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Showing posts from July, 2009

AIG: New Sources of Possible Rot

Okay, we all knew AIG's financial products division was a rogue, out-of-control actor that ended up bringing the giant to its knees. But at least, in the heart of the insurer's operations, everything was just splendid, solid as a rock.

Oops. Make that a sand hill.

The New York Times says:
State regulatory filings ... show that A.I.G.’s individual insurance companies have been doing an unusual volume of business with each other for many years — investing in each other’s stocks; borrowing from each other’s investment portfolios; and guaranteeing each other’s insurance policies, even when they have lacked the means to make good. Insurance examiners working for the states have occasionally flagged these activities, to little effect.
More ominously, many of A.I.G.’s insurance companies have reduced their own exposure by sending their risks to other companies, often under the same A.I.G. umbrella.
Ah, Jeez. Here we go again. Two interesting elements that emerge from this article: (1) Sta…

High-Frequency Trading: MUST READ!

Congrats to Mike, who is using his considerable economics training to good ends now over at the Atlantic's business blog section. He has an introduction to high-frequency trading that may be a bit of a slog for the novice, but it is a VERY IMPORTANT read for any stock market investor.

I've been watching the attention focused on high-frequency trading bloom rapidly over the last month or two -- sort of like a slow-motion explosion -- from Zero Hedge's initial ominous entries on the subject, to a New York Times piece that followed surprisingly quickly, to Mike now ... and I think this will be the next scandal in the stock markets, assuming enough people are bright enough to understand what's going on. They certainly should care.

What's happening: there is the market for the big boys with the high-powered computer algorithms, the Goldman Sachses and all ... and there is the market for the rest of us. My naked assessment so far, based on admittedly limited information: t…

A Short Break

I want to work on Vol. 4, but they pull me back!

So, the woman who made the 911 call which led to the arrest of Skip Gates – this is the neighbor at Harvard Magazine I wrote about – is denying she is a racist on account of her color. Her lawyer – no doubt retained to negotiate a book deal or a TV appearance – says that “the fact is, she’s olive-skinned and of Portuguese descent”. That is the same as being “tobacco colored”, in the less neutral phrasing of another American of Portuguese descent. “You wouldn’t look at her and say, necessarily, ‘Oh, there’s a white woman’. You might think she was Hispanic,” says the lawyer.

Personally, whenever I see a white woman pass by, I say to myself: ‘Oh, there’s a white woman.’ I also say, ‘Oh, there’s a black woman’, when I see a black woman pass by. Until recently, I also said to myself, ‘Oh, there’s a Chinese woman’ whenever I thought I saw a Chinese woman. But sometimes I got confused or had second thoughts: ‘Oh, maybe that was not a Chinese wo…

The Way Markets Work (in the age of speculative capital)

This past Friday, the New York Times had a front page article on “high frequency trading”. Under the heading “Stock Traders Find Speed Pays, In Milliseconds”, it said that “powerful computers, some housed next to the machines that drive marketplaces like New York Stock Exchange, enable high frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.”

The paper went on to explain how high frequency trading works. You can read the full article here. But you don’t have to. In high frequency trading, large orders by the institutional traders are shown – “flashed” – to equally large trading houses a few milliseconds before they are made public. The trading houses then exploit this information by getting ahead of the market.

Flash trades are available to anyone for a fee, in the same manner that live price quotes are available to anyone for a fee. The rest have to live with the “delayed” prices. So pompous postur…

One Thing I Know About the Systemic Rot

If you are not familiar with Jean Luc Godard and his approach to film making, chances are that you will not “get” his movies. Godard believes that the “bourgeois society”, as he calls it, is so corrupt that no matter how serious and worthy a message may be, it will be corrupted by the fact of its transmission in, and to, a corrupt environment. (A Far Side cartoon had a group of clowns throwing pies in one another’s face and one of them saying, ‘But seriously, folks!’)

Godard’s way of fighting this condition is willfully corrupting the message, so that the extremity of the illogic would shock the audience and awaken them to what takes place around them.

I can see his point. Every one can see his point; just turn on the TV! There have been many studies about the control of media by a handful of organizations and the impact of such concentrations. A recent study on the influence of the Internet found that while blogs play an important role in the dissipation of the news, the agenda, what b…

A Sad Day in Blogland

Mike, creator of the Rortybomb blog, is no longer anonymous ... on July 20, 2009, he came out, revealing his true name to be ... Percy Fraddlehapper ... no, no, his real name is actually ...

Mike. That's right. He was already halfway out of the blogger's closet of Hidden Identity anyway. His full name: Mike Konczal.

What's more, it looks like he just turned 30 and we forgot to send the virtual cake with the electronic candles. Drat. Anyway, Mike has been on a tear lately, churning out some top-notch content and raising his profile in a lot of places.

And now, like the character in the Jim Croce song, Mike can croon, "I Got a Name."

That leaves a dwindling number of us Resolutely Anonymous Bloggers. There's Cassandra does Tokyo(does anyone else get a little tired of the witty but de trop prose style?) and George Washington's Blog (now, in the great tradition of rebranding for knowing simplicity, titled just "Washington's Blog") ... and me.

Not to…

Annals of Cluelessness, Hank Paulson Edition

Is it just me or is anyone else thinking: How totally clueless was Hank Paulson?

I mean, Paulson now reveals that the Bush administration was discussing how to feed U.S. citizensin the event of a breakdown in law and order, had commerce and banking collapsed during the financial panic last fall. This, from the Independent:
Making his first appearance on Capitol Hill since leaving office, the former Treasury secretary Hank Paulson said it was important at the time not to reveal the extent of officials' concerns, for fear it would "terrify the American people and lead to an even bigger problem."
Four months before the Lehman implosion/AIG meltdown/freakout sirens started wailing, Paulson was saying this: "In my judgment, we are closer to the end of the market turmoil than the beginning." (May 16, 2008) Two months later, he's still blissfully optimistic: "It's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very …

I Smell Something ... Anti-Goldman ... In the Air

Even Lucifer himself, endowed with powers to shake the heavens and earth, couldn't counter the amount of bad publicity that the entity some perceive to be the financial anti-Christ (and that others simply call Goldman Sachs) has been getting lately. Recently Bloomberg TV commentators were taking potshots at Wall Street's most gilded survivor of Meltdown 2008, asking a very reasonable and quite pointed question: What the hell was Goldman doing with computer programs capable of manipulating markets (which an employee allegedly stole, prompting swift FBI action)?

But wait, there's more. Sure Matt Taibbi may be prone to working himself into an overwrought state about Goldman, with his "vampire squid" and "blood funnel" metaphors, but now Janet Takolivi has an opinion piece at CNN where she blasts Goldman's bloated earnings quarter and drops in a colorful bit of imagery that we'll probably see again in days to come.
Wall Street's "financial me…

And Edward Harrison Gets It As Well

The blogger behind Credit Writedowns wrote, in a post about Wells Fargo selling distressed assets for 35 cents on the dollar (and that was twice what most hedge funds were offering!):
To me, this explains very well why the PPIP program was a failure: if banks can sell distressed assets quietly over time to private bidders, they might be able to delay taking writedowns. But, the price discovery involved in the PPIP program would be a blood bath for banks already capital-constrained. This is why the program has failed.Yup. As I wrote on March 23, in "Five Reasons Why U.S. Banks are Secretly Terrified of Geithner's Plan":
2. Your game of vastly over-marking assets grinds to a halt.

Once your impaired bank assets are put in pools for private investors to bid upon, and real market bids result, you will be under enormous pressure to revalue huge swaths of your holdings. You can maintain that fictive price of $80 only if you keep the assets cloistered away, locked in a high towe…

The New York Times Figures It Out Too

This NYT editorial pretty well sums up what I've been saying for a while about the dying quail that is Geithner's plan to buy up toxic banking assets:
The Obama administration has largely shelved, for now, its plan to finance the purchase of banks’ toxic assets, ostensibly because of the banks’ recent success in raising capital. Analternative explanation is that the banks won’t sell. Recent accounting changes make it less painful for them to keep bad assets on their books. Why admit to losses if you don’t have to?Exactly. What I love about this bit of succinct truth-telling in the NYT is that it's not muddied by a lot of other pseudo-reasons, such as "investors don't want to partner with the government, fearful of being demonized or having the rules changed on them in midstream." Let's face it: that's just a smokescreen. If there's a big fat pile of money up for grabs in the middle of the floor, Wall Street will jump on it, damn the bad P.R. But if…

On the Destruction of Capital

The European Commission’s recently issued report on member states says that “the crisis is the equivalent of capital destruction, reducing – at least for a time –the productive potential of the economy.”

Capital is a social thing. It has no equivalent any more than art or religion has equivalents. Its destruction, likewise, is a very particular phenomenon. So it is nonsense to speak of the “equivalent of capital destruction”. What we have in this crisis is the destruction of capital, period.

Why did the authors of the report insert the word equivalent where it does not belong?

The answer is that it tones down what is being said. To the delicate ears (or eyes) of bureaucrats in Brussels, “destruction” would be too strong, so their minions diluted the word the best they could.

But surely these authors must know what capital destruction is, otherwise it would be impossible to speak of something “equivalent” to it.

The truth is that they do not. They merely have an inkling about it, the way B…

Hungry? Eat a Goldman Sachs Banker

You've lost your job. The kids are staring at you from the next room with those gaunt faces and soulful eyes. The unspoken question on their lips: after paying the utility bills and hospital expenses for Timmy's chemotherapy, can we afford to eat?

My answer: of course you can! Just stroll on down to Wall Street, find yourself a Goldman Sachs banker, get a roasting spit at Wal-Mart, squirt some lighter fluid on a bed of backyard briquets, and voila! Goldman Sachs bankers have plenty of fat on their bones -- it's hard to vouch for their nutritional value beyond that, but a nice, filling high-fat meal (the corpulent bankers might last a week and the funky leftover pieces can be turned into soup stock) can go a long way toward dispelling those recession blues.

How do I know they have fat on their bones? Check this out: the average Goldman employee is making almost $700,000 a year (and that includes the mailroom guys and the bubble-cracking receptionists, so you know the bankers …

A Curious Statement (worth pursuing further)

It was the main business news of the day that “Ex-Worker Said to Steal Goldman Code”, as the New York Times put it.

The story involved one Sergey Aleynikov, an ex-Goldman employee, who allegedly downloaded the firm’s proprietary trading software to his computer before leaving for greener pastures.

The story was jazzed up for maximum effect, with code words such as “sophisticated high-speed trading”, “a server based in Germany”, “a memory device” and, of course, “Sergey”! But it had too many holes in it and I didn’t buy it for a second. Apparently, neither did the judge, who released the said individual on a $750,000 bond.

If Sergey Aleynikov did what he is alleged to have done, he must have been a geek who learned nothing about finance while at Goldman. The superiority and, therefore, the value, of Goldman’s trading software does not come from some special insight into how markets work. It is, rather, due to the firm’s capital; Goldman could throw hundreds of millions of dollars into the…

A Rather Egregious Case of Confusing Cause and Effect

You have heard all the talk about correlation not being causation. About the perils of research: researchers finding what they (unconsciously) planted in the evidence; about being factually accurate about the observations and yet totally wrong on the conclusion; about the epistemology of science. Etc.

All those abstract issues were beautifully rendered in a real life and easily comprehensible example thanks to the research of Professor Mark Garmaise of UCLA’s business school. The Financial Times reported the results of the professor’s iconoclastic research in which he showed that “before crisis, US mortgage brokers fed loans of deteriorating quality to the banks they did most business with.” This, the professor concluded, proved that brokers abused the trust of the banks and in doing so, planted the seeds of the crisis which, everyone remembers, began in the subprime mortgage area:
”At the beginning of a relationship, the bank’s natural intuition is to avoid fly-by-night brokers they ba…

Always Taking the Path of Least Resistance

That could be the motto of Washington for its interventions into the financial markets. If you can either (a) Solve a crisis by directly confronting insolvent banks and taking measures that will cause some short-term pain but ensure a better future or (b) Roll the currency printing presses all night and flood the system with money and hope that that eventually works, over say five years or a decade or whatever ...

What do you do? (b) of course. (b) doesn't rile up the banking lobby, get any Congressional noses out of joint, threaten to anger any populist groups. (b) isn't leadership either, but leadership is a quaint notion these days. Let's face it: it's not that America is pain-averse. It's worse: we're discomfort-averse.

So, continuing our multiple choice test, if you can either try to resolve the housing foreclosure problem by either (a) Knuckling down on the banks and persuading them (through legislation, if need be) to renegotiate mortgages so that both the…

Isn't Revisionism Fun? The Geithner Plan Revisited

The New Republic's Noam Scheiber catches up with a "Deep Throat" from the Treasury Department as the Geithner plan, or PPIP, begins to spiral downwards faster, heading toward a near-certain death. You'll see a flurry of reasons tossed about for its demise, but if you get right down to brass tacks, there's only one that really matters: the banks don't want to play. They don't want to accept low auction prices for their bad assets. They want to pretend those holdings are worth more, for as long as possible, and postpone the day of financial reckoning.

As we all know, success has many fathers, but failure is an orphan. So does that mean the Geithner plan, which would have paired public and private investment to buy toxic assets, is an about-to-be orphaned failure? Au contraire, Mr. Nameless Insider insists:
If you had asked--I don’t want to speak for the secretary--what’s problem number one? I think he (Geithner) would say capital. Problem two? Capital. Prob…