This is a great summary that echoes many of my views. Taleb has been right on the mark for the last 4 or 5 years and continues to "get it".
Contast the analysis below to all the sheeple commentators on Bloomberg and CNBC that praise the morons like ("Subprime is Contained") Bernanke and (deer in headlights) Geithner.
The real answer to the "crisis" was to de-lever the financial system and general economy - the main step being to force creditors to convert their stakes for equity to recapitalize the failing companies. Not for the government to arbitrarily pick winners and losers while allowing some companies to fail and givings tens of billions of dollars in subsidies and bailouts to others.
Nassim Taleb's Ten Principles concerning Black Swans
1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks– and hence the most fragile – become the biggest.
2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and riskbearing.
We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.
3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get
us out of this mess. Instead, find the smart people whose hands are clean.
4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.
5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.
6. Do not give children sticks of dynamite, even if they come with a warning. Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.
7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.
8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.
9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).
10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties. Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news. In other words, a place more resistant to black swans.
Thursday, July 30, 2009
Thursday, July 23, 2009
Frugal McDougall
This is just too good not to post...from Mish's website:
Frugal McDougall, A Rhyme For Our Times (http://globaleconomicanalysis.blogspot.com/2009/07/frugal-mcdougall-rhyme-for-our-times.html)
Frugal McDougall worked very hard
Bought things with cash and not credit cards
And when it came to the things that he bought
Things that he needed were all that he sought.
Once he was sure that his bills were all paid,
The money left over was carefully saved.
You see in the future he hoped to retireAnd knew very well what that would require.
His neighbors were foolish and laden with greed.
They focused on wants instead of on needs.
They went out to dinner about every night.
When you’re middle class that’s one of your rights.
When they got their paychecks they spent every dime.
Having money left over would have been a crime.
Their credit was pushed to its uppermost limit,
When it came to debt they were very deep in it.
When Frugal McDougall would try to explain
The value of saving they all called him names,
So he wouldn’t bother most of the time.
He said it was something like ‘pearls before swine’
Meanwhile the neighbors got credit card offers,
Promising money to fill up their coffers.
Consumed by their greed they filled out every one,
With barely a thought as to what they had done.
And when the cards came they all ran about
Foolishly spending till they were maxed out.
A pool for the yard, perhaps some new skis.
They spent money like it was growing on trees.
Some even went on a cruise to the Med,
Where they all laid around looking tanned and well fed.
No thought was given to how they would pay,
For surely a bill would be coming their way.
In complete disbelief McDougall looked on.
He knew very well that they had it all wrong.
And the foolish idea that was shared by them all
Was that happiness was now on sale at the mall.
He’d been chastened so often he now bit his lip,
For fear if he didn’t he’d let something slip.
His neighbors would learn of his total disdain
For the way that their money was thrown down the drain.
Instead he would focus on his quiet life,
With his quiet children and his quiet wife.
In their simple way their needs were all met,
And their simple life was quite free of debt.
Then one day his neighbor came home joyously
In a gigantic brand new s. u. v.
Frugal McDougall just stood there and gawked,
Confused and bewildered and totally shocked.
He knew that his neighbor made twelve bucks and hour
And shouldn’t have this kind of purchasing power.
And when asked how he paid for this monstrosity
The neighbor replied, “with my home equity.”
The debt didn’t matter, the man was a dunce,
Whose only concern had been "how much a month."
The neighborhood pondered what he had just said
And one by one light bulbs came on in their heads.
Then sure enough the very next day,
New cars appeared in every driveway.
McDougall now cautioned that they should take heed,
All this debt served no legitimate need,
Instead they were putting their futures at risk.
The response they delivered was angry and brisk.
Frugal McDougall was called a big fool,
And other mean names that were equally cruel.
"We are all rich," they boldly declared
As Frugal McDougall stood there and stared.
"Our homes are all worth more than twice what we paid!
The good life is ours and should not be delayed!"
But Frugal McDougall refused to be goaded
And as he expected the debt bomb exploded.
The neighborhood values were starting to fall,
Faster and faster effecting them all.
Then as his neighbor stood looking distressed,
The new s. u. v. was being repossessed.
Soon all around, the neighborhood toys,
The ones that had recently brought so much joy,
Were all repossessed or put up for sale.
The pleasures they brought had grown a bit stale.
Purse strings were tightened as jobs were now lost.
It seems the free money came at a steep cost.
Banks were collapsing as everyone bailed
From upside down houses and lifestyles that failed.
All of the debt that could not be repaid,
Was now wreaking havoc that would not be stayed.
Government bailouts now came on the scene
As political leaders were all very keen
To keep credit flowing and money being spent,
So trillions of dollars were foolishly lent,
In a desperate attempt to keep prices high,
A fact that they won’t even try to deny.
These actions were more than a little perverse,
For adding more debt only made the mess worse.
This of course left them with one thing to do.
They needed more sources of tax revenue,
So small businesses that were already hurting
Were saddled with costly additional burdens.
Many scaled back hoping they could prevail
But quite a few more of them now simply failed.
So many neighbors were now out of work,
They turned on McDougall and called him a jerk!
The papers had all said that he was to blame,
Though none had specifically called him by name.
In a foolish attempt to curry some favor
It seems that they now blamed the problem on savers.
They said "greedy savers are hording their cash
And collectively made the economy crash."
His penchant for saving was very well known.
Poor McDougall’s cover was thoroughly blown.
"Tax him,” folks cried as they all shook their fists
“And tax him some more if he tries to resist!
He has more money than he’ll ever need,”
They cried in a horrid expression of greed.
Poor Frugal McDougall was truly confused,
Saddened, frustrated and now feeling used.
He’d tried to warn people of what lay ahead,
But they didn’t listen and blamed him instead.
The country can never be restored to health,
As long as we’re exporting all of our wealth.
Closing our factories, exporting our jobs
Turning the people into angry mobs
And all of this spending with no end in sight
Is the most direct cause of our national plight!
How did this happen, where did it begin?
This foolish game’s left us no way to win.
Now the brave politicians all deny fault
As the nations economy grinds to a halt
Is this the end of the U.S. of A?
Will McDougall’s country now fade away?
He doesn’t know and he really can’t tell,
But from where he’s standing it doesn’t look well.
The above was written by D. Jones who writes:
Hello Mish
I lost my job as a corporate aircraft mechanic last year and have been writing picture book stories for kids for the last few months. They are all rhyming stories like this one but none of the others are even remotely political.
I'm in the process of illustrating the first one in the hopes of getting it published.The [above] rhyme really isn't for kids but I've been thinking I might illustrate it in a Dr. Sues style for adults and see if there are any takers.
By the way, armed with information from your web site and patrick.net I tried to warn my family and friends of what was coming and was thoroughly rebuked by more than a few of them, so I shut up about it. I've now had apologies from several that say they wish they had listened. Thanks for all your efforts on behalf of the little guy that has nowhere else to go for the truth.
Regards
D. Jones
Mish: Thanks DJ and good luck to you. Any publishers out there interested in DJ's books? If so, drop me a line and I will put you in touch.
By the way, please see Aircraft repair jobs sold to foreign workers, resumes not important if you want to understand what is happening to aircraft mechanic jobs in general.
Frugal McDougall, A Rhyme For Our Times (http://globaleconomicanalysis.blogspot.com/2009/07/frugal-mcdougall-rhyme-for-our-times.html)
Frugal McDougall worked very hard
Bought things with cash and not credit cards
And when it came to the things that he bought
Things that he needed were all that he sought.
Once he was sure that his bills were all paid,
The money left over was carefully saved.
You see in the future he hoped to retireAnd knew very well what that would require.
His neighbors were foolish and laden with greed.
They focused on wants instead of on needs.
They went out to dinner about every night.
When you’re middle class that’s one of your rights.
When they got their paychecks they spent every dime.
Having money left over would have been a crime.
Their credit was pushed to its uppermost limit,
When it came to debt they were very deep in it.
When Frugal McDougall would try to explain
The value of saving they all called him names,
So he wouldn’t bother most of the time.
He said it was something like ‘pearls before swine’
Meanwhile the neighbors got credit card offers,
Promising money to fill up their coffers.
Consumed by their greed they filled out every one,
With barely a thought as to what they had done.
And when the cards came they all ran about
Foolishly spending till they were maxed out.
A pool for the yard, perhaps some new skis.
They spent money like it was growing on trees.
Some even went on a cruise to the Med,
Where they all laid around looking tanned and well fed.
No thought was given to how they would pay,
For surely a bill would be coming their way.
In complete disbelief McDougall looked on.
He knew very well that they had it all wrong.
And the foolish idea that was shared by them all
Was that happiness was now on sale at the mall.
He’d been chastened so often he now bit his lip,
For fear if he didn’t he’d let something slip.
His neighbors would learn of his total disdain
For the way that their money was thrown down the drain.
Instead he would focus on his quiet life,
With his quiet children and his quiet wife.
In their simple way their needs were all met,
And their simple life was quite free of debt.
Then one day his neighbor came home joyously
In a gigantic brand new s. u. v.
Frugal McDougall just stood there and gawked,
Confused and bewildered and totally shocked.
He knew that his neighbor made twelve bucks and hour
And shouldn’t have this kind of purchasing power.
And when asked how he paid for this monstrosity
The neighbor replied, “with my home equity.”
The debt didn’t matter, the man was a dunce,
Whose only concern had been "how much a month."
The neighborhood pondered what he had just said
And one by one light bulbs came on in their heads.
Then sure enough the very next day,
New cars appeared in every driveway.
McDougall now cautioned that they should take heed,
All this debt served no legitimate need,
Instead they were putting their futures at risk.
The response they delivered was angry and brisk.
Frugal McDougall was called a big fool,
And other mean names that were equally cruel.
"We are all rich," they boldly declared
As Frugal McDougall stood there and stared.
"Our homes are all worth more than twice what we paid!
The good life is ours and should not be delayed!"
But Frugal McDougall refused to be goaded
And as he expected the debt bomb exploded.
The neighborhood values were starting to fall,
Faster and faster effecting them all.
Then as his neighbor stood looking distressed,
The new s. u. v. was being repossessed.
Soon all around, the neighborhood toys,
The ones that had recently brought so much joy,
Were all repossessed or put up for sale.
The pleasures they brought had grown a bit stale.
Purse strings were tightened as jobs were now lost.
It seems the free money came at a steep cost.
Banks were collapsing as everyone bailed
From upside down houses and lifestyles that failed.
All of the debt that could not be repaid,
Was now wreaking havoc that would not be stayed.
Government bailouts now came on the scene
As political leaders were all very keen
To keep credit flowing and money being spent,
So trillions of dollars were foolishly lent,
In a desperate attempt to keep prices high,
A fact that they won’t even try to deny.
These actions were more than a little perverse,
For adding more debt only made the mess worse.
This of course left them with one thing to do.
They needed more sources of tax revenue,
So small businesses that were already hurting
Were saddled with costly additional burdens.
Many scaled back hoping they could prevail
But quite a few more of them now simply failed.
So many neighbors were now out of work,
They turned on McDougall and called him a jerk!
The papers had all said that he was to blame,
Though none had specifically called him by name.
In a foolish attempt to curry some favor
It seems that they now blamed the problem on savers.
They said "greedy savers are hording their cash
And collectively made the economy crash."
His penchant for saving was very well known.
Poor McDougall’s cover was thoroughly blown.
"Tax him,” folks cried as they all shook their fists
“And tax him some more if he tries to resist!
He has more money than he’ll ever need,”
They cried in a horrid expression of greed.
Poor Frugal McDougall was truly confused,
Saddened, frustrated and now feeling used.
He’d tried to warn people of what lay ahead,
But they didn’t listen and blamed him instead.
The country can never be restored to health,
As long as we’re exporting all of our wealth.
Closing our factories, exporting our jobs
Turning the people into angry mobs
And all of this spending with no end in sight
Is the most direct cause of our national plight!
How did this happen, where did it begin?
This foolish game’s left us no way to win.
Now the brave politicians all deny fault
As the nations economy grinds to a halt
Is this the end of the U.S. of A?
Will McDougall’s country now fade away?
He doesn’t know and he really can’t tell,
But from where he’s standing it doesn’t look well.
The above was written by D. Jones who writes:
Hello Mish
I lost my job as a corporate aircraft mechanic last year and have been writing picture book stories for kids for the last few months. They are all rhyming stories like this one but none of the others are even remotely political.
I'm in the process of illustrating the first one in the hopes of getting it published.The [above] rhyme really isn't for kids but I've been thinking I might illustrate it in a Dr. Sues style for adults and see if there are any takers.
By the way, armed with information from your web site and patrick.net I tried to warn my family and friends of what was coming and was thoroughly rebuked by more than a few of them, so I shut up about it. I've now had apologies from several that say they wish they had listened. Thanks for all your efforts on behalf of the little guy that has nowhere else to go for the truth.
Regards
D. Jones
Mish: Thanks DJ and good luck to you. Any publishers out there interested in DJ's books? If so, drop me a line and I will put you in touch.
By the way, please see Aircraft repair jobs sold to foreign workers, resumes not important if you want to understand what is happening to aircraft mechanic jobs in general.
Wednesday, July 01, 2009
The Definition of Insanity
Back to my roots on the global housing fiasco...
The definition of insanity is doing the same thing over and over again and expecting a different result. Well, the powers that be in Washington have decided to start banging their heads against the wall again but believe that this time, we will have a positive outcome.
See the article below regarding the latest housing bailout (there have been so many now that it is no longer possible to keep count)... This bill was passed by the house of reps today with a new 125% LTV cap.
Obama Mortgage Refinancing Program May Expand, Lockhart Says
Share Email Print A A A
By Dawn Kopecki and Jody Shenn
June 19 (Bloomberg) -- President Barack Obama’s program to help more homeowners refinance may be expanded to include borrowers who owe more than 105 percent of their homes’ values, Federal Housing Finance Agency Director James Lockhart said.
The Obama administration is considering allowing Fannie Mae and Freddie Mac to refinance loans with current loan-to-value ratios of 125 percent or higher, Lockhart said at a National Association of Real Estate Editors Association conference in Washington yesterday.
The Home Affordable refinancing program, announced Feb. 18, is part of the U.S. government’s efforts to stem soaring foreclosures and bolster consumer spending.
The 125 percent level on loan-to-values would preserve the ability of Fannie Mae and Freddie Mac to package and sell the debt into so-called real estate mortgage investment conduits, he said. While 125 percent loan-to-value ratio is on the table, Lockhart said “it’s not necessarily the number we’re going to end up with.”
The program has been “seeing a slowdown” as mortgage rates increase, he said. The average rate on a typical 30-year fixed loan was 5.38 percent this week ended yesterday, according to McLean Virginia-based Freddie Mac. The rate is up from a record low of 4.78 percent at the end of April.
Under the program, borrowers with loans already owned or guaranteed by Washington-based Fannie Mae or Freddie Mac who have loan-to-value ratios of 80 percent to 105 percent and aren’t delinquent can refinance without buying mortgage insurance, or paying for more insurance than they already have.
Warehouse Lending
Lockhart also said yesterday that his agency, the companies’ regulator, is looking at ways for Fannie Mae and Freddie Mac to help the so-called warehouse lending market, which provides financing to smaller, independent mortgage companies, amid a credit crunch.
While Fannie Mae and Freddie Mac are prohibited by law from lending directly to other firms, Lockhart said they may be able to provide the market some liquidity by committing to purchase multifamily and other loans. The U.S. seized Fannie Mae and Freddie Mac and put them under FHFA’s control in September.
NC: So we are going to solve the housing fiasco by allowing people to borrow 125% of their home's value???? Isn't this what got us into this mess to begin with. Here are just a few problems with this idea:
1) You are locking people into a mortgage that leaves them 25% in the hole right from the get go. In other words, on a $250,000 mortgage - if they choose to walk away from their house rather than do this asanine refinancing - they immediately save around $70,000 (which is probably close to 2 years of after tax income for someone with a $250,000 mortgage.
2) Fannie and Freddie are locking into mortgages where they have negative cushion on a loan being given to someone who is already in the process of defaulting on their current loan.
And don't forget that Fannie and Freddie are the two already insolvent companies that are sucking an aggregate of $200 billion in blood money from the taxpayers. So its not like they have a lot of cushion against the inevitable defaults they will be facing on these loans.
3) The Government now wants to bailout the so-called warehouse lending market which provides financing to small-time mortgage brokers. Where do I begin here?
Here is a start: mortgage brokers are those scumbag hucksters who preyed on the elderly and other non-financially savvy people to put them into subprime and adjustible-rate loans that they couldn't pay and brought the global financial system to the brink of total meltdown.
That is a great plan. Look - I am still generally positive on Obama. But he needs to put together a new financial cabal. A good start would be to can Bernanke and (deer-in-headlights) Geithner. These guys are dangerous.
The definition of insanity is doing the same thing over and over again and expecting a different result. Well, the powers that be in Washington have decided to start banging their heads against the wall again but believe that this time, we will have a positive outcome.
See the article below regarding the latest housing bailout (there have been so many now that it is no longer possible to keep count)... This bill was passed by the house of reps today with a new 125% LTV cap.
Obama Mortgage Refinancing Program May Expand, Lockhart Says
Share Email Print A A A
By Dawn Kopecki and Jody Shenn
June 19 (Bloomberg) -- President Barack Obama’s program to help more homeowners refinance may be expanded to include borrowers who owe more than 105 percent of their homes’ values, Federal Housing Finance Agency Director James Lockhart said.
The Obama administration is considering allowing Fannie Mae and Freddie Mac to refinance loans with current loan-to-value ratios of 125 percent or higher, Lockhart said at a National Association of Real Estate Editors Association conference in Washington yesterday.
The Home Affordable refinancing program, announced Feb. 18, is part of the U.S. government’s efforts to stem soaring foreclosures and bolster consumer spending.
The 125 percent level on loan-to-values would preserve the ability of Fannie Mae and Freddie Mac to package and sell the debt into so-called real estate mortgage investment conduits, he said. While 125 percent loan-to-value ratio is on the table, Lockhart said “it’s not necessarily the number we’re going to end up with.”
The program has been “seeing a slowdown” as mortgage rates increase, he said. The average rate on a typical 30-year fixed loan was 5.38 percent this week ended yesterday, according to McLean Virginia-based Freddie Mac. The rate is up from a record low of 4.78 percent at the end of April.
Under the program, borrowers with loans already owned or guaranteed by Washington-based Fannie Mae or Freddie Mac who have loan-to-value ratios of 80 percent to 105 percent and aren’t delinquent can refinance without buying mortgage insurance, or paying for more insurance than they already have.
Warehouse Lending
Lockhart also said yesterday that his agency, the companies’ regulator, is looking at ways for Fannie Mae and Freddie Mac to help the so-called warehouse lending market, which provides financing to smaller, independent mortgage companies, amid a credit crunch.
While Fannie Mae and Freddie Mac are prohibited by law from lending directly to other firms, Lockhart said they may be able to provide the market some liquidity by committing to purchase multifamily and other loans. The U.S. seized Fannie Mae and Freddie Mac and put them under FHFA’s control in September.
NC: So we are going to solve the housing fiasco by allowing people to borrow 125% of their home's value???? Isn't this what got us into this mess to begin with. Here are just a few problems with this idea:
1) You are locking people into a mortgage that leaves them 25% in the hole right from the get go. In other words, on a $250,000 mortgage - if they choose to walk away from their house rather than do this asanine refinancing - they immediately save around $70,000 (which is probably close to 2 years of after tax income for someone with a $250,000 mortgage.
2) Fannie and Freddie are locking into mortgages where they have negative cushion on a loan being given to someone who is already in the process of defaulting on their current loan.
And don't forget that Fannie and Freddie are the two already insolvent companies that are sucking an aggregate of $200 billion in blood money from the taxpayers. So its not like they have a lot of cushion against the inevitable defaults they will be facing on these loans.
3) The Government now wants to bailout the so-called warehouse lending market which provides financing to small-time mortgage brokers. Where do I begin here?
Here is a start: mortgage brokers are those scumbag hucksters who preyed on the elderly and other non-financially savvy people to put them into subprime and adjustible-rate loans that they couldn't pay and brought the global financial system to the brink of total meltdown.
That is a great plan. Look - I am still generally positive on Obama. But he needs to put together a new financial cabal. A good start would be to can Bernanke and (deer-in-headlights) Geithner. These guys are dangerous.
Sunday, June 21, 2009
Goldman Sachs Pulls Off 2nd Biggest "scam" in Financial History
Of course, it was done completelly legally although the ethics are another question.
Record Bonuses on tap for Goldman Staff
by CalculatedRisk on 6/21/2009 09:56:00 AM
From The Observer: Goldman to make record bonus payout (ht Jonathan)
Goldman Sachs staff can look forward to the biggest bonus payouts in the firm's 140-year history after a spectacular first half of the year ...
Staff in London were briefed last week on the banking and securities company's prospects and told they could look forward to bumper bonuses if, as predicted, it completed its most profitable year ever....In April, Goldman said it would set aside half of its £1.2bn first-quarter profit to reward staff, much of it in bonuses. It is believed to have paid 973 bankers $1m or more last year, while this year's payouts are on track to be the highest for most of the bank's 28,000 staff, including about 5,400 in London.
NC: I have no problem with people making an honest buck - or even millions of them. And I have no personal problem with Goldman Sachs, in fact, I have several friends that work there and I obviously hope they get a good bonus. But this scam they are on the verge of pulling off is truly infuriating.
I have done some research on Goldman's "record profits" based on their 2008 annual report and some articles that were printed in October - December of last year and this is how I believe it went down (take that with a grain of salt).
[Please note that this is my analysis and, obviously, could be incorrect (especially some of the details). I welcome any comments, feedbacks and corrections whether posted by name or anonymously.]
Record Bonuses on tap for Goldman Staff
by CalculatedRisk on 6/21/2009 09:56:00 AM
From The Observer: Goldman to make record bonus payout (ht Jonathan)
Goldman Sachs staff can look forward to the biggest bonus payouts in the firm's 140-year history after a spectacular first half of the year ...
Staff in London were briefed last week on the banking and securities company's prospects and told they could look forward to bumper bonuses if, as predicted, it completed its most profitable year ever....In April, Goldman said it would set aside half of its £1.2bn first-quarter profit to reward staff, much of it in bonuses. It is believed to have paid 973 bankers $1m or more last year, while this year's payouts are on track to be the highest for most of the bank's 28,000 staff, including about 5,400 in London.
NC: I have no problem with people making an honest buck - or even millions of them. And I have no personal problem with Goldman Sachs, in fact, I have several friends that work there and I obviously hope they get a good bonus. But this scam they are on the verge of pulling off is truly infuriating.
I have done some research on Goldman's "record profits" based on their 2008 annual report and some articles that were printed in October - December of last year and this is how I believe it went down (take that with a grain of salt).
[Please note that this is my analysis and, obviously, could be incorrect (especially some of the details). I welcome any comments, feedbacks and corrections whether posted by name or anonymously.]
- The "AIG bailout" was always about funneling tax payer money to the banks. Basically, the Treasury (namely Hank Paulson and now Geithner) and the Fed found away to subsidize their buddies on Wall Street without needing congressional approval. The sent the money via derivative contracts between AIG and the Wall Street banks under the guise of a Fed bailout of AIG.
- You see, and this is from the GS annual report, Goldman was already protected from an AIG default. They had purchased derivative contracts called CDS (credit default swaps) which are investments that go up in value when a reference company - in this case AIG - has a decline in creditworthiness. These contracts are generally bi-lateral agreements between two entities but their value is determined by a very liquid CDS market.
- Ironicallly, the reason that Goldman was hedging (or mitigating) its risk of AIG default is that it had $20 billion of CDS trades with AIG. In other words, Goldman had billions of dollars worth of CDS contracts with AIG that were protecting Goldman from defaults of mortgage bonds. It protected itself from an AIG default by buying CDS protection on AIG with completely independent 3rd parties.
- In October, when it appeared that AIG was about to go bankrupt, the CDS contracts on AIG would haved increased in value several times over again. So let's say on $20 billion worth of contract value that was purchased as $500 million, the value was now $15 billion.
- Goldman closed its CDS trades with the 3rd parties at a huge gain - somewhere around $10 billion (this is deduced from the mosaic theory between the 2008 annual report and several media reports that I read last year). Some people say that Goldman was told by Paulson (the former CEO of Goldman who still owns hundreds of million dollars worth of GS shares) that AIG would be rescued, so they closed the trades knowing that AIG would not default. But there is no evidence of this, so that can be ignored.
- Either way, Goldman already protected itself from the AIG default risk and was greatly compensated for doing so.
- Now, the Fed and the Treasury come in and pay out the counterparties of AIG on CDS trades. Goldman was a the top of that food chain and received somewhere between $12 billion and $20 billion in settlements from the U.S. taxpayers.
So you can now see how Goldman was able to "double-dip" and was paid out twice for the same contracts. And that is a huge part of how you are now seeing "record profits" for fiscal year 2009 as the government money via AIG is recorded as straight profits. Certainly, there are other factors allowing Goldman to report record earnings (such as a change in the FAS 157 accounting rules where companies can value assets at whatever price suits their bonus :) - but the AIG settlement is the largest factor.
To me, this is just completely outrageous. And the arrogance of announcing record bonuses is a poor PR move to say the least.
Tuesday, June 16, 2009
Risk Management, Bank Politics and the Financial Crisis
NC: To this day, my wife is convinced that I wrote this article anonymously with only a few facts and figures changed (like the fact that I would set my alarm for 5:30). I can peronally assure the readers that this description of life at a large multi-national bank is completely accurate and eerily describes the last 12 months at my previous employer.
When you deal with the guys at the top of the pyramids at these organizations, you realize just exactly how banks could have mismanaged themselves and ultimately the economy onto the brink of abyss. And if you think the regulators were any better...
The emphasis is mine.
The author is a former head of risk at a top investment bank. He wrote on condition of anonymity.
MY ALARM went off at 5.30am and I stumbled to the kitchen to make a coffee, knowing that it could be the last day I went to work for an investment bank. It was September 15 last year and Lehman Brothers had just gone under. As a result, I had lost my bank about $1 billion (£700m).
On the train I wondered what lay before me. Losses do not come much bigger. Would they let me through the door? After 13 years in banking, it looked like my number was up. The worst thing was that none of it had come as a surprise. I had inherited the risky trades a year earlier and warned my bosses about the size of the potential losses all along, but they wouldn’t let me get out of the positions. In an investment bank, nobody wants to hear about risks in their business - not while they are making money.
Until the end of 2008, I worked in a large investment bank, managing risks for the derivatives business. I was the guy who was supposed to mop up everyone else’s problems. I had to look at all the complex trades, work out what the losses could be, then find a way to protect the bank. That’s the theory.
I saw every trade. Knowing what I knew, I could work out every trick employed by these “Masters of the Universe” to line their own pockets, whether the bank made money or not. Those who make their way to the top of the pile in banking are not the best traders, but the best politicians. When it comes to complex trades, the bosses have the wool pulled over their eyes all the time by the people they employ.
Derivatives are what really confuse everyone. It’s a term that covers a whole range of contracts but basically they are bets on the future value of something - whether that’s a share, a shipment of iron ore or even the creditworthiness of another bank.
I once tried to block a large derivative deal because the maths didn’t make sense. It just wasn’t going to make enough profit to justify the 30 years of credit risk it was going to leave on the balance sheet. But the head salesman, who was behind the trade, would be paid his bonus in one year, not 30. Needless to say, he disagreed with my analysis.
My boss and I tried to face him down. He went straight for the jugular and threatened to take the matter to the head of Fixed Income, accusing us of curtailing good client business and short-changing the shareholders. I tried to make my case but my boss’s appreciation of derivatives was weak, to say the least. I could see he had lost my point in the first sentence of my argument.
By sentence two, the head salesman had sensed the weakness and went in for the kill. He calmly said that he would ensure that we would be fired if he missed the deal and it turned out our analysis was wrong. In his opinion, our analysis was deeply flawed.
At this point, my boss’s eyes started to well up with tears. The debate ended. We had lost and my boss had chickened out, consenting to the deal with no further dissent. I left the room in disgust.
High finance had been decided by what amounted to playground politics. The client in question went bust shortly after, brought down by complex derivatives sold to it by the investment banks. Shareholders lost everywhere. Bonuses were paid everywhere.
When you turn up for a job interview at an investment bank there is only one real answer to the question “why do you want to work here?” but it is rarely answered truthfully. While bankers will give many grand reasons as to why they do the job, they are driven by nothing else but money. Money is everything.
I once arrived at an interview to be told the head of derivatives was going to conduct the meeting in his Bugatti on the way home. When I met him, he told me he was driving to the hospital where his wife was having their first child. While speeding through London he talked mostly about himself and how much money he had been making. He was just one of the thousands of bankers who are obsessed with money – their money. Whether the bank makes money is a secondary consideration.
Often the banks themselves have no idea if they are making money or not. The regulation of derivatives has been so weak, and the speed of innovation of new products so fast, that it has left a void on the trading floor. Cowboy traders have been taking advantage of a flawed system, knowing there is almost no chance of anything coming back to hurt them. So long as the traders can make it look like they have made a profit, they get their bonuses. This is the financial equivalent of the Wild West, yet only those on the inside realise this.
When trading in complex credit products exploded into life a few years ago, a whole host of financial products were created, mostly with acronyms for names. These are the same products that went on to blow up investment banks around the world as the sub-prime crisis emerged.
In the early days, two big banks picked up that they had been dealing with each other on a regular basis in very large volumes. After a while they each inquired what the other was up to. Both thought they were making money on the trades – bank A was selling something to bank B, yet both banks reckoned they were making a profit on it.
So both banks booked a profit in their accounts, and both sets of traders got bonuses. You don’t need to be a genius to see the problem here. Ultimately, only one set of shareholders will benefit.
Five to 10 years down the line, a sharp-eyed accountant might be able to spot the problem, but that is unlikely. Every few years there is typically a market blow-up, and issues like this get conveniently washed away as overinflated assets are then deliberately marked down below their true value in preparation for the next boom. That’s the point in the cycle we have reached now.
Many senior managers have been as clueless as the outside world as to how to value these trades. They are simply sitting at the top of the pile, praying they have timed it well to enjoy a couple of good years and allow themselves the opportunity to cream off the mother of all bonuses.
Job protection is a career in itself. All these complex products are designed and controlled by complicated computer programs. It has been known for the analysts who build the valuation systems to add pages and pages of unnecessary computer code so as to conceal what is really happening.
The managers are unable to check their work and the end result is that the guy who built the system is the only one who knows how to work it.
It is wrong to think that all investment banks are the same. Some institutions have been getting to grips with these problems, others have not.
My old bank is far from unique. My exposure to Lehman came through credit insurance my bank had sold to investors. If Lehman defaulted on its bonds, we were one of the institutions that would be asked to pay up. Bizarrely, we held these positions as part of a strategy that was designed to reduce the damage we would suffer if one of our big clients were to go bust.
The problem I had spotted suggested that all of the bank’s derivative trades could be valued incorrectly. This was more than just a minor hitch. Nobody wanted to listen and nobody wanted to make a decision. I sent e-mails; nobody responded. I asked the chief executive to sign off on the strategy himself, but I never heard back from him. Most of the other banks accounted for these trades in the same way.
So I was not the only guy who came unstuck last September, thanks to Lehman’s collapse. That was the event that turned the credit crunch from a crisis into a disaster. When I arrived at work, they let me through the door as usual. I took the decision myself that enough was enough. I suggested to my boss that I be made redundant and that my team be spared.
When you deal with the guys at the top of the pyramids at these organizations, you realize just exactly how banks could have mismanaged themselves and ultimately the economy onto the brink of abyss. And if you think the regulators were any better...
The emphasis is mine.
The author is a former head of risk at a top investment bank. He wrote on condition of anonymity.
MY ALARM went off at 5.30am and I stumbled to the kitchen to make a coffee, knowing that it could be the last day I went to work for an investment bank. It was September 15 last year and Lehman Brothers had just gone under. As a result, I had lost my bank about $1 billion (£700m).
On the train I wondered what lay before me. Losses do not come much bigger. Would they let me through the door? After 13 years in banking, it looked like my number was up. The worst thing was that none of it had come as a surprise. I had inherited the risky trades a year earlier and warned my bosses about the size of the potential losses all along, but they wouldn’t let me get out of the positions. In an investment bank, nobody wants to hear about risks in their business - not while they are making money.
Until the end of 2008, I worked in a large investment bank, managing risks for the derivatives business. I was the guy who was supposed to mop up everyone else’s problems. I had to look at all the complex trades, work out what the losses could be, then find a way to protect the bank. That’s the theory.
I saw every trade. Knowing what I knew, I could work out every trick employed by these “Masters of the Universe” to line their own pockets, whether the bank made money or not. Those who make their way to the top of the pile in banking are not the best traders, but the best politicians. When it comes to complex trades, the bosses have the wool pulled over their eyes all the time by the people they employ.
Derivatives are what really confuse everyone. It’s a term that covers a whole range of contracts but basically they are bets on the future value of something - whether that’s a share, a shipment of iron ore or even the creditworthiness of another bank.
I once tried to block a large derivative deal because the maths didn’t make sense. It just wasn’t going to make enough profit to justify the 30 years of credit risk it was going to leave on the balance sheet. But the head salesman, who was behind the trade, would be paid his bonus in one year, not 30. Needless to say, he disagreed with my analysis.
My boss and I tried to face him down. He went straight for the jugular and threatened to take the matter to the head of Fixed Income, accusing us of curtailing good client business and short-changing the shareholders. I tried to make my case but my boss’s appreciation of derivatives was weak, to say the least. I could see he had lost my point in the first sentence of my argument.
By sentence two, the head salesman had sensed the weakness and went in for the kill. He calmly said that he would ensure that we would be fired if he missed the deal and it turned out our analysis was wrong. In his opinion, our analysis was deeply flawed.
At this point, my boss’s eyes started to well up with tears. The debate ended. We had lost and my boss had chickened out, consenting to the deal with no further dissent. I left the room in disgust.
High finance had been decided by what amounted to playground politics. The client in question went bust shortly after, brought down by complex derivatives sold to it by the investment banks. Shareholders lost everywhere. Bonuses were paid everywhere.
When you turn up for a job interview at an investment bank there is only one real answer to the question “why do you want to work here?” but it is rarely answered truthfully. While bankers will give many grand reasons as to why they do the job, they are driven by nothing else but money. Money is everything.
I once arrived at an interview to be told the head of derivatives was going to conduct the meeting in his Bugatti on the way home. When I met him, he told me he was driving to the hospital where his wife was having their first child. While speeding through London he talked mostly about himself and how much money he had been making. He was just one of the thousands of bankers who are obsessed with money – their money. Whether the bank makes money is a secondary consideration.
Often the banks themselves have no idea if they are making money or not. The regulation of derivatives has been so weak, and the speed of innovation of new products so fast, that it has left a void on the trading floor. Cowboy traders have been taking advantage of a flawed system, knowing there is almost no chance of anything coming back to hurt them. So long as the traders can make it look like they have made a profit, they get their bonuses. This is the financial equivalent of the Wild West, yet only those on the inside realise this.
When trading in complex credit products exploded into life a few years ago, a whole host of financial products were created, mostly with acronyms for names. These are the same products that went on to blow up investment banks around the world as the sub-prime crisis emerged.
In the early days, two big banks picked up that they had been dealing with each other on a regular basis in very large volumes. After a while they each inquired what the other was up to. Both thought they were making money on the trades – bank A was selling something to bank B, yet both banks reckoned they were making a profit on it.
So both banks booked a profit in their accounts, and both sets of traders got bonuses. You don’t need to be a genius to see the problem here. Ultimately, only one set of shareholders will benefit.
Five to 10 years down the line, a sharp-eyed accountant might be able to spot the problem, but that is unlikely. Every few years there is typically a market blow-up, and issues like this get conveniently washed away as overinflated assets are then deliberately marked down below their true value in preparation for the next boom. That’s the point in the cycle we have reached now.
Many senior managers have been as clueless as the outside world as to how to value these trades. They are simply sitting at the top of the pile, praying they have timed it well to enjoy a couple of good years and allow themselves the opportunity to cream off the mother of all bonuses.
Job protection is a career in itself. All these complex products are designed and controlled by complicated computer programs. It has been known for the analysts who build the valuation systems to add pages and pages of unnecessary computer code so as to conceal what is really happening.
The managers are unable to check their work and the end result is that the guy who built the system is the only one who knows how to work it.
It is wrong to think that all investment banks are the same. Some institutions have been getting to grips with these problems, others have not.
My old bank is far from unique. My exposure to Lehman came through credit insurance my bank had sold to investors. If Lehman defaulted on its bonds, we were one of the institutions that would be asked to pay up. Bizarrely, we held these positions as part of a strategy that was designed to reduce the damage we would suffer if one of our big clients were to go bust.
The problem I had spotted suggested that all of the bank’s derivative trades could be valued incorrectly. This was more than just a minor hitch. Nobody wanted to listen and nobody wanted to make a decision. I sent e-mails; nobody responded. I asked the chief executive to sign off on the strategy himself, but I never heard back from him. Most of the other banks accounted for these trades in the same way.
So I was not the only guy who came unstuck last September, thanks to Lehman’s collapse. That was the event that turned the credit crunch from a crisis into a disaster. When I arrived at work, they let me through the door as usual. I took the decision myself that enough was enough. I suggested to my boss that I be made redundant and that my team be spared.
Monday, June 15, 2009
Market Manipulation?
From Anonymous Futures Trader - Chicago Mercantile Exchange:
Recently, I read more comments on the nature like "The market is rising against all the technical indications" or since a few weeks almost every day of some analysts that a "technical Correction of 10-15% is healthy and inevitable. " But nothing happens. Corrections are about 2-3% not out and despite negative indicators en masse the market is rising constantly. This is indeed quite unusual, at least if you compare it to 'normal' Market behavior compares.
No wonder that there are increasing rumors that Market is manipulated. Normally I give to such conspiracy theories little. They draw most only depends on the real relationships to recognize. However, I have even in recent weeks some phenomena observed close to the Thoughts of a targeted manipulation is not quite so seem implausible lassen.
First one can observe that whenever the U.S. market over night falls (the futures will be 24 h traded) and the next day clearly negative for open threatens, just before stock market opening is a constant Bid (a collector) in the futures market and This opening up a piece raises. Especially in pre-trade is the relatively low volumes possible. This happens so regularly that already many people's attention have become.
Secondly appears whenever the market crucial points umzukippen suddenly threatens a great bid in the market oblivion. Finally, we are on 29 May and on 3 June shortly before Closing stock market view. On 29 For example, in May the market is threatened once again in the 200 -- Day abzuprallen line and down to rotate. For technical analysts this failure would be a clear Sell signal was. Since the market is already very long without any correction was gone, would be a greater downward movement was normal. But then came a few minutes before the close an unlimited orders over 5,000 S & P500 index futures in the market and catapulted them within seconds 1.5% above and on the 200-day line. The value of these orders amounted to nearly 250 million U.S. dollars!
It is hard to imagine that an institutional investor his orders so kursbeeinflussend in the market represents. Normally, one would such an order evenly distributed throughout the day and thus kursschonend in the market. On other days, similar things happened. So I ask myself, who the motivations here, and where the money comes. Only very very few institutional investors have the means, with such large orders to play. "
If there is no tampering, then there are at least unusually crazy times. Maybe I really can see ghosts, and the market is involuntarily from the institutional investors driven by the current upward movement have completely overslept. As far as I know there are very many! The stand on the sidelines and waiting for a correction to buy into the market them. You do not want in these overbought Market. But it comes and will not Correction. Maybe but then loses a or other nerve and goes "all in"? This mix of the short-acting "less negative "news, on the basis of the acting Stimuli until the autumn can pause, combined underinvestment with institutional investors is an explosive. It could lead to the market fundamentals of its decouple. We inflating a new stock and Commodity bubble experience. I already have a name to read: BGB - Bernanke-Geithner bubble. Everything well and good if these bubbles are not the property had suddenly and unexpectedly to burst.
NC: I don't generally believe in conspiracies but I can tell you that the 3 pm effect in the markets has been well known for the last 3 months. Everyday, the market makes a drastic move in the last hour (usually up, but sometimes down) - traders are even now openly talking about front-running the 3 o'clock move. And it all started on that day when the Fed and Citigroup made their big "2009 has been profitable" statements.
Anyway, if the government really wanted to manipulate the markets, they would just announce it and the market would immediately move up like 1500 points. They have openly announced all the other bailouts and manipulation schemes, so why not the stock market.
If it does turn out that the government or Fed is buying S&P futures pre-open and at 3 pm, I can assure you they think they are doing it with good intentions of helping the country and the world. Of course, you know what they say about the road to he!! being paved with good intentions.
Recently, I read more comments on the nature like "The market is rising against all the technical indications" or since a few weeks almost every day of some analysts that a "technical Correction of 10-15% is healthy and inevitable. " But nothing happens. Corrections are about 2-3% not out and despite negative indicators en masse the market is rising constantly. This is indeed quite unusual, at least if you compare it to 'normal' Market behavior compares.
No wonder that there are increasing rumors that Market is manipulated. Normally I give to such conspiracy theories little. They draw most only depends on the real relationships to recognize. However, I have even in recent weeks some phenomena observed close to the Thoughts of a targeted manipulation is not quite so seem implausible lassen.
First one can observe that whenever the U.S. market over night falls (the futures will be 24 h traded) and the next day clearly negative for open threatens, just before stock market opening is a constant Bid (a collector) in the futures market and This opening up a piece raises. Especially in pre-trade is the relatively low volumes possible. This happens so regularly that already many people's attention have become.
Secondly appears whenever the market crucial points umzukippen suddenly threatens a great bid in the market oblivion. Finally, we are on 29 May and on 3 June shortly before Closing stock market view. On 29 For example, in May the market is threatened once again in the 200 -- Day abzuprallen line and down to rotate. For technical analysts this failure would be a clear Sell signal was. Since the market is already very long without any correction was gone, would be a greater downward movement was normal. But then came a few minutes before the close an unlimited orders over 5,000 S & P500 index futures in the market and catapulted them within seconds 1.5% above and on the 200-day line. The value of these orders amounted to nearly 250 million U.S. dollars!
It is hard to imagine that an institutional investor his orders so kursbeeinflussend in the market represents. Normally, one would such an order evenly distributed throughout the day and thus kursschonend in the market. On other days, similar things happened. So I ask myself, who the motivations here, and where the money comes. Only very very few institutional investors have the means, with such large orders to play. "
If there is no tampering, then there are at least unusually crazy times. Maybe I really can see ghosts, and the market is involuntarily from the institutional investors driven by the current upward movement have completely overslept. As far as I know there are very many! The stand on the sidelines and waiting for a correction to buy into the market them. You do not want in these overbought Market. But it comes and will not Correction. Maybe but then loses a or other nerve and goes "all in"? This mix of the short-acting "less negative "news, on the basis of the acting Stimuli until the autumn can pause, combined underinvestment with institutional investors is an explosive. It could lead to the market fundamentals of its decouple. We inflating a new stock and Commodity bubble experience. I already have a name to read: BGB - Bernanke-Geithner bubble. Everything well and good if these bubbles are not the property had suddenly and unexpectedly to burst.
NC: I don't generally believe in conspiracies but I can tell you that the 3 pm effect in the markets has been well known for the last 3 months. Everyday, the market makes a drastic move in the last hour (usually up, but sometimes down) - traders are even now openly talking about front-running the 3 o'clock move. And it all started on that day when the Fed and Citigroup made their big "2009 has been profitable" statements.
Anyway, if the government really wanted to manipulate the markets, they would just announce it and the market would immediately move up like 1500 points. They have openly announced all the other bailouts and manipulation schemes, so why not the stock market.
If it does turn out that the government or Fed is buying S&P futures pre-open and at 3 pm, I can assure you they think they are doing it with good intentions of helping the country and the world. Of course, you know what they say about the road to he!! being paved with good intentions.
Saturday, June 13, 2009
Fascinating Proposal to "shrink Detoit and Flint"
Cities Downsize to Survive by CalculatedRisk on 6/13/2009 01:25:00 PM
From The Telegraph: US cities may have to be bulldozed in order to survive (ht Chad, Brian)
The government looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature.
Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area. The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint.
Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country.Mr Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes.
Most are former industrial cities in the "rust belt" of America's Mid-West and North East. They include Detroit, Philadelphia, Pittsburgh, Baltimore and Memphis.
In Detroit ... there are already plans to split it into a collection of small urban centres separated from each other by countryside.
"The real question is not whether these cities shrink – we're all shrinking – but whether we let it happen in a destructive or sustainable way," said Mr Kildee. "Decline is a fact of life in Flint. Resisting it is like resisting gravity."
NC: This is a fascinating proposal straight out of the History Channel show "Life After People". So they would actually turn old Detroit residential and commercial zones back into farmland or even its original natural state which I suppose would be forest.
If you get beyond obvious issues such as the logistics and morality of forcing people to leave their homes and businesses, even if in poor condition, its actually a great proposal. Ideally, you could recreate urban living in the remaining "villages" which would include higher density housing like townhouses and high-rise apartments and walkable residential areas, something always lacking in Detroit.
That being said, I still like my idea for turning the area into a clean water technology hub, but in the absense of economic and population growth - perhaps a "Life After People" experiment makes some sense and could even re-energize the area.
From The Telegraph: US cities may have to be bulldozed in order to survive (ht Chad, Brian)
The government looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature.
Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area. The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint.
Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country.Mr Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes.
Most are former industrial cities in the "rust belt" of America's Mid-West and North East. They include Detroit, Philadelphia, Pittsburgh, Baltimore and Memphis.
In Detroit ... there are already plans to split it into a collection of small urban centres separated from each other by countryside.
"The real question is not whether these cities shrink – we're all shrinking – but whether we let it happen in a destructive or sustainable way," said Mr Kildee. "Decline is a fact of life in Flint. Resisting it is like resisting gravity."
NC: This is a fascinating proposal straight out of the History Channel show "Life After People". So they would actually turn old Detroit residential and commercial zones back into farmland or even its original natural state which I suppose would be forest.
If you get beyond obvious issues such as the logistics and morality of forcing people to leave their homes and businesses, even if in poor condition, its actually a great proposal. Ideally, you could recreate urban living in the remaining "villages" which would include higher density housing like townhouses and high-rise apartments and walkable residential areas, something always lacking in Detroit.
That being said, I still like my idea for turning the area into a clean water technology hub, but in the absense of economic and population growth - perhaps a "Life After People" experiment makes some sense and could even re-energize the area.
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