March 31, 2014

Facebook Has Become The New Yahoo, And It's Obvious Mark Zuckerberg Knows It

One thing Silicon Valley industry insiders like to knowingly whisper to each other is that Facebook is the new Yahoo.

This winter, Facebook halted the rollout of a beautiful redesign.

The reason: The company realized that while the redesign looked great on new computers with big, sharp screens, it was hard to use on older computers with small, crappy screens. Most of Facebook's users still have small, crappy screens.

So, Facebook scrapped the photo-rich redesign and came out with a design that, while it may look like it's from 2009, works really well for most of its users. 

If Facebook can’t innovate on design because of its huge install base, then it really is becoming the next Yahoo.

Almost since its beginning, Yahoo has dealt with a classic innovator's dilemma.

It couldn't try really radical things with because was already such a huge business due to its popularity with hundreds of millions of mainstream users.

This left Yahoo vulnerable to smaller companies that can do radical things, because they have not yet become dependent on an existing business. Eventually those smaller companies, Google and Facebook among them, became much bigger companies that ate into Yahoo's revenues.

Now, Facebook is dealing with the same problem.

It can't redesign its site in a really cool, modern way that will appeal to users of 2017 because it would annoy the billion users it picked up starting in 2004.

This leaves it vulnerable to startups that can build social sharing tools optimized for tablets, phones, and computers built with today's technologies. Those startups don't need a billion users today to keep growing until they can start taking ad dollars away from Facebook.

The good news for Facebook shareholders is Facebook CEO Mark Zuckerberg seems to realize how much his company looks like Yahoo from circa 2005 and he's doing something about it.

Zuckerberg is using Facebook's massive market cap to make stock-rich acquisitions of startups doing the risky, innovative things Facebook can no longer do with In the past 16 months, Zuckerberg has spent $22 billion purchasing Instagram, Whatsapp, and Oculus.

You may wonder why the people running Yahoo didn't do the same thing a decade ago.

The truth is, they tried to.

But they made one big mistake that Zuckerberg isn’t making.

Specifically, they worried too much about paying the exact right price for big-ticket acquisitions. 
There's one really good example of this from Yahoo's history.

Back in 2006, Yahoo could have purchased a small, fast-growing startup that has, in the years since, become a $150 billion+ company.

Yahoo's board and this startup's board had both approved a deal that would have sold the startup to Yahoo for $1 billion.

But then, at the last minute, Yahoo's CEO, Terry Semel, decided $1 billion was too much. He went to the startup's CEO and told him the price he was willing to pay was now $850 million. That price was more in line with what Semel's CFO, Sue Decker, thought the startup would actually be worth.

What Semel didn't know was that the startup CEO hadn't really wanted to sell his company. But he'd told his board that if anyone ever offered $1 billion, he would take it.

So, when Yahoo had offered $1 billion, it had effectively called the startup CEO's bluff with his board. The deal was going to get done.  

But as soon as Semel offered $850 million, the startup CEO took the opportunity to back out of the deal entirely.

And that's how, in an effort to save $150 million, Yahoo lost out on a company now worth $150 billion.

That company? 


The CEO who turned down $850 million, but would have taken $1 billion?

Mark Zuckerberg.

The lesson here is not that Facebook will avoid Yahoo's fate because it is willing to make huge acquisitions.
Yahoo made plenty of huge acquisitions including Geocities and

The lesson Zuckerberg seems to have learned from Semel is that when he has already decided to make a huge acquisition, he isn't going to lose the deal over some amount of money that is a tiny fraction of that startup's future value.

He knows that in the technology business, acquisitions have a binary outcome: They either save you from your innovator's dilemma or they don't.


March 28, 2014

IMF Exposed in Ukraine Promotion with Two-Year Bailout

The International Monetary Fund has agreed a $14-18 billion two-year bailout for Ukraine, a deal to help it recover from months of turmoil that will also unlock further credits making a total of $27 billion. The agreement, announced on Thursday, is intended to help the heavily-indebted ex-Soviet republic stabilize its economy after anti-government protests which resulted in the overthrow of President Viktor Yanukovich and a standoff with Moscow in which Russia annexed the Crimea region. – Reuters 

Dominant Social Theme: The IMF rides to the rescue. What a relief. 

Free-Market Analysis: The Ukraine debacle has exposed certain truths to the world about the way the West operates and how the power elite destabilizes countries politically in order to gain further control over them. IMF officials are doing themselves no favors by participating, but doubtless have little choice. 

This IMF tranche is not a helpful gesture toward Ukraine so much as part of a calculated and continued campaign of destabilization and occupation. It is the Internet Era itself that is exposing these manipulations and making them considerably less effective in the 21st century than in the 20th. 

 The release of a taped conversation featuring senior US State Department official Victoria Nuland plotting the political future of Ukraine was circulated via the Internet. As were other provocations and deliberate "false-flag" operations launched by the West to ensure that Russia would not dominate the whole of the Ukraine, nor wield influence over it financially. 

Now the IMF has played its part, rushing into Ukraine with a program of funds worth US$27 billion. Here's more from the article: 

The program of reforms that accompanies the support and which the IMF says is necessary to get economy back on track and avoid a debt default may be painful for the population and the new government at a time of crisis and uncertainty. ... 

The agreement is also subject to approval by IMF Management and the Executive Board, which will consider it in April. Conditions sought by the Fund include allowing the national currency, the hryvnia, to float more freely against the dollar, increasing the price of gas for the domestic consumer, overhauling finances in the energy sector and following a more stringent fiscal policy. 

IMF mission chief Nikolay Gueorguiev outlining the proposed package said another important step was to pass a law on public procurement aimed at restraining corruption in the state sector and reducing state budget expenditure. Prime Minister Arseny Yatseniuk, who has dubbed his government a 'suicide' government because of the unpopular measures it will have to take to right the corruption-ridden economy after years of mismanagement, urged parliament to approve the measures outlined in the package. 

"Ukraine is on the edge of economic and financial bankruptcy," he said, warning that the price Ukraine will pay for Russian gas supplies was expected to rise by nearly 80 percent from April to $480 per 1,000 cubic meters. He said inflation in 2014 would be between 12 and 14 percent and unless laws were passed to support the austerity measures proposed by the IMF to stabilize the economy, GDP could fall 10 percent during the year and Ukraine could default. 

The previous, ousted government said the country of 46 million needed around $35 billion over two years to stave off bankruptcy. It faces about $10 billion in repayments on its foreign currency debt this year, excluding the several billion dollars it will require for gas imports from Russia. 

In June, it will have to pay out on a $1 billion eurobond that matures. In a move on Wednesday, seen as a gesture by Kiev to secure the IMF package, the government said it had agreed to raise the price of gas to the domestic consumer - a long-standing demand by the Fund - by more than 50 per cent from May 1. 

This was an unpopular condition for IMF aid that Yanukovich had refused before he was ousted last month. "Following the intense economic and political turbulence of recent months, Ukraine has achieved some stability, but faces difficult challenges," the IMF statement said. 

Announcing the agreement in the Ukrainian capital, Kiev, Gueorguiev declined to say how big the initial tranche of aid would be. Kiev has said it desperately needs cash to cover expenses and avert a possible debt default. The country's finance minister has predicted the economy will contract 3 percent this year. The bailout from the IMF will clear the way for several billion dollars in aid from the United States, European Union, Japan and other nations. 

Two points here. The first is that the West will seemingly throw as much cash as necessary at Ukraine to extend its influence and consolidate sociopolitical and economic gains. Second is that "austerity" is going to be an ongoing factor. 

Austerity in this case – as elsewhere – is a way for the government itself to expand authority in a region where government control is not strong. Greece is a prime example. Despite the failures of austerity, the process itself legitimized the government's strengthened role in Greek society. 

Nuland's comments show how intimately the West – the US, really – has been in forming the new sociopolitical, economic and military nexus that will run the part of Ukraine that Russia decides to leave alone. 

The IMF's involvement in Ukraine is simply one more event in a series of deliberate measures designed to cement Ukraine's fate as a Western proxy on Russia's border. 

The real significance of Ukraine may turn out to be not the political reconfiguration so much as the additional exposure of Western influence peddling and deliberate strategies of manipulation. These have already been exposed in Northern Africa and the Middle East, but the Ukraine saga continued the process and made it even more obvious. 

The power elite depends on a willing suspension of disbelief to promote facilities such as the UN, IMF, World Bank, etc. The more these facilities are seen as compromised and manipulated, the more they lose their luster – and certainly their credibility. 

Conclusion As the famous Macedonian General Pyrrhus once observed after winning the day against a superior Roman force but losing much of his army in the process: "A few more victories like this and we are undone."

March 27, 2014

Microsoft Is About To Release Its Most Important Product In Years

For years, Microsoft was powered by two cash cows: Windows and Office. 

But in the past three years, the Windows business has stalled.

After peaking in the first fiscal quarter of 2011, Windows revenue has gone sideways.

Office, however, remains a juggernaut.

The last time Microsoft reported its Office sales, the numbers were impressive. In the September 2013 quarter, revenue to Microsoft's business division was $24.7 billion. Sales at the Windows division were $19.2 billion.

But according to some of Silicon Valley's most outspoken venture capitalists, this will not — this cannot — last. To them, Office is just as doomed as Windows.

"The future of Office is pretty bleak," says Keith Rabois, VC at Khosla Ventures, and the former COO of mobile payments startup Square. "The only people that use Office are people that use laptops, and that's a dying breed."

Rabois says that when he was COO at Square, he used a traditional PC once a month. The rest of his time was on an iPad or iPhone. He also says he knows people running entire companies who never use computers. They're on smartphones and tablets.

For Rabois, this is the future of computing — PCs will die away and take Office with them.

"I don’t see much of a future for Office," he says before ticking off the pillars of the Office bundle. "Word has no future. Google Docs has replaced it. Quip and other things for tablet are better."

"Then there's Keynote. All of Silicon Valley has moved to Keynote," he says.

Keynote is Apple's answer to PowerPoint. And if you want an investment from Rabois, you'd better use Keynote. "Pitching us on PowerPoint would be a negative, a character flaw."

"Excel," says Rabois, "has real adoption, but I suspect that’s out of fear." He says Excel, with its power-user features, is the most useful program in the Office suite.

Still, he thinks it's needed only for "corner cases" and that, in the long run, it's toast.

Silicon Valley operates differently than the rest of the world. Just because small tech companies don't need Office doesn't mean big companies elsewhere don't. But people in Silicon Valley counter that argument by saying that what the Valley is doing today is what the rest of the world will be doing tomorrow.

Rabois isn't the only VC who is unenthusiastic about the future of Office. Kleiner Perkins investor Megan Quinn said on Twitter that "Excel is the worst. It's a product designed by MBAs, for MBAs. I'd rather use an abacus."

Google Ventures partner MG Siegler chimed in, saying, "It's one of those irrational fears. You think you need Office. In no way do you need Office. Not even to open files."

Is it possible that Microsoft could design a new iPad-friendly version of Office that saves the franchise? "I find it pretty difficult to imagine that," says Rabois. 

On Thursday, we'll find out if Rabois is right or wrong. Microsoft is holding a press briefing in San Francisco that it says is "focused on the intersection of cloud and mobile computing."

At the event, new CEO Satya Nadella will unveil Office for the iPad. We'll probably also see Office for Android and touch-based Windows devices. He'll also lay out his vision for the future of the Office line at Microsoft. 

Despite Microsoft's best efforts, iPhones and iPads have worked their way into corporate buying departments. The iPad is 91% of all enterprise tablets, according to mobile-security firm Good Technology. iOS is at 73% of enterprise activations.

Analysts have been begging Microsoft to put Office on the iPad for years. Estimates on how it can affect Microsoft's business are all over the place. Some say it will generate $1 billion in extra revenue, while others think it could kick in $7 billion in new sales. 

Just as important as the revenue is the psychology of getting Office on iPad. 

Microsoft has spent the past four years sitting out the iPad. A former Microsoft employee told us CEO Steve Ballmer made the decision to skip iOS and Android. "Our fearless leader tried to manage for the portfolio," says our source. "He felt it was a competitive need for the franchise."

Ballmer's math said if he only put Office on Windows devices, especially tablets, then more money would accrue to its fledgling Surface line of tablets. 

"It was a heated debate in the company," says our source. "[Former] Office leader Kurt DelBene fought aggressively to get Office on the iPad."

Ballmer's decision to bypass the iPad hasn't had much of a positive effect on the Windows business. Microsoft's first-ever tablet, the Surface, was a failure. It took a $900 million charge after it failed to sell enough Surface computers. 

However, it looks as if Ballmer has had a change of heart. We're told that Ballmer was the person who put Office for iPad into motion. Nadella has added his priorities to the release, and we'll see that Thursday. 

This is a big moment for Microsoft. It's an opportunity to prove that it can build successful software on other platforms. 

This has to be the future of Microsoft, because the Windows platform is no longer the dominant computing platform. And it will never again be the dominant platform.

When Apple launched the iPhone, Microsoft controlled over 90% of the computer market through Windows. Five years later, Windows-based devices were only 40% of our computing devices. 

Today, Windows is down to less than 20% of the computing market, according Benedict Evans, analyst for venture-capital firm Andreessen Horowitz. (Even crazier still, Apple's computer devices — iPhones, iPads, and Macs — were equal to Windows-based PCs and phones last quarter.)

In a way, this is back to the future for Microsoft. Microsoft's earliest success was making software for the Mac. 

For all the doom and gloom from people like Keith Rabois, it's important to remember that Office remains a very popular suite of software. Not only does it generate a staggering sum of revenue for Microsoft, many people really like it, despite what Rabois says. 

"Anybody who says Google apps is better than Office is a liar," a former Microsoft employee who is being forced to use Google Docs at his new job tells us. He says of Docs, "I hate it! I hate it! I hate it!"

Putting aside the anecdotes, there is this inescapable fact: Microsoft says Office users made 500 billion Office documents last year. If Office for iPad is a hit, Microsoft will ensure that number doesn't get any smaller. 


March 26, 2014

As Predicted, IRS Deems Bitcoin to be Property, Limiting Its Usefulness in Commercial Transcations

We told readers earlier this month that the IRS was well-nigh certain to deem Bitcoin to be property, not a currency, and that would deter its use in commerce. We got pushback from Bitcoin defenders, who tried several lines of argument, basically along the lines of “digital currencies are inevitable” and “the tax authorities are irrelevant”.

Today, the IRS has issued a release that states that it regards Bitcoin as tradeable property, which is what tax maven Lee Sheppard had predicted.

More important, the fact that Bitcoin is property means it can be taxed at short or long term capital gains rates, or as ordinary income, depending on the holding period of the Bitcoins in question and the status of the holder (investor v. trader v. Bitcoin miner v. business accepting Bitcoin as payment). The record-keeping burden of having to track Bitcon prices against the dollar at the time of acquisition versus the time of use will be a substantial deterrent to their use in commerce.

The IRS also stated that its view is retrospective, meaning that Bitcoin users, traders, and miners are expected to report income on their personal income filings due April 15 (I wonder if this also means the IRS is expecting Bitcoin-related businesses to amend the returns they filed on March 15, the due date for corporate returns). We are embedding its release at the end of this post.

We also noted that other advanced economies are moving in a similar direction, with Japan having designated Bitcoin as not being a currency and hence subject to capital gains and sales taxes.

Some extracts from media coverage. First, the Wall Street Journal:
In a notice, the IRS said that it generally would treat bitcoin held by investors much like stock or other intangible property. If the virtual currency is held for investment, any gains would be treated as capital gains, meaning they could be subject to lower tax rates…. 
The IRS notice also made clear that many people involved in handling virtual currencies—and many transactions involving them—would be subject to the same extensive record-keeping requirements, and taxes, as other people and other deals. 
Notably, use of bitcoin in a retail transaction typically would be a taxable “event” for many buyers, requiring them to figure out the gain they had made on the virtual currency—and eventually pay tax on it. Tax experts say that could come as a surprise to some investors. It also could put a damper on use of bitcoin for many retail purchases. 
The IRS also said that bitcoin “miners”–including people who use computers to validate bitcoin transactions or maintain transaction ledgers—also would be subject to tax on payments received in bitcoin. “Mining” that constitutes a trade or business would be subject to self-employment taxes, the IRS said. 
Other people who receive bitcoin for performing services—including employees as well as independent contractors—also would be subject to tax on the fair market value of the virtual currency, the IRS said. Employers typically would have to report wages on a Form W-2, and the payments would be subject to withholding and payroll taxes, the IRS said.
The IRS, faced with a choice of treating Bitcoins like currency or property, chose property. That decision could reduce the volume of transactions conducted with the virtual currency, said Pamir Gelenbe, a venture partner at Hummingbird Ventures, which invests in technology businesses. 
“It’s challenging if you have to think about capital gains before you buy a cup of coffee,” he said. 
Charles Allen, chief executive officer of BitcoinShop Inc., an online marketplace, said he’d like to see the IRS reconsider its decision as virtual currencies develop. 
“The implications this decision will have on the Bitcoin ecosystem are far reaching, and will be burdensome for both individual users of Bitcoins, Bitcoin-focused business and for the general adoption of virtual currencies,” he said, adding that Bitcoin users will adapt to the rules…. 
Bitcoin miners will have to report their earnings as taxable income with a value equal to the worth on the day it was mined. If they mine as part of a business, they would have to pay payroll taxes as well. 
The IRS will require information reporting similar to how the tax agency receives notification of stock transactions and payments to independent contractors. 
“The danger is the creation of an electronic black market, similar to the cash economy,” Joshua Blank, a tax law professor at New York University, said in a December interview. “That’s what the IRS wants to avoid.” 
The ruling takes effect immediately and covers past and future transactions and tax returns. The IRS said in the notice that it may offer relief from penalties to people who engaged in transactions before today and can show “reasonable cause” for underpayments or failure to file.
At least one Bitcoin enthusiast recognized the implications. Reader Scott A, who had regularly been sending me links to stories on the potential for Bitcoin, sent this message right after the IRS notice hit the wires:
Subject: bad news for btc
This will:
- open the way to applying UCC Article 9
- impose a tax burden on businesses accepting btc as payment
Below is the IRS notice.

March 25, 2014

The SEC Finally Takes an Interest in Collateralized Loan Obligations

The old saying is “better late than never,” but as we hope to demonstrate, the SEC is awfully late to take an interest in collateralized loan obligations. The problems it has gotten curious about now were discernible years ago. And the failure to take interest until now means that misbehavior that was discussed in the press during the crisis is almost certain to go unpunished, since the statute of limitations for securities law violations has passed.

By way of background, CLOs are a form of structured credit. Their constituent ingredient is leveraged loans, a fancy term for loans to companies that have a lot of debt once the financing is completed. Most leveraged loans are created in private equity acquisitions. The sponsor takes a pool of leveraged loans (100 is a representative number) and creates a series of securities from them. Just like residential mortgage backed bonds, the cash flows from interest and principal payments on the loans are paid out in a specified priority: AAA investors get first dibs, then when the’ve gotten their share, the funds are allocated to AA investors, and so on.

Technically, a collateralized loan obligation is a type of collateralized debt obligation, but the term “CLO” was well established, and no one in the media wanted to use the label “asset backed securities collateralized debt obligation” aka ABS CDO, as a moniker, so subprime-based CDOs have become “CDOs” and CLOs remain CLOs. But there are differences besides in asset type. CDOs were effectively resecuritizations, in that they took risky pieces of a previous structured credit deal (residential mortgage backed securities) that no one wanted (the BBB tranches) and sausage-like, bundled them with a little bit of other credits and ground them up again and sold them.

Due to the leverage-on-leverage and the lack of real diversification, they would fail catastrophically if they failed. By contrast, despite being based on risky loans, CLOs are a first generation structured credit, and hence natively less nasty.

But “less bad than a CDO” is hardly a high bar. The SEC is looking into two issues with CLOs. As the Wall Street Journal notes:
SEC investigators are looking at whether banks and companies are using the bond deals to hide certain risks illegally, said the people close to the probes. A number of likely cases in that area are in the pipeline, one of the people said. 
Separately, the government has expanded an inquiry into how Wall Street banks sell the deals, the people added. The securities being examined aren’t traded on any exchanges or open platforms, and their prices are negotiated privately between buyers and sellers.
We’ll deal with the pricing issue first, since it’s more accessible and was an area of abuse during the crisis. Back to the Journal:
The SEC also expanded an investigation into whether a number of Wall Street banks are cheating clients by mispricing certain bond deals, according to people close to the investigation… 
Bill Harrington, a structured-finance expert who formerly worked at ratings firm Moody’s Investors Service, a unit of Moody’s Corp., said an investigation made sense, given how nontransparent the market is. “In general, CLO prices can’t be easily checked or compared across sellers,” he said.
I actually saw an attempt at this sort of mispricing first hand. Before the storm hit, there had been a massive takeover boom, and banks still held a lot of unsold leveraged loan and CLO inventory when the markets froze. CLO losses got a lot less attention than subprime-related losses, since the latter were so much larger. Nevertheless, just paying attention to Bloomberg and Financial Times stories, you had a rough sense of where the market was and the trajectory. I happened to be waiting to meet someone in a bar, and I overheard a Goldman Sachs salesman trying to hawk CLOs to what I assumed was a wealth management client, as in an individual investor. He was telling them they were a great deal at 95 cents on the dollar. Even I knew that 95 was wildly overpriced and the current market prices were 90, tops, and anyone with an operating brain cell knew they were headed lower. Moreover, Goldman would probably dump its weaker positions on a guy like that.*

The other mispricing, which was occasionally reported in the financial media later in the crisis, was bank trading itty bitty trades with each other or friendly clients to establish a “market” price for marking their books. Where was the SEC then?

Let’s turn to the SEC’s other focus, again from the Journal:
Banks often use so-called structured-finance transactions to offset their own risks. For example, some banks have used derivatives to structure deals that transfer the risk of loan defaults off their books, without them having to move the actual loans. These transactions are favored by banks because moving the loans can be operationally cumbersome and may require the consent of borrowers.
Keep in mind that banks can have risk transfer fail even when it puts its exposures in an off balance sheet vehicle,** but that does not appear to be the primary focus of the SEC’s investigation.

The “derivatives to structure deals” refers to credit default swaps. Often banks will use synthetic CLOs, meaning ones composed of credit default swaps, to offset their position, while keeping the loans on their balance sheet.*** The problem there is what traders call basis risk, that the prices realized in an event of default on the CDS will not match the price the bank penciled out when it sold the deal.**** So the SEC is correct to be concerned. But again, this has been an issue from the very inception of using CDS to transfer loan book risk to investors, from the famed JP Morgan Bistro and less well known Swiss Bank GLacier Finance transactions in 1997. So the SEC is 17 years late. Charming.

And in the middle of the Wall Street Journal piece, the authors Jean Eaglesham and Katy Byrne unwittingly pass on SEC propaganda:
Before the crisis, Wall Street assembled and sold trillions of dollars of collateralized debt obligations, or CDOs, which are securities based on pools of mortgages and other debts that are sold to investors in slices of differing credit ratings and risks. CDOs have been the focus of numerous high-profile SEC actions since the 2008 meltdown, but the agency has no plans to bring more CDO cases related to the financial crisis, according to people close to the agency. 
The SEC feels it brought all the CDO cases it could, and the agency also is bumping up against a statute of limitations in some cases, the people said.
The SEC filed a token one CDO case per major firm and got “cost of doing business” fines from the biggest single cause of the crisis. As we explained long form in ECONNED, it was heavily synthetic CDOs that allowed banks to create a multiple of real economy subprime risk, thus greatly multiplying those exposures, and turning what would otherwise have been a S&L level crisis into a global financial crisis. And why was the SEC not more aggressive? Because its head of enforcement, Robert Khuzami, had been general counsel for the Americas for Deutsche Bank during the crisis. Anyone who has a casual knowledge of the subprime saga, such as reading The Big Short, knows that patient zero of toxic CDOs was Deutsche Bank trader Greg Lippmann. In other words, a serious investigation of CDOs would have implicated Khuzami. No way was that going to happen.

So I wouldn’t hold my breath that the SEC is finally prepared to get tough, but I would be delighted to be proven wrong.

* If you doubt that this sort of behavior was common, read up on what JP Morgan did to one of its most important private clients, Len Blavatnik.

** Sponsors are use off balance sheet vehicles and structured credits to offload risks onto investors, and thus report any exposure as having been removed from their balance sheet when the deal is sold. But there is a proud history of supposedly off balance sheet vehicles proving not to be off balance sheet when the deals went bad. The famous example, which was covered well during the crisis, was structured investment vehicles, or SIVs. There were some variants in the structure, but they held longer-dated assets, including, natch, subprime exposures and were funded with comparatively short-term, significantly or completely reliant on the commercial paper market. When investors woke up to subprime risk in August 2007, the first big casualty was the asset backed commercial paper market, meaning commercial paper than funded SIVs. When the short term commercial paper funding SIVs matured and the SIV could not roll the CP, the choice was to let the SIV collapse or have the bank step in and fund it itself. Investors screamed at the banks that they had better not stick them with losses of a disorderly collapse, and banks found themselves funding them (at least until they could unwind them).

Similarly, credit card securitizations have been regularly bailed out by sponsors when they perform poorly. Basically, banks can’t afford to burn these investors too badly and expect to be able to continue to sell these deals.

In case you wondered why this would be attractive, from “Understanding the Risk of Synthetic CDOs“:
Screen shot 2014-03-25 at 2.13.21 AM
This results from both the fact that the timing of defaults could differ from what the issuer had estimated, and that CDS are settled shortly after the event of default, while the losses on loans are determined through a much longer bankruptcy and/or restructuring process. The differences in losses realized on the CDS versus on the referenced credit (which is an entity, but the banks will be holding a specific loan or bond) are typically significant. 

March 24, 2014

Who In Ukraine Will Benefit From An IMF Bailout?

This is an important, nitty-gritty discussion of the grim prospects for Ukraine under the tender ministrations of the IMF from economists Jeffrey Sommers and Michael Hudson. Unlike many TV segments on social and economic issues, this one packs a lot of information into a short time frame. If you are time pressed, you can read the transcript here. A key section:
HUDSON: The objective of IMF loans is to deindustrialize the economy. It is to force the economy–meaning the government when you say the economy–the government has to pay the IMF loan by privatizing whatever remains in the public domain. The Westerners want to buy the Ukrainian farmland. They want to buy the public utilities. They want to buy the roads. They want to buy the ports. And all of this is going to be sold at a very low price to the Westerners, and the price that the Westerners pay will be turned over to the Ukrainian government, that then will turn it back to the Ukraine. So whatever the West gives Ukraine will immediately be taken back.
Be sure to listen to this illuminating case study of what an IMF bailout really means.


March 21, 2014

A New Wall Street Looting Scheme: Disaster Savings Accounts

As famed short seller David Einhorn says, no matter how bad you think it is, it’s worse. We’ve got proof of his dictum in the form of a new looting scheme, the Disaster Savings Account Act. Since the financiers haven’t yet gotten their hands on Social Security, they are looking for new worlds to plunder. Here’s the blurb from one of its promoters:

An Open Letter to the House and Senate:
Support Measures to Encourage Private Disaster Mitigation
Dear Member of Congress, 
We write to urge you to support the Disaster Savings Account Act introduced by Rep. Dennis Ross, R-Fla., and Sen. Jim Inhofe, R-Okla. The act, which allows individuals to deduct up to $5,000 per year to spend on disaster mitigation or recovery, is a strong step toward ensuring Americans are kept safe from natural disasters and extreme weather events. 
In 2011 and 2012 alone, 25 separate disasters each caused more than $1 billion in damage. Since 1996, there have been 15 natural disasters that have cost the Federal Emergency Management Agency more than $500 million, with totals for several of those events running into the billions. This pattern is unsustainable. By encouraging individuals to use their own dollars to prepare for disasters, the Disaster Savings Account Act reduces future financial liabilities for the federal government and, most crucially, saves lives by guaranteeing communities are better prepared before disaster strikes. 
With the anticipated rollback of 2012′s reforms to the National Flood Insurance Program, it’s more important than ever to take steps to prevent damage from flood events. NFIP is already $25 billion in debt, and future storm events will further erode its balance sheet. But increased mitigation can help reduce this impact. 
Beyond stemming the impact from floods, the Disaster Savings Account Act will diminish the effects of many other catastrophic events, from wildfires to tornadoes to hail storms. Already, California is experiencing its driest year yet, increasing the risk of wildfires, while 46 tornadoes have ripped across the South and Midwest. As of March 12, ten disaster areas already have been named in 2014. 
The stakes are incredibly high. Motivating individuals to assess their natural disaster risks and prepare accordingly should be a top priority. While it isn’t the federal government’s role to come into communities and mitigate against every possible disaster, offering incentives to those looking to prepare privately is a reasonable step for Congress to take. 
Therefore we ask that you support the Disaster Savings Account Act and move the legislation to passage.
Lori Sanders
R Street Institute
This is an unvarnished effort to use climate change as a cover to funnel more money to Wall Street via a tax break, which of course will prove useful only to people with discretionary income, as in top 20% earners. So of course, as is always the case with neoliberal programs, lower income people must be made to suffer because they deserve it.

And the excuse is that this sop to Wall Street will help cut disaster relief spending. First, that is never gonna occur. Not helping people in distress, is a great way to assure unfavorable media coverage. Remember what Katrina did for Bush?

Second, aside from the cynical political interest angle (and we are starting with the cynical elements because this proposal is so barmy), there is a much bigger reason government steps in when disasters strike: they can mobilize resources. What do you think someone is going to do with their disaster savings account when they are stuck with roads washed out, no electricity, and no working gas pumps on any routes out? You need government intervention to help with evacuation and trucking food and other needed support and services (like the equivalent of MASH units in really serious events, say a large earthquake in a densely populated area).

Moreover, the “every man for himself” approach which these accounts presuppose almost assures worst-case outcomes: looting and/or overly aggressive defensive responses to suspected looters (you can imagine someone coming to check and see if people are safe being shot for their intended act of concern) and public health issues (failure to drain water properly and cordon off various risks, like hazardous stored chemicals; the need to provide sanitary facilities, etc).

So please, e-mail or call your Congressman and Senators and tell them what a horrid idea this is and how you are firmly opposed to this ham-handed subsidy to Wall Street. 


March 20, 2014

The Federal Reserve Seems Quite Serious About Tapering – So What Comes Next?

Will this be the year when the Fed's quantitative easing program finally ends?  For a long time, many analysts were proclaiming that the Fed would never taper.  But then it started happening.  Then a lot of them started talking about how "the untaper" was right around the corner.  That hasn't happened either.  It looks like that under Janet Yellen the Fed is quite determined to bring the quantitative easing program to a close by the end of this year.  Up until now, the financial markets have been slow to react because there has been a belief that the Fed would reverse course on tapering the moment that the U.S. economy started to slow down again.  But even though the U.S. middle class is in horrible shape, and even though there are lots of signs that we are heading into another recession, the Fed has continued tapering.

Of course it is important to note that the Fed is still absolutely flooding the financial system with money even after the announcement of more tapering on Wednesday.  When you are talking about $55,000,000,000 a month, you are talking about a massive amount of money.  So the Fed is not exactly being hawkish.

But when Yellen told the press that quantitative easing could end completely this fall and that the Fed could actually start raising interest rates about six months after that, it really spooked the markets.

The Dow was down 114 points on Wednesday, and the yield on 10 year U.S. Treasuries shot up to 2.77%.  The following is how CNBC described the reaction of the markets on Wednesday...
Despite a seemingly dovish tone, markets recoiled at remarks from Yellen, who said interest rate increases likely would start six months after the monthly bond-buying program ends. If the program winds down in the fall, that would put a rate hike in the spring of 2015, earlier than market expectations for the second half of the year. 
Stocks tumbled as Yellen spoke at her initial post-meeting news conference, with the Dow industrials at one point sliding more than 200 points before shaving those losses nearly in half. Short-term interest rates rose appreciably, with the five-year note moving up 0.135 percentage points. The seven-year note tumbled more than one point in price.
But this is just the beginning.  When it finally starts sinking in, and investors finally start realizing that the Fed is 100% serious about ending the flow of easy money, that is when things will start getting really interesting.

Can the financial markets stand on their own without massive Fed intervention?

We shall see.  Even now there are lots of signs that a market crash could be coming up in the not too distant future.  For much more on this, please see my previous article entitled "Is 'Dr. Copper' Foreshadowing A Stock Market Crash Just Like It Did In 2008?"

And what is going to happen to the market for U.S. Treasuries once the Fed stops gobbling them up?
Where is the demand going to come from?

In recent months, foreign demand for U.S. debt has really started to dry up.  Considering recent developments in Ukraine, it is quite certain that Russia will not be accumulating any more U.S. debt, and China has announced that it is "no longer in China’s favor to accumulate foreign-exchange reserves" and China actually dumped about 50 billion dollars of U.S. debt during the month of December alone.

Collectively, Russia and China account for about a quarter of all foreign-owned U.S. debt.  If you take them out of the equation, foreign demand for U.S. debt is not nearly as strong.

Will domestic sources be enough to pick up the slack?  Or will we see rates really start to rise once the Fed steps to the sidelines?

And of course rates on U.S. government debt should actually be much higher than they are right now.  It simply does not make sense to loan the U.S. government massive amounts of money at interest rates that are far below the real rate of inflation.

If free market forces are allowed to prevail, it is inevitable that interest rates on U.S. debt will go up substantially, and that will mean higher interest rates on mortgages, cars, and just about everything else.

Of course the central planners at the Federal Reserve could choose to reverse course at any time and start pumping again.  This is the kind of thing that can happen when you don't have a true free market system.

The truth is that the Federal Reserve is at the very heart of the economic and financial problems of this country.  When the Fed intervenes and purposely distorts the operation of free markets, the Fed creates economic and financial bubbles which inevitably burst later on.  We saw this happen during the great financial crisis of 2008, and now it is happening again.

This is what happens when you allow an unelected, unaccountable group of central planners to have far more power over our economy than anyone else in our society does.

Most people don't realize this, but the greatest period of economic growth in all of U.S. history was when there was no central bank.

We don't need a Federal Reserve.  In fact, the performance of the Federal Reserve has been absolutely disastrous.

Since the Fed was created just over 100 years ago, the U.S. dollar has lost more than 96 percent of its value, and the size of the U.S. national debt has gotten more than 5000 times larger.  The Fed is at the very center of a debt-based financial system that has trapped us, our children and our grandchildren in an endless spiral of debt slavery.

And now we are on the verge of the greatest financial crisis that the United States has ever seen.  The economic and financial storm that is about to unfold is ultimately going to be even worse than the Great Depression of the 1930s.

Things did not have to turn out this way.

Congress could have shut down the Federal Reserve long ago.

But our "leaders" never seriously considered doing such a thing, and the mainstream media kept telling all of us how much we desperately needed central planners to run our financial system.

Well, now those central planners have brought us to the brink of utter ruin, and yet only a small minority of Americans are calling for change.

Soon, we will all get to pay a great price for this foolishness.  A great financial storm is fast approaching, and it is going to be exceedingly painful.

March 19, 2014

Why the Justice Department Inspector General Report on Mortgage Fraud Matters

Hello, folks! As Yves is off explaining the world to Washington, I’m manning the controls for a couple days.

This allows me to ensure that NC has that whole Justice Department IG report on mortgage fraud covered. I know that Yves heaved the written equivalent of a sigh at the news, and she wasn’t wrong. Nothing tangible is likely to happen for the borrowers victimized by the abusive practices that DoJ willfully neglected to prosecute. And there’s surely a seat being kept warm at Covington & Burling for Eric Holder’s post-government career; this won’t hurt him a bit. Yesterday, Elizabeth Warren, Elijah Cummings and Maxine Waters requested a meeting with Holder over the report; I doubt he’s stressed about it.

But because I don’t feel the coverage so far has plumbed the depths of this corruption, and because it’s still happening, it’s not worth going silent just yet. It’s probably spitting into the wind, yes, but I’ve got the time and the spit, so I want to note a few things.

1. “Mortgage fraud” is a limiting term

There’s a yawning gap between “mortgage fraud,” in the context of how the IG presents it in this report, and the full breadth of fraud and deception at the heart of the crisis. Mortgage fraud, per the definition used by the FBI and the IG, is very specifically mortgage origination fraud, the misrepresentation used to get people into loans. That includes misrepresentation by borrowers, such as lying on a loan application, but also the actions of lenders falsely documenting income or wildly inflating appraisals. In later years, mortgage fraud came to include “foreclosure rescue” schemes, where illicit actors claim to be able to get loan modifications for borrowers for a fee, and then abscond with the money and do nothing for the borrowers.

You can clearly see that this focuses on a small corner of the much more widespread fraud that has gone on for over a decade now. And it inherently, by definition, leaves the biggest Wall Street actors out of the equation. When the DoJ, FBI, or this IG report talks about mortgage fraud, they’re not talking about:

•Securitization fraud, the knowing packaging of worthless loans into bonds to unsuspecting investors;

•Securitization fail, the improper conveyance of mortgages into trusts, breaking the chain of title on the loans;

•False Claims Act fraud, where servicers collect on FHA insurance or other government benefits with faulty loans;

•Tax fraud, through setting up REMICs and then not following the guidelines with mortgages and notes, yet still benefiting from the tax status;

•Servicer-driven fraud, like the mass misplacement of loan modification documents in order to push people into default, the bonuses given for foreclosures, dual tracking, improper fee pyramiding, imposition of fees not included in the mortgage documents, lost payments, people getting foreclosed on because they underpaid by ten cents, etc.;

•Forced-place insurance fraud, the kickback scheme to saddle borrowers with lapsed insurance with junk policies that cost several orders of magnitude more;

•Foreclosure fraud, the mass production of false documents to prove ownership over loans with a questionable paper trail;

•Robo-signing, the notarization of thousands of court statements a day by line workers who know nothing about the underlying loan information;

•Breaking and entering by “property preservation” specialists who illegally break into occupied homes and occasionally ransack them in the name of “keeping watch” over properties thought to be abandoned.

I could go on. Even housing discrimination, whereby minority borrowers were charged higher interest rates and non-prime loans (even when they qualified for prime), is not incorporated into this definition of “mortgage fraud” (DoJ has actually prosecuted a fair bit of this discrimination through the Civil Rights division, but nobody’s gone to jail for it IIRC). The litany above implicates mega-banks who sold the securities, servicers (until recently, typically the arms of mega-banks) who serviced the loans, trustee mega-banks who managed the deals, and so forth. Mortgage fraud under the DoJ definition implicates fast-money, fly-by-night lenders that imploded when the whole scheme went kablooey. More recently it involves foreclosure rescue scams, which the interview subjects say flat-out in the IG report don’t involve enough money for them to consider prosecution.

That’s not true of the various types of bank-driven frauds. And without corrupt securitization feeding the need for lots of loans, there would have been far less corrupt lenders, if any. But as Gretchen Morgenson pointed out, the IG report specifically excludes securities fraud from this overview. This is on page 2 of the report:
Some observers use the term “mortgage fraud” to include mortgage-backed securities fraud, which involves wrongdoing related to the packaging, selling, and valuing of residential and commercial mortgage-backed securities. However, the FBI considers this type of misconduct to be a form of securities fraud and not mortgage fraud; therefore, we did not include as part of the scope of this audit.
That’s an absurd justification. This was all part of the same overall scheme. Even if the DoJ did a “good” job on mortgage fraud as defined by this report, it wouldn’t have touched Wall Street, because the definition mostly comprises lying on loan applications. In a way, the FBI’s compartmentalizing here shows how the law enforcement apparatus was never going to get to the bottom of the scandal. They placed a false frame on it, one that inherently goes after the little guy and not the bigger players.

Of course, as we see, DoJ couldn’t even be bothered to get the small spade work done (which could have led them to the top). And if they wouldn’t prosecute small-time fraud, they weren’t going to prosecute anything.

2. DoJ’s own systems prevented accountability for their actions

One of the major themes, if not the major theme, of the report concerns how the DoJ’s case management system, known as LIONS (Legal Information Office Network System), was simply unequipped to track how many mortgage fraud cases the department handled. The interview subjects said this:
According to EOUSA officials, LIONS is a tool used to assist the USAOs in assessing staff caseloads and managing their offices. These EOUSA officials also stated that the LIONS system was not designed as a statistical system and therefore can be an imperfect tool for responding to specific, detailed inquiries seeking comprehensive, uniform nationwide data sought for purposes other than case management. Despite these limitations, EOUSA officials said that LIONS is frequently used to provide the data used for the Attorney General’s Annual Report, the United States Attorneys’ Annual Statistical Report, and numerous requests for statistical data from the Office of Management and Budget, Congress, and the public at large.
This is stunning. So US Attorneys have known for years that LIONS cannot provide statistical analysis for nationwide data. It’s an open secret that the system is a joke. But DoJ uses it to provide that statistical data anyway!

When Congress first started asking for very basic information about how many cases were in the pipeline, all the way back in July 2008, mortgage fraud cases weren’t even tracked separately in LIONS. They added a code, but even then, US Attorneys repeatedly told the IG that the data was unreliable, that they would frequently find misclassifications, that cases opened before July 2008 were often never re-coded, etc. The database does not even track the business title at whom the denoted mortgage fraud prosecution (i.e. were they a small fry or an executive). The LIONS database for civil enforcement cases STILL doesn’t have a code for mortgage fraud, nor does another system, USA-5, used to track what kinds of cases DoJ personnel have worked on. It all gets lumped in under “financial institutions fraud,” which can mean any number of things.

There’s practically no reliable method of evaluation, then, to determine whether DoJ has been diligent with respect to their narrow definition of mortgage fraud. And I can’t help but think that’s intentional. I see a lot of cautions about the limitations of LIONS and no effort to, well, find a system that does statistical analysis better. And that could of course help with information sharing, an important component of understanding and verifying a nationwide, interlocking set of frauds. Nobody wanted to put that kind of effort into it, so you have garbage in, garbage out.

Here’s the best part: in the DoJ response to the IG report (more on that later), they don’t even commit to adding the necessary fields to accurately compile mortgage fraud data:
The Department will continue to evaluate and reassess its existing data collection mechanisms for allowing the Department to better understand the results of its efforts in investigating and prosecuting mortgage fraud and to identify the position of mortgage fraud defendants within an organization. Indeed, EOUSA has already begun considering the addition of a LIONS field for “occupation” in financial fraud and mortgage fraud cases.
Begun considering! The foot-dragging is a giveaway that the Department is not interested in metrics, perhaps because of what they would show.

3. When did a priority become a non-priority?

People who worked in US Attorney’s offices will tell you that there was a moment in time when mortgage fraud was actually a priority, or at least appeared to be. Teams of FBI agents and lower-level US Attorney personnel were formed. Cases were opened. Things were percolating. The facts of the IG report show that changed, and mortgage fraud moved further down the totem pole, with cases closed and emphasis placed elsewhere. The question that must be asked is whether mortgage fraud was never a priority at all – a PINO, or priority in name only – or if it was specifically downgraded, sometime after the financial collapse. This unsubstantiated report says there was a handshake deal in 2008 not to prosecute. I can’t vouch for it. But something happened. The IG provides the contours but doesn’t get to the bottom of the decision-making process.

4. Lying to Congress: The famous story coming out of this report regards the 10 months’ worth of repeated lying by DoJ about their prowess in prosecutions. We already knew much of this thanks to Bloomberg’s Jonathan Weil, but we didn’t know that DoJ had immediate awareness that the stats they gave at an October 2012 press conference (note the date, one month before the Presidential election) were flawed, and yet used the numbers anyway in press releases until August 2013 (when they then tried to change the numbers in the old releases retroactively).

The key question is whether they used those knowingly false numbers in testimony to Congress. We do know from p.20 of the report that then-Assistant AG of the Civil Division Tony West testified to Congress in 2011 that “mortgage fraud was a top priority of the Department,” but that’s not specific enough to be considered lying to Congress. Did anyone from DoJ use numbers about mortgage fraud prosecutions they knew to be false in Congressional testimony? That’s really important information, and Patrick Leahy or Darrell Issa or any other committee chairman who welcomed Eric Holder or DoJ officials from October 2012 to August 2013 should be asking it.

5. DoJ takes credit for someone else’s collar

Back to the DoJ’s response to the IG report, written by Deputy AG James Cole. While agreeing with the recommendations of the report, Cole tries bravely to defend the Department’s record in light of this complete torching by the IG. But he couldn’t come up with anything better to say about prosecutions of individual bank executives than this:
The Department has brought significant criminal and civil enforcement actions against company officials for conducting mortgage fraud resulting in significant losses. For example,in the criminal enforcement context, the Department secured a conviction in 2011 against Lee Bentley Farkas, the former chairman of a private mortgage lending company, Taylor, Bean & Whitaker, for Farkas’s role in a more than $2.9 billion fraud scheme that contributed to the failure of Colonial Bank, one of the 25 largest banks in the United States in 2009.
What a risible half-truth. Everyone who knows the Farkas story knows that this wasn’t DoJ’s collar. In fact, it was the work of that Obama Administration nemesis, Neil Barofsky, when he served as the Special Inspector General of TARP. The Farkas case began as a SIGTARP investigation, because Farkas convinced Colonial Bank to try to rip off $550 million in TARP funds. That’s what led to a scheme in place since 2002 to unravel. SIGTARP was the lead agency on the case until Barofsky left. He’s listed on DoJ’s press release about the indictment.

Technically, the US Attorney for the Eastern District of Virginia, Neil MacBride, finished the prosecution. But the fact that DoJ, in their alibi, takes credit for a case that was handed to them by an outside agency that did all the investigative work, shows how bare the cupboard truly is.

It’s important to point this stuff out systematically. Everyone should have an informed response to those who claim that financial prosecutions are just too hard, or that law enforcement made the proper effort. Especially because this is STILL going on. LIONS remains a crappy database. DoJ still can’t track cases well. Mortgage fraud continues to be an inherently limiting definition. Without knowing all this, that will never change.


March 18, 2014

Tangible Versus Financial Assets: The Great Migration

Wealth comes in many forms, but only two general categories: tangible and financial. Tangible wealth is made up of real, physical things like buildings, farmland, oil wells, commodities, etc. These things can be seen and touched, and – crucially – they don’t have counterparty risk. That is, no one else has to make good on a promise for a tangible asset to have value.

Financial assets like bank deposits, insurance policies, bonds, and annuities do have counterparty risk, which is to say they depend on someone else’s promise. A bank deposit, for instance, only has value if the bank is willing and able to produce that money when the account holder requests it. And a piece of paper currency is only valuable if the government manages the money supply properly. The part of the economy represented by industries that deal primarily in financial assets is known as FIRE, for finance, insurance, and real estate (real estate in this case referring to mortgages and other property loans that are packaged and traded).

Equities, because they represent ownership shares in public companies, can be either tangible or financial depending on the underlying company. A share of Exxon Mobil stock is a tangible asset because oil wells are real, while a share of Goldman Sachs or JP Morgan Chase would be financial because a bank’s wealth is primarily in the form of loans and other financial instruments. 

Over long periods of time these two asset categories tend to move in and out of favor, with tangible assets being more prized in hard, uncertain times when preservation of capital is paramount and counterparty risk is suspect, and financial assets being favored when times are good and people have grown to trust major financial institutions and governments to keep promises and generate big returns.

One of the keys to successful money management is to understand which category is ascendant and therefore the more profitable/safe place to be. During a boom, one should own financial assets until they become relatively-overvalued (as they did in 1929, 1968, and 2000), then shift into tangible assets and own them until they become overvalued (1947 and 1980).

As this is written in late 2013, the world is at one of these inflection points, perhaps the biggest ever. As the following charts illustrate, during the expansion of the credit bubble that began after World War II Americans gradually became more and more optimistic about the future and more trusting of banks and governments. Because the good times seemed likely to continue, using other people’s money to achieve one’s ends came to be seen as increasingly reasonable and wise. Debt expanded and finance (i.e. the debt industry) became an ever-more important part of the economy, while manufacturing in particular and tangible assets in general became relatively less important. The FIRE economy doubled as a percent of GDP between 1947 and 2008 while manufacturing fell by nearly two-thirds. For investors, the standard portfolio of stocks, bonds and dollar cash was a great way to build wealth, with very little long-term downside risk. 

That faith was shaken by the crash of 2008, which should have marked the end of the post-WWII cycle of credit expansion and ushered in a mass-migration out of finance and into tangible assets. Instead, the world’s fiat currency managers upped the ante, cutting interest rates to zero and flooding the system with newly-created currency in an attempt to re-inflate the financial bubble. They handed the biggest banks effectively-unlimited amounts of free money, and the banks, reluctant to lend so soon after their near-death experience, simply deposited their excess reserves with the Fed, earning a small but risk-free return. Illustrating just how much money the banks were given, even with this hyper-conservative investment strategy, the industry reported record profits in 2013.

And within the banking industry it was the major banks, as the recipients of most of the Fed’s largesse, which reaped most of the rewards. In 2013, the 1.5 percent of banks with the largest asset bases earned about 80 percent of the industry’s profits. Big-bank stocks, meanwhile, were among the best performers of the post-crash bull market. The debt monetization experiment had succeeded in lengthening what was already an extreme pendulum swing towards financial assets. 

So now the question becomes, will the monetary authorities be able to push the pendulum further, or was the financial asset recovery of 2009-2013 the last gasp of a dying trend? By now you know that we’re firmly in the latter camp. The expansion that began after World War II has produced extraordinary amounts of debt, leverage and complexity, from a financial standpoint achieving “peak” everything. Finance has no further to go, and the great migration out of financial assets and into tangible things is about to begin, on a scale commensurate with the historically-unprecedented size of the post-WWII credit bubble.