How bad is California's situation?

Its now the measuring stick on how to judge other state collapses.

10 States Hurtling Toward Califonia-Level Disaster

I will have to research Idaho

That's maybe better than the Texas heat, and the skeeters.

NCES Stats

8th grade Math 4th Grade Math

CA: 46th 48th

TX: 15th 20th

8th Grade Reading 4th Grade Reading

CA: 49th 49th

TX: 32nd 32nd

So I am not seeing much good news for CA in these stats. Its a bit frightening, in fact.

One of the great selling points for "high-tax, high-service" government would be that you could leave a lot of the burdens of life on auto-pilot. National healthcare means you are covered from a major life worry. Bank insurance means you don't have to shop for a bank that's safe. Excellent schools means you don't have to endlessly research schooling options.

When it fails it means you have the worst of both worlds: high taxes (plus entrenched, unionized bureaucracies!) with poor outcomes that make the average taxpayer again be in charge of their life - searching for private schools, charter schools, or conniving to get their kid into the one or two decent schools in the district. Or simply moving to another state.

Bye Bye Bank of America

After confirming that I have to pay 5 bucks a month for a savings account unless I keep a certain amount in it, and 8 bucks a month for checking, I have decided to check out other banks. With essentially a zero percent interest rate, you lose money if you screw up and go below the minimum, which I did twice on the savings account. And there is NO WAY it costs them 5 bucks to maintain an internet savings account.

I already bank with ING Direct, and was going to go with them, but I read about USAA Federal Savings Bank. This bank is affiliated with the US armed forces, but is open to anyone now. (They still ask about any military service but its not a requirement for banking services.)

There are no charges for savings or checking (same with ING Direct.)

There are no charges for using any ATM, (ING Direct only has one network that is free.)

They have a system where you digitally scan checks, and deposit them electronically from your home. (ING Direct does not have this.)

USAA accepts international wire transfers, while ING Direct does not. (This is why I used BofA in the first place.)

Everything else is pretty standard. I will slowly try out USAA and if I end up with issues, go to ING Direct.

p.s. Dave told me he buys Bank Drafts at Bank of Taiwan for like 30 NT and then sends an actual bank draft back to be cashed via snail mail. Cheaper than the US$ 30 wire transfer charge. I may look into this.

Good Value for Money?

Germany has high taxes, but maybe they get excellent services for that money, e.g. superb education, infrastructure, etc.

Now California's state government is hurting for money. Should we raise taxes to pay for all of those excellent services we are getting? Well, let's review where we stand. We shall use Texas as a benchmark, because they are also a large border state. California of course will kick the shit out of Texas.

State Ranking, Taxes per Capita

California: 10th (US$ 2,724.31 per capita)

Texas: 49th (US$ 1,434.16 per capita)

OK –California easily wins, spending much more taxes on critical government services. Its obvious from the data that Texas is a goddamn bastion of cheap-ass small government idiots who chronically underfund public services.

Therefore, according to our hypothesis, California should get much better returns from these investments our tax dollars are funding. Let’s check out education, probably the most important service provided by the State.

State Ranking, Education

California: 47th

Texas: 25th

WTF? Dude, Louisiana and Alabama beat California, and we are just above, shudder, Mississippi.

Well, I am going to guess that Texas somehow skews its money into education and California does not, which would explain this weird result.

Teacher’s Average Salary

California: 1st (US$ 59,825)

Texas: 34th (US$ 41,744)

(Oh, and keep in mind that education ranking included teacher pay as part of its metric – so despite paying the most, which should boost CA’s ranking, the remaining scores still poll it down to 47^th.)

Now, to be fair, we will note that Vermont is #1 in Taxes, #1 in education, and # 19 in teacher’s pay. So the theory that high taxes could deliver high levels of public goods has not been disproven.

What has been shown is that Californians are not getting much “Value for Money” and that we are no Germany on the Pacific. Hell, we are not even a Texas on the Pacific.

Alternative History

In 2001, GTIC a major Chinese financial firm went bankrupt. Here are the ten lessons from this case from the Asian Wall Street Journal. I am only quoting the relevant ones here and apply them to Fannie and Freddie debt held by the Chinese.

No company is too big to fail.

Gitic's bankruptcy refuted the moral hazard fallacy that any Chinese companies would be too big to fail. Even if a company is owned directly by a provincial government, it remains a stand-alone limited liability entity whose debts will not enjoy the full faith and credit of the Chinese government. A loan to such company must be based strictly upon its balance sheet and financial condition, and not upon any implied connection to, or shareholder relationship with, the government. Full faith and credit will be enjoyed only by government bonds and corporate debts that are explicitly guaranteed by the Chinese government.

Since Freddie Mae and Freddy Mac did not have EXPLICIT federal government guarantees, only implicit, we could have simply let the Chinese take a big haircut and pointed them to CITIC bankruptcy 2001 for our reasoning.

Foreign creditors do not have preference.

Previously, when the People's Bank of China closed down insolvent financial institutions, such as China Venturetech Investment Corp., foreign creditors were assured that they would be repaid in full. The PBOC had initially closed down Gitic under similar procedures and with a press announcement that foreign creditors would have priority. But after realizing the full extent of Gitic's debts, the Chinese government decided to apply the PRC Bankruptcy Law, probably as a test case. Under the Bankruptcy Law, all unsecured creditors are treated equally, regardless of whether they are foreign or domestic.

Again, we could have made them take a hair cut along with domestic bond-holders, and pointed to this case. Not saying it would be a great idea, as I have no idea what would have happened after the news was dropped, but its fun to fantasize about making the PRC take a huge loss on their sterilization program. You pays your money and takes your chances when you don't let your currency appreciate and instead ship us products in return for pieces of paper.

Treat Chinese legal opinions with caution.

Gitic's bankruptcy was perhaps most unjust for foreign lenders which had made loans to Gitic's Hong Kong subsidiaries that were guaranteed by Gitic's unincorporated branch in Hong Kong. The lenders had prudently obtained legal opinions from well-known Chinese law firms in Beijing and Guangzhou opining that guarantees made in Hong Kong need not be registered with or approved by SAFE. One of these law firms has since seemingly vanished, leaving no forwarding address or phone number. The lawyer who had signed one of the other opinions has since left his law firm, and when finally reached by phone, has disavowed responsibility for the opinion. Meanwhile, the innocent foreign lenders are left holding legal opinions that are not worth the paper on which they were written.

After we told them about the hair-cut, we close down the offices, turn off the lights, and unplug the phones. Maybe leave a voice mail box so they can yell at us to vent some anger. They do have nukes after all.

Empirical and result-oriented approach to reform.

Since Gitic's bankruptcy, the Chinese government has effectively forbidden any other major Chinese company from going bankrupt. It has also tried to appease the international banking community with offers of more favorable out-of-court restructuring settlements, such as that for the Guangdong Development (Holdings) Ltd. group, in which the Guangdong provincial government voluntarily injected a water plant supplying water to Hong Kong as part of the restructuring.

Hmmmm, I don't get how this jibes with the first lesson "no company is too big to fail." If you forbid bankruptcy, then isn't that saying it is possible to be too big to fail?

Too Big To Fail

The phrase "too big to fail" was actually coined in 1984 during the Continental Illinois bank failure, where, during hearings a senior government official let slip that probably the top 11 banks in America were "too big to fail." Continental Illinois was the 7th largest bank at the time. Shareholders basically wiped out, but bond-holders were bailed out.

The author of the book Too Big to Fail (written in 2004!) made the following comment (paraphrased)

Bondholders can assume that they will be paid in full by the government. So, they stop caring whether the bank they are lending to will be prudent. Thus, risk is under-priced and when something is priced too low, you consume more of it than you might normally, .e.g. the bank actually takes larger risks.

I guess this logic also applies to small creditors like depositors who can rely on FDIC.

So, the perverse incentives for banks would be to be very big, and also have a lot of interconnections, counter-parties, etc. to make sure you are a major systemic risk.

.......

How about restaurants? Do you ever consider going in a restaurant but then have second thoughts based on cleanliness, lack of other customers, chef coughing over my food, etc.? I do.

But I never worry about what the hell my bank is up to behind the scenes. Are they lending my money to goat turd entrepreneurs or itinerant patent trolls? Don't care.

Is this a poor analogy?

Follow Up on AIG

This article from April 2009 says they have wrapped up about 50% of their CDS business but the rest will not be finished until end of 2010, with some even lasting longer.

Another more recent article about AIG is very interesting as well, as they are getting some money back as the financial market improves. Also interesting is the idea that the government could have temporarily guaranteed the collateral rather than bailing out AIG (sort of the same thing, but perhaps with less active ownership.)

From these two articles it appears they are no longer selling CDS just winding down.