Other Alpha Sources

A piece today in the Global & Mail shows the downsides of homeownership when crisis strikes. Indeed, Spain is in risk of producing a very large number of people who will effectively never be able to pay off their debt if, of course, this same debt is not written off on the balance sheets of the banks.

The 44-year-old construction worker sat at the folding table in the tiny living room of his basement apartment on the outskirts of Barcelona and tried to grasp the larger meaning of a letter from the bank informing him he no longer owned the property.

The apartment will be auctioned at a fraction of the price he’d paid for it four years ago, when his fast-rising salary seemed a sure ticket to middle-class stability for his family. If a buyer is found this week, he and his four teenaged children will be evicted. As Spain has no personal-bankruptcy law, he will still owe the bank almost €200,000 – more than the current market value of the apartment – even if he loses it.

What is so diabolical here is the fact that he will still(!)l owe money even after getting evicted. The bank should take part of (if not the entire) loss if they choose to evict him. Alternatively of course, Cedena should be able to stay (pay what he can) and then of course effectively never own his property again as it will be under water. Even here I think the bank should assume some of the losses on their balance sheet. It is basically as follows. If they let him stay and pay whatever he can it can be a bet that the property price will re-surface at some point in the future. In my opinion this is stupid and the bank should assume a large chunk of the CURRENT loss on their balance sheet today. Then Senor Cadena stays and pays what he can and the banks will be able to take the loss now up front and move on. What we see here on the other hand is effectively just moving around the liability since there is no way that these people can pay, ever!


John Hempton does some soul searching on his portfolio and discusses whether US banks are turning Japanese. This is a really a must read and puts the suggestions to overhaul the financial industry in the US into perspective. Moreover, it is an excellent exposition into the issue of what ZIRP really means.


I am currently reading the Predator's Ball by Connie Bruck and as I am consequently submerged in the wizardry of the 1970s and 1980s junk bond raiders I enjoyed this story by Bloomberg a lot. Basically, these guys are still at it and this particular story is a wonderful tale about how Leon Black (who was part of Milken's inner circle) is pitted against Carl Icahn who himself was one of Milken's pawns in the 1980s. Great stuff ...