Michael Lewis On The Daily Show
by ilene - March 17th, 2010 2:27 pm
Michael Lewis On The Daily Show
Courtesy of John Carney at Clusterstock
Michael Lewis talks about the financial crisis and subprime mortgages with the only news anchor Americans trust, Jon Stewart.
| The Daily Show With Jon Stewart | Mon - Thurs 11p / 10c | |||
| Michael Lewis | ||||
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Statistical Color
by ilene - March 12th, 2010 11:46 am
Statistical Color
Courtesy of Michael Panzner at Financial Armageddon
Although I’m not an economist, I spend a lot of time trying to figure out which way the economic winds are blowing. For a country as large, diverse, and globally connected as the United States, it can be quite challenging deciding which trends and data points are relevant at any given point in time, and which are extraneous, untimely, incomplete, or misleading. It doesn’t help, of course, that many so-called experts in Washington and on Wall Street (along with their enablers in the media) are happy to dissemble and distort instead of presenting the pertinent numbers along with a straightforward interpretation of what they mean. But even when the data is unencumbered by spin, it helps to understand its shortcomings and limitations. Below are four reports that provide some additional color on the statistics that many analysts are keying in on nowadays.
"Economic Data Can Be Misleading" (Financial Times)
Headline-grabbing data releases might be painting a rosy picture of the US economy at the moment - but it would be wise to keep an eye on what other, less-scrutinised surveys are showing, says Rob Carnell, chief international economist at ING.
For example, the Institute for Supply Management’s manufacturing index still works as a bellwether for the US economy – but only for a section of it, he says. “Nearly half of US private sector employees work for small firms of 50 people or less, or are self-employed – and you can bet that most national surveys save time and effort by sampling mainly large companies.”
“Right now, the ISM index is consistent with GDP growth rates of about 4.5 per cent. The headline survey from the National Federation of Independent Businesses, whose members typically have less than 50 workers, is consistent with a contraction of about 1 per cent.”
Neither is actually “wrong”, Mr Carnell says. “We just have to be aware that they are describing different parts of the US economy, and that the aggregate picture is somewhere in between.”
Relying too heavily on one survey carries risks, he said. “Strategists who assumed the rise in the ISM in 2002 and 2003 would result in a surge in Treasury yields to 8 per cent got it badly wrong,” he notes. “Size really does seem to matter when using data to forecast economic growth or market variables.”
"Credit Card Users: Not So Responsible After All?" (Associated Press)
With unemployment high and personal wealth diminished, how was it that…
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We Need Real Financial Reform That Directly Ends Too Big To Fail
by ilene - March 11th, 2010 12:17 pm
We Need Real Financial Reform That Directly Ends Too Big To Fail
By Senator Ted Kaufman (via Clusterstock)
(In a speech on the Senate floor this morning, Ted Kaufman (D-Del.) blasted current financial reform proposals. He called for reform that sets strict limits on the size of banks and doesn’t depend on regulatory discretion.)
Introduction: Where the Burden of Proof Lies
Financial regulatory reform is perhaps the most important legislation that the Congress will address for many years to come. Because if we don’t get it right, the consequences of another financial meltdown could truly be devastating.
In the Senate, as we continue to move closer to consideration of a landmark bill, however, we are still far short of addressing some of the fundamental problems – particularly that of “too big to fail” – that caused the last crisis and already have planted the seeds for the next one. And this is happening after months of careful deliberation and negotiations, and just a year and a half after the virtual meltdown of our entire financial system.
Following the Great Depression, the Congress built a legal and regulatory edifice that endured for decades. One of the cornerstones of that edifice was the Glass-Steagall Act, which established a firewall between commercial and investment banking activities. Another was a federally guaranteed insurance fund to back up bank deposits. Other rules were imposed on investors to tamp down rampant speculation, like margin requirements and the uptick rule on short selling.
That edifice worked well to ensure financial stability for decades. But in the past thirty years, the financial industry, like so many others, went through a process of deregulation. Bit by bit, many of the protections and standards put in place by the New Deal were methodically removed. And while the seminal moment came in 1999 with the repeal of Glass-Steagall, that formal rollback was primarily the confirmation of a lengthy process already underway.
Indeed, after 1999, the process only accelerated. Financial conglomerates that combined commercial and investment banking consolidated, becoming more leveraged and interconnected through ever more complex transactions and structures, all of which made our financial system more vulnerable to collapse. A shadow banking industry grew to larger proportions than even the banking industry itself, virtually unshackled by any regulation. By lifting basic restraints on financial markets and institutions, and more importantly, failing to put in place new rules as complex innovations arose and became widespread, this deregulatory philosophy unleashed the forces…
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The Ugly Americans: Wall Street Excluded from European Government Bond Sales
by ilene - March 9th, 2010 6:37 pm
Well, well, well, karma works in mysterious ways. - Ilene
The Ugly Americans: Wall Street Excluded from European Government Bond Sales
Courtesy of JESSE’S CAFÉ AMÉRICAIN
It will be interesting if Asia and South America pick up this theme of banning the Wall Street banks on ethical considerations.
The cheating going on in the financial markets is really getting to be outrageous.
Guardian UK
Europe bars Wall Street banks from government bond sales
By Elena Moya
Monday 8 March 2010 21.36 GMT
European countries are blocking Wall Street banks from lucrative deals to sell government debt worth hundreds of billions of euros in retaliation for their role in the credit crunch.
For the first time in five years, no big US investment bank appears among the top nine sovereign bond bookrunners in Europe, according to Dealogic data compiled for the Guardian. Only Morgan Stanley ranks at number 10.
Goldman Sachs doesn’t make the table. Goldman made it to number five last year and in 2006, and number eight in 2007, the data shows. JP Morgan was in the top ten last year and in 2007 and 2006 but doesn’t appear this year.
"Governments do not have the confidence that the excessive risk-taking culture of the big Wall Street banks has changed and they still cannot be trusted to put the stability of the financial system before profit," said Arlene McCarthy, vice chair of the European parliament’s economic and monetary affairs committee. "It is no surprise therefore that governments are reluctant to do business with banks that have failed to learn the lesson of the crisis. The banks need to acknowledge the mistakes that were made and behave in an ethical way to regain the trust and confidence of governments."
European sovereign bond league tables are now dominated by European banks such as Barclays Capital, Deutsche Bank, and Société Générale, the Dealogic table shows. Their business model is usually seen as more relationship-based, while US investment banks have traditionally been focused on immediate deal-making. (A euphemism for customer face-ripping - Jesse)
Being left out of government bond sales means missing out on one of the top fee-earning opportunities this year, given the relative drought in mergers and acquisitions and stock market flotations. Western European governments need to raise an estimated half a trillion dollars this year to refinance debts and pay for bank bailouts and rising unemployment….
Investment banks insist their business areas are separated by confidentiality walls, but countries have been furious about some of their trades appearing to conflict –…
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The SEC’s Top Economist Quits In Protest Over Ridiculous Short Selling Rules
by ilene - March 9th, 2010 6:05 pm
The SEC’s Top Economist Quits In Protest Over Ridiculous Short Selling Rules
Courtesy of John Carney at Clusterstock/Business Insider
The news that the Securities and Exchange Commission’s top economist is leaving should highlight huge blot on the record of Chairman Mary Schapiro.
James Overdahl, the economist, run the unit of the SEC charged with evaluating the economic impact of proposed rules. In 2008 his office evaluated the impact of short sellers.
What the economists found is that a lack of evidence for the so-called “bear raids” in which short sellers were allegedly piling onto distressed stocks. Rather, short sales increased when stocks rallied. They concluded that there is no evidence that “episodes of extreme negative returns are the results of short-selling activity.”
But the SEC went ahead and adopted rules restricting short sales anyway, voting 3-to-2 to to limit short sales when a company’s stock falls 10 percent from the previous day’s close. Overdahl’s departure highlights how much this is political pandering rather than good policy making based on empirical results.
Overdahl will step down March 31 to join NERA Economic Consulting, according to Bloomberg.
See Also:
SEC To Look To Punishing Wrong, Even When It Doesn’t Go Right
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Charles Schwab: US Investors Are Still Worry-Wart Savers Who Avoid Risk And Spending
by ilene - March 3rd, 2010 9:55 pm
More evidence that the public is not drinking the proverbial Kool Aid. See also my recent article, Volume - Hiding in Plain Sight. - Ilene
Charles Schwab: US Investors Are Still Worry-Wart Savers Who Avoid Risk And Spending
Courtesy of John Carney and Gregory White at Clusterstock/Business Insider
Charles Schwab has released their latest survey of independent investment advisors and it points towards an across the board increased conservatism on the part of most clients.
While hedge funds and investment banks might have made a killing on distressed and risky asset classes, the retail investor isn’t chasing those particular rabbits.
In fact, the report make a good case for continuation of the "new normal," with retail investors focused on savings over spending, security over risk, debt reduction over accumulation.
Of course, you never can tell whether the retail sector is an indicator of things to come or a contrary indicator pointing in the wrong direction.
Check Out The Trends On The Minds Of Investment Advisors Across The U.S. >>>
Image: Charles Schwab
(What's this?)
(Index Universe, 2/26/10)
(Index Universe, 1/21/10)
(Investing Guy, 1/21/10)
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Here’s The Untold Story Of How AIG Destroyed Itself
by ilene - March 3rd, 2010 10:10 am
Here’s The Untold Story Of How AIG Destroyed Itself
Courtesy of John Carney at Clusterstock/Business Insider
Image: http://commons.wikimedia.org
The collapse of American International Group (AIG) was largely the result of a little understood investment strategy that allowed the insurance giant to make optimistic bets on the housing market and other asset classes without having to actually buy the bonds backed by mortgages or other assets.
The details of AIG’s investment strategy have been largely obscured by the analogy with insurance. In the typical telling, AIG is depicted as insuring mortgage bonds packaged by banks. AIG often seems to be almost a passive and unsophisticated player that came in after the deal.
In reality, AIG was deeply involved in the creation of the financial products it insured, according to a person familiar with the matter.
AIG was frequently involved right from the start of deals to securitize assets. It conducted its own due diligence on asset backed securities, sometimes going further than the banks that were actually buying the securities. Its financial professionals at times pitched deals AIG wanted insure to underwriters. It was an active participant in the market with a sophisticated, if risky, strategy for investing in the housing markets and infrastructure projects.
AIG As A Buyer Of Risk
AIG’s financial products division became what is known on Wall Street as a “synthetic buyer” of a variety of asset backed securities, including mortgages and infrastructure linked bonds. AIGFP would sell credit default swaps that performed for the company much like an ordinary bond would for a bond investor. As long as the insured bonds were performing, AIG would receive a regular revenue stream from the buyer that mirrored the regular payments of interest and principle that a bond holder would receive. AIG was able investing in the bonds without actually having to buy them.
AIG, in other words, was essentially performing the financial product equivalent of buying a house with out having to make a down payment.
Goldman Sachs, which has been depicted in the press as “stuffing” AIG with risk to bad mortgages, frequently found itself packaging bond deals specifically to meet the demand from AIG for mortgage exposure, sources familiar with the matter say.
For AIG, investing in the bonds synthetically by selling credit default swaps had a major advantage over buying the bonds directly. Much of AIG’s capital was tied up in regulated insurance business, which meant that despite its huge balance sheet it could only deploy investment assets in…
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DOES THE GOVERNMENT MANIPULATE STOCK PRICES?
by ilene - February 26th, 2010 10:19 pm
Excellent article by Pragcap - I highly recommend reading. - Ilene
DOES THE GOVERNMENT MANIPULATE STOCK PRICES?
Courtesy of The Pragmatic Capitalist
There has been a lot of chatter over the last year about the government’s involvement in the equity markets. Yesterday’s market action was certainly odd. Several large institutions were active buyers of enormous blocks of the S&P on no news. The volume shot through the roof from out of nowhere. It was not an unusual occurrence. We have seen it repeatedly over the course of the last 12 months (see here for more). Of course, this whole discussion has a very conspiratorial aspect to it, but I think it’s less nefarious than many presume (depending on your definition of nefarious when it come to pseudo-government intervention in markets).
The usual argument with regards to government intervention in the equity markets is pretty simple. The government, or the “President’s Working Group” (aka, the Plunge Protection Team) purchases securities in big blocks and jams prices higher. Jamming, gunning, carpet bombing (whatever you want to call it) is quite simple. In any market there are down times in terms of volume. If you have the firepower (the capital) and the desire you can knock out just about every asking price on the board. Have a look at just about any Russell 2,000 stock at around noon as the volume slows to a drizzle and ask yourself what you could do with $10,000,000? Of course, the same goes for the downside. You can hit the bids and literally knock them off the board in an illiquid market (exactly what we saw in Fall of 2008 with fund redemptions).
Anyone who has ever traded in size has seen this in action. It’s like taking a machine gun to a medieval battle or sending the U.S. Army to Baghdad (not that anyone would ever do such a thing). The point is, you can slice through prices like a hot knife through butter, create a certain sentiment in the
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Toxic Exploding Freddie Mortgage Factory To Close
by ilene - February 26th, 2010 1:54 pm
Toxic Exploding Freddie Mortgage Factory To Close
Courtesy of Karl Denninger at The Market Ticker
McLean, VA – Freddie Mac (NYSE: FRE) announced today that on or about September 1, 2010, the company will cease purchasing and securitizing interest only mortgages, including Freddie Mac Initial InterestSM fixed-rate and adjustable-rate mortgages. Additional information will be provided to Freddie Mac Seller/Servicers in an upcoming Single-Family Seller/Servicer Guide bulletin.
Interest only mortgages, including Freddie Mac Initial Interest mortgages, provide for interest-only payments for a specified period of time beginning with the first monthly payment after the note date, and principal and interest payments on a fully amortizing basis for the remainder of the mortgage term.
These "vehicles" are an outright scam for 99% of all borrowers. Their exclusive proper use is as a bridge loan.
Let me explain.
Let’s say you have a $500,000 house you wish to buy. An I/O loan for the first two years (for example) at approximately 3.5% (currently) would have an interest-only payment of $1,458.
But when the two years is over assuming the interest rate does not change you now have a 28 year amortizing loan and the payment jumps to $2,329.70 - an increase of about 60%.
This is damn near what you have with an "Option ARM", which is similarly explosive when it has an initial "teaser rate." For example, the same loan with a 2% "initial teaser" interest-only has an initial payment of $833.33, but jumps to the same $2,329.70 if it resets to 3.5% once the "teaser" is over.
Note that these ARM rates are very cheap too - if rates go up it gets worse - much worse. Indeed if the rate resets to a fixed 5% then the amortizing P&I on the remaining 28 year term is $2,756.38.
Good luck making that payment if you qualified on the "interest-only" term’s expense.
Freddie (and Fannie) had no business getting involved in these toxic self-immolation devices in the first place as they are intended to do exactly one thing - asset-strip the borrower by forcing him or her to come back after the interest-only period and refinancing.
In an environment where home prices are not advancing, however, such refinancing is of course impossible, which leads immediately to foreclosure.
The not-amusing part of this is that it was the market’s collapse that forced government supported enterprises to stop looting the American citizen.
Say thanks to the government - both past and present administrations - for conspiring with our banks to literally flense the American Citizen…
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Wall Street’s Bailout Hustle
by ilene - February 19th, 2010 10:15 am
Wall Street’s Bailout Hustle
Goldman Sachs and other big banks aren’t just pocketing the trillions we gave them to rescue the economy - they’re re-creating the conditions for another crash
By MATT TAIBBI
On January 21st, Lloyd Blankfein left a peculiar voicemail message on the work phones of his employees at Goldman Sachs. Fast becoming America’s pre-eminent Marvel Comics supervillain, the CEO used the call to deploy his secret weapon: a pair of giant, nuclear-powered testicles. In his message, Blankfein addressed his plan to pay out gigantic year-end bonuses amid widespread controversy over Goldman’s role in precipitating the global financial crisis.
The bank had already set aside a tidy $16.2 billion for salaries and bonuses — meaning that Goldman employees were each set to take home an average of $498,246, a number roughly commensurate with what they received during the bubble years. Still, the troops were worried: There were rumors that Dr. Ballsachs, bowing to political pressure, might be forced to scale the number back. After all, the country was broke, 14.8 million Americans were stranded on the unemployment line, and Barack Obama and the Democrats were trying to recover the populist high ground after their bitch-whipping in Massachusetts by calling for a "bailout tax" on banks. Maybe this wasn’t the right time for Goldman to be throwing its annual Roman bonus orgy.
Not to worry, Blankfein reassured employees. "In a year that proved to have no shortage of story lines," he said, "I believe very strongly that performance is the ultimate narrative."
Translation: We made a shitload of money last year because we’re so amazing at our jobs, so fuck all those people who want us to reduce our bonuses.
Goldman wasn’t alone. The nation’s six largest banks — all committed to this balls-out, I drink your milkshake! strategy of flagrantly gorging themselves as America goes hungry — set aside a whopping $140 billion for executive compensation last year, a sum only slightly less than the $164 billion they paid themselves in the pre-crash year of 2007. In a gesture of self-sacrifice, Blankfein himself took a humiliatingly low bonus of $9 million, less than the 2009 pay of elephantine New York Knicks washout Eddy Curry. But in reality, not much had changed. "What is the state of our moral being when Lloyd Blankfein taking a $9 million bonus is viewed as this great act of contrition, when every penny of it was a direct transfer from the taxpayer?"…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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