Arcane Gazebo

An extra story in a rare comic book

Today I held in my hands a copy of the most valuable comic book issue in existence, Action Comics #1 (which contains the first appearance of Superman).

Well, actually I was holding an impermeable plastic capsule containing the book; naturally I couldn't touch it directly or leaf through it. And it was far from mint condition, so this one was worth far less than some of the other remaining copies of this famous issue. But nevertheless it was exciting to see this piece of comics history, a time capsule from 1938.

It goes without saying that the better condition a comic book is in, the more valuable it is—at least on the collector's market. And indeed this is true of most goods. But I felt like the experience of seeing this as a historical artifact was actually enhanced by the fact that it didn't look like it had come right from the printing press. The left edge was cracked from frequent reading, there was a food stain on the cover, and the name "Junior" was written in pencil in the corner. Some kid loved this book. I can imagine him reading it at the dinner table. The book itself has its own story that a mint copy wouldn't have.

Cycle of life

Today I decided to test the notion that you never forget how to ride a bicycle. In my case it had been about 20 years since I last rode a bike, so it seemed plausible that I might actually have forgotten. It turned out that while I was pretty inept when I got on the bike today, I was almost certainly better than I would have been had I never learned in the first place. It took intense concentration, but I managed to avoid falling over, colliding with anything, or ending up in the Hudson River (it turns out the trail has no guardrail between about 100th and 125th streets).

Some thoughts about the re-learning process:

• Turning is harder than I remembered.
  
• Actually, just going in a straight line is harder than I remembered.
  
• Bicycle seats are uncomfortable.
  
• Sharing the road with the New York City taxicab fleet is a somewhat terrifying prospect. Waiting until I got to the bike trail before I attempted to ride was a very good idea.
  
• However, the riverside trail on a warm Saturday afternoon has its own hazards: hordes of pedestrians, some of whom are not very attentive.
  
• Being an obviously incompetent cyclist in front of those hordes of people is embarrassing, but not as much as, say, walking through Times Square in a Starfleet uniform to see the new Star Trek film. Not that I have any experience with that.
  

Schadenfreude Alert

Every bear market has its silver lining. According to Bloomberg, Russian billionaires are being forced to cut back on their glamourous lifestyles.

The best paragraph from the article provides an insight both into behavior at the top of the cycle and the Russian system of justice:

Planeload of women? What planeload of women? Case dismissed.

It turns out, with its dependence on $100 a barrel oil, Russia is sort of the new Houston where, back in the mid-1980s after product prices collapsed, one saw bumper stickers around town that said, "Lord, please send another oil boom. I promise not to piss the next one away."

Rise (and kneeling) of the machines

Via Tyler Cowen, this looks like a good way to scam people who subscribe to a very odd theology:

Information Age Prayer is a site that charges you a monthly fee to say prayers for you. A typical charge is $4.95 per month to say three prayers specified by you each day.

"We use state of the art text to speech synthesizers to voice each prayer at a volume and speed equivalent to typical person praying," the company states. "Each prayer is voiced individually, with the name of the subscriber displayed on screen."

Prices, however, are dictated by the length of the prayer. As noted in the Information Age Prayer FAQ, "A discounted prayer will cost less than other prayers of similar length."

Entertainingly, the Yahoo News article goes from reporting on this service to cataloging occurrences of praying robots in science fiction, naturally including the Cylon religion in the recent Battlestar Galactica. However, Information Age Prayer seems to be less akin to the frakkin' toasters than it is to, well, ordinary toasters.

A Scalping, Not a Haircut

In an auction that took less than two minutes, the best office building in New England, Boston's John Hancock Tower, traded today for $640 million, or roughly half of what Broadway Partners paid for it in 2006. The building traded before that, in 2003, for $935 million.

But even those numbers don't tell the whole story. The CMBS desk of one highly regarded Wall Street firm calculates that if you reduce the stated purchase price to reflect the value of the assumed debt (97% loan-to-value, 5.6% rate), the value of the building by itself is closer to $470 million, which would be 67% below peak pricing and half of its 2003 value.

No one in the commercial real estate business that I know of thinks that values have fallen that much. But when not much is trading, it's hard to say for sure. To the extent that this trade is at all reflective of the market in general, things could get really, really ugly before it's all said and done.

P-PIP for Dummies

The Financial Times website has a cool animated explanation of the Public-Private Investment Partnership program here. It takes about three minutes to watch and is narrated by a guy with a terrific English accent. Things always seems more understandable when they're explained by the English, for some reason.

Although having seen "Quantum of Solace" for the second time last night, I'm still not sure I understand that, even though it was quite obviously the product of an English imagination.

The chase scenes were fun, though.

Mama Always Said I'd Be the Chosen One

Carl: Welcome to this edition of Squawk Box. I'm joined this morning by Joe Kernen. Becky Quick has taken the day off to work on applications to law school.

Joe: In the studio with us today is one of the giants of the Jersey waste-hauling business, Tony Soprano. Thanks for joining us today, Mr. Soprano.

Tony: Don't mention it.

Carl: Tell us what's new in waste-hauling these days.

Tony: We're settin' up to do a big business in dese toxics.

Joe: You mean, nuclear waste, that sort of thing?

Tony: Naw. I'm talkin' about the toxic assets, all dese banks need to get rid of right away. Uncle Sugar is stakin' us himself, and there's some sweet deals. Me and the boys at the Bada-Bing, we're gettin' in on it, this P-PIP thing.

Carl: You mean the Public-Private Investment Partnerships that Secretary Geithner announced last week?

Tony: Yeah, dat's it. You heard of leveraged buy-outs, right? Well, this is more like a leveraged give-away. The government puts up 93 cents on th' dollar, you put up the other 7. You buy dese toxics and hope for the best. It don't work out, you walk away, raise the rates on your shy business to cover your lost 7. And if it works? Well, you wouldn't believe the vig. I'll be able to afford whatever Carmela wants to buy plus an extra Russian girl or two. Maybe get a new boat. All on account of buying dese toxics on the cheap.

Joe: Just for information, they're not called toxic assets anymore, you know. The word is "legacy." Say, you can't smoke in here.

Tony: (Lighting up a cigar) Who cares what they're called. All I know is, we are bellying up to the trough, along with the big hedge fund players. Was dem that designed the whole thing anyway, dese hedge fund guys, then they just give the plan to little Timmy and said, here. Dis is what you're gonna do if you wants the likes of us to get you some liquidity back in the system. Where's the ash tray?

Carl: There's a trash can right-

Joe: But do you guys have any real experience in working out bad credits?

Tony: (Laughing until he chokes) Sorry. Dat was a good one. We got an entire collections department. Reports to Paulie Walnuts. We have a high recovery rate. One hundred percent from the deadbeats who are still breathing.

Carl: You think the banks are really going to sell at prices that will look attractive?

Tony: Whadda you t'ink? The buyer is owned and largely controlled by the government. It so happens the government regulates and in many cases also owns the banks that are the sellers. How the banks gonna say no, with the government holdin' a gun to their heads? They don't play ball, they might find themselves in receivership. The fix is in, see. This is sweeter than anything we ever thought up in the business. I mean the waste haulin' business.

Joe: But aren't you worried about populist rage and Congress maybe taxing away your winnings some place down the line?

Tony: I take it you don't know too much about how political campaigns are financed.

Carl: Well, thanks for spending part of the morning with us, Mr. Soprano. Please join us tomorrow when we will interview Christopher Moltisanti about making it as a screenwriter in Hollywood.

Tony: Umm, you might want to think about bookin' someone else. Just in case.

Notional Value of Derivatives

I was in the audience at the Spring meeting of the Pension Real Estate Association in Washington, DC, when Tim Ryan, CEO of the Securities Industry and Financial Markets Association, addressed us about the current situation in the financial markets and the governmental response. He was modestly positive that the new Public-Private Investment Partnership and TALF programs will work, so the general message was reassuring.

In response to one question from the audience, he said that the book value of derivative positions tend to be the "notional value" of those positions. This set up a little alarm bell in my head, so when I got back to Houston I looked this up here.

As I understand it from this explanation, the $1.6 trillion book value of AIG's derivatives overstates substantially its total credit risk exposure, which is some small fraction of that number- so my Tuesday morning post about the amount at risk if the book is mismanaged by new and less competent staff clearly exaggerated the potential size of the risk. Actually to calculate the risk would require a level of understanding of each position that only those involved in the trades could possibly have.

As to this flawed analysis, apologies, and mea culpa. I was erroneously applying the accounting we use in commercial real estate to derivatives. My bad.

I think the main point does remain the same, however- as seen by the mad scramble in the AIG Paris office today to replace the two guys who resigned there, thus potentially triggering defaults in their derivatives contracts. The question of whether the taxpayers will be called upon to prop this company up to the tune of even more billions rides in large measure on whether the current book gets unwound as competently as possible. Whether the replacements Banque AIG finds for its two resigning executives will be good enough to satisfy the French banking regulators and thus avoid a default, and who knows what additional damage to this company, is a risk we, as 80% owners of the company, wouldn't be running but for all this whole bonus anger.

Get a Grip

This morning's edition of The Wall Street Journal reports that AIG's Paris unit is scrambling to find replacements for two executives who have tendered their resignations in the wake of the bonus "outrage." Apparently, something like $264 billion in derivatives contracts will be declared in default if the two men are not replaced to the satisfaction of French bank regulators. This is because such contracts typically contain "key man" or "change of control" clauses that are triggered if certain important personnel leave and aren't satisfactorily replaced.

Here is one example- among many- why it was more than just stupidity or greed for AIG to pay retention bonuses. Losing some of the people it currently has puts billions of dollars at risk.

So, listen up people. Your outrage about these bonuses may be "justified." But by indulging yourself in it, instead of controlling it, you are potentially costing yourself (and me, and every other taxpayer) money.

The Dude Abides

Carl: Welcome to this morning's edition of Squawk Box. My name is Carl Quintanilla and I have with me Joe Kernen. Becky Quick is out ill today. Get well quick, I guess you'd say, Beck.

Joe: Funny, Carl. I'll have to remember that one. With us in the studio today is a man who is sort of a symbol of the recent problems in our nation's housing market. He's agreed to come on camera and tell us his story, which is a pretty brave thing to do, considering the facts. This is Mr. Jeffrey, uh, Lebowski, is it?

The Dude: Call me the Dude, man. Or Duder, or his Dudeness. El Duderino if you're not into the whole brevity thing. Listen, man, I have to, like compliment you. You're Green Room has everything. Even the Dude's favorite beverage.

Joe: Milk? On ice?

The Dude: Yeah, man. Something like that. But, look, there's no Credence on the sound system back there. You need to work on that, man.

Carl: So, Dude, as we understand it, you refinanced your house in Southern California in 2005 through what is known as a subprime loan from Countrywide Mortgage.

The Dude: It was Walter's idea, man. Oh, and, hey. Hope you don't mind the, you know, shades. These lights are too bright for the Dude's eyes.

Joe: Who's Walter?

The Dude: Bowling buddy of mine. He went to work as a mortgage broker. Answered an ad in the paper and they set him up, like, overnight. Desk, cards, cell phone.

Carl: So Walter solicited you for a new loan on your home.

The Dude: Yeah, man. Said, like, everybody's doing it.

Joe: Were you employed at the time?

The Dude: No, man. I'm between gigs.

Joe: When did you last work?

The Dude: Roadie for Metallica's Ecstasy of Gold Tour. '89.

Carl: But even though you had no income, you were able to refinance your house. At an appraised value several hundreds of thousands of dollars greater than your cost.

The Dude: The Dude has, like, expenses, man. The cost of living has shot way up. Pie stick for example. Costs twice what it used to. And Walter said whatever the house was worth, it would be worth double that in two years. It's Southern California, man. Real estate never gets cheaper.

Joe: How did you expect to service the mortgage?

The Dude: The Dude is not quite following you there.

Joe: Your house payment. How did you expect to be able to make your house payment?

The Dude: Oh, that. Walter said not to worry about that, man. No one cared, he said. His job was to close the loan and then these Countrywide people would sell it on to somebody else and he'd move on to the next borrower. Pretty sweet, huh? Say, um, could I maybe get, you know, a refill? The girl in back knows how to make-

Carl: But now your lender is threatening foreclosure, is that correct?

The Dude: Yeah, man. Greedy, blood-sucking bastards. It's corporate greed, man, bringing this country down. These people need more regulation. We said this years ago, in the Port Huron Statement. The first draft, not the watered down second version. Everybody knows this. They say it all the time on TV. It's the banks fault for being greedy, man. Now look at the mess we're in.

Joe: But, Dude, don't you feel somewhat responsible? I mean, taking out a loan that you had no means to repay? Isn't it in some measure your own fault that now you'll lose your house to the bank? And isn't it true that the reason we are in the shape we are in now, when you get to the bottom of it all, is that millions upon millions of Americans did what you did? Leveraged themselves to the eyeballs with debt they couldn't pay? So they could buy more and more STUFF? And now these self-same people are the ones jumping up and down about Wall Street being bailed out of so-called "toxic assets" which is just a euphemism for a whole lot of bad IOU's from people like you?

The Dude: Hey, easy, man. Look, this whole subprime thing- it's complicated, man. Lot of ins, lot of outs, lot of what have yous.

Joe: Well, your revolution is over, sir! The bums lost! And stuck the rest of us with the check!

Carl: Joe, hey, it's okay. Now, Dude, do you know where you will live yet?

The Dude: Hey, man. The Dude abides. Say, about that refill-

Carl: Thanks, Dude. And thanks for joining us, ladies and gentlemen. Please join us again tomorrow when our guest will be Congressman Barney Frank, who has a new seven point plan for making housing more affordable to people of modest means.