Patenting the debt bomb

It's only occurred to me today that Collateralized Debt Obligations might actually have been patented, and thanks to Google's patent search option here's one, by George H Butcher III, which he sold to Goldman Sachs. The application was filed in 2000, but the patent was finally granted in September 2007.

And here's one of the drawings:

I suppose they patent Ebola-derivative viruses, too.

Guaranteed HUGE gain for UK investors!

 A repeat of last year's opportunity, but even better: postage stamps without a stated face value represent a great buying opportunity.

"From 30th April First Class stamps will go up by 30.4% from 46p to 60p and that Second Class stamps will rise by 38.9% from 36p to 50p." - Economic Voice.

This is at a time when interest rates on variable-rate cash ISAs are 3% or less, so even allowing for the opportunity cost of leaving money in secure, tax-free deposits, you can make a rock-solid net gain of 26.6% - 34.8%.

Buy NOW (I just did) for this year's birthdays, anniversaries and Christmas - and all your business postage.

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

"Lockerbie bomber" Al-Megrahi "innocent"

Back in 2009 (see here, here and here), as the authorities prepared to release the so-called Lockerbie Bomber to return to Libya, ostensibly on compassionate grounds, I came across a blog by Scottish law professor Robert Black. The latter, together with Jim Swire (father of one of the victims) smelt a rat.

Some suspect that not only was the wrong man accused - the wrong country, even (the operation may have been Iranian) - but that there was a deliberate miscarriage of justice and a cover-up, and that Al-Megrahi was sent home to prevent a retrial that would blow the whole affair wide open.

Now (hat-tip: Ian Parker-Joseph) Scottish newspaper The Sunday Herald has published a 5-year-old, hitherto secret legal review of the case, which they say contains evidence that could well have led to Al-Megrahi's conviction being overturned. The link to the (slightly redacted) 800-page text is here.

This is a bad day for the reputation of the Scottish legal system, especially when (as Parker-Joseph does) one is tempted to rope in outstanding concerns about the 1996 Dunblane massacre and alleged child abuse victim Hollie Greig.

Time for a full public enquiry - no "safe pair of hands", please, no cripplingly narrow terms of reference, full power of subpoena, all evidence on oath and no prior indemnification against prosecution for perjury or other perversion of the course of justice. And later, possibly, a huge action for damages by Al-Megrahi and his family.

And then let's see what else needs to be cleared from the Augean stables.

Why the UK should join the EC immediately (look at St Kitts)

Matt Taibbi's "anti-Semitic" Goldman campaign

Would YOU remain a client?

I think this may be GS' "duckhouse moment": a word or phrase crystallises what is wrong, so that the common man can see it. Sensing this, the GS supporters overreact, e.g. Alex Brummer in the Daily Mail:

"The most enduring image of Blankfein era is that of the great, vampire squid drawn in an excoriating article in Rolling Stone magazine in 2010. What Rolling Stone does not seem to have realised is that this was a rerun of a notoriously anti-Semitic campaign by the late 19th-century polemicist ‘Coin’ Harvey against the Rothschild family.

Whatever mistakes Blankfein and Goldman may have made, it does not deserve that."

"Made mistakes... not deserve... anti-Semitic campaign..." Sounds like a panic reaction to me. Was, for example, betting - massively profitably - against your own product, a "mistake"?

According to Brummer's account, Loyd Blankfein is "determined not to leave until all the investigations hanging over the investment bank have been cleared up." I'll bet he is.

How about this memoir from Leo Kolivakis, formerly an analyst with a big Canadian pension fund manager:

Yes, they [GS] are an exceptional firm, attract some of the best, brightest and most interesting people, deliver exceptional service, but the crisis of 2008 exposed some serious conflicts of interests that have yet to be addressed.

Back in the summer of 2006, I wanted to short the hell of out structured credit products by shorting the ABX indexes. I had just completed research on CDO-squared and CDO-cubed and was certain the U.S. mortgage market was a disaster waiting to explode.

In November 2007, ABX indexes tied to the highest-rated subprime-mortgage bonds fell to new lows, a sign of deterioration in the perceived risk of the securities following a report showing home prices were declining in more than a third of U.S. cities but by that time, I had lost my job for speaking out on the risks of our credit portfolio.

What's the point? I remember a conversation with our Goldman client representative and some of their analysts where they kept asking me: "Why do you want to do this? Are you sure you want to do this?" It was actually annoying me and I told them "Yes, we are sure, just let me know what is the best way to go about this trade."

Well, we never put on the trade, but Goldman Sachs did and they made off like bandits shorting subprime mortgage bonds. They weren't alone. Some well known hedge funds like Paulson & Co. and a handful of others also made a killing. That whole sordid affair still bothers me to this very day. I lost my job, the pension fund lost billions, and Goldman made a killing!"

And back to Taibbi, specifically his famous 2009 "vampire squid" article - here is part of his section on GS's role in the great mortgage swindle:

"...Not that Goldman was personally at any risk. The bank might be taking all these hideous, completely irresponsible mortgages from beneath-gangster-status firms like Countrywide and selling them off to municipalities and pensioners — old people, for God's sake — pretending the whole time that it wasn't grade D horseshit. But even as it was doing so, it was taking short positions in the same market, in essence betting against the same crap it was selling. Even worse, Goldman bragged about it in public. "The mortgage sector continues to be challenged," David Viniar, the bank's chief financial officer, boasted in 2007. "As a result, we took significant markdowns on our long inventory positions … However, our risk bias in that market was to be short, and that net short position was profitable." In other words, the mortgages it was selling were for chumps. The real money was in betting against those same mortgages.

"That's how audacious these assholes are," says one hedge fund manager. "At least with other banks, you could say that they were just dumb — they believed what they were selling, and it blew them up. Goldman knew what it was doing."

If I had GS as my advisers, I'd want to know for sure if I was categorised as a favoured client, or as a "muppet" whose use was to buy GS "axes" and have my "eyeballs ripped out".

And perhaps Mr Brummer should seek to disprove Mr Taibbi's allegations, rather than spin them as the frothings of a racist/religious bigot. There are plenty of genuine anti-Semites and cheap gibes like the one he levels against Taibbi must ultimately serve to lower our guard against the real thing.

Maybe Brummer's sloppy dating - Taibbi's article appeared not in 2010 but 7 July 2009 - is an indication of his anxious haste, or that of whichever GS insider muppet ("it is my understanding", says the journalist, coyly hinting at his source) was briefing him about Blankfein's intentions.

UK youth unemployment almost as bad as Greece's

Here's the truth about those terrible youth unemployment statistics: the UK's is pretty much as bad as Greece's. In fact, two years ago, ours was significantly worse than theirs.

For the UK stats, see here; for discussion of Greek unemployment, see yesterdays' post here.

Greek youth unemployment overstated?

Reportedly, young Greeks are suffering especially badly in the economic collapse: 51.1% of youth were unemployed in December. (Spain is even worse than Greece, according to Zero Hedge.) But how are these percentages calculated, and which young people are we looking at?

The first tweak is age brackets. Across Europe, the statistical comparison takes into account youngsters aged 15 - 24, but here in the UK, since ROSLA (the Raising of the School Leaving Age) in 1972, our youth are only officially in the employment market from age 16 onwards.

Continuing with the UK, should we look at who is employed, or who is unemployed? As this ONS video explains, only 50% of UK 16-24s are employed,  which implies that the other 50% are unemployed. This is where sub-categories play a part: 36% of youth are "economically inactive" (not looking for work), leaving a mere 14% who are looking for a job but don't have one. However, the "unemployment rate" excludes the economically inactive and is expressed as the number of unemployed divided by (number unemployed plus employed), i.e. about 14/(14+50) = 22.2% in the last quarter of 2011.

The "economically inactive" category includes students in further and higher education. So one factor worsening the "unemployment rate" is the growing trend for youngsters to stay on in education and become economically inactive. One way to improve the rate is through apprenticeship schemes. This has helped Austria's unemployment rate stay at only 7.3% and Germany's at 8.5%. Hence, I suppose, the recent British Government ad campaign for apprenticeships. 

How much difference does education make? Let's look what proportion of all British 24-year-olds who left the education system at different stages, are unemployed: 13% of those with only GCSEs, 7% of those who only got A-levels, and 5% of those who obtained degrees. So A-levels seem to make a difference, but is it worth staying economically inactive for a further 3 years after that, taking on an average £53,000 of student debt?

Now, back to Europe and especially Greece.

Comparing across Europe, the Office of National Statistics says our youth unemployment RATE (15 -24) is 21.8% as against an EU average of 21.5%; we're better off than Spain, Ireland, Italy or France, seen in this way. However, if we look at youth unemployment PROPORTION or RATIO (that is, number of young unemployed divided by total number of young people), the figures are lower but the ranking changes: the EU average is 9.1%, and the UK's figure is 12.7%. Spain's is far worse, at 19.5%  but Ireland, France and Italy are better than the UK.

The difference in "rate" and "ratio" is stark in Greece, also: in 2010 the rate was 32.9% but the ratio was 10%. I decode that as meaning that out of every 100 young Greeks, 10 were unemployed, c. 20 employed and almost 70% economically inactive. The rate in Q3 2011 rose to 45.8%, which if the numbers of economically inactive remained the same would mean an unemployment ratio of some 14%, i.e. one in seven youngsters, not half of them. Maybe it's one in six, now.

We need the raw data, not just dodgy, headline-grabbing percentages. 

For example, the Hellenic Statistical Authority's latest release, covering the whole labour force as at December 2011, shows (a) 3,899,319 employed, (b) 1,033,507 unemployed and (c) 4,424,562 "inactive". That means an unemployment rate - a/(a+b) - of 21%, but an unemployment ratio of 11%.

Year on year - Dec 2010 to Dec 2011 - the numbers of unemployed increased by 40.9%, but the number of employed decreased by only 7.9%. Plenty of room for spin there, negative or positive as one pleases. ("Inactives" increased by only 1.6%.)

In the case of the young, one would expect there to be a significant element of "inactives" aged 15-24, simply because of the numbers staying on in further and higher education. So although "inactives" account for some 47% of the whole labour market, they constitute (as I estimated above) about 70% of the 15-24 age group.

According to the same release, the youth unemployment rate for December in the years 2006 - 2009 were as follows: 28.4%, 24.5%, 26.3%, 28.9%. In December 2010 it jumped to 39.0% and by December 2011 it was 51.1%; so most of the damage has been done in the last two years.

Let's assume, for the sake of argument, that the number of 15-24-year olds and the percentage of young "inactives" has remained constant since 2006. Using the assumptions derived from the 10% ratio / 32.9% rate figures above, we get the following breakdown of the Greek youth labour market ratios:

Dec 2009: (a) employed 21.6%, (b) unemployed 8.8% and (c) inactive 69.6%
Dec 2011: (a) employed 14.9%, (b) unemployed 15.5% and (c) inactive 69.6%

... in other words, as I guessed earlier, one in six young people is unemployed.

Now if there is an increase in youngsters opting for further education to ride out the recession, the proportion of inactives increases and this worsens the unemployment rate. Similarly, if young people who are employed leave the country for better-paid work abroad, the total actively wanting work within Greece decreases and this enhances the proportion of unemployed.

As a general point, perhaps looking at the wrong figures leads us to make the wrong policy decisions. Using education to skew employment statistics has a dynamic balance of contradictory effects, as we have seen; and education post 18 is both costly and questionable in terms of cost-effectiveness.

To what extent should education be seen as a gateway to employment, as opposed to a consumer luxury? Wouldn't Shaw's Eliza Doolittle be better off setting up her flower shop, or teaching elocution, than getting an arts degree and a monster student loan?

Shouldn't we simply measure our success by how many young people are actually in work? I can see why policymakers don't, but shouldn't we?

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), and missing all those day-trading opportunities.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content.