Showing posts from April, 2009

An Analysis of International Monetary Relations – Part 2: Where We Are

These days, references to the Great Depression and the Bretton Woods system abound. Analogy with the past crises is supposed to shed light on the present.

In analogy, we seek to establish sameness between two disparate objects. “Bone to dogs is like meat to cats” highlights the universal need of animals for food. The analogy works because that need is a defining and unchanging attribute of animals.

History is dynamic. The snapshots of historical events – a Great Depression here, a monetary crisis there – might have some surface resemblance to some aspects of the current crisis, but they could offer nothing by way of understanding the problem at hand. The secret of understanding history is knowing the nature of its dynamism, the way the changes take place.


”A major lesson of the crisis is that the remarkable overall performance of the global economy between 2003 and 2007 contained within it the seeds of its own destruction”. Thus spoke the U.S. Treasury secretary Timothy Geithner the o…

PPIP Death Watch, Installment #382

More evidence the PPIP will fail: a similarly designed plan is floundering. The Washington Post reviews the Term Asset-Backed Securities Loan Facility (TALF) program and finds it wanting:
In its first two months, the government's signature initiative to support consumer lending has fallen well short of expectations, deploying only a fraction of the amount officials had hoped to extend to stimulate auto loans, student loans and credit card lending. The TALF structure, through partnering private and public investment, was supposed to support as much as $1 trillion a month in new lending. However, in April it backed only $1.7 billion in loans, about a third of March's total.

What's wrong? Problems include (1) Private investors see the government as an unreliable partner that could suddenly turn around and change terms or impose restrictions on them (2) The brokerage houses, the key intermediaries that arrange the lending transactions and hold assets as collateral, are being u…

Best Line of the Day

From Jeffrey Goldberg's "Why I Fired My Broker":
I took a random walk down Wall Street and got hit by a bus.Read the Atlantic article for one man's soured take on investing, from the viewpoint of a little guy. You can practically hear him laughing bitter tears. Especially precious is the dialogue on the second screen, when the author is being given the lowdown on brokerages. No, they're not given him unbiased advice. No, they're not his friends. The brokers are just selling. Don't get fooled by the plastic smiles.

They remind me of a friend's pet iguana. Occasionally the animal would come over and stand close to his leg, which reminded me of a dog nuzzling its owner. At first I thought, "Oh, that's cute. He's reaching out, seeking companionship." My friend quickly disabused me of that notion: "He just wants to be fed." And I watched the reptile more closely and realized it was true. There was no warmth in those beady eyes, on…

Why Citi’s Accounting Trick Makes Even Less Sense Than You Think

No one appears to have pointed out the following yet. (The reasoning strikes me as sound and would destroy any last vestige of credibility for the accounting weirdness that allowed Citigroup to book a $2.5 billion gain because the company edged ever closer to bankruptcy, which drove down the value of its debt.)

First the quick recap (and it’s still not completely clear to me what Citigroup did, but I think I’ve got the basic accounting principle down at least). Citi’s earnings were buoyed by a rule that, according to Bloomberg, allows companies “to record any declines in their debt as an unrealized gain.”

The Business Insiderwent on to explain the rationale thusly:
In other words, because Citi's debt is trading at distressed levels, the company could, theoretically, book some balance sheet gains by buying it back -- reducing liabilities by more than it costs to retire that debt. Of course, they haven't done that yet. But they could!But could they? Of course the accounting rule im…

A Good Man in a Bad Business

David Kellermann, the acting CFO of Freddie Mac, was found dead of apparent suicide. He was 41.

Alas, poor David Kellermann. I knew him not. The news reports said that he was a “hard worker”, “a good guy”, with “extraordinary work ethic” and “integrity”. His apparent suicide in a weird way confirms that; imagine a good man with extraordinary integrity witnessing the going-ons in the mortgage industry. But being good is not enough. Like the charitable work of society ladies – sending get-well cards to wounded soldiers – it could be perfectly useless. Like the cultural activities of financiers – takeover artists underwriting operas – it could be downright detrimental. Sartre developed the notion of praxis – the activity of an individual or group in an organization with an eye toward some end – precisely to reach beyond the inadequacy of this in-itself do-gooding.

I cannot speculate on what David Kellermann was going through; if I did that I would be writing fiction. But I am certain tha…

Hey Look! The Emperor's Buck Naked!

The Fourth Estate is getting surly. About time, I say. For a while, I thought they were pliantly going to go along with the fraud that is this quarter's earnings season for the major U.S. banks. But the cojones have dropped into place, the rapier wit is sharpening, and the acid is starting to fly off the tip of some tongues ...

Anyway the metaphor gaining prominence to describe the banks' numerical trickery is legerdemain -- if you're unsure about the meaning, think "magician."

Huffington Post politely dismisses the banks' results.

Andrew Ross Sorkin of the New York Times lances the boil.

U.S. Banks' 1Q Earnings: Take with Grain of Salt

Oh Lordy. Major U.S. banks are putting up a string of deceptive earnings. The only useful exercise this quarter is diving behind the numbers to uncover what’s really going on. It ain’t pretty. The latest exposé comes from Dan Denning at Daily Reckoning. Check this out:
... all of the banks benefitted from what financial sector analyst Meredith Whitney called "back door financing." Whitney described what amounts to Fed-sanctioned front-running of the fixed income market by the banks. The Fed publicly telegraphed its intention to buy $750 billion mortgage backed securities from Fannie Mae and Freddie Mac and $300 billion in U.S. Treasury bonds. And that was AFTER it announced in late November of last year it would be wading in as a buyer for all agency bonds to support the U.S. mortgage market.What’s front-running? Simple: you get out in front of a customer’s order to line your own pockets. The illegal version goes like this: Shady Brokers ‘R Us gets an order from the Orphans F…

Advice from the North: Make Banking Boring Eh?

I know that Canada, our frostbitten neighbor to the north, gets its share of ribbing. It's seen as a big, bland place with agreeable people who seem to belong on the set of a James Stewart movie. If Latinos are fiery red, Canadians are a dull and cool shade of blue.

And they are apparently the perfect teachers for wayward U.S. bankers. This articleI found wonderfully refreshing. It shows the Canadian banking system as a resounding triumph of common sense (and, it also seems, executives have a sense of decency and modesty, unlike Wall Street where swaggering arrogance rules).

Check out the quote below. Can you imagine, say, Dick Fuld saying this without a smirk?
Ed Clark is a plainspoken, polite and prudent Canadian bank CEO with a few simple rules: "We should never do things for our customers and clients that we don't actually understand. If you wouldn't put your mother-in-law in this, don't put our clients in it." It was clear to Clark that the explosion in sub…

Of Baseball Cards and Bad Assets

Check out Mike over at Rortybomb; he's got a good post on the accounting method known as mark-to-market. The principle is simple (and makes sense to me): You value an asset on your books (your bicycle, your Jim Rice rookie baseball card, your synthetic CDO) for what the market is willing to pay. None of this whining that, "Well, my Jim Rice card IS worth $85; it's just that the damn paper mill closed last summer and everyone's worried about their jobs, so there's a shortage of liquidity among baseball card buyers right now." Or the banking industry version: "Well, my synthetic CDO IS worth $85 million; it's just that the damn financial crisis and irrational fear are stifling credit markets, so there's a shortage of liquidity among CDO buyers right now."

Mike links to a good New York Times wrap on the mark-to-market rule change that went down April 2 (note: I don't usually comment on people's faces, but this accounting chairman has got…

JPMorgan Flips Geithner the Bird

I’m surprised bloggers aren’t atwitter over this story that hints that Treasury Secretary Geithner's PPIP plan is starting to look DOA:
Speaking on the company's just-concluded conference call, JP Morgan (JPM) CEO Jamie Dimon downplayed the PPIP, saying the bank had nothing to sell into it, and that it certainly had no interest in partnering with the government as a buyer. What's more, he said, he didn't consider the PPIP to be that big of a deal, suggesting that it's just one small piece of what Treasury is doing to prop up the system.Earlier I suggested that U.S. banks were secretly terrified of the Geithner plan: it would expose how much they had overvalued their bad assets. Meanwhile, almost everyone else concluded the major banks should be gleeful, not glum. They argued that Geithner's plan to buy toxic bank assets through a public-private partnership (PPIP) would mean big subsidies for private investors, huge overpayments landing in the laps of the banks, …

We're Turning Chinese, Not Japanese

Anyone out there know JPMorgan Chase's net interest margin, from first-quarter earnings? I've simply seen references to it as "huge" and at a decade-high. Reporting earlier this month, Wells Fargo boasted that its own margin reached a stunning 4.1 percent, which Mathew Padilla here notes is "extremely high."

This, I think, will be a big story for the banks this earnings season.

First, what is net interest margin? It sounds complicated, but it's really not. If I borrow $1,000 at 2 percent interest, then lend it at 4 percent interest, my net interest margin is 2 percent. It's also called the "spread." Clearly, the bigger the spread, the better my profits. In the above example, I make $20 for every thousand I lend. But if I expand that margin to 4 percentage points, now I'm making $40. Because banks are mainly about borrowing and lending, the size of the spread matters hugely for profits.

Banks are currently borrowing cheaply thanks to a hod…

A Parting Look (Shot?) at Goldman’s “Blowout” Earnings Report

Sit tight, this will be a longish entry, but I think it’s worth trying to tie up some loose ends on the puzzle of Goldman’s moonshot on first-quarter earnings. My initial take was a bit naive and incomplete, though the suspicion was well-placed.

Investors may wonder why Goldman doesn't want them looking closely at what powered its great numbers. CFO David Viniar was notably vague during the analysts’ conference call when speaking about the division that reaped the bulk of the quarterly revenue (Zero Hedge has the transcript here).

The answer is simple: the bank itself appears to deserve very little credit for its resounding success. Goldman is like the two-year-old toddler nominally holding the baseball bat, while Uncle Sam, who’s really doing the swinging, whacks the ball and says, “Attaboy, Johnny, you just smacked one!”

First, look at the grim reality. Division by division, the first quarter was largely a flop at Goldman. Asset management crapped out (down 29 percent). Investment…

Why Won’t Goldman Just Come Clean?

Phew ... a whirlwind of Goldman Sachs analysis in the wake of their, ahem, blockbuster earnings report. And Goldman’s share sale got pushed out the door pretty fast; it kind of reminded me of the salesman at the used-car lot: “So what do you say ... ah, that’s just a spot of rust ... the horn does work, it’s just a little finicky ... listen I haven’t got all day, you want it or not?”

Will Goldman’s new investors wake up with buyer’s remorse? The company still hasn’t done a good job explaining what’s going on with its first-quarter earnings. Here’s a short list of things worth asking Goldman, point blank:

1. Where does that $12.9 billion you got from AIG show up in your results (when taxpayers bailed out AIG, the insurer turned around and handed out billions to counterparties on derivative trades)? After all, you had a lousy fourth quarter, a lousy December, and then out of the blue you report a spectacular first quarter, even as the jobless rate climbs and housing deteriorates further a…

Goldman Had a GREAT Quarter! ... Uh, Wait a Minute ...

First reaction to Goldman Sachs earnings: Wow! Goldman had -- surprise -- a really good quarter. Wait a minute -- did I say really good? I mean really, REALLY good. The company blew the doors off the dump. It smacked a towering home run over the long fence in center field.The AP reported:
The New York-based bank said it earned $3.39 per share, easily surpassing analysts' forecasts for profit of $1.64 per share.Hell, when a ballplayer crushes the pitch like this, you might assume he’s on steroids or something. Hmm. Hold that thought. Let’s number-dive the Goldman earnings.

Total net revenue (all reference to revenue after this will be to “net”, fyi) was $9.4 billion. Profit was $1.66 billion. Good so far. Now let’s look at a few segments to see what drove this crazy-good news.

Investment banking? Well, no, that was only $823 million in revenue, down 30 percent from a year ago (and even 20 percent lower than the horrible last quarter of 2008, when the company as a whole lost $2.29 bill…

Jeremy Siegel Screws up His Math, But He’s Got a Point

My alternative title for this entry was: "AIG Black Hole Distorts the Time-Space Continuum of Investing." It was a bit too playfully abstruse, so I deep six’ed it, though its relevance will become clear once you reach the end.

First, to understand this rather geeky entry, you should go here first, then here. Jeremy Siegel argues that the price-earnings ratio for the S&P 500 Index is badly calculated and would be more accurate if weighted by the market capitalization of its members. He correctly notes that the large losses of a few firms get added to the returns of healthy firms, thus dragging down overall profits and inflating the overall P/E ratio. Because of this, Siegel says stocks look more expensive than they really are. Note: If you’re lost already, see the next paragraph.

(Market capitalization equals number of shares outstanding times the price of each. Price/earnings ratio refers to the price of the stock divided by the earnings per share.)

Now let’s dispense with …

Ah! So That's What the SEC Was Doing ...

This story was good for a dark chuckle of despair (bold mine):
While Wall Street executives were sinking the economy and Bernard Madoff was ripping off investors, the Securities and Exchange Commission (SEC) was engaged in a multi-million dollar effort to...rearrange their desk chairs at their Washington D.C. headquarters.

"This is a total waste of time that we should be spending conducting investigations," said Steve Ellis, Vice-President of Taxpayers for Common Sense who calls SEC’s $3.9 million dollar desk reorganization "preposterous."

According to a new report from David Kotz, the Inspector General for the SEC, employees were subjected to a massive reorganization in 2007 and 2008 that they now say was unnecessary and did not improve organization or communication. Over 600 employees, 81% of those surveyed by the Inspector General, said that the rearranging of desks was not "worth the cost and time."So while Bernie Madoff Ponzi'ed billions of dollars…

An Analysis of International Monetary Relations – Part 1: How We Got Here

No economic event in the 20th century had a greater impact on world affairs than the Bretton Woods Agreement. The regime of fixed exchange-rates that it established and the collapse of that system after 25 years under the strain of its internal contradictions are both watershed events in the history of the world in general and finance in particular.

The foundation and the driver of the Bretton Woods system was the convertibility of the U.S. dollar to gold. The U.S. undertook to deliver 1 troy ounce of gold for every $35 dollars that foreign nations’ central bank presented to it. The exchange rate of major currencies was fixed against the dollar and, by extension, one another, to prevent manipulative devaluations. At the time of the signing of the Agreement in 1944, approximately 75% of the world’s gold stock was in the U.S., so there was no question about the country’s ability to honor its promise. (The stock was created because the U.S. companies that sold goods to the warring parties…

Yves Smith Nails It

Yves writes:
We have been saying for some time that the policy premise of the Fed and Treasury has been that the financial crisis is that it is a liquidity crisis, not a solvency crisis. If you are of that school, the fallen prices of various assets is due to a combination of scarcity of funding plus irrational panic. Find ways to provide liquidity and give investors that magic elixir, confidence, and voila, crisis over.

Having watched the credit markets closely before the implosion, we'll agree there was plenty of irrationality. But it was in the gross underpricing of risk. The snapback to current pricing to us thus seems a return to rationality plus new fundamentals based on borrowers who never should have been lent money in the first place defaulting on such a scale as to damage overall economic activity. And that means, as plenty of Serious Economists (Krugman, Buiter, Stiglitz, to name a few) have warned, the Geithner cash for trash program is a huge misallocation of taxpayer d…

Outrage Story of the Day

My alternative title for this entry was “Meet the New Boss, Same as the Old Boss.” The Washington Post tells us here that the Obama administration has resorted to cleverness and deception to funnel money to financial companies who want the dough but not the restrictions, such as on pay, that Congress has slapped on TARP funds. Ironically, the Obama-ites would thus be taking a page from the playbook of the failing major banks. Remember how these financial institutions created entities that lived off-balance sheet until they got in trouble, at which time the retractable tether cord mysteriously appeared and they got sucked back into the mother ship. Don’t you love U.S. accounting rules?

Obama’s administration apparently has created intermediary vehicles to “wash” the money before it reaches the intended recipients, so they’re not directly getting TARP funds (and so don’t have to abide by TARP rules). If you’re thinking, “Gosh, that sounds an awful lot like money laundering,” you get the …

Let the Games Begin?

The electronic ink is barely dry on my previous blog entry, when comes this story from the Financial Times that U.S. banks may buy each other’s toxic assets under the Geithner plan.

Dear God no.

This recalls a “good news, bad news” joke I read years ago. It goes like this:

The soldiers had been fighting hard for weeks. They were hungry, tired and unwashed. One morning the captain stood before them and said, in a booming voice, “Men, I have some good news and bad news.” Everyone fell quiet. “First, the good news,” the captain said. “Today there will be a change of socks.” A lusty cheer broke out. After a pause, the captain went on, “Now the bad news. Atkins, you change with Smith, Smith you change with Jones, Jones you change with O’Reilly ...”

If the banks just swap their dirty socks (um, toxic assets) among themselves at inflated prices, nothing will be achieved other than the shifting of billions of dollars of losses onto taxpayers. This could turn out to be a breathtakingly brazen gam…

Banks: Secretly Terrified of the Geithner Plan or Not?

I wanted to revisit my earlier blog entry about the public-private partnership that Geithner has laid out for buying up distressed banking industry assets. It appears that I occupy a lonely, contrarian position. The Net has been rife with theories about how banks will profit big, private investors will profit big, and the taxpayers will get the royal shaft. If this is all correct, banks should be secretly gleeful, not terrified.

I’m not sure it’s the full picture though. First, hit rewind: Bush and his Merry Bunglers wasted more than three months playing pattycake with the U.S. banks, then left Obama in a pretty bad spot. Sure, they dumped a financial crisis on his doorstep. But they also left behind something else fairly poisonous: a populace and a set of talking heads that have grown deeply skeptical of anything the government proposes. (Of course Obama’s team didn’t help itself by continuing in the footsteps of the Bushies.)

So when the Geithner plan gets unveiled, the reaction is ..…