The Answer to All of the World's Problems
If you've taken an ecology class or even a high school biology class, you may remember that one of the first ideas you came across was the concept of carrying capacity of a given species in a given ecosystem. In short, there is only so much a given species that can exist in a given ecosystem before the species seriously fucks up the enviornment and there is a population decline in the subsequent generations. In short, if there are too many wolves in the forest, they will kill too many deer and there won't be enough food for their children, so many of them will in turn starve to death.
Humans like all animals are no exception. The fact of the matter is there are about 6.6 billion people on the earth right now. I've heard estimates that if we continue at the same rate of population growth, there will be around 20 Billion people by the end of the century. Given that, it's only a matter of time before we excede the carrying capacity on earth, if we haven't already. As a result, one way or another we are going to fuck up our enviornment, whether it is through global warming, depletion of our fisheries, exhaustion of farmland or a hole in the Ozone layer. We can try to tackle all of these problems, but they are merely effects, not the actual cause. To pose an analogy, it would be like rowing along in a rickety old row-boat. As soon as the boat springs a leak, you plug it with your finger and continue rowing on until it springs another leak and another leak, until you don't have any fingers left and the boat inevitably sinks in shark infested water.
In short, we can keep trying to tackle global warming or whatever enviornmental issue, but inevitably, something else will come along, because there are too many God-damn people and it is too taxing on the enviornment to feed them all. I like to think this problem is the legacy of the enlightenment, which sought to end human suffering through reason, but the fact of the matter is LIFE IS PAIN. We are here on this earth to suffer and we may not like it, but we have to get used to it. The only way we are going to solve this problem is by bringing on a lot more pain.
As a result, I propose a simple solution to our growing enviornmental problems, especially for those of you living in America, because Americans are by far the biggest consumers of, well, everything. 1. Go out to the nearest gun store. 2. Buy a 12 guage 3. Knock on your neighbor's doors and 4. well, you get the point. Just think how much we could reduce carbon emissions if everyone in America offed their neighbor!
In any case, if your devotion to the enviornment is not that strong, I suggest you sit back, relax and enjoy the golden years. You must remember that a hundred years ago, your ancestors were probably living in a hut without plumbing, electricity, TV, the internet or even facebook. So why worry about the enviornment and doom and all of that, it's going to happen one way or another and plain and simply we're not willing to take the only course of action to stop it. So let's just sit back and enjoy the ride. Let the band play while the Titanic is sinking.
Tuesday, September 30, 2008
As I sit here in Russia, waiting for my new work permit, cursing the bureaucracy of this country, I've decided to take advantage of the vast amount of free times I have to educate myself, filling my days reading about the worst financial crises since the Great Depression. In any case, yesterday was a monumental day, not just because the Dow dropped almost 800 points, not because the bailout didn't pass (it probably will in some form or another), but because of Wachovia and the greater implications for the banking system.
Since the failures began, the US government has been using the 3 megabanks (JP Morgan, Bank of America and Citibank) to clean up the major bankruptcies and bank failures. JPM bought WaMu and Bear Stearns. B of A took on Countrywide Financial and Merrill. Now, Citi just bought Wachovia. The thing about Wachovia is it could've become a fourth megabank. As recently as last week, Wachovia was in talks with Morgan Stanley about a merger. The combined bank would've had around $1.8 Trillion in assets, placing it along side the other 3. Unlike all the other bank failures to date, Wachovia was a pretty diversified commercial bank. WaMu was just a savings and loan and had made a lot of wrong way bets on the housing market. Bear Stearns, Merrill Lynch and Lehman Brothers were all highly leveraged investment banks and did not have access to a stable deposit base for funds. Wachovia, by contrast had a strong deposit base, a diversified business, a huge balance sheet and was not all that leveraged. On top of all that, Wachovia was not insolvent like, Wamu, Bear and Lehman when it was bought. Although they would've taken some hits, Wachovia had about $80 Billion in equity at the end of 2Q 2008, and citigroup is expecting a maximum of $42 Billion in losses. In short, it should've been able to survive the crisis. The main concern is that depositors were withdrawing money, which killed their balance sheet. Now this is huge. The fourth largest bank was just bought for 1/50th what it was worth a year ago.
Now this is where things get scary. Out of the big 3, Citigroup is in the worst shape financially. Sure, they got a pretty good deal with Wachovia, $80 Billion or so in equity for only $2 Billion, but the company is leveraged up the wazoo. According to their 2Q earnings statement, the companies Assets-to-equity (the cheap and easy way) is about 20 to 1, but of their equity about 1/3 is goodwill and another sixth is intangible. As a result, their real leverage ratio is about 40 to 1, and this isn't even including all the crazy off-balance sheet SIVs and so on that they will probably eventually have to bring on their books. At the end of the day, the deal increases Citi's total assets to about $2.8 TRILLION, with only $69 Billion in equity supporting it (once goodwill is subtracted and the additional $10 Billion they plan to raise is added in). All in all, that results in a assets to equity ratio of about 40 to 1, again. This means, that all it takes is for their portfolio to decrease by 2.5% and the company is done. The Wachovia deal also doesn't help out Citi all that much, as roughly 50% of Wachovia's equity is goodwill and Citi is expecting around 50% losses on the rest of the equity.
Now looking at Citi's financials, I notice that the company hasn't marked down many of their consumer loans from their commercial banking business. According to Nouriel Roubini, who has been pretty much right about everything in this crisis, calling it play by play from a year before it began, we are only about 1/2 to 1/3 of the way through the writedowns and loan losses. So in effect, it's not difficult to imagine that Citigroup $800 Billion loan portfolio could get written down by 10%. Then there is also the effect on their proprietary trading book, which is around $500 Billion. The stock market has been tanking. Anyone want to take a guess how many losses they have incurred there? All if Citi were to post a 13.8% loss on its trading porfolio, that $69 Billion in equity would be gone. Mind you, the average hedge fund is down 10% this year, and investment bank propreitary trading desks are more or less giant hedge funds.
Another major concern is the deposit issue, as evidenced by Wachovia. Citibank had approximately $803 Billion in deposits at the end of 2Q 2008. This number is slated to increase to $1.3 trillion following the completion of the wachovia transaction, resulting in deposits 18.8x equity. In other words, if 5.3% of Citigroup's deposits were withdrawn suddenly, the bank would fold. While granted only about half of those deposits would be located in the US, it's troubling given where Citi's American operations are concentrated. Citigroup has its largest presence in the Northeast of the United States, the wealthiest region in the country. It is not too uncommon to find people in the Northeast with over $100,000, the maximum amount insured by the FDIC, deposited in a given bank. As a result, if Citi's future were to come into question, it would not be unreasonable to expect despositors with above the insured limit to run to the bank, seeking to move their excess funds.
In short, Citigroup might be on the ropes. So what? I mean, Bear, Merrill, Lehman, AIG, Wachovia and Wamu have all failed, what does it matter if Citi fails? Well the problem is, that now Citi's balance sheet has grown to almost $3 Trillion, making it the largest bank in America (B of A/Merrill Lynch will have about $2.7 Trillion in assets and JPM will have just over $2 Trillion). It is unlikely that the Citigroup/Wachovia merger would've gone through under normal market conditions, due to antitrust concerns, let alone a merger between 2 of the big 3. Outside of the US, probably only UBS, Deutsche Bank and HSBC are the only banks in this ball park, and it's unlikely that any of them would be able to swallow this kind of a deal or get past the antitrust laws. Simply it would be impossible to effectively manage a bank of that size. Over the course of this year, Citi has raised around $50 Billion in equity from sovereign wealth funds and the like, but all of them have been burned by their investments in US financials, so they have turned off the funds faucet as well. So what happens if Citibank falls and no one can pick them up?
Citibank's bonds are currently yielding around 9%, firmly in junk bond territory, despite their AA- (Soon to be A+) credit rating. Throughout this crisis, bond yields and credit default swaps, moreso than stock price, have been the leading indicator of who's going to go next. Interbank lending is also frozen. In the end, I see some big time government intervention coming for Citi, with or without the bailout plan...
Since the failures began, the US government has been using the 3 megabanks (JP Morgan, Bank of America and Citibank) to clean up the major bankruptcies and bank failures. JPM bought WaMu and Bear Stearns. B of A took on Countrywide Financial and Merrill. Now, Citi just bought Wachovia. The thing about Wachovia is it could've become a fourth megabank. As recently as last week, Wachovia was in talks with Morgan Stanley about a merger. The combined bank would've had around $1.8 Trillion in assets, placing it along side the other 3. Unlike all the other bank failures to date, Wachovia was a pretty diversified commercial bank. WaMu was just a savings and loan and had made a lot of wrong way bets on the housing market. Bear Stearns, Merrill Lynch and Lehman Brothers were all highly leveraged investment banks and did not have access to a stable deposit base for funds. Wachovia, by contrast had a strong deposit base, a diversified business, a huge balance sheet and was not all that leveraged. On top of all that, Wachovia was not insolvent like, Wamu, Bear and Lehman when it was bought. Although they would've taken some hits, Wachovia had about $80 Billion in equity at the end of 2Q 2008, and citigroup is expecting a maximum of $42 Billion in losses. In short, it should've been able to survive the crisis. The main concern is that depositors were withdrawing money, which killed their balance sheet. Now this is huge. The fourth largest bank was just bought for 1/50th what it was worth a year ago.
Now this is where things get scary. Out of the big 3, Citigroup is in the worst shape financially. Sure, they got a pretty good deal with Wachovia, $80 Billion or so in equity for only $2 Billion, but the company is leveraged up the wazoo. According to their 2Q earnings statement, the companies Assets-to-equity (the cheap and easy way) is about 20 to 1, but of their equity about 1/3 is goodwill and another sixth is intangible. As a result, their real leverage ratio is about 40 to 1, and this isn't even including all the crazy off-balance sheet SIVs and so on that they will probably eventually have to bring on their books. At the end of the day, the deal increases Citi's total assets to about $2.8 TRILLION, with only $69 Billion in equity supporting it (once goodwill is subtracted and the additional $10 Billion they plan to raise is added in). All in all, that results in a assets to equity ratio of about 40 to 1, again. This means, that all it takes is for their portfolio to decrease by 2.5% and the company is done. The Wachovia deal also doesn't help out Citi all that much, as roughly 50% of Wachovia's equity is goodwill and Citi is expecting around 50% losses on the rest of the equity.
Now looking at Citi's financials, I notice that the company hasn't marked down many of their consumer loans from their commercial banking business. According to Nouriel Roubini, who has been pretty much right about everything in this crisis, calling it play by play from a year before it began, we are only about 1/2 to 1/3 of the way through the writedowns and loan losses. So in effect, it's not difficult to imagine that Citigroup $800 Billion loan portfolio could get written down by 10%. Then there is also the effect on their proprietary trading book, which is around $500 Billion. The stock market has been tanking. Anyone want to take a guess how many losses they have incurred there? All if Citi were to post a 13.8% loss on its trading porfolio, that $69 Billion in equity would be gone. Mind you, the average hedge fund is down 10% this year, and investment bank propreitary trading desks are more or less giant hedge funds.
Another major concern is the deposit issue, as evidenced by Wachovia. Citibank had approximately $803 Billion in deposits at the end of 2Q 2008. This number is slated to increase to $1.3 trillion following the completion of the wachovia transaction, resulting in deposits 18.8x equity. In other words, if 5.3% of Citigroup's deposits were withdrawn suddenly, the bank would fold. While granted only about half of those deposits would be located in the US, it's troubling given where Citi's American operations are concentrated. Citigroup has its largest presence in the Northeast of the United States, the wealthiest region in the country. It is not too uncommon to find people in the Northeast with over $100,000, the maximum amount insured by the FDIC, deposited in a given bank. As a result, if Citi's future were to come into question, it would not be unreasonable to expect despositors with above the insured limit to run to the bank, seeking to move their excess funds.
In short, Citigroup might be on the ropes. So what? I mean, Bear, Merrill, Lehman, AIG, Wachovia and Wamu have all failed, what does it matter if Citi fails? Well the problem is, that now Citi's balance sheet has grown to almost $3 Trillion, making it the largest bank in America (B of A/Merrill Lynch will have about $2.7 Trillion in assets and JPM will have just over $2 Trillion). It is unlikely that the Citigroup/Wachovia merger would've gone through under normal market conditions, due to antitrust concerns, let alone a merger between 2 of the big 3. Outside of the US, probably only UBS, Deutsche Bank and HSBC are the only banks in this ball park, and it's unlikely that any of them would be able to swallow this kind of a deal or get past the antitrust laws. Simply it would be impossible to effectively manage a bank of that size. Over the course of this year, Citi has raised around $50 Billion in equity from sovereign wealth funds and the like, but all of them have been burned by their investments in US financials, so they have turned off the funds faucet as well. So what happens if Citibank falls and no one can pick them up?
Citibank's bonds are currently yielding around 9%, firmly in junk bond territory, despite their AA- (Soon to be A+) credit rating. Throughout this crisis, bond yields and credit default swaps, moreso than stock price, have been the leading indicator of who's going to go next. Interbank lending is also frozen. In the end, I see some big time government intervention coming for Citi, with or without the bailout plan...
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