Who pays the taxes in your neighborhood?

Here is an interesting exercise. Download the 2008 tax spreadsheet from the IRS website for your state to see who files returns along with amazing amount of other information - dependents, mortgages, deductions, etc.

You will be able to chart who pays the taxes in your area. And the chart will probably look like this, with the highest earners (the famous 1%) paying the bulk of the taxes.   Enjoy.

Government vs. the private sector - compare and contrast

This video was sent to us by one of the readers. It seems to be factually correct, although it would be great to have someone with a strong knowledge of US federal government employee statistics to verify it. The growth in numbers and salaries of government employees seems staggering. The contrast to the private sector is also eye-opening. And it does paint a grim picture of the US voter lack of willingness to make the necessary budget cuts because so many voters are in some way tied to the government. Some of the statistics show why the Supercommittee was doomed from the start.

The new IMF facility Is no bazooka

The IMF announced a new facility today to deal with the eurozone crisis. The member states will be able to borrow short term funds in the amount that is ten times their "member quota". That seems like a big number, but here is the estimate based on recently published quotas. The numbers published are in the IMF's currency called XDR (based on the IMF Special Drawing Rights). Here are the numbers in EUR billion:

Austria	18
Belgium	40
Greece	9
Ireland	11
Italy	68
Portugal	9
Spain	35

This will definitely help, but it's a far cry from the 1 trillion "bazooka" the EU has been working on. Below is a chart of debt maturities for Italy, France, and Spain. The IMF facility limits will be reached fairly quickly.

Source: Barclays Capital

In addition there will be resistance from the US to commit significant incremental capital to Europe's "bailout" - effectively putting the US taxpayer at risk via exposure to the IMF.  It would not be a good move in an election year.

Spain's yield curve shows desperation

As Spain struggled to sell short-term debt this morning in an auction that showed how desparate the situation is becoming, the bond spreads to Germany hit a new high.

5-yrs Spain to Germany spread (Bloomberg)

Spain's government bond yield curve has flattened dramatically in the last month, approaching inverted levels. This curve now looks like a junk/stressed corporate credit curve.

Spain Government Bond Yield Curve - now and a month ago (Bloomberg)

These levels are not sustainable as the government's interest expense will spiral out of control and corporations simply will not be able to borrow. What adds fuel to the fire here is that Spain's unemployment rate is 21.5% with some 5 million unemployed. Restructuring/default seems inevitable.

MF Global failure - asset/liability mismanagement 101

Let's start the morning with a video of Emanuel Derman being interviewed about MF Global. This is how hype in the media starts. The question effectively posed to Derman is how financial models played a role in MF GLobal failure. Derman accurately answers that it's the old funding mismatch. And where was the "market risk management"? Again, it's all about asset/liability (mis)management 101. MF Global failure has nothing to do with models. Enjoy.

The Hype Award Goes to Ned Ryun, Founder and President of the American Majority

Many so-called "grass roots" movements in the US are important as they challenge the status quo and sometimes accelerate positive change. But one problem these organizations and often their leaders suffer from is not fully understanding what it is they are trying to accomplish. The Tea Party is one of those movements. Many point to Ron Paul as representing the Tea Party movement, but that is not entirely true. Ron Paul is a Libertarian, which is a much older group. Ron Paul understands Libertarian principles fully and represents them without compromise.  He also knows his facts.

The Tea Party however could do better than someone like Ned Ryun, Founder and President of the American Majority organization. Here is what Mr. Ryun had to say in the Huffington Post:

To this day Goldman Sachs, JP Morgan Chase and other banks borrow billions from the government through no-interest loans, then loan the money back to the government at interest. Banks then turn around and charge taxpayers 4-5% as mortgage owners and 20-25% interest as credit card customers -- so that we can use our own money. We take the risk. We pay the bill. They make the profit. In what world is that free market capitalism?

Mr. Ryun, where did you learn this? Did you fill your brain with media sound bites and conspiracy bloggers? A little education will help your cause tremendously. Banks are not borrowing "billions from the government through no-interest loans". They are in fact lending to the Fed as much as $1.5 trillion (see chart below). It's called "excess reserves" (but sounds like you slept through that lecture in school.)

Next time before you decide to regurgitate other people's hype, try to learn what the facts are. Otherwise you are doing a disservice to your organization. So congratulations Mr. Ryun. Today you get the Sober Look Hype Award.

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Sober Look Mobile

Sober Look Mobile is now turned on using Google Blogger. Hopefully it will no longer crash Blackberries (that job is best left to RIM).

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NYU Shows us "How to Repair a Failed System"

NYU Stern recently presented a series of White Papers titled “Restoring Financial Stability: How to Repair a Failed System”. And how exactly does NYU plan to repair the system? The answer is by getting into the ratings game. This wouldn’t just be the letter ratings but a quantitative approach to measuring how “systematically risky” a financial institution is.

From NYU Stern: This calculation takes three steps. First it estimates on a daily basis, the relation between equity returns on a particular firm and the broad market. These are estimated using asymmetric volatility, correlation and copula methods similar to those in other sections of V-Lab. Then it simulates this process in order to calculate the drop in equity value of this firm that would be expected if the aggregate market falls more than 40% in a six-month window. This is called Long Run Marginal Expected Shortfall or LRMES. Finally, equity losses expected in a crisis are combined with current market value of equity and book value of debt to determine how much capital would be needed in a crisis in order to maintain an 8% capital ratio to asset value.

Using equity prices to measure the "riskiness" of a financial firm is not a novel approach, but the goal here seems to be to comprehensively combine various metrics to come up with a scale. It results in a ranking system that lists financial institutions from the most risky to the least. Here is their list of the “riskiest” banks – with Deutsche Bank being the riskiest of the top 15 in terms of system-wide impact:

Deutsche Bank AG
BNP Paribas
Barclays PLC
Mitsubishi UFJ Financial Group
Credit Agricole SA
Royal Bank of Scotland Group PLC
HSBC Holdings PLC
Mizuho Financial Group Inc
Bank Of America
ING Groep NV
Societe Generale
JP Morgan Chase
Citigroup
Lloyds Banking Group PLC
Sumitomo Mitsui Financial Group

Not surprising to see DB here because of their size, leverage, and sovereign debt exposure.  It’s interesting to point out that there are no US institutions in the top five and only one – BofA in the top ten. US dealers (GS and MS) are not even on the top 15 list.

If these firms are sorted by leverage instead of systematic risk, a very different top 15 list is emerges:

Dexia SA
Bank of Greece
SNS REAAL NV
Credit Agricole SA
Banco Comercial Portugues SA
Commerzbank AG
Societe Generale
Deutsche Bank AG
Natixis
KBC Groep NV
Banca Monte dei Paschi di Siena SpA
Barclays PLC
Banco Popolare SC
National Bank Of Greece
Bank of Ireland

Most of these are not a surprise.  Also there are no US institutions on that list. In fact these are some of the "scarier" firms that could (or already have) send a shock through the system.

This is clearly an interesting quantitative tool, but as always, the danger is that regulatory bodies will misunderstand the results and make policy decisions based on misconceptions. The methodology could potentially be used as way to flag certain institutions by a global regulator, but it certainly is not a way to “Repair a Failed System”.

Thanks to Ed Grebeck of Tempus Advisors for the tip.

SoberLook.com