Monday, November 2, 2009

About CIT And Sardines

CIT, one the world's largest finance companies specializing in lending to medium-sized companies and equipment leasing, just filed for bankruptcy. It is highly unlikely that American taxpayers are going to recoup any of the $2.33 billion of bailout money the company was provided with in the form of preferred equity.

In the chart below, let's take a look at CIT's balance sheet assets, its equity and the price of its shares - all at year-end except for the last two quarters of 2009 (click to enlarge), and ask ourselves this simple question: what is the probability these assets (mostly loans and leases) were really worth what the annual and quarterly reports said, particularly after 2006?

Judging from the share price: zero probability, of course.

But, this post is not really about CIT. Rather, it is meant as a general comment on financial company balance sheets. To wit, it is nearly impossible to properly value loans, leases and other more esoteric financial assets (e.g. CDO, CDS, IRS, FRA, etc.) when we are out in 3+ sigma territory in delinquencies, defaults, counterparty risk metrics and volatility. One day a company like CIT is supposed to be "worth" $6 billion according to its books, the next it's hyena food.

I've said it before and I'll say it again: a company that bases its valuation, indeed its entire business, on the Trading Sardine principle (see below) should be judged not by analysts but by fishmongers. Better yet, by their wives..
The Trading Sardine

Andy convinces Billy to buy a can of sardines at a high price by telling him how wonderful they taste. Billy, being greedy, decides to resell them to Charlie for a profit at an even higher price by convincing him, too, about how great these sardines are. The process is repeated several times until the last buyer, let’s call him Zebediah, pays a million bucks to Yorick for a can of the “world’s absolute best sardines – EVER”.

Well, Zebediah decides to open the can and eat the sardines, only to discover they are ordinary, plain sardines. Furious at being swindled, he yells at Yorick: “You crook! You liar! I paid you a million bucks for plain ordinary sardines. They were not the greatest tasting sardines - EVER”, yells Zeb.

Yorick shrugs and replies…

“Hey Zebediah, you are such a schmuck. Those were not eating sardines – them were trading sardines!"



    The way I heard the "sardine" story, and I heard it in spanish, is that it was a freight car of sardines that keeps exchanging. The last guy swings open the door to the fright car of sardines and is jolted backwards by the rotten smell. he tells the seller, "these f#&cking sardines are rotten, what are you trying to do to me here...?" The seller smiles and tells him... "These sardines are not for eating, they're for selling...." :-)

    Best regards,


  2. Um... how can companies assign value any other way than by the trading sardine principle when fiat is behind it all anyway ?
    Being generous by nature, today I foreswear any feminist outrage at the last line of your post, Hell. ;-)


    This is a great story originally told by Robert W. Service of a scene he observed in a mining camp in the Yukon River. Come to think of it the whole market is starting to look like The Cremation of Sam McGee.


  4. Great post, I loved the sardines story.

  5. I e-mailed a story to Thai, but I thought you would be interested in it, too, Hell.

    Does Economics Violate the Laws of Physics?

  6. From the article linked by Okie:

    "Neoclassical economics is inconsistent with the laws of thermodynamics."


    Permagrowth and neo-con is in complete antithesis to the Second Law of Thermodynamics, which is essentially the One Law of The Universe.

    I began writing a piece for The Oil Drum over a year ago (they invited me to do a guest post, but I was lazy and never completed it) - it started like this:

    "It is unfortunate that Rudolf Clausius formulated the Second Law of Thermodynamics in 1850, nearly a full century after Adam Smith published his Wealth of Nations.

    Adam Smith was a brilliant man and would have immediately perceived the contradiction between his economic theories and physical law".


  7. I see a focused Stimu...nay, a focused Jobs Bill in America. There will be much rejoicing. A thousand points of light will come together. Happiness never decreases by being shared. Look toward the future; when you are not sure of your path, search for clues in your past. Heed the nagging wife. Beware the eager vendor. Grand adventures await those who are willing to turn the corner. Do or do not....there is no try. Remember, anger begins with folly, and ends with regret.

  8. Regarding classical economics in violation of the 2nd Law of Thermodynamics. Yes and no.

    And yet, one of the first things one learns in economics is what?

  9. "There is no such thing as a free lunch."

    This axiom/maxim, broadly speaking, acknowledges the laws of nature.

    Which just goes to prove at least one thing, that no discipline is safe from corruption in the service of man's will.

  10. And I was a great article too Okie, thanks.

    Indeed, as you are aware, I wrote the following posts on just this topic for Deb and Dink a while back to help them understand a few of the books Hell had posted on his book list.

    I am not sure whether to agree or not with's Hell's comment re: neo-cons (I do or don't depending on the viewpoint I come at his comment from). Indeed, I might suspect that they too feel liberal think tends to violate the conservation of energy as well.

    ... Indeed one could make a reasonable case that there is a whole lot more thinking which violate the conservation of energy than just classical economics, but as I am supposed to stay on topic and this would get int discussions on moral matrices, etc... I will let it go.

    @Edwardo, I suspect you already know about this which does remind me of Hell's recent posting on boundary conditions and the following comment:

    "A steeply positive yield curve - as it is now - is the bond market's way of discounting a sharp rebound in the economy; I believe this optimism is unfounded and will soon be proven wrong, leading to a reversal."

    There is one instance where this statement could be wrong, namely when the US currency is weakening in the setting of a massive deflationary credit crunch.

    Under such a scenario, investors would still demand higher returns on the long bond in order to justify the risk of dollar collapse.

    It appears at first blush that India has blinked.

  11. Your sardine tale sounds like the Aussie housing market:

    Those were not Living in houses – them were trading houses!"

  12. Your sardine tale sounds like the Aussie housing market:

    Those were not Living in houses – them were trading houses!"

  13. Yes, Thai, India sees the Sanskrit on the wall. And Warren Buffet does too as his "all in investment" in railroads isn't so much a bet on a rosy future for the U.S. economy as it is a bet on the monetary authorities stewarding the nation into a currency collapse.

    Yes, "The sage of Omaha" is a wily old *&%! who would like the nation to think that he is engaging in something approaching a patriotic gesture, when, in fact, he knows what is coming will ruin all those who aren't exposed in the resource area.

    So he will direct the dilution of the class B shares of Berkshire Hathaway by 50 to 1 making it easier for the biggest shareholders to distribute their more modestly priced shares to the sucker public.

  14. Edwardo:

    I would much rather buy oil than gold; as gold will not power any industry as oil will. Although they are somewhat related in terms of their prices being affected by the value of the dollar.

  15. There is something that I think that you are ALL forgetting on these issues.
    One of the major functions of money as an exchange system is to... introduce DELAY in exchange (which barter does not seem to do...)
    Introducing delay in exchange is what, among other behaviors, opens up the perspective of... (drum roll, please...) : TIME.
    What are Hell's graphs telling us, in the boundary conditions ones, at least ?
    That economic cycles seem to be becoming.. SHORTER AND SHORTER.
    This is a direct reflection on OUR human perception of time (it all hangs together...), which in turn inflects economic conditions.
    When cycles become shorter and shorter, time ends up... collapsing, at least for the purposes of.... PREDICTABILITY (which is a hazardous venture with or without... time).
    I think you guys are way off base in your 19th century, oh so human, desire to, in sheer Procrustian fashion (for YOU, Econolicious), make human behavior espouse thermodynamic laws.
    This is rather... TOTALITARIAN thinking, in my book, and a rather close read of Okie's link reveals this... (But what am I saying... WHO really knows how to, or bothers to... READ these days ?)
    Thai, I am offering myself the luxury of this philosophical foray here because as I see it, on this post at least, Hell himself has not stayed.. on topic, and since Hell has not come over to the saloon to spar, well, the saloon is coming to him TODAY.

  16. Dear Debra,

    Is the world as it is, or is it as I see it?

    Quantum physics and the Second Law of Thermo does not "see" a wall between human perception/thought and physical reality..

  17. Hell Kudos, you really are straying into our Saloon conversation.

    Is information energy?

    Is risk information (energy)?

    Is a thought simply a thought and/or is it energy (e.g. an information structure)?

    Is a word a word? Is it information? Is it energy?

    Is a string of words (a sentence) information (energy)?

    And if they are information, the second law applies.

  18. The rating agencies were corrupted either because viscous ideologues had infiltrated the system (see Greenspan's mea culpa), or the United States especially along with the ROW was recognized for what it is, an unsustainable ponzi beast doomed to the tar pit in an era of declining energy supplies.

  19. The entire universe is one giant exercise in free lunches.

    Economic Ponzi Fraud moves too many free lunches into the wrong hands.

  20. Careful,Thai, we don't want to end up like Rabbi Akiba. (See StreetRat, or better yet, google Rabbi Akiba. I personally have not checked out that infamous Wikipedia on him... I have OTHER sources.)

  21. Thai... is ENERGY a... METAPHOR ?
    Hell, I continually get this feeling that you don't think I am understanding you, but I don't think this is true...
    Just for fun... what's the relationship between what you just stuck up in your comment on the blog, and the Republican, Bushy think that.. their perception of reality induces reality ?
    What's the difference between what you're saying and what THEY'RE saying ? (were..)

  22. Energy is the stuff of which the universe is made.

    Our would reflects the thoughts that we choose to act upon.

  23. To Anon above,

    The rating agencies are human, therefore subject to human corruption --greed looks to be the main motivator--no Aaa ratings, no fees.

    We live in a predatory world, humans being one of the most cunning. How do you avoid being prey? Eliminate your exposure

  24. Yawn, Marcus, I can't resist unsheathing my claws... you need to check out some NEW Darwinian social science/science authors... your sources are... dated, now...

  25. JP

    "Energy is the stuff of which the universe is made."


    "Our world reflects the thoughts that we choose to act upon."

    Again true

    AND you did not answer my question

    "Is a thought simply a thought and/or is it energy (e.g. an information structure)?"

    For if "Energy is the stuff of which the universe is made."

    Then your thought is still part of that universe, no?

    If so, then does the conservation of energy apply to love?

    Deb agreed and its not worth it.

    And re: totalitarianism

    I shared the following thoughts with Greenie some time back

    Your body has an (infinite?) layer of controls within it.

    There are controls for molecules (DNA, proteins, etc...), controls for cells, controls for organ systems, controls on your behaviors within society, etc...,

    -not every molecule can work with every other molecule
    -not every cell type in your body can do whatever it wants
    -not every cluster of cells can do whatever they want
    -not every organ can do whatever it wants
    -not every organ system can do whatever it wants
    -not every human being can do whatever they want in society.

    There are endless levels of control on top of endless levels of control all working together within the confines of Greenie.

    Kind of like two people communicating over the blogs ofthe internet. Think about all the levels of languages that are involved in order for the communication to take place:

    -Machine language
    -Linguistic agreement on languages
    -Thai and Greenie actually typing English on their keyboards in order to actually communicate

    Levels of language upon levels of language in order to communicate
    (And I have greatly simplified this topic in order to make my point).

    Or as Edmund Burke (the father of modern conservatism) once astutely noted:

    “The restraints on men, as well as their liberties, are to be reckoned among their rights.”

    Libertarians tend to see all restraints as needing to occur at the level of individual integrity and reputation destruction, etc...

    Socialists tend to see these restraints at the level of social institutions, etc...

    In truth restraints are required at every level of a system if teamwork and cooperation is to flourish.

    It is what it is

    Just my two cents

  26. I don't usually mix work type blogs with stuff as important as bemoaning the evils of the American banker but this one broke my heart and as I see so much of this already, I thought I would pass it along in case any of you feel like helping a random stranger out.

    The link to the link is here.

    Otherwise, move on

  27. Life seems to be both interative and fractal, Thai.

    You need underlying structrue for anything to happen.

    You need both the appropriate container and the appropriate contents, so to speak.

    The body doesn't have an infinite number of controls. Just a large enough number of controls that it's infinite for all intents and purposes, I suppose.

  28. LOL!!!


    You like to bust my chops for being the resident troll yet I don't see all that much disagreement ;-)

    Be well

  29. "Permagrowth and neo-con is in complete antithesis to the Second Law of Thermodynamics, which is essentially the One Law of The Universe."

    Unsubstantiated garbage as usual. Won't you commies ever give up on this EROEI bulshit?

    20 years back, I had to print or photocopy every scientific paper I needed to read. Today I just download.

    20 years back, someone running analyzing a protein structure needed a large supercomputer sheltered in a air-conditioned room and maintained by elaborate (read it as energy-consuming) processes. Today the same analysis can be done on my laptop and no AC needed.

    20 years back, a physicist from Japan needed to be flown all the way to Switzerland to help work on data analysis. Today, a large group of scientists from 15 countries can work together online to understand gene information coded in a complex eukaryotic genome.

    Those are at least three examples, where economic growth reduced energy consumption. It is not all about driving hummers and building high-rises as you commies like to portray.

  30. Dear Manoj, aka Commies, Commies Everywhere

    You are sadly misinformed. Addition and division are separate arithmetic operations. One results in sums and the other in ratios.


  31. Hellacious:
    I heard the story as follows: "I'll trade you this $10,000 dog for your two $5,000 cats". Then the guy trades a $5,000 cat for ...


  32. Hell, would you be willing to hum a few more bars?

    IA, re: trading cats for dogs. ;-)

  33. Debra, I stopped reading your posts a while ago. Your writing is a bit too labored and thoughts a bit too scattered to take seriously.

    I see you learned one of Bozo's tricks of citing authorities on a general subject without focus on a specific point.

    Take Hell's writing as a good example of clear unambiguous communication and try to better yourself.

  34. *Bozo hears someone call his name*

    *Bozo walks up to Marcus and shows him the pretty flower pinned on his outfit*

    *SQUIIIIRTTT, Marcus falls for the squirting flower gag and gets blasted in the face with water, he is soaked!*

    *The audience howls with laughter*

    *Marcus has learned another one of Bozo's tricks*

    *Bozo gives Marcus a Tootsie Roll and walks away*

  35. YES, Hell, addition and subtraction are not in the same league as multiplication and division.
    All four operations reflect distinct and different perceptions of what you like to call "reality" and exchange.
    Thanks for KO ing the comment about Commies, etc.
    Marcus... I know I am perverse, but...
    If you had really stopped reading my comments, you would not have bothered responding to the last one...
    Better luck next time :-)

  36. Debra, "Marcus... I know I am perverse..."

    Good Deb, rehabilitation starts with admitting you have a problem.

    These clear concise posts I don't mind reading, as opposed to your typical scatterbrained posts.

  37. Marcus, if you want to continue sparring you're going to have to move over to the Saloon (out of respect for Hell...)
    I said I was perverse. I did NOT say... that I had a problem..

  38. Oh, and JP, re: "Life seems to be both interactive and fractal"

    I suspect you were being intentional, but just in case it was otherwise: how would you describe a chaotic system to a fourth grader?

    And which point of view would be most appealing to look at the chaotic system from- that which is constant, or that which changes?

    And this preferred point of view is established by your own internal filter (moral matrix?).

    ... And as an FYI (if you were unaware), cognitive scientist have firmly establish the filter is highly genetically (and environmentally) influenced.


  39. wow !!! It's a good blog. The story of sardines is interesting.
    debt consolidation

  40. Nice sardine story. This was my first time to hear about it.

  41. I like the story of the farmers that kept selling the same pig to each other at an ever increasing price. The pig died when it reached 10k and the insurance company (AIG = taxpayer) was charged for the loss. That way the "loss" was socialized!

  42. Hell, I have been pondering the following three comments in the thread above (the first two are yours, the third is IAs) from my own viewpoint of cooperation and personal responsibility:

    1. "Neo-con is in complete antithesis to the Second Law of Thermodynamics"

    2. "Addition and division are separate arithmetic operations. One results in sums and the other in ratios."

    3. "I heard the story as follows: "I'll trade you this $10,000 dog for your two $5,000 cats". Then the guy trades a $5,000 cat for ..."

    Am I to assume by comment #2 you mean:

    1. Sum = total amount of oil left.
    2. Ratio = total amount left relative to total original pre-industrial endowment.

    So even if we develop new processes to improve energy efficiency, as they only "subtract" from total world consumption, the effect is not felt like a dropping EROEI's?

    If this is the case, I wonder if you are not making an aspect or viewpoint logic error?

    I say this as you seem to be applying a kind of linear logic to a non-linear system and therefore ignoring the scaling properties of cooperation permitted through conservative social behaviors and personal responsibility.

    For my question to you is what part of human energy usage is scale invariant across all aspects of society just as IA suggest with his rather fractal analogy?

    I would suggest behavior is the #1 item on any list and it is behavior which is intimately intertwined with cooperation in a kind of a reverse addition/division relationship just as you allude.

    Changes in social behavior/cooperation affect all energy consumption, e.g. the denominator.

    Indeed, from where I am sitting, your addition/division observation seems epistomologically inappropriately applied and the burden of proof is really on social liberals to show their views do not violate the conservation of energy.

    If my thoughts are correct, there is a much stronger peak oil case for cooperation than even I originally recognized, as would makes sense from an evolutionary perspective.

    Thoughts appreciated.

    Hope you are well

  43. I have always fancied taking sardines, bread and a bottle of milk for breakfast every morning. I guess anyone would say i am addicted to sardines. Reading this article, i had a new perspective. Thanks, Amigo!
    I would be Glad if you read