Is this the seriously smart money?

It pains me to say anything nice about Exxon Mobile management.  They are the most notorious climate change sceptics for instance, something I rank along with believing that the world was created in six days about 6000 years ago.  

The belief might be politically convenient for Exxon, just as it might be politically convenient for some conservative politicians – but otherwise it dumb and possibly dangerous.

But – putting my politics aside I am going to say something really nice about Exxon.  They look a lot smarter than me – and a lot smarter than most of the rest of us.

Remember the super-spike in oil.  Remember how it was going to remain high forever.  It was only a few months ago.

You would think that Exxon believed it too – and ramped up their capital expenditure to take advantage of the super-cycle boom to come.

You would think…

But you would be wrong.  

Here are the capital expenditure numbers for the company by year in millions:

2002 11,437

2003 12,859

2004 11,986

2005 13,839

2006 15,462

2007 15,837

Now anyone who followed this industry knows that the cost of building new plants, pipes and drilling new holes skyrocketed during this period – so the physical amount of capex done by Exxon probably reduced during this period.  It reduced whilst the cash flow from operations went from 21 billion to 52 billion.  

Sure capex went up a little in the first nine months of this year but even that increase was disciplined.  

The conclusion you have to come to is that Exxon did not drink the kool-aid.  They were at the centre of one of the biggest booms out there – and they were not sucked in.

So – if you want to know who the smart money were – look no further.

John Hempton

PS.  There is another hypothesis consistent with the data – one which paints Exxon in a very poor light.  The alternative hypothesis is that they did little capex because they did not have worthwhile projects to do – that is that their reserves are stuffed.  I see little evidence for that hypothesis but hope to entertain it in the comments.

However I should note that I know so little that it is entirely possible that the PS bear case is correct.  Knowledgeable comments much appreciated.  

J

Weekend edition: iphones and Galileo

The comments have proved to my satisfaction that the effect noted here is an artifact of the lens and not a crescent of Venus.  So the discussion here is faulty.  

Thanks to the person who put up the comment.  The issue is that there are simply too many pixels in Venus...

However I am left perplexed as to why Venus pixelated as a crescent - with the lit side tilted towards the sun (as you would expect) and Jupiter and the Moon look like circles (the moon) or squares (Jupiter).  If someone is able to give a good optical explanation I would appreciate it.  

Meanwhile I will try to replicate the Brad Delong picture with a mobile phone camera and a 10 megapixel SLR.  

John

--------------------------

Brad Delong has a photo on his blog taken with an iphone of the moon, Jupiter and Venus.

It is impressive – and through it – looking at the individual pixels – you can tell that Venus is a crescent.

Now all Galileo did – which marks him as one of the greatest minds of all time – was look at Jupiter through a simple telescope and plot the four moons (I have never been able to resolve more than four moons).  And if you do this regularly – certainly every evening for two or three weeks – you will come to the conclusion that the moons circle Jupiter.  Galileo’s letter to the Prince of Venice is here and an English translation of the text attached to the diagrams is here.

Galileo did not distinguish between the moons and stars – the notion that the sun was just another star far out in the uncharted backwaters fo the unfashionable western spiral arm of the galaxy was beyond him.  But he did work out that the “Medici Stars” revolved around Jupiter and that was a major challenge to the authorities.

The second great Galileo experiment was to work out that Venus revolved around the sun – and for that he took observations in the morning and the evening for considerable time – observing the crescent shapes.  

And Brad Delong has shown you can do that with an iphone.

Here is Brad’s image

 – and here is an expansion of the pixels of Venus.

When technology that good is easily available the excuses for basic scientific ignorance are becoming thinner and thinner.

Now to take the eight year old out with an iphone and teach him some real science!  There are few excuses...

John Hempton

The bull in the china shop

Well I am relieved.  It has been my contention that Sheila Bair is the bull in the china shop.  She confiscated Washington Mutual because it might cause a problem for her agency.  There is little evidence that WaMu was illiquid or insolvent at the time – and indeed if the losses were only what JP Morgan has assumed then the bond holders (which she wiped out) would have received considerable value – probably par.  

I contend she did this based on the narrow and short-dated assumption that it would make a potential headache for her agency (and her agency alone) go away.  

The confiscation of WaMu caused the rapid collapse of Wachovia – which she insisted could only be saved with a government guarantee when within a few days she had a hard offer involving no government money.

Her actions destabilised Citigroup as well.

There is plenty of evidence she made these mistakes all on her own and she should resign.

Press reports indicate that Geithner wants her gone.  Geithner is no political hack wanting to get rid of the Republican.  He just wants to get rid of the dangerous and irresponsible bull in the china shop.

Some press indications are that Sheila Bair will be hard to remove.  She is a statutory appointment after all – and her position will survive a change in government.  And if she puts up a fight she will be even more destabilising.

A change in administration is the perfect opportunity for Sheila to resign.  Then she can do it without disgrace.  But my contention is that every day Sheila is in the position is another day added to the end of the financial crisis.  She, more than anyone, makes it clear that intermediate funding in banks is insecure – and fixing that perception is the first and most important thing needed to make this crisis go away.

So Sheila, you are going to be asked to resign anyway.  Please make it quick, give your successor time to undo the damage you did and help get this crisis over with.  

John Hempton

Great interviews in finance

Sorry - YouTube has mangled the video and the sound is stuffed.  I can't seem to fix.  

Mish alerted me that Land America had filed bankruptcy.  Its a company I used to follow - but I never shorted.  

This is a gem - an interview from only 18 months ago.

The money quote: "the United States real estate economy is the envy of the world... the ability to create value out of real estate by taking mortgages and securitising them..."

And this was the seemingly boring business of title insurance!

Goodbye Tanta - I will miss you...

Doris Dungey (Tanta) - a really competent blogger in the mortgage area has died at an unfortunately young age.  

I am not much into obits...  I would rather praise the living when they can enjoy it.

But I will give you one blog post - an absolute gem which shows the quality of the woman:

http://calculatedrisk.blogspot.com/2007/03/unwinding-fraud-for-bubbles.html

John Hempton

Weekend edition: surf lifesaving as a spectator sport

I am a volunteer surf lifesaver at Bronte Beach.  I used to be at North Bondi (one of the softest but most crowded Sydney beaches) but moved my allegiance when I moved to Bronte.  It scares me though because Bronte Beach, whilst having a reputation as a family beach – and a multi-cultural hang-out – is actually quite dangerous.  A large amount of water comes in (usually on the north end of the beach) and cycles out in a fierce rip.  [For the uninitiated a rip is a current going straight out to sea.]  The rip is a “Kieren Perkins rip” because on days like today you would need to be Kieren Perkins to swim in against it.

Anyway I had a patrol on Saturday afternoon.  It was quiet – very quiet because it rained in the morning and rain was predicted in the afternoon.  I spent my time chatting to a lifesaver who I had never previously met – but who was a lot fitter than me.  (He rowed for Australia at the Beijing Olympics.)  

Sunday afternoon was different.  The beach was crowded, the surf was up and the rip was strong.  

I said Bronte had a reputation as a family beach – and so it does – but for two main reasons:

1. there is a large grassed area where large family groups (extended newer-Australian families, drunk groups of younger Anglo-Saxons) have barbeques, play cricket or kick soccer balls, and
   
   
2. propped against the southern edge of the beach is a big rock hole which is very child-friendly at low tide.  Bulldozers have dragged the rocks out of the centre – and left a beautiful and calm sandy swimming hole – known ubiquitously as the “bogey hole”.  You can see a picture of it in calm conditions here.  
   

I was down the beach with my son (aged 8), a friend of similar age and the neighbourhood six year old.  The surf was up so we were playing in the bogey hole.  The kids were playing with some other 8 year olds who had come with an extended group of Muslim Australians.  I wound up chatting with one of the dads.  The Muslim group was racially mixed but highly identifiable because the women were wearing head-clothes.  Even then there was a range of hijab – black African muslims in form fitting jeans but loose (and hence obscuring) upper-body clothing and fairly full hijab, and a European Muslim (probably Bosnian) wearing a scarf loosely over her shoulders but not obscuring any of her hair.  The men told me they had come from Belmore – a suburb of Sydney with a large mosque and a double-digit percentage of Arabic speakers.

The boys would have fitted neatly in anywhere.  They were wearing board shorts, playing a little loudly and splashing water on each other - and they spoke in English and Arabic.  Some of the women were throwing sand at them as they played in the bogey hole.  

Two of the fathers climbed through the rocks that sheltered the bogey hole from the wild surf (the waves had 8-10 foot faces).  The tide was rising and the dads enjoyed the water splashing around them.  At least they enjoyed it until they didn’t – as the waves were getting just a little rough.

I wasn’t the only person that noticed.  Two lifesavers (clubbies) were also watching from the shore.  They tried climbing around the rocks to talk to the men – but they thought better of it and snuck back to the beach.  

I should explain "clubbies".  The beaches of Sydney mostly have amateur surf-lifesaving clubs.  However the amateurs only patrol the beaches on weekends and public holidays.  They also have professional life-guards.  The clubbies wear red-and-yellow.  The life-guards (almost all former clubbies) wear blue.  The lifeguards are all amazingly fit and competent.  The lifesavers (clubbies) vary – from overweight middle-aged finance executives (me) to super-fit amateurs (the Olympic rower I was chatting with on Saturday).  

Anyway the two clubbies were on it – as the obvious happened.

The two blokes – now getting quite uncomfortable as bigger surf washed them against the rocks – decided to swim for it.  They swam out to sea.

The only problem was that they wound up immediately in a very strong rip – and it was obvious within seconds that they were going to need rescuing.  There were two lifesavers.  They immediately radioed back to the tent what was happening and one clubby got into the surf on a yellow rescue board.  The other stayed on the shore watching.  By this stage I was watching – along with twenty others – quite enjoying the spectacle.  I tapped the wife of one the victims on the shoulder – a woman of indeterminate Middle Eastern origin in a fairly formal hijab.  I pointed out her husband needed rescuing.  She didn’t believe I was talking about her husband – and ignored me.  She apologised later – when she was getting over her utter panic.  

Anyway a lifeguard (blue shirt – blue rescue board) ran in (he heard the radio) and got out in maybe 20 seconds.  Some surfers had also managed to get to our hapless victims.  The clubby cheered me up by proving my inadequate surf-rescue board skills were not alone.  Clubby number 1 lost the board as he was trying to get victim number 2 onto the board.  The lifeguard came in with victim number 1.  [It turns out later than number 2 was a competent swimmer who did not understand rips and would have drowned eventually, number 1 could barely swim and would have drowned rapidly without rescue.  Victim 2 held onto the clubby 1 whilst they both awaited something that looked like rescue.]

The rescue board washed up on the beach – and I was sprinting down the beach ready to grab it and do some heroics of my own.  Another clubby beat me to it – and as he was on patrol and in uniform it really was his turn.  He went out.  I grabbed a rescue tube (just some floatation) and decided if clubby number 2 was going to have troubles that I would jump into the rip and ride the same current out as they had.  I was not needed (for which I was grateful).  

Only about this time did the Muslim women realise that their men-folk were in mortal danger.  There must have been 50 people watching this as the best entertainment all day before the women realised there was a problem.  But once the Muslim women realised there was a problem there was plenty of commotion.

The two blokes were ferried into shore.  The lifeguard (who had gone out again in case he was needed) surfed in gracefully on his knees on a very large wave.  He made me feel inadequate as to my rescue board skills all over again.  

I chatted freely to the woman in the formal hijab.  She was shocked – and told me how common drowning was in her home country.  I explained to her that the clubby that rescued her husband was a volunteer – she had no idea.  She was amazed that volunteers would “risk their lives” like that.  For a competent lifesaver there isn’t that much risk – but the action is still of volunteers savings lives.

The last I saw the whole group of Muslim families – maybe 20 people in all – walked up to the lifesavers’ tent to say thank you.  

A few years ago there were race riots at Cronulla beach with drunken Anglo louts beating up on Maronite and Muslim Lebanese Australians.  The proximate cause was a Lebanese lout assaulting a lifesaver after the lifesaver had told the man not to play soccer on the beach (which was crowded with passive sunbathers).  The lifesaving clubs however didn’t cover themselves in glory either – with one racist younger lifesaver having written on his body the line “we crew here – they flew here”.  

But today made me proud.  It made me proud of my surf club and made me proud of Australia.  It also made it patently clear that there are ways that we can coexist – that Muslim/Western relations do not have to be all bad.  And that us Westerners would risk our lives for a couple of wayward Muslim blokes just as we would for each other.

John

Even Krugman doesn't get how plainly irrationally bad it is out there

I used to think that if the government only made the GSE obligations full faith and credit (FFC) obligations the remaining problems in the conventional mortgage market would go away.  Paul Krugman still thinks it:

The Fed is confusing me

OK, so the Fed is planning to buy obligations of the GSEs — as well as securities guaranteed by the GSEs. This is in an effort to lower spreads. The Fed will in effect pay for these purchases by having the Treasury issue U.S. government debt.

But the GSEs have been nationalized. Their obligations are already U.S. government debt. What’s going on here?

It’s true, as the Fed’s statement says, that

Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late.

But that’s presumably because the Bush administration, weirdly, has refused to declare that GSE debt is backed by the full faith and credit of the US government. Why not just make that declaration, turning GSE debt into Treasury obligations, rather than stuff the obligations onto the balance sheet of the Federal Reserve?

Is this some kind of strange political game? Is there something else going on here? Inquiring minds want to know.

He is of course wrong.  The Goldman Sachs obligation is full faith and credit of the US Treasury - and trades at an irrationally wide spread.  Nobody has given a plausible explanation (except lack of trust in the government) as to why the spread on FDIC paper issued by Goldies but backed by the full faith and credit of the US Treasury is 200 bps.

For once the world is even stranger than Paul Krugman thought and stranger than his models.

Now there is an implication here - which is if the market will not believe that something is full faith and credit of the US Government then the government should buy it, issue treasuries and make an arbitrage profit.  There is a free lunch here.  Of course this mucks government accounting around (the debts wind up on balance sheet of the government rather than just contingent).  However it does not change the economics from the government perspective.

And in the process we go from the government buying the troubled assets of financial institutions to the government buying the guaranteed liabilities of financial institutions.

John Hempton

Proof we are not in Kansas any more

Brad Delong thinks that the failure of Citigroup is about “risk premium”.  I think it is about trust – and I guess in some sense these are the same thing.  However it is about trust then no plausible amount of capital solves the problem – whereas in the Brad DeLong model there is a reasonably estimable and plausible quantum of capital that is sufficient.

Anyway today was a deal that proved to me just how strange these markets are. 

 

Goldman Sachs got to issue some FDIC bonds.  These bonds are guaranteed by the FDIC and are hence full faith and credit of the US government.  They were issued at over 200bps of spread.  The spread traded to about 200bps.

That spread makes no sense whatsoever unless you really believe that there is a chance that the US government is going to selectively default.

Once upon a time Long Term Capital Management traded “on-the-run” versus “off-the-run” Treasury bonds, noting that a 29 year bond (which was off the run) had a different yield to the current 30 year bond (which was the reference bond and hence more liquid).  If you went long the illiquid bond and short the liquid bond you might make 16-20bps.  Lever that 100 times and you get quite a nice return on equity.  However if the spread between them (call it a liquidity premium) blows out you can get into some trouble.  

Now we have an FDIC bond with a spread of 200bps or more.  No need to lever 100 times – ten times will make you a super-profitable hedge fund.  And you are leveraging 10 times to term matched US Government obligations which should be less risky than the slightly term mismatched positions taken by LTCM.  

Of course it is a little harder these days to borrow the government securities needed to pull the LTCM stunt.  (There has been a problem with fails in the Treasury market.)  But the margin leaves me gob-smacked.  

If anyone has an explanation other than trust (a belief the US government might default on full faith and credit obligations) or liquidity let me know.  If Brad Delong is right – and it is about capital then this should be able to be levered 5 times as there should be little capital risk.  

But I don’t think it is about capital – it is about something else – something altogether darker and harder to solve.

In the Wizard of Oz all you needed to do was click your red shoes together.  

I have been trying all day!

John Hempton

Arguably the best proxy disclosure of the year

I had never heard of Schulman until today – but then Footnoted led me to  a proxy disclosure.  I won’t adorn this:

During fiscal 2008, the Compensation Committee determined that maintaining a lease on a private airplane was no longer a cost-effective method for providing business-related transportation to our Named Executive Officers and Directors. The airplane was used only for business-related travel, and personal use was not permitted. With the termination of the lease on the airplane, it also became increasingly difficult and cost prohibitive to access our Canadian fish camp. Consequently, the fish camp, which was only used for business entertainment purposes, was offered for sale during 2008. The only offer to purchase the fish camp came from Terry L. Haines, our former Chief Executive Officer and President. Ultimately we negotiated with Mr. Haines to sell the fish camp for a purchase price of $55,000 and the transaction closed during fiscal year 2009.

Reaction to the bailout

The consensus is that the Citigroup bailout was bad - see Mark Thoma.

I am going to differ here.  The bailout was well designed...

except

1).  The Government should have taken a much larger fee - at least 20 percent ownership of Citigroup - and arguably more.  Shareholders should be punished.

2).  The attachment point of the excess of loss policy is too low.   If the attachment point had been 80 billion Citigroup would survive.  There was no need for a 40 billion dollar attachment point.  

The problem with the bailout was not the design - it was the amount extracted from Citigroup shareholders.  The government took too much risk for too little reward.

I am surprised that the shareholders were not effectively wiped out as per Fannie, Freddie, AIG.

Not displeased - but somewhere I wish the government would get a happy medium somewhere - rather than one rule Citigroup and one rule for Fannie.

John Hempton