15 years, as it was originally expected, but a much shorter time frame of 5 years. After five years of its existence – Securum was able to perform all that it was expected to do and much more.

An American Securum?

American policy makers are urged to look at the Swedish experience to draw solutions for the current banking crisis. It is true that  this is a very good example of how a banking crisis was solved, but there are some fundamental differences that makes this approach a little difficult to take.

1. In Sweden, taxpayers were at both ends of the table: Nordbanken was a state owned bank and Securum was also a state owned company. Whereas –  American banks are privately owned. But if the government created a bad bank like Nordbanken – the taxpayers will have to take the tab of the poor decisions made by the private sector and this creates the problem of moral hazard as well.

2. Nordbanken had real assets that were easy to value: It is easier to value a hotel or an office space, than it is – to value a Mortgage Backed Security (MBS) or other such exotic derivative instruments. In some ways it is easier to liquidate real companies or assess their health, than it is to liquidate derivative instruments that form the bulk of the toxic assets today.

3. There was no Global Recession in 1993: The entire world faces the prospects of a deep and protracted recession today and the global economy needs to recover in order for an  American Securum to repay anything back to the taxpayers.


The Swedish experience can’t be taken as a template or model solution for the current situation. However, there are many important lessons there like the structure of Securum with an independent board, the swift way in which it acted etc. that can be taken to formulate a solution for the current crisis.

Take Your Pick

The Daily KOS lays out the four things that the government is trying to achieve to solve the banking crisis:

a.) lifts Big Shitpile off the balance sheets of the banks, while at the same time leaving them

b.) solvent and

c.) in the hands of private investors, without

d.) constituting a flat-out transfer of wealth from taxpayers to bank shareholders.

The clarity and brevity of these four points drive home the almost impossible mission that the plan wishes to achieve. There is no way that all these things can be done together.

You can take your pick and decide which ones you want and which ones you don’t, but getting all of those together is not possible.

I think there is no way that the tax-payers can avoid a transfer of wealth. At best – they can expect that their wealth is not transferred to bank shareholders. Which means that a lot of the bank stocks should eventually go to zero (which is where they seem to be heading).

In that case tax payer money would be used to fund new banks or old banks with new capital, but the existing shareholders will be wiped out.

The third point about keeping the banks private is a – no point for me. I don’t think anyone is interested in seeing the government run banks and the government won’t take such a step at all. They may take over banks temporarily but even they would want to – Reprivatize them as fast as possible. So I myself am not particularly worried about that.

The first two points about lifting shitloads off the balance sheet and keeping them solvent at the same time will be much easier to implement if “them” is seen as the entire banking sector and not the big banks. If the big banks are insolvent – then let them go under and smaller banks and other financial institutions take over their assets. This way even if “they” are insolvent, the banking sector as a whole will be solvent.

The FDIC insures deposits at 8,384 banks and financial institutions, surely, not all of these are bust, and there must be a lot of them who want to expand and take advantage of the current situation. The smaller players should be able to benefit from the mistakes of the big boys and be given a chance to expand.

One of the criticisms of Securum was that it was too ruthless and it got difficult to compete with it. That means that competitors who did the right things were not able to take advantage of the situation as they would have liked to, because the government interfered with the way the markets behave.

So far, in the current scenario very few bankers have complained about the government intervention, but there is at least one banker – US Bancorp CEO – Mr. Richard K Davis who has done so. So that shows that there must be more bankers who want the government to stay out of it all. Which means they are strong and healthy and hence should be allowed to take over the weaker banks or at least the some of the assets of the weak banks, and reap the benefit of their discipline in the run-away years.

I have taken my pick, its your turn now – Which do you pick?

AIG Restructuring

I was happy to read this AIG Restructuring piece in the Financial Times. AIG is expected to report a loss of 60 billion dollars this Monday. If a company that has taken government aid twice in the last six months – reports the biggest loss that any company has ever reported – then it is time to recognize that it is too big to save.

Under the plan – the government (which already controls 80% of AIG) will split AIG into three divisions and then try and sell off the individual parts.

These three pieces will be:

  1. AIG’s Asian Operations
  2. AIG’s International Life Insurance Business.
  3. US Personal Lines Business.

There can be an additional fourth unit, which holds the toxic assets and all other troubled businesses on AIG’s balance sheets.

In any such deal the government will have to take a hit on its shares and debt that it has recently issued to AIG, but at least such deals are clear to understand and promise much more than the financial accounting type of deals that were in the news – related to Citi.

The other good bit about this is that the government will be able to re-brand Bank Nationalization as Reprivatization and make the bank deals more palatable to people.

For once, I am looking forward to a Monday.

Bank Nationalization

There is a lot of talk about Nationalizing the banking sector and in general there is a lot of resentment against it.

To me, most of this is because of the connotation of the – N word, rather than the actions that are expected out of this process.

What Would Nationalization Mean?

There have been 14 Nationalizations already this year, with the FDIC taking over 14 insolvent banks and transferring their assets to stronger banks. The losses on these were shared between the FDIC and the stronger bank, and the depositors were protected by FDIC.

This is nothing new and has been happening for years now.

Typically FDIC does this over a weekend and the depositors of the old bank switch over to a new bank from a Monday. So the government doesn’t end up running a bank till eternity, but is only a temporary owner till it finds a new home for the assets of the bank.

However, the key thing this time is the size of the bigger banks. The banks that the FDIC normally deal with doesn’t exceed a few billion dollars, and rarely has operations outside United States. They usually don’t have any complex financial derivatives, currency assets, trading desks and such.

So, the Nationalization question should really be an – operational one and not a ideological one.

Even if everyone agreed that Bank Nationalization is the only alternate, could the Government do that with existing resources at hand?

Probably not.

But there is nothing that stops them from going the Sweden way and hiring professionals who deal with these derivatives, currencies etc. and augment FDIC to deal with the current situation.

Too Big to Save?

It is being harped upon repeatedly that the big banks are too big to fail, but the real question is – are they too big to save?

There is probably no single entity that can take over a 2 trillion dollar bank. The only way to deal with a – T – is to break it to a – B. This happened recently when Citi sold its retail brokerage business – Smith Barney for 2.7 billion dollars. So, it is possible, albeit, by breaking it up into smaller pieces.

Other Alternatives

There are plenty of other alternatives around, like the – Bad Bank idea based on Securum. Then there are other wackier ideas like the government pledges to buy up to twice the number of bank shares currently available, at twice the recent average prices, in five years.

Right now, the Nationalization one is doing the rounds as the most popular one and I think with a little rebranding like – Interim Nationalization or  Nationalization till Reprivatization – this may just make it through.

Citi Zooms Up as the Dow Dives

It has been a very interesting day today. A little depressing perhaps, but interesting. In the morning there was news that the US Government will convert its Citi Preferred Stock which it bought for a cool $45 billion dollars a few weeks ago into a 40% equity stake.

The total market capitalization of Citi was about $11 billion dollars today, so if you or I had – $4 billion, and wanted 40% stake in a bust bank – we could do that with only one – tenth the price the government wants to pay.

A lot of newspapers reported in the morning that this deal will not involve any additional taxpayer money – which is true, but for some reason they didn’t report that – at today’s prices, the deal can be done at – one-tenth the price.  In fairness to them, they were reporting a rumor, and did say that the stake would be between 25 and 40 percent.

The difference between Preferred Stock and Equity – is that Preferred Stock doesn’t carry voting rights, but the company needs to pay a fixed dividend on it. On the other hand, common equity stock carries voting rights but doesn’t carry any fixed dividends.

The news (or rumor?) of government buying out 40% equity stake and diluting the voting power of existing equity shareholders should have sent Citi’s stock down several percentage points, but since the government planned to buy it for much more than what it was really worth – the stock went up by 11% today.

At some point during the afternoon, Mr. Market got really somber and went down to levels it had not seen in 12 years. Dow hit 12 year lows today and saw a sudden fall towards the end of trading.

The fact that the there was a joint statement from the Fed, Treasury and other Government organizations that was really hard to decipher and vague didn’t do any good to Mr. Market’s mood.

I tried to read and understand the statement several times but I must admit – I don’t understand what the Fed means. It seems the arrangement with Citi would have shored up its capital ratios and made it appear stronger on – books of accounts.

But, how it helps to solve the problem of toxic assets or easing the credit markets – I have no idea.

Then in the evening Fed  issued another statement to the effect that a strong and resilient financial system is necessary for the economic recovery. What effect it happens on the markets – we can only find out tomorrow.

At some point after the markets closed, Reuters reported that AIG is expected to announce a fourth quarter loss of $60 billion! Its lawyers are contemplating bankruptcy, if the government doesn’t bail them out.

AIG traded at about 50 cents today and the total market capital of the company was about $1.4 billion. Just to put things in context – the government has put in $150 billion in AIG during the last few months, and it may well need to put billions more.

But if it puts more money in AIG – that will be like putting good money after bad, as 60 billion is a really really huge number and no company has made such a big loss in just three months ever.

But I’d be really surprised if the government doesn’t throw good money after bad – no one wants another Lehman at this point in time.

As interesting days go – it doesn’t get any more interesting than this, but I hope we don’t see a repeat of it any time soon. But, that may well be a hope against hope.

Cost of 14 Failed Banks in 2009

So far in 2009 – 14 banks have failed , and have been taken over by the FDIC. These banks are much smaller than Citi or Bank of America, and the latest one to fail  – Silver Falls Bank, Silverton, OR – had assets worth $131.4 million dollars.

The FDIC facilitated a purchase agreement with – Citizens Bank – who will take over the deposits of Silver Falls Bank and the depositors of Silver Falls will now bank with Citizens Bank.

The combined assets of all these failed banks amount to $6.87 billion dollars and the total losses because of these failures amount to $1.65 billion dollars.

So that means on an average, when a bank failed in 2009, the taxpayer incurred a loss of about 24% of the assets held with the bank.

Here is a list of all the 14 banks that failed in 2009 with their Assets and Cost to Federal Insurance Deposit.

S. No. Bank Name Assets Cost
1 Silver Falls Bank, Oregon $131.4 million $50 million
2 Pinnacle Bank, Beavorton, Oregon $73 million $12.1 million
3 Corn Belt Bank and Trust Company, Pittsfield, Illinois $271.8 million $100 million
4 Riverside Bank of the Gulf Coast $539 million $201.5 million
5 Sherman County Bank, Loup City, Nebraska $129.8 million $28 million
6 County Bank, Merced, California $1.7 billion $135 million
7 Alliance Bank, Culver City, California $1.14 billion $206 million
8 FirstBank Financial Services, McDonough, Georgia $337 million $111 million
9 Ocala National Bank, Ocala, Florida $223.5 million $99.6 million
10 Suburban Federal Savings Bank, Crofton, Maryland $360 million $126 million
11 MagnetBank, Salt Lake City, Utah $292.9 million $119.4 million
12 1st Centennial Bank, Redlands, California, $803.3 million $227 million
13 Bank of Clark County, Vancouver, Washington $446.5 million $145 million
14 National Bank of Commerce, Berkeley, Illinois $430.9 million $97.1 million

It will be interesting to see what the estimated cost of solving the banking crisis eventually comes out at, but I hope it is lesser than 24% than the total assets of the major big banks in the country. But looking at these numbers I think all of us should brace ourselves to see a price tag that stretches to a – T, not a – B.

Crisis of Credit Explained

I am not sure how viral this video has gone yet, but I am really sure it is going to get very popular in the next few days. This is excellent work done by Jonathan Jarvis who has made this video explaining the current crisis in easy terms with a great creative visual on his website – crisis of credit

He has allowed this video to be embedded in websites so I am using it here for our readers, but you should really watch it at his website in HD!

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Interesting Reads – 21st Feb

I guess the most interesting thing I saw or read this week was Rick Santelli’s Tea Party video at CNBC. I must admit that I feel a certain relief that someone has gone ahead and said this out loud on television.  I am sure most of you must have seen this video, but if you haven’t, go ahead and click the play button.

Here are some other great reads from the Blogosphere this week:

1. Understanding the Stimulus Bill by Richer and Slimmer: I laughed myself silly till I realized that this was what was really going on.

2. Fundamental Factors in Determining Investment Return by The Oblivious Investor: This is a post about Payouts and Predictability as two important determinants of Investment Return.

3. Consumer Debt Starts to Drop by Barel Karsen: A post that looks at the first drop in consumer debt in decades.

4. How To Use Stock Screens by The Dividend Guy: The Dividend Guy explains how he uses Stock Screens to help make investment investment decisions.

5.  Are ETFs contracting Mutual Fund – itis by Thicken My Wallet: Thicken My Wallet discusses how ETFs are complicating stuff and layering them with fees.

6. Would You Buy A New iMac Or Fund Your Emergency Fund With Your Tax Returns by The Passive Dad: The title says it all and its a thought, worth a thought.

7. Adjust your Tax Withholding by M is for Money: This post talks about how you can adjust your tax outgo and take steps to get your money upfront rather than get a fat Tax Refund.

8. Obama’s Foreclosure Bailout Plan: Should There Be Help For Homeowners: SVB asks this difficult question and you should read this post (and comments) as it has got some really interesting view points.

9. Blue Ocean Strategy by The Smarter Wallet: This is a very interesting post about Entrepreneurship and a strategy which aims at entering a market in which there is no competition.

10. 2009 Stimulus – Education and Benefits by Cash Money Life: This is a very informative post and talks about the provisions of the stimulus plan.

11. Reward – Risk or Risk – Reward by Old School Value: This post took a little time for sink in and but makes good sense.

12. Counter Intuitive Way of Lowering Your Spending by MoneyNing: MoneyNing talks about a novel way of spending less – snoozing off his wallet.

13. My Lower Tolerance for Corporate Bureaucracy by My Wealth Builder: Just the quote about Yogi Berra at the top at this article makes this worth a read!

Finance Carnivals:

1. Millionaire Mind and Making Money

2. Festival of Stocks