Thursday Highlights

Good morning.

  1. Of the generations of men and the passage of time.
  2. The “history” channel, why scare quotes? Check the link.
  3. So, what is Mr Rove noted for, especially by the Democrats? It seems the biggest difference between what they complain about regarding Mr Rove and the activities of Mr Obama is for which side on which they strive.
  4. More unusual campaign tactics.
  5. The SOTU speech, highlighting contradictions and a flowchart and a little highlighting of characteristic Obama dishonesty
  6. One more on the speech. So look at the first two quoted pieces here. How can a person say those things in one speech and not be termed a deceitful liar? How can Democrats defend this man regarding this sort of dishonest? I really don’t understand it.
  7. So, how did Mr Romney manage to pay 13% in taxes while making 20 millions? By donating 16% of his income to charity. Odd that both Mr Romney and Mr Buffet share the same opinion on the efficacy of government spending vs their own charitable contributions. Can we not pretend those of us who don’t make millions also share that same opinion about government efficiency vs our own charity?
  8. So many crocodile tears. It strikes me as very false when lots of people suddenly “like” you, praise you, and talk about how wonderful you are when you’ve been affected by tragedy … and the never even noticed you prior to the event. Seems very fake to me.
  9. 100% to 1000% yield? Who thinks that’s a good idea? Seriously.
  10. This quiz has been going around. I scored 12-15. How about y’all?
  11. Geek zoooom
  12. Monster? I’d have thought coward the better term.

7 Responses to Thursday Highlights

  1. 9.100% to 1000% yield? Who thinks that’s a good idea? Seriously.

    Not really as impressive as it seems. The deal the Greeks are working on entails writing down the principle of their debt, I think by 50% or more.

    So pretend you own a bond that will pay you $100 in a year but since the debtor is in trouble, the major bond owners are talking about a deal to pay $0.50 on the dollar. So today if someone offered you $50 for that bond, you’d probably take it since that’s what you can expect to get in a year or so anyway. But a bond whose face value is $100 but whose price is $50 has, tada, a 100% return. To achieve a 1000% return the bond price would have to fall to $0.10. Which is possible if negotiations break down and the Greek gov’t.

    On the other hand you can make real money here. Suppose you pick up the bond for $30 from someone panicing that there’s going to be a default and they work out a deal for $0.70 or maybe even work out a deal to just keep turning over the debt. Now you’ll get the $100 at the end of the year giving yourself a return in excess of 100%. Happened in the US when the new gov’t debated whether or not to honor the Revolutionary War debt.

  2. Boonton,

    Not really as impressive as it seems. The deal the Greeks are working on entails writing down the principle of their debt, I think by 50% or more.

    Some avuncular advice from you. With financial acumen like that “not as impressive as it seems” … don’t you ever, ever talk to a loan shark about borrowing money.

    So, let’s see how that works. Say I have a home mortgage for 50k that I’m having trouble paying. So … I go to Guido who sells me five year “bonds” at 10cents on the dollar. To raise the 25k to pay half my principle will take 250k of bonds. So in 5 years I have to pony up 250k to pay Guido … or he introduces me to Rocky and his fabulous knee adjuster. But you’re pretense it that a five year payout of 250k on 25k is not “impressive” and will be just peachy for the Greeks when that comes due.

    I think that you should never, ever ever again impugn my financial/econ savvy after you decided that was just a “unimpressive” and “ordinary” sort of deal.

  3. I think you’re misunderstanding here. Forget about you borrowing money for your mortgage. Say your mortgage is $100K but you’re missing payments and looking to go into foreclosure. What would I, a big hedge fund, pay your bank who may want to sell me you mortgage?

    Say I buy it for $50K. If you turn yourself around and make good on your mortgage my return is a whopping 100%! If you fail and I get only $55K at the foreclosure sale then my return is only 10%. For you, though, your interest rate that you have to pay each month is whatever the rate was when you took out your mortgage. You are not taking out a new mortgage today for $50K with 100% interest and I don’t think that’s what Greece is doing. I think these are the current yields in the 2ndary markets for Greek debt.

  4. Boonton,

    I think you’re misunderstanding here. Forget about you borrowing money for your mortgage.

    You said to pay attention to that. You said, “The deal the Greeks are working on entails writing down the principle of their debt, I think by 50% or more.” What does that mean if not paying down on a mortgage by taking out bonds?

  5. I don’t think they are issuing bonds with a 50% or 100% yield. Existing bonds are trading at 100% yield because the market is pricing in the expectation of a 50% loss of principle.

    In terms of the mortgage example, it would be like if you went to the foreclosure auction yourself and brought your house for $50K in borrowed money. Before the auction, your original mortgage might ‘trade’ at 100% yield. After the auction you have a new debt but at a reasonable interest rate.

  6. Boonton,

    Existing bonds are trading at 100% yield because the market is pricing in the expectation of a 50% loss of principle.

    I thought bonds paid 100% or if the company defaults or goes bankrupt, they pay basically nothing. They’d sell at 50cents or 10cents if the risk of default was high. If you’re not doing a default, then you have to pay in full when they come due. Normally as the date gets closer and closer for a bond due date to come due the value gets closer and closer to 100%. Bonds a few years out don’t sell below market just because of risk (and typically that’s not the primary price driver) but the future/present value of money.

    In terms of the mortgage example, it would be like if you went to the foreclosure auction yourself and brought your house for $50K in borrowed money. Before the auction, your original mortgage might ‘trade’ at 100% yield. After the auction you have a new debt but at a reasonable interest rate.

    Right (almost). And the term “borrowed money” in this example is the bonds, which are selling at 10 cents, which is a problem because it means you are on the hook for $500k to raise that 50k. The (almost) is there because, as you claimed, the money is going to pay down the principal. So you’re not going to a foreclosure auction, you’re taking out a second mortgage at horrible rates to pay down the principal on your house. This for us normal folks would be really really dumb. I think the Greeks are going it because they think Guido’s buddy with the knee adjuster isn’t going to really swing his bat.

  7. I thought bonds paid 100% or if the company defaults or goes bankrupt, they pay basically nothing. They’d sell at 50cents or 10cents if the risk of default was high. If you’re not doing a default, then you have to pay in full when they come due. Normally as the date gets closer and closer for a bond due date to come due the value gets closer and closer to 100%.

    Or a company can, say, enter bankruptcy where it doesn’t wipe out its bond debt, but restructures it. In that case maybe you’ll get 50% when the bond is due. Before enterting bankruptcy, there’s a period where the company’s fate may be uncertain. It may be that the company can use bankruptcy to hold creditors at bay until it can re-emerge. In that case it may very well make good on its debts….or it could totally default. If the market is betting on default and the bond is selling for $50 you can make a killing buying it up today for $50 and cashing in for $100 if the company emerges.

    Right (almost). And the term “borrowed money” in this example is the bonds, which are selling at 10 cents, which is a problem because it means you are on the hook for $500k to raise that 50k.

    That’s what I’m unclear about. You aren’t paying 100%, your bond is trading at a yield of 100%. From what I’m getting this isn’t brand new borrowing by Greece at 100%, it’s the price of already issued Greek debt.

    So you’re not going to a foreclosure auction, you’re taking out a second mortgage at horrible rates to pay down the principal on your house. This for us normal folks would be really really dumb. I think the Greeks are going it because they think Guido’s buddy with the knee adjuster isn’t going to really swing his bat.

    Well unlike a mortgage, bonds are usually structured with giant balloon payments of principle a the end of their term. It would be like you having a $300K mortgage for ten years at 5% where you pay $15,000 every year until year ten where you have to fork over $300K on top of your yearly interest payment. In year ten, of course, you have to either have $300K set aside or reborrow at whatever the rate is then. Therein is the ‘Guido’ problem…even with a balanced budget, gov’ts have to reborrow the principle as it matures and if the market says no then there’s default.

    An odd thing about scale, though, the market really doesn’t care about your mortgage. It can easily get by without ever giving you a mortage so it makes you jump through hoops. On huge scales, though, the case reverses. It’s actually very hard for the market *not* to buy gov’t debt which is the problem we have now, a shortage of money. The market needs fresh crops of new debt to be released on a periodic basis and a default would be like putting salt in the field of a once fruitful farm.

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