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.