Showing posts from 2009

That Giant Sucking Sound ...

is New York City inhaling another finance blogger. That's right, first it was Mike over at Rortybomb, and now I've got a semi-full U-Haul truck parked in the frigid cold, waiting for the trip tomorrow morning. All day I've been playing that moving game of Tetris, slotting in boxes, furniture and odds and ends (guitars, keyboard, studio photography light poles) in available spaces in a cavernous truck.

For my readership of 10 to 15 -- you know who you are -- my blogging may be a bit less frequent after I start this new job. It's not that I lack ideas; the rub is simply that blogs suck up time. Maybe I'll try blogging shorter (a la Greg Mankiw, who sometimes just links to stuff he finds interesting, with no comment). I dunno; that's not really my style. But ...

I really, really wanted to do a long entry this week on the maddening futility of regulating banks using capital ratios. The problem is that Basel-type thinking (capital weightings for certain classes of ass…

An Economist of Our Time

Few people stand up to a close scrutiny. Paul Samuelson, who died on Sunday at the age of 94, fell apart at first glance. The man was a mountebank, a particularly offensive mix of knave and fool whose crowning as “Titan of Economics”, as the Wall Street Journal put it, said volumes about the society which did the crowning.

He neither understood nor followed the age-old advice that Clint Eastwood’s Inspector Callahan disdainfully summarized: “A man’s got to know his limitations”. In that, he was a fool. He knowingly and methodically downplayed, dismissed and covered up the contradictions that came into his ken, especially the ones which sprang from his “theories”. For that, he was a knave.

He was a “popularizer”; he stripped the “complexities” from the ideas to make them more palatable to the masses. He explained, according to the New York Times obituary, “what Marx could have meant by a labor theory of value”. (Marx meant what he said!)

He dabbled in everything and left behind “voluminou…

Dimon, in the Giving Xmas Spirit, Gives Obama the Bird?

Just had to link to this naked capitalism post by Tim Duncan:
Bankers Support Regulation? Au Contraire?

Only hours after Obama met with Wall Street "fat cat" CEO bankers (about half of whom opted to be patched in by conference call -- how's that for signaling?), JPMorgan put out this media release on its Web site.

The JPMorgan statement of Dec. 14 appears to be guarded support for financial regulation. In other words "yes, let's have some of course, but slowly, slowly ... carefully, carefully."
The details matter, and the stakes are simply too high and the consequences too far-reaching to do this hastily and poorly. While we agree with many of the proposals, we share concerns with others that some regulatory proposals could restrict lending by banks, which will hinder economic growth and job creation.
Duncan's analysis:
This press release so quickly after the meeting at the White House today would seem to have no apparent purpose other than to make it clear t…

Joe Lieberman, Mighty Force of Nature

It looks like uber-nebbish Joe Lieberman gets to exact his will on the nation on health-care reform. Amazing. So this is democracy. One guy can hold hostage the most important health care legislation in decades.

I was listening to Lieberman on TV last night. He sounds like a Jewish Steven Wright. I keep waiting for the punchline. ("I'd kill for a Nobel Peace Prize ... but seriously folks, about health care ...") Lieberman has a flat, uninflected, depressive aspect that apparently the people of Connecticut find irresistible.

Hell hath no fury like a former Democrat scorned.

The U.S. Treasury Reaps Big Profits

The news that the U.S. Treasury had “reaped” $936 million from the sale of JPMorgan warrants was everywhere over the weekend. Google “treasury + $936 million” and see for yourself.

Credit the U.S. Treasury with the P.R. job. Its announcement said that JPMorgan’s warrants provided “an additional return to the American taxpayer from Treasury’s investment in the company”.

Additional return. Investment. American Taxpayer. Only Apple Pie and Motherhood were missing from the formal communiqué.

If the “return to U.S. taxpayer” had any meaning, or if the sum involved even matched what Maddoff “investors” are going to get back from the IRS, I would go through the trouble of showing in numbers what this “return” entailed; I know a thing or two about warrants and options.

Still, you can form an informed opinion about the matter from the concluding sentence of the FT article that reported the happy news on its front page:
The Treasury said the price was well above what JPMorgan had offered to buy bac…

A Brief Commentary On a Picture

According to the New York Times, this is how Prof. Sidney Plotkin of Vassar “dramatizes the pressure a president faces in a falling economy”. Click here to see how.

The paper said that Prof. Plotkin shines “a Marxist light” on the economic crisis, though Marx is an “uninvited guest,” the professor was quick to add.

What does he know about his uninvited guest?

Marx wrote: “In the analysis of economic forms … neither microscopes nor chemical reagents are of use. The force of abstraction must replace both”.

Prof. Plotkin has substituted dramatization for abstraction. He no doubt thinks that this shows his enthusiasm. And he may well be enthusiastic. But there is a deeper rationale behind his theatrics which makes them appeal to his students and administrators.

Here is an excerpt from the manuscript of Vol. 4 of Speculative Capital. We pick up where the product is produced and must now be sold, i.e. converted into money. Without this conversion, the production process will come to a halt:

Is the SIV Accounting Fraud Nearing an End?

Anyone who's read this blog for a while will know that one thing I absolutely can't wrap my head around is the Great SIV Loophole, and why it was never addressed until the "structured investment vehicles" exploded messily.

Here's how everything worked before the financial crisis/meltdown/blowup: A bank -- let's call it "Smitigroup" -- creates an off-balance sheet vehicle; let's give it a sexy name like "Xena." Here's what lil ol' Xena does: it borrows money by issuing short-term securities, then in effect lends money by buying longer-term securities. Now, if you're a Joe Blow reader who's wondering, "Exactly why does, ahem, Smitigroup, want to do this?," let's look at what's going on.

You make the short-term borrowing at say 2.8 percent, then you buy longer-term products at say 3.5 percent. Notice the "spread" between the two. Borrow a million for $28,000, buy a longer-dated asset (like, say, a…

Matt Taibbi's Latest Must-Read: Obama's Big Sellout

The Rolling Stone writer takes on President Obama in his latest Wall Street slamdown. Everyone should read it, whether or not you agree with him, or care for his freewheeling, expletive-heavy, cynical style. I think Taibbi does channel well the pissed-off liberal-intellectual zeitgeist of disgust with Wall Street excesses.

His main points are:

1. Everyone who's senior level on Obama's economic/Treasury team once worked for Robert Rubin, came from Citigroup, came from Goldman Sachs, or some combination of all three. It's rather sobering as he ticks off the names, one by one -- and ties them back to Rubin/Citi/Goldman. And we wonder why we get so much Samethink out of this White House on economic issues?

2. Banking lobbyists right now are busily gutting legislation that would add consumer protections for financial products and force stricter regulation and transparency for derivatives trading. They are of course abetted by our "elected" representatives, who probably s…

More Proof that "IBG" Thinking Motivated Bankers

Well, the electronic ink was barely dry on my previous entry when I noticed, somewhat belatedly, this piece by Lucian Bebchuk et al in the Financial Times: Bankers Had Cashed in Before the Music Stopped.

Yesterday I blogged that OPM ("Other People's Money") and IBG ("I'll Be Gone") were meta-reasons for the financial crisis. Of course that didn't quite square with part of the accepted storyline of the collapse: namely, as Bebchuk notes, "according to the standard narrative, the meltdown of Bear Stearns and Lehman Brothers largely wiped out the wealth of their top executives."

In which case, IBG thinking ("I'll Be Gone when this stinker of a product/strategy blows sky high") would have afflicted the junior traders, but not the senior leaders, it would appear. And, accordingly, one would expect a furious flurry of pay reform taking place now as angry CEOs, their wallets and their stock portfolios scorched once, vow to never let such …

The Two Abbreviations that Explain the Financial Collapse

I was traveling this weekend -- back! -- and last night it occurred to me that if you want to understand why this financial crisis occurred, you can look hard at two often bandied-about abbreviations. Forget about low interest rates, regulatory lapses, securitizations, risky derivatives etc. etc. Those are reasons, but these are meta-reasons. These are the reasons that create the environment for the reasons. These abbreviations are easy to understand, but have deep, wide-ranging implications.

1. OPM ("Other People's Money)
What does it mean to make bets with other people's money? I think the answer is obvious. When I'm betting my house on an outcome, you can be assured that my thinking moves down a different decision tree than when I'm betting your house.

How was Wall Street betting with "Other People's Money"? Largely, this came about because of a shift in ownership models. The old wingtipped investment bankers worked at firms owned by partners. The of…

The Fed: Ivory Tower Economists or Just Clueless Bagholders?

The Fed as bagholder ... it hadn't occurred to me until I read this piece on naked capitalism called "The Fed, Treasury and AIG" (the title has the disarming ring of a child's nursery rhyme). Author: Richard Alford, former Fed economist. He defends the Fed's behavior related to the AIG rescue -- he sounds a bit querulous at times, but it's a thankless mission he's on -- and then he hooks a sharp left turn toward the end of his essay and launches a flurry of pointed and interesting questions:
Why didn’t Treasury announce a more detailed proposal including a Fed role limited to bridge financing? Why didn’t the Fed require it as a condition for supplying “liquidity” to the capital-impaired AIG? Why didn’t the Fed require a commitment from Treasury to assume AIG assets it acquired subject to legislation being enacted? Why didn’t the Fed leave the responsibility for management of AIG with Treasury? Why did the Fed permit itself to be used as an off-balance shee…

Obama's Two Biggest Blunders: What do They Have in Common?

I'll go out on a limb -- actually, I don't think I have to go very far out -- and wager that wise historians of the future will chronicle two big blunders of President Obama's first year in office. They will be:

1. His kid-glove handling of the banks that caused the financial crisis. There was too much "please" and "if you don't mind" and mucho foot-dragging on reforming a broken system and rooting out wrongdoers. The president expressed a little outrage, maybe once or twice, then drew back into his shell. Meanwhile the government has handed over billions to the banking industry, very few strings attached, as unemployment soars. The perception on Main Street: the Obama administration is beholden to a plutocracy that really runs the U.S. of A.

There is much anger about the bailouts that's on a steady simmer right below the surface, I think. It will cripple Obama's future ability to be effective. Paul Krugman really nailed it with his recent op-…

A Daisy Chain of Crises

What should you conclude upon hearing of the financial crisis in Dubai?

Perhaps the question is too vague. So let me give a hint:
after the collapse of the financial system in the U.S.; after the collapse of the financial system in the U.K.; after the collapse of the financial system in much of the Western Europe; after the collapse of the financial system in the Eastern Europe; after the collapse of the financial system in the emerging countries; after the collapse of the Russian economy in 1998; after the collapse of the Mexican economy in 1994; after the collapse of the financial system in Argentina in 2001; after the collapse of the “Asian” economies in 1998 – that would be Hong Kong, Indonesia, Malaysia, Singapore, Thailand, The Philippines, South Korea, Taiwan; after the economic and financial crisis in 1998 in Latin America – that would be Brazil, Argentina, Chile, Bolivia, Ecuador, Columbia, Uruguay; after the collapse of the Japanese economy that has been going on for almost tw…

PPIP Deathwatch, November Edition

The Geithner plan (PPIP), for public-private partnerships to buy up toxic assets saddling banks in the U.S. financial system, has been roundly attacked from the start. For my part, early on, I predicted PPIP would fail for a simple reason: the banks wouldn't offer up any toxic assets for sale (for fear of revealing themselves insolvent) and the U.S. government wouldn't have the stomach (or balls) to compel them to.

So I offer up this article in US Banker (a little late, but it's been a hectic month): PPIP Finally Ready, But Who's Selling?

For me, the impact paragraph comes at the very end (bold mine):
Ron Glancz, a partner at Venable LLP who has clients with toxic assets, agreed. "It's not created a lot of stir," he says. "We have banks that have a lot of toxic assets, and they are not selling to PPIP. It doesn't deal with the fundamental problem that banks can't book these losses, because that's a depletion of capital."The official sto…

Phew! Just Flew Back from China and Boy My Arms Are Tired

Or however that joke goes. Right now I'm de-jetlagging after a seemingly endless flight from Hong Kong and trying to catch up on what I missed. I spent a week in China. For today, just a short odds-and-ends entry...

(1) When did passengers turn into "customers"? I noticed this on the Continental flights I took. Had it been only one flight, I would have just written off the incident as someone on the flight crew remembering some half-digested bit of marketing political correctness. But this practice was apparently part of some memo because the "customers" references came up on different legs of my journey. "Customers, please be seated." "We thank our customers for flying with us." That sort of thing.

One thing you gotta understand about me: I love the English language. I love it on a number of levels, right down to the sound of words knocking together. Further, I believe in simple, direct, effective communication. I grit my teeth when corporate…

A Question of Perspective

Last Friday, William Dudley, the president of the Federal Reserve Bank of New York delivered a long speech on “Lessons From the Crisis” in the Center of Economic Policy Studies Symposium at Princeton University. I don’t suppose you could get any more serious than that in terms of authority and setting, even though the speaker felt compelled to issue a disclaimer: “As always, my remarks reflect my own views and opinions and not necessarily those of the Federal Reserve System.” It is astounding how no one dares to speak freely, even when the subject is a non-political, technical one and the speaker is the president of the New York Fed.

My aim is not to offer a blow-by-blow critique of the speech. What I want to focus on, rather, is Dudley’s perspective, the way he sees things. I wrote about this seeing-things-through-the-eye-of-finance-capital in here and here. So the focus is not on Dudley. He is merely a Rumian part that adequately reflects the whole.

The technical description of market…

Tin Ear of the Year Nominee: AIG's CEO

Man, this guy is -- how to put this gently? -- aw, the hell with it -- the very embodiment of chutzpah. Early in this financial crisis, I noted the curious lack of contrition on the part of Wall Street bankers. There was nothing in the way of an apology, just a lot of hustling out the back door with the bags of TARP money. There wasn't even that mumbled, eyes downcast, insincere "I'm sorry" that you get from your four-year-old who was caught smearing peanut butter on his sister's ponytail. At the time I wondered about the deafening silence of Wall Street's public relations machines.

Lately, Wall Street's head honchos have opened up a bit more, even going on "charm" offensives. And now, you understand why they were silent before. Because these guys radiate arrogance, even when they think they're striking a humble pose. You have Lord Blankfein over at Goldman Sachs, telling us the firm is doing God's work (shades of noblesse oblige) and tha…

Blankfein Makes the Argument for Heavily Regulating Banks

Imagine a world in which the air that we breathe -- that's right, that air all around you -- wasn't freely available. Let's say it's held in "air reservoirs" and pumped into our airtight houses. Whenever we go outside, we have to take compressed air in tanks because the normal atmosphere can't support life. And we all get used to living this way -- okay, it's a bit inconvenient, but everyone gradually adjusts and life goes on.

How do you think, in such a world, air would be "regulated"? With the same light hand we would use for regulating the sale of frivolous items, such as lawn gnomes and chia pets? Ah, dumb question. Of course not. Air would be the most regulated commodity mankind has ever known. There would be frequent quality checks for air contamination, strict rules about pipes that carried the critical air supply, regulations about every aspect of the portable air tanks that we depended on.

Why? Simple. Without air, we die. This is a l…

Must Read of the Day: Kill Credit Default Swaps

At first, my leading "must read" candidate was Roger Ehrenberg's Barking up the Wrong Tree. Roger identifies an ongoing problem with Washington's attempt to knuckle down on the financial industry: legislators get distracted by pander-ready sideshows. Example: dark pools and high-frequency trading in the stock market (note: I'm not saying either is necessarily harmless, but I agree that they're not doing the harm of the big elephants in the room -- unregulated derivatives trading and corrupted credit-rating agencies). Why is this? As Ehrenberg observes, plenty of little investors are in the stock market, so Congress takes on related issues with a lusty sense of outrage. But derivatives and credit raters are willfully ignored because the subjects aren't as sexy and grandma doesn't spend any time checking out, say, how Moody's grades "SocGen CMBS Non-Conforming Pool XII."

Still, that blog entry dropped to second place on my "must read&q…

How Much Crappy Collateral is the Fed Warehousing?

The possibly scary answer to this question periodically gets my stomach churning. When the definitive works are written on this financial crisis, in another decade or so, I think the authors will pass judgment not so much on the overt bailout -- TARP is small potatoes, folks -- but on the "invisible bailout" that no one ever voted on, but that the Fed orchestrated behind the scenes. We can't write these definitive books yet, because the outcome of the invisible bailout isn't clear.

What put me in mind of this subject: this paper over at Zero Hedge, allegedly by a "Nathan Jerome Burchfield," that claims the Fed may have accepted crappy CMBS (commercial mortgage-backed security) collateral against loans it made. This occurred through the TALF, or the Term Asset-Backed Securities Facility. And then, after the Fed accepted this stuff as top notch collateral (AAA rated, creme de la creme), the ratings agencies -- interestingly enough -- turned around and downgrad…

On “Industrial Policy”

What type of stories would I cover if I were a financial journalist?

A couple of weeks ago, The New York Times had an interview with William Clay Ford Jr., “perhaps the most seasoned auto executive in Detroit.” He has more than 30 years on the job at Ford Motor Company which was founded by his great grandfather. He is presently the executive chairman of the board. A Q&A and the follow-up went as follows:
Q: Is the financial support given by taxpayers to G.M. and Chrysler a positive development for the American economy?

A: The biggest concern that we had all through this was the collapse of the supply base. I believe that if G.M. and Chrysler had gone into free-fall bankruptcies, it could have devastated the entire industrial base of this country.

Q: Does the average American value the domestic auto industry?

A: They should. One cannot find a healthy economy anywhere in the world that does not have a strong industrial base, period. We seem to be the only country in the world that doesn…

Settling the "Was it Lehman?" Dust-up

Was the U.S. government's decision to let Lehman Brothers tumble into bankruptcy last fall a fatal miscalculation? By letting Lehman go, did we precipitate the brutal freeze-up in the credit markets?

Answering that question has become a hot niche topic for debate. The latest contribution by William Sterling is here: Looking Back at Lehman. It's a rather tedious read, so I'll just cut to the chase:
In contrast to the analysis of Lehman skeptics such as John Taylor (2008, 2009) and John Cochrane and Luigi Zingales (2009), the evidence we present supports the view of many practitioners that the decision not to rescue Lehman represented an immediate and massive shock to the financial system that was larger by an order of magnitude than anything seen over nearly two decades.First, if you examine the day-by-day, blow-by-blow data, I think it's obvious that the Lehman bankruptcy did matter hugely. But if you look at the larger picture, I don't think Lehman mattered much at …

Selected Readings for a Thursday Morning

1. Under Attack, Credit Raters Turn to the First Amendment

First, a disclaimer on my recommendation for this Huffington Post investigation: a version of this story has been done before; it's not exactly anything new. To wit: Moody's and friends like to scurry behind the First Amendment when outraged investors seek recompense for losses after believing their inflated ratings.

I know the argument the credit raters are trying to make, but it always has offended me somewhat. You think of the great figures of American history who have invoked the First Amendment, and how it has been this core, unassailable principle that makes our democracy so powerful. And then Moody's ... well, subverts it to this end. I suppose my reaction is akin to the reaction you'd expect from a Fox commentator who discovered footage of a beatnik casually wiping his butt with the American flag.

For now the lesson we must learn is to treat the credit-rating agencies as untrustworthy, unfortunately, as th…