Tuesday, June 2, 2009

The torch passes ...

It's true, in a way:

The American Century ends today with the death of General Motors as we knew it, the free-market engine that powered an economy and a culture to global preeminence, selling physical and social mobility to millions who had previously lived in small insular worlds.

-Robert Stein

Our self-confidence today is as it was at the peak. That strikes me as not well calibrated.

Is this just the end of the buggy whip? It doesn't seem so. All the new "whips" are made elsewhere and our accounts are not in good shape ...

Sunday, April 5, 2009

The Exceptional Case of Spain

Fast growth and "non-derivative banks" didn't keep them from poor investments in property.

The ugliness is getting worse.

Saturday, April 4, 2009

This Week In Markets History

It is announced, not from Buckingham Palace, but from Scotland Yard:

Scotland Yard lost £30m of taxpayers' money by reinvesting in a doomed Icelandic bank just weeks after withdrawing the cash on the advice of its financial expert, the Observer can reveal.

The Metropolitan Police Authority withdrew all investments from Landsbanki in April last year following instructions from its treasurer, Ken Hunt. But just weeks later, it reinvested with the bank without informing Hunt who remained in the dark until the bank was nationalised in October.

- Guardian

Thursday, April 2, 2009

Eternal Rebirth

This could fall into the category of Invincible Wall Street, but it has a tinge of fear-greed in it that is wholly different.

Apparently, the CEO whose board approved dividends well into the crisis (Merrill board approved payments up to the very last...), has the vision/visibility to say that recovery may take hold in 2009.

I'd put 3:1 odds that BOA will have a big-bath 4Q this year, at a minimum; but that's just me.

Wednesday, April 1, 2009

Hiding the Copula and Other Tales

Well, very late, I've read about the formula at the center of the storm.

It's supposed to have hidden risk. I'm looking at Chart 5 - does this hide risk? It doesn't look like it (although I'm not sure why it is not symmetric about zero or why the risk appears linear with changes in "correlation", off hand). I mean, the author is clearly showing a sensitivity to correlation.

The insight is a pretty straight-forward application of the properties of a Markov process. From what I can tell, the mathematics of modeling survival rates (hazard rates) did two things. It generalized the mathematical problem AND it allowed people to use different estimates/estimators for the model inputs. The latter may have been more critically important, because it's not at all clear how much information is in credit spreads to begin with, right?

Anyway, Paul Wilmott thinks Gaussian Copula is not robust, but Black-Scholes is. Off hand, it's not easy to see what they are after with that. Both have Gaussian assumptions. You might argue that covariances are more sensitive to leptokurtosis than, say, standard deviation estimates, or something; but, given the Wilmott-Taleb emphasis on outliers, you'd think they would welcome that (if it were true).

Monday, March 30, 2009

Asset Allocation, Revisited

Soon enough, we will find out who advised on this:

Under Millard's strategy, the pension agency was directed to invest 55 percent of its funds in stocks and real estate. That included 20 percent in US stocks, 19 percent in foreign stocks, 6 percent in what the agency's records term "emerging market" stocks, 5 percent in private real estate and 5 percent in private equity firms.

That would be the Pension Benefit Guarantee Association, who shifted their allocation in February, 2008.

Friday, March 27, 2009

Invincible Wall Street - Another Dash-for-Cash

It's not just Wall Street, but if you still had any illusions that Greenspan's enlightened self-interest stuff rules the day, read this.

It's not just Merrill Lynch executives who made an alleged, last-minute, dash-for-cash. The storyboard:

Chief credit officer of mid-size bank advises board not to pay a bonus/salary demand of then CEO, a request made just before TARP monies flow in and the first quarterly losses come down.

In one of last acts, CEO summons said credit officer, fires him, while having people "sweep" his blackberry and computer.

Today, we know about this only because there is a lawsuit ...

This is how the lousy ethical situation at the top perpetuates itself. Only those who 'go along' continue.

The evidence of it is everywhere, if you just keep your eyes open.

Three Helicopters



There is helicopter Ben (Benanke). He drops money and doesn't want to talk about on whom the manna is falling (whether it is Bear Stearns today, or not, or Lehman - that's ... a ground job).

Alan Greenspan says that there is $850+ billion more to go. Depending on how you think that is (or should be) spread around, any one of the above is "correct". Fasten your seatbelts, it will be, literally, the ride of your lifetime, most likely!
There is helicopter Larry (Summers). He believes that, if you fly too high, you get burned, so he keeps his altitude.

There is helicopter Paul (Krugman). He sees the chessboard from a higher altitude and wants to move mountains (or dismantle the Frankenstein that he sees).

Alan Greenspan says that there is $850+ billion more to go. Depending on how you think that is (or should be) spread around, any one of the above is "correct". Fasten your seatbelts, it will be, literally, the ride of your lifetime, most likely, even from March, 2009, onwards!

For the record, if there is a bias in thought to be demonstrated, I doubt it is a belief akin to a 'market mystique'. If it's anything tangible, it may be a cultural thing or the proximity of having been a regulator, the protective and curative attitude of having had banks as part of your liege.

On the other hand, there may be no bias, because some people do have superior, 'inside' information from bank examiner's reports ...

I'm More Systemically Important Than You!

A dialog on the new proposals.

I think they ought to have waited for the details, but ... they didn't. These are really knotty problems, and I don't think this proposal is going to carry its burden.

1. How do we prevent another AIG?

Well, it looks like the kinds of contracts they sold will be set-up so that it would have been obvious that they were so exposed.

Whether AIG FP would have been declared a 'systemically important' firm or not is open to debate. Afterall, the HQ was in London, yes?

Of course, there is the matter of AIG's 'securities lending' losses. Wassup with that? How much incremental capital do you need for insanely stupid? In other words, let's not pretend that hanging out a sign "AIG & Co, Inc., AAA Systemically Important Firm with Punative Capital Requirement(s)" solves the problem. It just designates the risks.

2. How do we prevent another LTCM?

It looks like hedge funds of a certain size will need to register and report their positions. If they don't, ... well, there are no new civil or criminal penalties proposed.

Now, this proposal doesn't specifically say, that LTCM would have been "out of bounds", as it was then constituted, IF it had remembered to register. Maybe they would have cleared through a Canadian firm, to avoid the one-world, regulatory hassles...

Structured products, like CDOs or linked notes - those aren't 'OTC traded derivatives', so let's not pretend that that embedded risk is captured by new clearing systems.

3. How do we prevent more Lehman and Bear Stearns weekends?

The Fed - Ben Bernanke? - wants out of it. No more weekends at Ben's. That's how I read the proposals, at least.

Where does the discount window (liquidity pinch) end and the Treasury/FDIC start? Who knows, exactly, except at the (overnight?) point of insolvency....

Somehow, Lehman might have been operated in temporary "conservatorship". Do you see that happening, for a broker-dealer operation?

Otherwise, the options are those already just on the table: an equity stake from the government, but at the discretion of two Presidential appointees with no limits proposed (a bailout without strings attached?) .

No interest in equity? Well, they propose they could buy debt or guarantee liabilities. The first seems inconsistent with the spirit of the idea of 'eliminating too big to fail' and the second, with the notion that the firm is 'temporarily insolvent' (but not impaired, I guess).

4. Who does all the new watching.

Not the safety-and-soundness Fed, who are the natural group to do it, one would guess.

Thursday, March 26, 2009

Value of the Geithner Put

Someone not on the AIG multi-million dollar payroll puts together a model and finds that, at 7:1, the Geithner put may be worth about 11% to the average investor. My back-of-the-envelope numbers (see below) suggested about the same.

This is hardly giving away the store.

[Side note: They misinterpreted the max stated leverage of 6:1, I think, as an "odds" formulation, to come up with only 1/7 of the total capital required.... If you have 5:1 leverage, you have an organization with 20% equity, under common parlance.]

(h/t Salmon)

Invincible Wall Street


Truthiness is not a bell to ring.

Even after the 90s, it's still going on. The Spitzer-Wall Street settlement monies will stop being paid, coincidentally, this year, I believe.

Anyway, Mike Mayo is out, grumbling. Richard Bernstein is out, maybe grumbling.

Pushed or pulled?

Can we talk about it now

I'm never one for fantasizing about a "new era" on Wall Street or something the FT called a new era of 'accountable capitalism' (good grief, no); but maybe, just maybe, the level of disclosure is up, when you see something as plain and starkly written as this:

Add to that the reality that private equity firms generally don’t make their money by choosing good investments. They make it on an amazing Technicolor array of fees: management fees, deal completion fees, consulting fees, performance fees, special events fees, fees of every kind and stripe. Chalk it up to yet another racket of the bubble years.

I have to say that there are probably a few good private equity firms, a few who know certain industries and can really execute better than talent served on plates from over-paid search-firms.

The expansion of the field, however, naturally could have been expected to lower standards ...


Anyway, the most important is that Wall Street still rules the world:

"Little noticed in the recent bail-out package is the favorable tax treatment private equity firms will receive when repurchasing their distressed debt." [see comment section]

Wednesday, March 25, 2009

Invincible Wall Street

More in our series, "Invincible Wall Street" (for the record).

Let us enjoy our cake, we're the good guys?:

JPMorgan Chase is considering spending $138 million to buy new corporate jets and a hangar to house them, ABC News reported Monday. ...The banking giant, one of the few firms to hold steady so far in the financial turmoil, plans to spend nearly $120 million for two Gulfstream 650 planes and an $18 million renovation for a hangar at Westchester Airport outside New York City, according to ABC News.

“When I hear the constant vilification of corporate America, I personally don’t understand it,” Mr. Dimon said recently. “I would ask a lot of our folks in government to stop doing it because I think it’s hurting our country.”

Why do overpaid search firms, or whatever, always turn up the same cast of characters?:

Bernie Sanders, the senator from Vermont who is independent in spirit as well as party label, has placed a hold on President Obama's nomination of Gary Gensler to head the Commodity Futures Trading Commission.

...and another Phoenix:

One of the enduring mysteries of American life is how it is, exactly, that so many people guilty of serious breaches of the public trust manage to maintain respectability in virtue of having committed this breaches while working for Republican presidents. Here’s Fred Malek guest-hosting on CNBC and loading Rep Paul Ryan’s “give more money to rich people” alternative budget. Who’s Fred Malek? Read this Colbert King article for the full details. But to make a long story short, though Malek is most infamous for the fact that on Richard Nixon’s behest he compiled a list of Jews working at the Bureau of Justice Statistics

Humor in Uniform

Paul Krugman: Smart economist, or all-knowing being?
- Justin Fox

Although I've met Larry Summers a couple of times, in just public settings, I've never met Paul.

From a distance, he seems like a guy you'd want to be your uncle or dad, as much as a 'smart economist' or even 'omniscient being'.

Tuesday, March 24, 2009

Geithner's First Plan


Well, the plan is out, and it looks sort-of like what I proposed (see just below).

Wall street cheered it. Someone once said (me?) that the fastest way to 'solve' the current financial problem was for the FED to start writing credit default swaps. In a (limited) sense, that is what the plan does, because the FDIC is providing 'guarantees' on debt, for a "fee", that will be used to purchase risky assets.

It's getting a nasty reception, from sensible people.

It does seem that the financing of the plan is getting the most fire, because it interferes with the pricing of assets (Krugman, Self-evident).

Leverage does not change the expected value of an asset. However, the presence of non-recourse loans does change the ROI, and that will cause people to bid up.

How much?

Well on my figures, it's not nearly as much as Paul's worried about. With an 80% standard deviation in the price of the 'toxic pool' of assets, I come up with a maximum 'subsidy' of about 11% change in the bid, the fair-value price, which occurs at the maximum leverage they propose (1:6).

This will not break the bank.

The quibble could be handled by an upfront FDIC financing 'fee', which could be set so as to price-out the value of non-recourse financing (at 11% in our maximum example below). It would raise the minimum private investment from circa 17% to circa 26%, as well., although fees are technically not 'equity'.

What is scary is that, the public takes circa 8.6 times the dollar amount of downside risk as does private part, at the maximum leverage. With an FDIC financing fee, as I suggest, that reduces to about 4.8x, which is still sizable. The public has far bigger shoulders, here.

Put another way, an 80% standard deviation for 'toxic assets' is way out of whack with a leverage ratio of 1:6 ... so is 50%, 40%, or maybe even 30%. [I suppose this is why the distressed asset guys so seldom use leverage, let alone quite so much.]

Basically, one would hope that they could do with a lot less leverage, that is, with a greater public-private partnership.


So, the focus is on the FDIC, how much insurance 'fee' they are going to charge and how they will determine how much leverage to use. Both are linked to their estimates of credit risk, primarily.

Also, the recalcitrant bad-loan holders will need to be forced to disgorge, competitively or by the regulator's stress-test.

Last, no one really knows how the RMBS housing markets will behave, as the efforts to stem foreclosures kick in.

Thursday, February 5, 2009

"Lemon Tree, Very Pretty"


The foot pounding to avoid lemon socialism, in which citizen-taxpayers "agree" to socialize the risks and privatize the returns can be heard across the plains. Openly agree, one should say, to contrast with the regular way, which is to have lemon socialism hidden in laws and regulations (from both political parties) that enable misalignment of risks and rewards.

But, these days, we have to eat the lemon. At least on the banking side.

Obama's team will never socialize the big banks, fully, despite that the best case for it might be purging a generation of dead-head management and elevating some people who really do know the risks of modern financial products and markets. (Cleaning out corporate boards is another good idea, as should have been done wholesale at Merrill and Lehman, right?)

So, what other choice is there?


The best combination is for the Treasury and Fed to work together. The Treasury provides the risk capital and the Fed has available infinite leverage (at least for a time).

The private sector, particularly the distressed assets crew, knows how to value assets no one wants, much. The best of all worlds is to share risk-capital with the private sector, to scare-up a public-private partnership, and leverage it with the Fed-Treasury combo. That's one way to get past the problem of government getting duped in setting/taking a price on things its bureaucrats don't understand.

Another risk-sharing is to pre-package large-bank bankruptcies, allowing banks (and some non-banks) to trade out of their debt-obligations at or near market prices or at zero, if necessary. A restructuring of their liabilities will allow further risk-sharing with public funds. How? Well, the Treasury can 'substitute' the erased liabilities with recourse provisions. The banks sell assets at a price to the Treasury, who picks up an amount of risk consistent with the Treasury's economic forecasts, but the banks share or assume risk that the asset values come in below that.

Exchanging debt obligations for recourse guarantees is another public-private risk sharing that might work, if it is enough in the mid-term to avoid a terrible, terrible long-term.

The truth takes only a few words (to borrow a famous phrase from Chief Joseph). This might be the American solution, one that contrasts with the way that Europe have done so far and that Japan did a long while ago.

I wrote this in 20 mintues this morning. I have no idea what is taking weeks and weeks to conceptualize, inside the Obama team, unless it is the gory detail of regulatory structure redesign or a forward-looking, step-by-step to step around too-big-to-fail.

Maybe they are trying to decide what to do with housing market intervention, first? That would make sense. Soon, they should have had enough time for a masterpiece, though, so my expectations are high.

Thursday, January 29, 2009

Pictures - Regional Economics


We do not have a national housing market - Alan Greenspan (and others)

...which is true, until there is a national credit crunch?

Here is a map from the WSJ that puts up some data on where the spending and relief may be going, throughout the country. On a per-capita basis, it's spread pretty evenly:

Here is the latest foreclosure map from the NY Fed. Sorta makes the approach look less than perfectly targeted, although maybe foreclosures are not the best metric. Still ...:

Here are the persistent poverty areas, a designation defined in the house bill, HR-1, as of 1990 (yeah, quite old, but...). Notice that almost all the non-metro areas are all ... in red-state, South.

Here is the change in economic activity, as measured by the Philly Fed - direction is most important here (notice the states that have been spared, so far);

Invincible Wall Street

Another for our series, "Invincible Wall Street":

Jan. 27 (Bloomberg) -- American International Group Inc., the insurer saved from collapse by government money after losses on credit-default swaps, offered about $450 million in retention pay to employees of the unit that sold the derivatives, according to two people familiar with the situation.

About 400 workers at the financial products unit may get the money in two installments

It costs that much to manage an existing book of business? Really?

Friday, January 23, 2009

I love the internet

We should find out the size of Thain's severance sometime today or in the next few days, I suspect:

'I'm not sure that McCann and Fleming left just because they may have fallen out with John Thain. The reality is that both these executives would have bagged huge severance packages (triggered by change-of-ownership clauses in their contracts). If they stayed, all they would have had to look forward to compensation-wise was US government restrictions, which would have resulted in $400,000 base salaries and no bonuses for the foreseeable future.

my uneducated, basic view, shared:

I have worked for Citi for 35 years now, joining when it was still called First National City Bank of New York. The rot, in my view, set in after the Travellers deal. We all thought that we'd end up going to Hell in a handcart, and it's now coming to pass.

No Money for BOA?

Disgorge and bankrupt Merrill. Then, try again. That is, wash, rinse, repeat. [I know, it probably can't be done.]

Superbly compiled by Rob Cox: A History Lesson With Merrill Deal (No doubt, this didn't get sent around to BOA's shareholders, as they voted "yes").

Thursday, January 15, 2009

The Beauty Contest Keynes Didn't Write About

Everyone knows Keynes' famous beauty contest analogy, in which the marginal price/prize is what the next person bidding in the beauty contest for an item will pay.

What he seems to have left out (to my memory) is the beauty contest that went on to get Bernie Madoff to manage your money.

Since nothing ever changes, how could the great man have missed this layer of the onion?

Maybe a Keynes maven can enlighten us.

Even if not, you cannot miss the irony of people scrambling for the privilege of loosely regulated money-management, given this headline:

Madoff might not have made any trades

Wednesday, January 14, 2009

Citibank Shrinks


It's the thing to do (for a bank), since they cannot expand in the current environment, much, given their balance sheet.

Meanwhile, people are somehow surprised that Sandy Weill's ... er, vision exceeded his grasp? Naw, really?

"The problem with Citi is the model, the execution, the management," Smith said. "How do you go a decade without integrating?"

Could it be that non-integration suits some people's management style? Who knows, but the idea that there is a high growth or highly profitable, easily managed "sub-business" for Citibank is ... chimera.