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Showing posts from June, 2009

Pray Tell Me, Are Derivatives Good or Are They Bad?

For the past 30 odd years, derivatives have acted as the barometer of popular sentiment toward markets. In good times, they are praised as ingenious inventions that allow companies to save money in their finances. In bad times, they are scorned as the mysterious devices created to game the system. At all times, they are not understood. The level of discussion never goes beyond the derivatives-are-good/derivatives-are-bad platitudes.

This appalling insubstantiality is in full display again in the latest round of talks about the regulation of markets that, naturally, involves derivatives. In its latest research paper, the Bank of International Settlement likens markets to “pharmaceuticals” and argues that more potent drugs – that would be derivatives – should be made available only by prescription. (The analogy cannot be carried any further because that would imply that only very sick companies could use complex derivatives.) Sage of Omaha is on the record with this gem of a thought tha…

Tim Geithner's BIG Gamble

As the Treasury Secretary's toxic-asset plan (PPIP, for acronym lovers) sputters out, soon to wind up on the ash heap of discarded ideas to solve this financial crisis, it's worth pausing to consider what lies in the balance: nothing less than Geithner's own neck.

Consider: the Obama crew takes office in January. What are you going to do about the financial crisis, everyone demands with a hysterical edge. Amid much blaring of trumpets, Geithner promptly appears before Congress with ... no plan, just a lot of artful blather. Hmm. Not good.

But it's still early, he just hasn't had time to craft a detailed plan, and he does return to unveil a real proposal. The trick, he explains, is to remove the toxic legacy assets from the books of the banks; the mounds of crappy loans and securities are weighing them down like an anchor, forcing them into a defensive crouch and causing them to shy away from making loans.

Geithner's plan is for the government (the money) and priva…

PPIP Deathwatch Intensifies

Ah, the WSJ is finally coming around.

Check out this June 29 story: "Wary Banks Hobble Toxic-Asset Plan."

Of course if you were reading this blog (ahem), you would have known this was coming on March 25: "5 Reasons U.S. Banks Are Secretly Terrified of Geithner's Plan."

And if you wanted a blueprint of how the banks were going to hobble the toxic-asset plan, I did explain a plausible scenario in this April 16 entry: "JPMorgan Flips Geithner the Bird."

Or, if you want to just sit around and wait for a while, the Wall Street Journal will get around to figuring all this out by the end of June (hee hee).

Upchuck Story of the Morning

GE: We're not just about lightbulbs anymore. We're also the biggest lender you never knew about.

Plug your nose. Open your mouth. Stick your finger down your throat. Think emetic thoughts. This lead from the Washington Post says it all:
General Electric, the world's largest industrial company, has quietly become the biggest beneficiary of one of the government's key rescue programs for banks.
Ugh. I've got a new sport for the 2012 Olympics: loophole diving. And I predict America will take the gold, silver and bronze.

Matt Taibbi Goes for the Gold(man)

The Rolling Stones writer takes his usual inimitable, no-holds-barred, no-venom-spared approach to his subject, in this case Goldman Sachs, in this very provocative (and long) piece. On the fringes, Taibbi may sound a little rabid and conspiratorial-minded, but he has marshaled a very impressive body of evidence that deserves a good, long ponder.

He ties Goldman to major bubbles that go all the way back to the Great Depression. I noticed that a few comments about the article accuse him of anti-Semitism. I don't buy it -- not at all. There is undoubtedly anti-Goldman sentiment out there that really is thinly veiled anti-Semitism. But Taibbi's piece is too full of hard facts (maybe stretched a bit too far in places) to be dismissed as simply anti-Jewish frothing. Just look at the sheer number of ex-Goldmanites that Taibbi identifies in high political office. After a while he more or less gives up trying to count them all. It's rather sobering.

Read it, read it, read it. And fo…

An Excerpt from Vol. 4: A Primer on Bond Mathematics (2 of 2)

In its original form, the equation FV = PV (1 + i) assumes nothing. It merely takes the facts of the transaction – $100 lent at 4% for one year, in our example – and calculates how much money is due to the end of the term. Of course, the lender, like all lenders, assumed that he would be paid back in full, otherwise he would not grant the loan. But that is the lender’s assumption and does not affect the equation. Even if the borrower defaults, the validity of the relation would stand, as it only calculates what should be due to the lender.

Things change when we solve the equation for the present value, PV:

PV = FV/(1 + i)

Mathematically, all we did here was to rearrange the equation, a simple operation familiar to 6th graders. But that technical operation shifted the focus to the present value.

This emphasis and the name “present value” would confuse our borrower and lender. “What do you mean by the ‘present value’ of the loan?,” they would demand to know.

– “The present value is the curre…

In Memory of the Passing of a Great American

This morning brought a bit of sad news: the inventor of the "Magic Fingers Vibrating Bed" passed on to the Great Beyondat the ripe age of 92.

I found this story, as with so many things Americana, on the Huffington Post blog. The story included a photo of the inventor: a mild-looking elderly man wearing old-guy couture and glasses thick enough to fry an ant. It's a candid shot -- it looks like his grandkids were taking him to the park that day for a walk or something.

In other words, a perfectly appropriate, informal image. Who would expect the obiturary photo of the inventor of the vibrating bed to show him wearing a tie and preppy sports jacket and an aristocratic sneer? No, John Joseph Houghtaling was one of us, an everyday Joe. He belonged to a peculiarly American tradition: guys who invent stuff that no one really needs but that everyone wants to try at least once.

For one shiny quarter, his vibrating bed promised 15 minutes of "tingling relaxation and ease" …

More Games People Play with Credit Default Swaps

Willem Buiter lays out the latest manipulationsengineered in the credit default swap market. I was aware of various squeezes that the holders of CDS (those who are insured against default, in other words) would try to orchestrate, to send a company pitching into bankruptcy so they could collect on their bets. But, in a delicious irony, they're not the only ones who can play games in the CDS markets where, remember, you don't have to have any interest in the underlying asset (bond, security, whatever) to take a bet.

Check out his case study of Amherst Holdings. It turns out the writer of CDS policies can (legally) screw the holders. And so Amherst did.

So, to add to the list of offenses committed by the CDS market:

#77 -- high potential for unethical game playing (manipulating, screwing the other guy through a big-money muscle play, whatever you want to call it).

All of which reminds me: I talked to a former Morgan Stanley guy over the weekend. Quite bright, articulate. He passiona…

An Excerpt from Vol. 4: A Primer on Bond Mathematics (1 of 2)

I am busy with Vol. 4 of Speculative Capital. Its subject keeps expanding because I digress. Each digression then proves to be the main subject. Here is a short excerpt on “bond mathematics” from the manuscript, with only minor editing for the blog, so you would see what I mean.

***
Consider a borrower who borrows $100 at the going rate of 4% a year for one year. As the evidence of his obligation to pay, he gives the creditor an IOU, a promissory note saying that, at the end of the year, he, the borrower, will pay back the original sum plus the accrued interest, for a total of $104. The calculus of the note is as follows:

100 + 100 x .04 = $104, or:

100 (1 + .04) = $104

The amount presently borrowed, $100, is the present value of the loan. The amount to be paid back in one year, $104, is its future value. If we designate these values by PV and FV, respectively, and let i stand for interest rate, we can generalize this relation as Eq. (1):

PV (1 + i) = FV
Eq. (1) is the fundamental relation …

Squishy Values Stuff, But Very Important

Check this out, at Mark Thoma's site, on "Financial Community Norms."

I think Thoma has latched onto something that has escaped the notice of a lot of other commentators during this crisis. Namely, that the rot in our system may go pretty deep and must be addressed at that level. We need to take a second look at attitudes and values and norms. It sounds like squishy stuff, but we ignore it at our own risk. We've produced a financial culture now that accepts that crass self-enrichment and naked ambition and the relentless pursuit of loopholes (meet the letter of the law, but not its spirit) are one hundred percent okay. You get yours, I get mine, and who cares who gets hurt. Capitalism is a rough game that's not for sissies.

I'm not sure what the answer to the narrow-mindedness and greed is. Good luck trying to embed a moral compass in every MBA's butt. Unfortunately, the U.S. government's craven approach to the big banks, and its failure to knock them d…

Goldman Sachs, Easter Egg Hunt

Identifying the former Goldman Sachs employees working for the U.S. government is frankly like an Easter egg hunt. "Hey, look, I found one over here in the West Wing! Four for me! How many do you have so far?" From time to time, the media helpfully provides a map of sorts. Here's the latest I found, from the Huffington Post. Also note the revolving-door game, which is a bit more troubling (Former SEC head Arthur Levitt to Goldman -- argh, the white knight to the dark side, woe is us).

Goldman of course touts the Goldman-to-Washington-Halls-of-Power conveyor belt as a commitment to public service. Right. Which is why so many Goldman alums start soup kitchens for the homeless and found Goodwill used-clothing depositories. Not quite. Let's get real here. Any organization has its own DNA of sorts that defines itself and that ensures its survival. Anytime you can spread your DNA beyond the narrow confines of your business environment, into the larger political arena, where…

It's a Small, Small (Goldman Sachs) World

I'm starting to understand where the Goldman Sachs-is-everywhere paranoia comes from. It's because ... Goldman Sachs IS everywhere, sort of like a ubiquitous Lucifer with a money clip. Is Goldman Sachs Satan? I know this guy thinks so. Anyway, they're not just hogging all the top spots in the Treasury Department anymore. They've also got a desk at your favorite newspaper!

Check this out: At the Wall Street Journal, staffer Evan Newmark included in his online blog this gag-worthy line: "Hank Paulson is a national hero." I know, my reaction was the same: "Come again? What planet are you living on? Earth? My Earth? And this is Hank Paulson, former Treasury Secretary, bald guy, hangdog face? Same guy who as head of Goldman successfully lobbied Washington to let Goldman and four other investment banks escape capital requirements in 2004, letting them pump up their leverage crazy-high, leading to failures (Bear Stearns, Lehman) and a full-blown financial crisis…

My Best Jon Stewart Impersonation

Okay, sure, we already knew this: Bank Profits from Accounting Rules Masking Looming Loan Losses. First-quarter bank profits were nothing but a chimera, the finance industry's version of a griffin that vanishes with heavy wingstroke over a nearby rainbow.

Now for my Jon Stewart impersonation. Ahem.

So let me get this straight: Citigroup and friends can kick sand in the face of 98-lb. government weenie Tim Geithner -- hey, we don't need your plan to buy our crappy assets! -- because they're healthier now, and if you don't believe that, hey just look at their first-quarter profits -- which, uh, by the way, were all make-believe, like your two-year-old daughter's imaginary friend in the sandbox. Oh yeah. I've got LOTS of confidence this is going to turn out well.

Prediction: There will be a nasty double dip in this recession; the green shoots are brown shoots that have been spray-painted. We will face the bank problem once more. And everyone will moan and gnash thei…

The Best Government Money Can Buy

Sometimes the big U.S. banks make me laugh until the tears start flowing down my cheeks, then I realize I can't tell if I'm laughing or crying.

Here they are, in the New York Times, putting the campaign contribution nozzle in the gas tanks of our favorite Congresspeople. Because, you may not realize it, but Congresspeople need a very special fuel to run, and that fuel is green (but sadly not Soylent Green, so we can't just mash up surplus poor people).

Sometimes I despair of this country ever being able to heal itself. We are so firmly in the grip of moneyed interests. We have met the enemy, and he is wearing a rep tie and a member of the American League of Lobbyists.

Hate to Say I Told You So, But ...

When Geithner whisked the veil off his bank rescue plan (to set up public-private partnerships to buy toxic bank assets through auctions), everyone immediately began crawling over it with a magnifying glass, looking for flaws. The informed commentariat was screaming about the taxpayer being ripped off, about huge subsidies for overpayment on crappy assets, and on and on. At first blush, it looked like the banks were playing us for fools again.

I proposed a counter-theory early on, on March 25 (and was one of the rare few to throw my weight behind this particular viewpoint, as far as I can tell; Roger Ehrenberg was another):

The major banks, weighed down with toxic debt, weren't celebrating Geithner's auction plan; rather, they hated it. Huge overpaying on the part of the buyers (investors paired with the government) wasn't baked in at all. Unless the system could be gamed, which seemed unlikely, overpayment would be relatively small. Once the banks took a good hard look at …

PPIP Deathwatch, June 3 Edition

There's a saying: If they're going to run you out of town, get out in front and make it look like a parade.

Well, Timothy Geithner by now must be reading the handwriting on the wall. The major banks don't like his public-private partnership plan to buy their lousy assets through auctions. They ain't gonna play. Putting their assets up for sale for anything resembling market value would expose the parlous state of their books. And Geithner knows he has a weak hand: he doesn't want to push the big banks into doing anything they don't want to; he's not an auto industry regulator after all.

So Geithner begins to slowly back away from PPIP, talking about it in a sort of detached way:
"As confidence has improved a little bit, we may see less interest -- both on the selling side and the buying side," Geithner said. "It's hard to tell, though, how much interest you're going to see. There's still some concerns, too, about the rules of the ga…