Saturday, April 24, 2010

Talk is Cheap

I never thought I'd say it:  But George W. Bush is lookin pretty good compared to the sorry excuse for a President the US has now.  At least Bush wouldn't try to win you over with starry eyed rhetoric (more talk = more Bushism sound clips).   Even if I didn't agree with most of his actions: invading Iraq, instituting a massive new branch of government (Homeland Security), tax cuts that his country couldn't possibly afford, massive deficit least he DID something.

Barack Obama has talked for well over 2 years.  And talked.  And talked.  You'd think he was still in fucking campaign mode.  DO something, jackass!  You have plenty of things that NEED to be done (get out of Iraq, balance the budget, fix the economy, stop bailouts, end fraud).  Yet, all you do is TALK.  Do something.  Fuck, it doesn't even have to be legislative, all you have to do to "fix" the problem of endless corporate greed and fraud is start enforcing EXISTING laws.  Where are the criminal investigations against rampant mortgage fraud?  You can't just fucking scold banks, and then not hold them accountable.  Laws are only meaningful if you actually enforce them.  Reinstate leverage limits if you're worried about "excess leverage".  Start bringing criminal indictments against ALL the fraudulent lending.  Reinstate mark-to-market accounting and get banks to remove all their bullshit off-balance sheet assets.   There's a reason that shit is hidden, it's because no-one wants to see it.  Ban CDS's, move derivitives to be traded on an open exchange.

Or you could give bankers a lecture...ya that will fix everything:

Mr. Obama accused the financial industry of spending millions on lobbyists and offering misleading arguments and attacks to derail the proposed reform legislation, which is aimed at cracking down on Wall Street in the wake of the worst financial crisis in decades.
The U.S. House of Representatives passed a comprehensive set of reforms, while the U.S. Senate is debating a version of the proposals.
Although his tone was stern, Mr. Obama's speech was largely conciliatory, which could help pave the way for passage of the legislation.
"[The] crisis was born of a failure of responsibility--from Wall Street to Washington -- that brought down many of the world's largest financial firms and nearly dragged our economy into a second Great Depression," Mr. Obama said.
Take responsibility for your own actions such as enforcing existing laws, before you start flapping your gums about "banks behaving badly".   It's YOUR responsibility to ensure existing laws are enforced.  Put up or shut up.

If you don't fix the culture of fraud, you will clearly demonstrate the major difference between your presidency and your predecessor's.  While both will be deemed abject failures, I tend to think of your predecessor's defining quality as one of incompetence.  Your legacy, however, will be far worse.  Your presidency will not be defined as one of incompetence, but one of willful complicity with the banking lobby.  Hope and change = more empty rhetoric.

Sunday, April 11, 2010

Canadian Banks - Don't Mess with Our Taxpayer Backstop

Is it really any different here?  Are our banks more prudent?  Are they wise?  Do we have a good banking "system"?

Ask the bankers, and you'll get a resounding "Yes, of course we do!  We didn't need government bailouts!"

Why?  Because they've managed to offload all of their credit risk through lending loads of cash to sketchy borrowers so they can buy houses that they can't afford.  The Canadian banking system is less risky...for the bankers! Risk doesn't magically disappear.  If you lend money to someone who cannot pay it back, and then securitize and sell that debt to someone've just transferred that risk to the bondholder.  And who would that be?  CMHC, ie. the Canadian government, ie the Canadian taxpayer.

So while the banks themselves are safe, everyone else is not.  The Canadian government is already running a massive budget deficit, and this doesn't take into account future spending committments the aging boomers for health care.  Nor does it factor in the costs of covering all these bad mortgage bets for when the housing market corrects. When the MBS's stop generating the returns they're supposed to be providing because the borrowers can't pay...the taxpayer is left holding the bag.

And they aren't giving up that taxpayer gravy train without a fight.  They're worried about global financial reforms that don't take into account "Canada's unique banking system" (ie. Canadian banks mortgages are safe, because the Government is backing them via CMHC - sound familiar? Fannie? Freddie?)
Under Canadian law, mortgage insurance is mandatory if the down payment is 20% or less, in an effort to protect lenders from default. As it happens, the dominant provider of coverage is Crown-owned Canada Mortgage and Housing Corp. Further, the federal government backstops the coverage in the event of a default.
"But there is no credit given to that under the proposed rules," said Don Drummond, senior vice-president and chief economist at Toronto-Dominion Bank. "That's got all the Canadian banks agitated."
As a result, Canadian banks would be forced to have the same amount of capital against their mortgages as a bank in another country operating in a riskier environment.
"Our unique Canadian mortgage market was one of the important reasons why we did so much better than others, and this now may be in peril due to several proposed rules that go over and above the requirements for more capital," Mr. Waugh told shareholders at the bank's annual meeting in St. John's. the much vaunted Canadian banking system, wasn't a result of prudent lending but more about having the government back your assinine mortgage bets? This doesn't sound familiar at all does it?

Mr. Poschmann said the marketplace likes the current setup in Canada, citing that Royal Bank of Canada is able to sell so-called covered bonds to fund a pool of uninsured, but good-quality, mortgages.
Of course, Canadian banks have also benefited from the setup between Ottawa and CMHC. Industry analysts say the mortgage insurance setup has led to relatively low credit risks for Canadian lenders. It is estimated that almost half of mortgages held on bank balance sheets are insured.
Also, CMHC plays a major role in mortgage securitization. Under its Canadian Mortgage Bond Program, established in 2001, financial institutions originate mortgages, pool them and sell them as packages in the form of mortgage-backed securities to an entity called Canadian Housing Trust. The trust, advised by CMHC, issues bonds that pay interest similar to Government of Canada bonds, using the cash flow from the mortgage-backed securities to make the payments.
Gee, duh, I wonder why the banks like this setup where they can take virtually no risk, and can sell overpriced mortgage securities to someone that is guaranteed to buy the shit?   Will the taxpayers like the Canadian "system" when the MBSs blow up and the government is forced to either slash spending (not likely given the spenthrift Keynesian idiocy going in Ottawa), run bigger deficits (welcome to higher interest rates), or increasing taxes (GST back to 7%+). 

To close...let's look at how well this worked out for Fannie:

US housing prices began their fall in 2005.  And delinquencies are still skyrocketing (even though Fannie imploded long ago and has already been seized by regulators).  We haven't even hit our bubble peak yet, as such the CMHC (Fannie North) crisis may be another 5 years out (or more).  This will not end well.

Admission of a Housing Bubble

OK, not exactly in those words, but when average home prices in Canada are up 10% and the head of a major Canadian real estate agency says:
“House sale data from the past two year period shows tremendous variances in terms of how different cities reacted to the recession,” said Phil Soper, president and chief executive officer, Royal LePage Real Estate Services. “In Vancouver and Toronto, for instance, the dramatic unit sales fluctuations exhibit a significant degree of market irrationality: inordinately fearful when faced with poorer markets; and overly enthusiastic when the tables turned.”
And to be clear, we haven't yet entered the "fearful" stage yet.   We're still in euphoric home orgasm mode. Human wants being what they are, there is always an overshoot in consumer sentiment going both ways, so while this bubble will eventually "correct" it is quite likely to eventually overshoot, where the bulk of the population will hate housing and realize it's a non-liquid, depreciating, terrible asset to own for investment purposes.  Looking south, this is the current sentiment of most Americans, and in general that sentiment is earned due to the collapse in home prices, the crushing reality of negative equity, and the evaporation of the American Dream for the middle class.

We as Canadians, are not so different from our southern neighbours...we're roughly where they were circa 2005.   The top is near.  I fully except the prospect of rising rates, tightening lending standards, and the introduction of the HST to be catalysts for the correction.  It's beginning.

Speaking of higher rates, just as the cost of fixed rate mortgages already have begun rising as per Tightening the Vice - It Begins, variable rates mortgages will soon rise as well, when the Bank of Canada starts raising the benchmark rate from it's historic low of 0.25%. 

Scotiabank expects the benchmark rate to rise to 3%.  No, that's not the prime rate, that's the overnight rate.  Expect prime to hit 5%.  And no, this isn't on some timeline far into the distant future (like 30 years from now when the bulk of new homeowners will still be paying their mortgages)...this is by next year.  I know what you're thinking...they can't/won't do that.  You're fine to believe that, but banks are pricing in that likelihood, so maybe consumers should too...after all, they're the one's setting the rates on the mortgages right?

Friday, April 2, 2010

Canadian Consumer Confidence - Delusional

CIBC economist Benjamin Tal released a report this week outlining the massive divergence of Canadian consumer confidence with the reality of their financial situation.  Basically, he introduced a new metric a "Consumer Capability Index" which roughly is meant to gauge a consumers ability to consume as opposed to their willingness to (via debt typically).  Full report here, it's well worth a read, and it's a pleasant surprise to see anything meaningful coming from the banks on this.

A few highlights:

Does this look sustainable?

Not only is the debt to income ratio increasing, the rate of increase as at about the highest level it's been at in the last 20 years.  As mentioned in the article (emphasis mine):
Despite Canadian consumers’ high spirits, their recent
consumption pattern has not been supported by an
equivalent increase in income. In fact, growth in real
disposable income has been trending downward over
the past year (Chart 2), and to a certain extent debt is
replacing income as a major driver of consumer purchases
The rising importance of debt as a determinant of
consumption can be seen in the fact that the 2008-09
recession was the first economic contraction on record
to show overall expansion in real household credit. As of
February, overall household credit was up by more than
7% on a year-over-year basis—more than three times
faster than income growth.
 People aren't making more money, they're simply spending more, due to the ease of credit cards, consumer lines of credit (including HELOCs).  That debt eventually has to be paid, and the cost is that the consumer has to service the debt in the meantime.

Note that the debt service ratio is around the same level as mid 2006, even though borrowing costs today are significantly lower.  When rates rise, the DSR will rocket higher as well.   This is when consumers are going to feel the pinch (along with increasing taxes as well due to poor public finances).  Ouch.

How bad are things?  Apparently the consumer either hasn't noticed the problem, or are hoping it will go away.  Canadian consumers seem to be wildly optimistic...over what no-one can seem to say.  Reality vs. fantasy:

 Ie, Canadian consumers haven't seen their finance in such a piss poor state of affairs in over 20 years, but you wouldn't know it to ask them.

A brief timeline:

Up until around 2001: Canadians expectations were basically in line with reality with some minor fluctuations from the mean.

2001 - 2008: The bubble years.  Canadians become completely disconnected with reality and are wildly optimistic due to their rapidly appreciating home values.

Late 2008-Early 2009:  Market implosion.  Canadians briefly wake up and face reality as their savings in the market (RRSP's or otherwise) get absolutely hammered as the market crashes

Early 2009 - present: Bank of Canada makes money free, drops rates to zero, and the great Canadian reinflation begins.  Idiots bid over houses driving record housing prices after the biggest financial collapse since the Great Depression.   Market rallies massively on fumes.  Happy delusional days are here again!

Future:  Rates rise. Canadians wake up with a massive debt infused hangover.  Consumer spending dries up as the majority of disposable income is directed towards debt service with rising rates.  Economy enters the next dip of the next recession...presumably at some point people wakeup and face reality and a REAL recovery can actually begin.

The public sector 100K club

The Ontario government recently release their disclosure of employees making more than $100K   Who made the list?  A crapload of people.  Reading the list I'm convinced that the bulk of our government is made up of middle managers, board members who presumably get a sweet appointment to meet monthly, to do God knows what,  and a bunch of lawyers.  Heck, over 1200 nurses make over 100K per year, as well as a significant number of police officers.

Even the MSM has went through and ranted about some of the more peculiar job titles that fall into the club.

In addition to the usual suspects, there are dog handlers, plumbers and many blue-collar workers in the ranks. A common trait that ties them together is a penchant to be just a tiny bit defensive.
“Oh look, a traffic signal foreman makes $100,000,” said Frank Lalli, a traffic signal foreman from Hamilton who made $114,402 last year.
Lalli, who is on call 24/7 every second week, says he’s married to the city. Sometimes, he has to stay out all night long in bad weather to fix traffic lights.
“Every second week my life is upside down. I can’t go to a movie, I can’t go to Toronto, I can’t go to an event because you never know when you’re going to get called,” the 66-year-old said.
Reality to Lalli: YOU MAKE $114,402!  With full benefits/pension presumably IN ADDITION to your salary.  And you're being funded by THE TAXPAYER which increasingly is finding themselves without ANY JOB.  Unfuckingbelievable the utter sense of entitlement.
Bonnie Olmstead, a security guard at Ontario Power Generation’s Nanticoke station, knows it’s strange to see a security guard make $111,890. But her secret isn’t on-call shifts or midnight dates with traffic lights.
“I’m a mechanical millwright who got hurt, that’s why I make that kind of money,” Olmstead said from her home in Jarvis, Ont. “I certainly appreciate that the company looked after me.”
 No shit.  So you're basically saying you got a sweet job appointment because you can't do any real work anymore.  Great.  Why are you still being paid a ridiculous salary, shouldn't you be on disability making some (reduced) percentage of what you actually made previously (you know, because you aren't really doing "work" anymore?

Ontario's manufacturing base has been utterly slammed by the global recession and somehow the taxpayer and the private sector is expected to make up for the public sector's largesse.  Did I mention that Ontario is running a massive budget deficit?  For more on that, Mish has a good comparison of the state/provincial budget debacles of California and Ontario.

Of course it's not just federal and provincial/state budgets that are completely a basket case, municipal budgets are ridiculous as well.  Case in point: Toronto.  1329 Toronto police officers earn over $100K per year (article)

David Soknacki was reacting to the release of 2009 public sector salary disclosures that list 1,329 Toronto police uniform and civilian employees who last year earned more than $100,000 – a more than 30 per cent increase from the year before.
In 2008, 1,006 employees of the Toronto police service earned more than $100,000.
Those fattened pay cheques do not include lucrative "paid duty," where off-duty officers, paid by private companies, earn $60 to $70 an hour to perform such duties as directing traffic around construction.
"Politically, it's toxic" to question whether the city can afford to pay policing costs, said Soknacki, who left office in 2006.
"When money comes up for police, it's very, very difficult to push back.
Of course it's dificult to push back against any public union because they have a vested interest solely in their own benefits, and the hell with the taxpayer.   After all you can't put a price on:  public safety, your children's education, your health.  Funny how somehow this equates to endlessly spiralling costs for all of these services isn't it?

But of course the hypocricy doesn't stop there.  Let's say for argument's sake that a police officer is worth 100K (I don't believe this for a second, by the way) because they are valiantly sacrificing their own safety to protect the public.  After all THAT'S what we're paying for right?
Michael Thompson, who was paid $161,892, and Abdulhameed Virani, who collected $151,042, were among the 380 constables who topped the $100K club in 2009.
Thompson and Virani didn't rack up their overtime as homicide detectives on 24-hour call.
Instead, they nearly doubled their salaries – the base salary of a first-class constable is $87,500 – in large measure by writing traffic tickets that require them to make frequent court appearances.
Uniformed officers grumble privately that politicians don't mind because they generate income for the city.
Under the Toronto Police Association collective agreement, police officers who attend court as witnesses during a scheduled off day are paid a minimum four hours, at 1.5 times their basic wage, even if the appearance lasts 10 minutes. Officers receive three hours of pay at time and a half if they appear in court before a scheduled shift.
Hmm, so maybe it's not about public safety, it's about prosecuting minor traffic offenses and generating revenue for the government?  I wasn't aware that police services were a "for profit" operation.  Utterly ridiculous.  Not to mention, if the officers are so busy "serving the public" how come they can make extra pay working to direct traffic "on the side" for private companies at $60-$70 an hour.   And to be clear, you can't really blame the officers for making ridiculous overtime by writing tickets/going to court, as if the compensation package is specifically setup that way, you're not really encouraging officers to protect and serve, you're encouraging them to issue tickets and sit in court for a few hours.  I'm pretty sure you can find tons of people that are capable of doing this for much less than $100K per year...