This morning, CNBC's morning program is still beating a loud drum regarding the sudden drop in equity prices on Thursday afternoon. To facilitate the process, they invited Pennsylvania Democrat Representative Paul Kanjorski to be a guest host. Kanjorski is a member of the House Financial Services Committee, thus, his attraction for CNBC. Talk about one hand washing the other......
It's ironic for CNBC to have Kanjorski guest host to discuss Thursday's alleged trading scandal, because Kanjorski is actually a scandal-tainted legislator, himself. I found this out due to an accident a month or so ago. At the time, I had written a post on one of my blogs involving Kanjorski. Reading through my Sitemeter details of visits, I found that one reader had found my post from a search for 'Kanjorski scandal.'
Sure enough, Kanjorski, a Representative since 1984, has a big earmarking scandal in his past apparently involving using millions of dollars of federal money to enrich his family. Wasn't Kanjorski's regionally-close, Pennsylvania Democratic House colleague John Murtha, also known for excessive, often self-serving earmarks, too? Must be something in the water up in Northeast Pennsylvania.
Anyway, knowing this makes Kanjorski's earnest-looking, solemn attitude regarding finding and punishing equity market traders and 'insiders' much more of a joke. After all, it seems Kanjorski is a veteran 'insider' himself.
But, back to the issue. Kanjorski has been spewing all manner of hot air this morning, no doubt to make ideal campaign sound bites and video clips. Particularly, he went to great lengths to extol the current financial market regulatory personnel as just the best "in 25 years." Really. Honestly.
No matter that a Democratic administration staffed those agencies. And Democratically-controlled committees are taking a 'hands off' approach with Mary Shapiro in the wake of the incident.
And, as I'm writing this, Kanjorski is lampooning voters who blame CRAs, Fannie and Freddie for causing much of the recent mortgage-backed financial meltdown. That, alone, should tell you that Kanjorski is living in an alternative universe where Congress has never done anything to damage our financial system.
By now, though, it's pretty clear what happened on Thursday. The NYSE used its human specialists to engage a trading slowdown. Claiming that a two minute pause in trading does not constitute 'stepping away' from the market, the NYSE chief and his colleagues and defenders all claim they were merely bringing 'order' to markets run amok from too much electronics.
When the NYSE's specialists essentially took a hike on selected equities, the order flow immediately went to the NASDAQ, which, because of the NYSE's absence, had to order match in a less-liquid market. With more sell orders than buy orders, the 'real,' instant market prices fell.
I really don't think what happened is much more complicated than that.
You can conjure up all manner of conspiracy theories, but, in reality, it does seem to be a case of the regulatory authorities allowing for one exchange to engage equity-specific trading halts, while allowing another exchange to trade through.
What do you think will happen in cases where this differential treatment of individual equities occurs? In down markets, prices will gap down. If Thursday had been an up day, prices would have been skipping up discontinuously, and buyers would have complained about missing bids and being filled at what they considered to be ridiculously high prices.
The truth is, the definition of a "market" involves several dimensions. No one buyer or seller can set prices. Prices must be continuous. Price discovery has to be ubiquitous.
If any of these tenets are violated, it's not a 'market' anymore. Therefore, 'market' orders aren't really going to have their desired effect.
Funny how it's become pretty obvious that the cause of Thursday's ultra-sharp sell-off is a regulatory mistake of keeping exchanges in step with each other. But, because it was a regulatory lapse, the party in power is looking elsewhere for someone to blame.
Tuesday, May 11, 2010
Monday, May 10, 2010
The ECB Bailout
The business media airwaves are still filled with arguments about the cause of the Thursday elevator-shaft ride of US equity markets late in the afternoon.
No real news there. This morning's CNBC "debate" with the usual regulatory suspects, including Ned Reilly, Elizabeth Nowicki and Jacob Frenkel, got nowhere. Ms. Nowicki was decidedly more informed and credible on this topic than the last one on which I saw her opine on CNBC.
Together, though, the various pundits shed no real new light on the existing gulf between the NYSE human, stock-specific 'circuit breakers,' and the NASDAQ's lack of human intervention. It doesn't take a genius to realize that if one exchange, with most of the liquidity, takes "breaks" at its own discretion, while other markets trade on, then discontinuities are going to occur. Nobody has yet provided justification for breaking those NASDAQ trades. And there are none. If you elected to trade during a market downdraft, you should get that for which you asked. The arbitrary trade-breaking after the fact is unconscionable. No matter that the NYSE, which caused the problem, is finger-pointing at the NASDAQ for breaking trades.
At this point, you can assail Congress and the SEC for allowing this situation to even occur.
But the real news is the spectacular rebound of the S&P, up to 1155 in pre-trading futures at 9:20, on the strength of the ECB bailout of the Euro and all the potential Eurozone countries requiring help.
The US equities market will no doubt open on an upward tear for the morning.
Of course, the longer term consequences of the ECB $1T bailout fund is much more sobering, and hardly cause for this bounce.
First, the ECB isn't the Fed. Europe's economy isn't the same as the US economy.
Just where is the value to be found underpinning this sudden materialization of one trillion Euros?
Sure, we hear that there will be Euro-quantitative easing, just like in the US in late 2008. Greek bonds are trading up and spreads are down.
Everyone feels that the bottom has been put in, once again, by a financial regulatory authority.
Hooray!
Where is all this money actually coming from? Is it real, or just a printed, time-shifted value play by sovereign governments, and their agents, to cover sovereign shortfalls for a few years?
By the way, in case you hadn't noticed, between the IMF and the Fed's own promise to join the party on quantitative easing, this means the US sovereign balance sheet, already stuffed with subprime mortgages and other financial toxic waste, is going to get some more.
Funny, weren't we just debating how overstretched the US balance sheet is? How much debt we'e created and excess money we've printed?
Maybe investor confidence has returned relative to last Thursday and Friday, which, together, accounted for a loss of 4.7% on the S&P.
Can it last?
Already this morning, before the open, many pundits were looking to today's close and warning of a false rally and more equity declines ahead.
No real news there. This morning's CNBC "debate" with the usual regulatory suspects, including Ned Reilly, Elizabeth Nowicki and Jacob Frenkel, got nowhere. Ms. Nowicki was decidedly more informed and credible on this topic than the last one on which I saw her opine on CNBC.
Together, though, the various pundits shed no real new light on the existing gulf between the NYSE human, stock-specific 'circuit breakers,' and the NASDAQ's lack of human intervention. It doesn't take a genius to realize that if one exchange, with most of the liquidity, takes "breaks" at its own discretion, while other markets trade on, then discontinuities are going to occur. Nobody has yet provided justification for breaking those NASDAQ trades. And there are none. If you elected to trade during a market downdraft, you should get that for which you asked. The arbitrary trade-breaking after the fact is unconscionable. No matter that the NYSE, which caused the problem, is finger-pointing at the NASDAQ for breaking trades.
At this point, you can assail Congress and the SEC for allowing this situation to even occur.
But the real news is the spectacular rebound of the S&P, up to 1155 in pre-trading futures at 9:20, on the strength of the ECB bailout of the Euro and all the potential Eurozone countries requiring help.
The US equities market will no doubt open on an upward tear for the morning.
Of course, the longer term consequences of the ECB $1T bailout fund is much more sobering, and hardly cause for this bounce.
First, the ECB isn't the Fed. Europe's economy isn't the same as the US economy.
Just where is the value to be found underpinning this sudden materialization of one trillion Euros?
Sure, we hear that there will be Euro-quantitative easing, just like in the US in late 2008. Greek bonds are trading up and spreads are down.
Everyone feels that the bottom has been put in, once again, by a financial regulatory authority.
Hooray!
Where is all this money actually coming from? Is it real, or just a printed, time-shifted value play by sovereign governments, and their agents, to cover sovereign shortfalls for a few years?
By the way, in case you hadn't noticed, between the IMF and the Fed's own promise to join the party on quantitative easing, this means the US sovereign balance sheet, already stuffed with subprime mortgages and other financial toxic waste, is going to get some more.
Funny, weren't we just debating how overstretched the US balance sheet is? How much debt we'e created and excess money we've printed?
Maybe investor confidence has returned relative to last Thursday and Friday, which, together, accounted for a loss of 4.7% on the S&P.
Can it last?
Already this morning, before the open, many pundits were looking to today's close and warning of a false rally and more equity declines ahead.
Friday, May 07, 2010
The NYSE vs. NASDAQ
Quite the interesting remote boxing match this morning on CNBC between the heads of the NYSE and NASDAQ.
Distilled to its essence, the mudslinging between the two chiefs consisted of Duncan Niederauer claiming that the "other exchange," i.e., NASDAQ, had insufficient liquidity to support market orders, while NASDAQ's Bob Greifield accused the NYSE's specialists of, once again, stepping away from filling orders for 90 seconds in an already-plunging market.
Who's right?
It matters, because the NYSE is voiding many trades which rewarded buyers at the very-low prices available once the NYSE's specialists abdicated their role.
Worse, as various pundits noted, many of the institutional buyers brave enough to step in at the bottom and buy, sold out before 4PM for nice gains. Now, they entered this morning short and had to cover.
Whether retail or institutional, investors don't need this sort of game being played. I'm not talking about the plunge in prices, but the arbitrary post-hoc decision to void selective trades. The most profitable, of course.
Funny how that worked, isn't it?
My feeling is that Niederauer's NYSE is the culprit here, not Greifield's NASDAQ. People want to trade, and often allow existing routing systems to "find" the best price. If the NYSE is effectively taking a break, those orders will go to the NASDAQ. If that means lower volume, and automated programs are stepping away lower with bids to buy as sell volume builds, so be it.
Whether it's 1987 or now, using a "market order" during a panic is an invitation to disaster. You have knowingly surrendered to uncontrollable market pricing forces.
If anything, this shows, again, for the zillionth time, that NYSE specialists will violate their duty and step away rather than do their job and provide market liquidity when it goes against them.
Distilled to its essence, the mudslinging between the two chiefs consisted of Duncan Niederauer claiming that the "other exchange," i.e., NASDAQ, had insufficient liquidity to support market orders, while NASDAQ's Bob Greifield accused the NYSE's specialists of, once again, stepping away from filling orders for 90 seconds in an already-plunging market.
Who's right?
It matters, because the NYSE is voiding many trades which rewarded buyers at the very-low prices available once the NYSE's specialists abdicated their role.
Worse, as various pundits noted, many of the institutional buyers brave enough to step in at the bottom and buy, sold out before 4PM for nice gains. Now, they entered this morning short and had to cover.
Whether retail or institutional, investors don't need this sort of game being played. I'm not talking about the plunge in prices, but the arbitrary post-hoc decision to void selective trades. The most profitable, of course.
Funny how that worked, isn't it?
My feeling is that Niederauer's NYSE is the culprit here, not Greifield's NASDAQ. People want to trade, and often allow existing routing systems to "find" the best price. If the NYSE is effectively taking a break, those orders will go to the NASDAQ. If that means lower volume, and automated programs are stepping away lower with bids to buy as sell volume builds, so be it.
Whether it's 1987 or now, using a "market order" during a panic is an invitation to disaster. You have knowingly surrendered to uncontrollable market pricing forces.
If anything, this shows, again, for the zillionth time, that NYSE specialists will violate their duty and step away rather than do their job and provide market liquidity when it goes against them.
Some Eye-Opening Data On Fannie Mae
On Wednesday, I wrote this post comparing Fannie Mae and Freddie Mac to the Second Bank of the United States of the early 1800s.
Yesterday, two sources provided some absolutely eye-opening numbers on Fannie.
On CNBC, a reporter noted that the last eleven quarters resulted in, I believe, a $30B loss, which was itself equivalent to the GSE's profit of the prior 30 years. The occasion of this report was yesterday's "earnings," meaning loss announcement by Fannie, of $8B for the first quarter of 2010.
The Wall Street Journal noted, in its lead staff editorial, that Fannie and Freddie were leveraged twice as highly as Bear Stearns.
The Journal piece also stated,
"By concealing how much they (Fannie and Freddie) were gambling on risky subprime and Alt-A mortgages, these companies sent bogus signals on the size of these markets and distorted decision-making throughout the system. Their implicit government guarantee also let them sell mortgage-backed securities around the world, attracting capital to U.S. housing and thus turbocharging the mania."
No private company could sustain this behavior. It would have been bankrupt several years ago, if it looked remotely like either GSE now does.
Of course, it's also evidence of what happens when a government-underwritten entity "competes" in the economy. It drives out all private sector competitors. In the case of mortgage conduits, no private conduit could remain in the broad, mid-market space occupied by the GSEs. Only the jumbo-loan high end could support private conduits, and they dried up in the mortgage meltdown.
As it now stands, Fannie and Freddie have lost $126.9B through the end of last year, and have no limit on the amount of losses we, the taxpayers, will subsidize going forward.
It's a stunning account of horrible management being propped up, and a money-losing strategy being bankrolled with no limit.
How can any economy prosper with business models like these funded in perpetuity?
Yesterday, two sources provided some absolutely eye-opening numbers on Fannie.
On CNBC, a reporter noted that the last eleven quarters resulted in, I believe, a $30B loss, which was itself equivalent to the GSE's profit of the prior 30 years. The occasion of this report was yesterday's "earnings," meaning loss announcement by Fannie, of $8B for the first quarter of 2010.
The Wall Street Journal noted, in its lead staff editorial, that Fannie and Freddie were leveraged twice as highly as Bear Stearns.
The Journal piece also stated,
"By concealing how much they (Fannie and Freddie) were gambling on risky subprime and Alt-A mortgages, these companies sent bogus signals on the size of these markets and distorted decision-making throughout the system. Their implicit government guarantee also let them sell mortgage-backed securities around the world, attracting capital to U.S. housing and thus turbocharging the mania."
No private company could sustain this behavior. It would have been bankrupt several years ago, if it looked remotely like either GSE now does.
Of course, it's also evidence of what happens when a government-underwritten entity "competes" in the economy. It drives out all private sector competitors. In the case of mortgage conduits, no private conduit could remain in the broad, mid-market space occupied by the GSEs. Only the jumbo-loan high end could support private conduits, and they dried up in the mortgage meltdown.
As it now stands, Fannie and Freddie have lost $126.9B through the end of last year, and have no limit on the amount of losses we, the taxpayers, will subsidize going forward.
It's a stunning account of horrible management being propped up, and a money-losing strategy being bankrolled with no limit.
How can any economy prosper with business models like these funded in perpetuity?
Thursday, May 06, 2010
Bear Stearns' James Cayne Declares He Was Innocent
I didn't see all of yesterday's FCIC hearings, but I did hear/see the beginning of former Bear Stearns Chairman James Cayne's testimony.
This morning, I read the Wall Street Journal's recap of his remarks. It makes for rather sad reading, as the article noted that not one of the defunct investment bank's five former executives admitted responsibility for the firm's demise.
According to the Journal, Cayne said,
"Bear Stearns's collapse was not the result of any actions or decisions unique to Bear Stearns. Instead, it was due to overwhelming market forces that Bear Stearns, as the smallest of the independent investment banks, could not resist."
So, after admitting that Bear's 42:1 leverage was "too high," Cayne never the less avoided and evaded taking any blame for knowing that, and allowing it.
Instead, he and his crew of former high-fliers at the firm blamed the market.
It reminds me of a lesson I learned years ago at Chase Manhattan Bank.
We were investigating, at the direction of our CEO, the productivity and profitability of the bank's securities trading business. This necessitated a few meetings with the unit's manager, an SVP. At the time, this was a fairly lofty and unassailable position at the bank.
My partner and I asked what were evidently off-putting and potentially embarrassing questions of the SVP in question, who, for this post, shall remain nameless.
In particular, when we examined the relationship between the unit's trading volumes, bonuses, profits and operations costs and requirements, it became clear what was going on. The unit required expensive facilities capacity from its IT group, but felt it should pay the lowest estimated IT costs in the industry for that type of trading.
When comparing volumes and profits, it was clear that the unit's traders and managers enjoyed outsized bonuses, but didn't take any serious losses in calm or unprofitable markets.
The SVP's response was, laughably, that in good markets, he and his traders added a lot of value but, when markets were bearish, well, that was not something they could control, so losses weren't their fault.
Sound familiar? It's like all of these large bank trading execs read the same business management manual full of aphorisms designed to let them share in gains but always avoid 'market-related losses.'
This is neither a new, nor surprising contention. It's just that Cayne's and his fellow former Bear Stearns executives' explicit statement of it is particularly nauseating, in light of events.
This morning, I read the Wall Street Journal's recap of his remarks. It makes for rather sad reading, as the article noted that not one of the defunct investment bank's five former executives admitted responsibility for the firm's demise.
According to the Journal, Cayne said,
"Bear Stearns's collapse was not the result of any actions or decisions unique to Bear Stearns. Instead, it was due to overwhelming market forces that Bear Stearns, as the smallest of the independent investment banks, could not resist."
So, after admitting that Bear's 42:1 leverage was "too high," Cayne never the less avoided and evaded taking any blame for knowing that, and allowing it.
Instead, he and his crew of former high-fliers at the firm blamed the market.
It reminds me of a lesson I learned years ago at Chase Manhattan Bank.
We were investigating, at the direction of our CEO, the productivity and profitability of the bank's securities trading business. This necessitated a few meetings with the unit's manager, an SVP. At the time, this was a fairly lofty and unassailable position at the bank.
My partner and I asked what were evidently off-putting and potentially embarrassing questions of the SVP in question, who, for this post, shall remain nameless.
In particular, when we examined the relationship between the unit's trading volumes, bonuses, profits and operations costs and requirements, it became clear what was going on. The unit required expensive facilities capacity from its IT group, but felt it should pay the lowest estimated IT costs in the industry for that type of trading.
When comparing volumes and profits, it was clear that the unit's traders and managers enjoyed outsized bonuses, but didn't take any serious losses in calm or unprofitable markets.
The SVP's response was, laughably, that in good markets, he and his traders added a lot of value but, when markets were bearish, well, that was not something they could control, so losses weren't their fault.
Sound familiar? It's like all of these large bank trading execs read the same business management manual full of aphorisms designed to let them share in gains but always avoid 'market-related losses.'
This is neither a new, nor surprising contention. It's just that Cayne's and his fellow former Bear Stearns executives' explicit statement of it is particularly nauseating, in light of events.
Berkshire's Burlington Northern Deal Finally Gets Scrutiny
Last November, I wrote this post concerning Berkshire Hathaway's offer to purchase Burlington Northern railroad.
Among my observations were these,
"First, because Berkshire already owned 22% of BNI, Buffett was able to secure a private screening of the recent board presentation. As an effective insider, then, Buffett had special knowledge that you or I don't about the company's recent and prospective performance.
I don't believe such knowledge made the ultimate difference in Buffett's offer, but it does show how and why Buffett can get deals you cannot. And won't be hauled into court, either, for doing them. Like, oh, say a Sri Lankan-born hedge fund manager?
It also explains why Buffett doesn't want competition in this bid. If he had approached the BNI management publicly, and/or with an investment bank, he may have had one or more hedge funds quickly raise the price through arbitrage.
But right now is a good time to buy. While liquidity is high, M&A activity hasn't re-ignited yet on a large scale. There probably isn't a single business competitor who is positioned to take BNI without anti-trust issues. And it would take some time for even a few private equity groups to collaborate on a bid for BNI. Plus, they tend to want quicker returns than Buffett will accept.
Again, here is where Buffett gets opportunities others do not. How many investors would sit still for being told that a $44B acquisition is carrying a 30% premium and may not pay off for a decade? Most would redeem at the next quarterly window."
Well, it seems I wasn't the only one who noticed this latent unfairness. The Wall Street Journal reported this morning that the SEC is looking into Berkshire's/Buffett's possible violation of "13D," a regulation governing how and when large shareholders must inform other shareholders of the former's "plans or proposals" to take control of the firm.
In the Burlington Northern case, one could argue that Buffett triggered that when he made his oral offer to buy the shares of the firm that Berkshire didn't already own.
The Journal goes on to note that this informal, quiet approach, which Buffett so often uses, tends to depress the acquisition prices he must pay for his targets.
Hmmm....sounds sort of, well, illegal and cronyistic, doesn't it? A large firm's wealthy, influential CEO being allowed liberties with SEC regulations that ordinary investors don't get?
The Journal piece notes that enforcement of 13D
" has long fallen into a gray area. Potential buyers are loath to disclose a potential deal, fearing that it could upset their ability to complete the transaction. The SEC, meanwhile, has shown only spotty attention to this area of the law over the years, say securities attorneys."
According to one attorney quoted in the Journal article,
"Once the large shareholder decides that it plans to make an offer, that is a material change. You have a duty to amend your 13D filing promptly. There is no real dispute on this."
This would, of course, have affected several of Buffett's prior deals, but, most significantly, the recent BNI caper.
It's no doubt wildly naive and optimistic to believe that Buffett will be vigorously pursued and charged in this matter. The guy has managed to so ingratiate himself with Congress and the current administration that it would be like sending your own grandfather to jail if Buffett were appropriately dealt with in this matter.
How's that for crony capitalism?
Among my observations were these,
"First, because Berkshire already owned 22% of BNI, Buffett was able to secure a private screening of the recent board presentation. As an effective insider, then, Buffett had special knowledge that you or I don't about the company's recent and prospective performance.
I don't believe such knowledge made the ultimate difference in Buffett's offer, but it does show how and why Buffett can get deals you cannot. And won't be hauled into court, either, for doing them. Like, oh, say a Sri Lankan-born hedge fund manager?
It also explains why Buffett doesn't want competition in this bid. If he had approached the BNI management publicly, and/or with an investment bank, he may have had one or more hedge funds quickly raise the price through arbitrage.
But right now is a good time to buy. While liquidity is high, M&A activity hasn't re-ignited yet on a large scale. There probably isn't a single business competitor who is positioned to take BNI without anti-trust issues. And it would take some time for even a few private equity groups to collaborate on a bid for BNI. Plus, they tend to want quicker returns than Buffett will accept.
Again, here is where Buffett gets opportunities others do not. How many investors would sit still for being told that a $44B acquisition is carrying a 30% premium and may not pay off for a decade? Most would redeem at the next quarterly window."
Well, it seems I wasn't the only one who noticed this latent unfairness. The Wall Street Journal reported this morning that the SEC is looking into Berkshire's/Buffett's possible violation of "13D," a regulation governing how and when large shareholders must inform other shareholders of the former's "plans or proposals" to take control of the firm.
In the Burlington Northern case, one could argue that Buffett triggered that when he made his oral offer to buy the shares of the firm that Berkshire didn't already own.
The Journal goes on to note that this informal, quiet approach, which Buffett so often uses, tends to depress the acquisition prices he must pay for his targets.
Hmmm....sounds sort of, well, illegal and cronyistic, doesn't it? A large firm's wealthy, influential CEO being allowed liberties with SEC regulations that ordinary investors don't get?
The Journal piece notes that enforcement of 13D
" has long fallen into a gray area. Potential buyers are loath to disclose a potential deal, fearing that it could upset their ability to complete the transaction. The SEC, meanwhile, has shown only spotty attention to this area of the law over the years, say securities attorneys."
According to one attorney quoted in the Journal article,
"Once the large shareholder decides that it plans to make an offer, that is a material change. You have a duty to amend your 13D filing promptly. There is no real dispute on this."
This would, of course, have affected several of Buffett's prior deals, but, most significantly, the recent BNI caper.
It's no doubt wildly naive and optimistic to believe that Buffett will be vigorously pursued and charged in this matter. The guy has managed to so ingratiate himself with Congress and the current administration that it would be like sending your own grandfather to jail if Buffett were appropriately dealt with in this matter.
How's that for crony capitalism?
Wednesday, May 05, 2010
Congress Remains Silent On The Modern Bank of The United States- Fannie & Freddie
Robert Wilmers, CEO of M&T Bank Corporation, wrote a hard-hitting editorial in yesterday's Wall Street Journal entitled, bluntly, "What About Fan and Fred Reform?"
In the past few weeks, much has occurred in Congress and the administration which smacks of trying to supercharge the rush to poorly-thought, badly-drafted finance so-called "reform."
The Dodd bill is, of course, quite far from real, effective reform. And that's if we actually believed that the Congressional panel formed to investigate the recent financial crisis had completed its job. And various pundits and officials had contributed credible, objective testimony, while meaningful, measurable criteria were advanced and adopted for assessing the US financial system's health and effectiveness.
Mr. Wilmers is the CEO of a rather quotidian commercial bank. It's not a former investment bank now reborn as a commercial bank. It's not a money center bank in New York.
Thus, Mr. Wilmers' observations have some credibility and a lack of obvious bias.
He wrote, at length, about how huge and problematic Congress has allowed the two GSEs to become,
"Congress may be making progress crafting new regulations for the financial-services industry, but it has yet to begin reforming two institutions that played a key role in the 2008 credit crisis—Fannie Mae and Freddie Mac.
We cannot reform these government-sponsored enterprises unless we fully confront the extent to which their outrageous behavior and reckless business practices have affected the entire commercial banking sector and the U.S. economy as a whole.
At the end of 2009, their total debt outstanding—either held directly on their balance sheets or as guarantees on mortgage securities they'd sold to investors—was $8.1 trillion. That compares to $7.8 trillion in total marketable debt outstanding for the entire U.S. government. The debt has the implicit guarantee of the federal government but is not reflected on the national balance sheet.
To date, the federal government has been forced to pump $126 billion into Fannie and Freddie. That's far more than AIG, which absorbed $70 billion of government largess, and General Motors and Chrysler, which shared $77 billion. Banks received $205 billion, of which $136 billion has been repaid.
Fannie and Freddie continue to operate deeply in the red, with no end in sight. The Congressional Budget Office estimated that if their operating costs and subsidies were included in our accounting of the overall federal deficit—as properly they should be—the 2009 deficit would be greater by $291 billion."
Does anyone seriously doubt that any attempt at effective regulatory change of this sector will fail without addressing- and fixing- Fannie and Freddie?
Then Mr. Wilmers concludes with this knockout blow,
"According to a 2004 Congressional Budget Office study, the two GSEs enjoyed $23 billion in subsidies in 2003—primarily in the form of lower borrowing costs and exemption from state and local taxation. But they passed on only $13 billion to home buyers. Nevertheless, one former Fannie Mae CEO, Franklin Raines, received $91 million in compensation from 1998 through 2003. In 2006, the top five Fannie Mae executives shared $34 million in compensation, while their counterparts at Freddie Mac shared $35 million. In 2009, even after the financial crash and as these two GSEs fell deeper into the red, the top five executives at Fannie Mae received $19 million in compensation and the CEO earned $6 million.
This is not private enterprise—it's crony capitalism, in which public subsidies are turned into private riches. From 2001 through 2006, Fannie and Freddie spent $123 million to lobby Congress—the second-highest lobbying total (after the U.S. Chamber of Commerce) in the country. That lobbying was complemented by sizable direct political contributions to members of Congress.
Changing this terrible situation will not be easy. The mortgage market has come to be structured around Fannie and Freddie and powerful interests are allied with the status quo. I recall a personal conversation with a member of Congress who, despite saying he understood my concerns about the two GSEs, admitted he would never push for significant change because "they've done so much for me, my colleagues and my staff." "
When I read these last three paragraphs, I was instantly reminded of President Andrew Jackson's campaign against Nicholas Biddle's Second Bank of the US. A quasi-governmental entity so entwined with the federal government's officials and Congress that the two could not wean themselves from the Bank.
Biddle contributed to many Congressional campaigns, calling to mind Wilmers' reference to his member of Congress friend.
The Second Bank of the US dominated politics for four years. Fannie and Freddie could do so, now. They are that powerful, corrupt, and entangled with the nation's financial troubles and system.
In the past few weeks, much has occurred in Congress and the administration which smacks of trying to supercharge the rush to poorly-thought, badly-drafted finance so-called "reform."
The Dodd bill is, of course, quite far from real, effective reform. And that's if we actually believed that the Congressional panel formed to investigate the recent financial crisis had completed its job. And various pundits and officials had contributed credible, objective testimony, while meaningful, measurable criteria were advanced and adopted for assessing the US financial system's health and effectiveness.
Mr. Wilmers is the CEO of a rather quotidian commercial bank. It's not a former investment bank now reborn as a commercial bank. It's not a money center bank in New York.
Thus, Mr. Wilmers' observations have some credibility and a lack of obvious bias.
He wrote, at length, about how huge and problematic Congress has allowed the two GSEs to become,
"Congress may be making progress crafting new regulations for the financial-services industry, but it has yet to begin reforming two institutions that played a key role in the 2008 credit crisis—Fannie Mae and Freddie Mac.
We cannot reform these government-sponsored enterprises unless we fully confront the extent to which their outrageous behavior and reckless business practices have affected the entire commercial banking sector and the U.S. economy as a whole.
At the end of 2009, their total debt outstanding—either held directly on their balance sheets or as guarantees on mortgage securities they'd sold to investors—was $8.1 trillion. That compares to $7.8 trillion in total marketable debt outstanding for the entire U.S. government. The debt has the implicit guarantee of the federal government but is not reflected on the national balance sheet.
To date, the federal government has been forced to pump $126 billion into Fannie and Freddie. That's far more than AIG, which absorbed $70 billion of government largess, and General Motors and Chrysler, which shared $77 billion. Banks received $205 billion, of which $136 billion has been repaid.
Fannie and Freddie continue to operate deeply in the red, with no end in sight. The Congressional Budget Office estimated that if their operating costs and subsidies were included in our accounting of the overall federal deficit—as properly they should be—the 2009 deficit would be greater by $291 billion."
Does anyone seriously doubt that any attempt at effective regulatory change of this sector will fail without addressing- and fixing- Fannie and Freddie?
Then Mr. Wilmers concludes with this knockout blow,
"According to a 2004 Congressional Budget Office study, the two GSEs enjoyed $23 billion in subsidies in 2003—primarily in the form of lower borrowing costs and exemption from state and local taxation. But they passed on only $13 billion to home buyers. Nevertheless, one former Fannie Mae CEO, Franklin Raines, received $91 million in compensation from 1998 through 2003. In 2006, the top five Fannie Mae executives shared $34 million in compensation, while their counterparts at Freddie Mac shared $35 million. In 2009, even after the financial crash and as these two GSEs fell deeper into the red, the top five executives at Fannie Mae received $19 million in compensation and the CEO earned $6 million.
This is not private enterprise—it's crony capitalism, in which public subsidies are turned into private riches. From 2001 through 2006, Fannie and Freddie spent $123 million to lobby Congress—the second-highest lobbying total (after the U.S. Chamber of Commerce) in the country. That lobbying was complemented by sizable direct political contributions to members of Congress.
Changing this terrible situation will not be easy. The mortgage market has come to be structured around Fannie and Freddie and powerful interests are allied with the status quo. I recall a personal conversation with a member of Congress who, despite saying he understood my concerns about the two GSEs, admitted he would never push for significant change because "they've done so much for me, my colleagues and my staff." "
When I read these last three paragraphs, I was instantly reminded of President Andrew Jackson's campaign against Nicholas Biddle's Second Bank of the US. A quasi-governmental entity so entwined with the federal government's officials and Congress that the two could not wean themselves from the Bank.
Biddle contributed to many Congressional campaigns, calling to mind Wilmers' reference to his member of Congress friend.
The Second Bank of the US dominated politics for four years. Fannie and Freddie could do so, now. They are that powerful, corrupt, and entangled with the nation's financial troubles and system.
Tuesday, May 04, 2010
Just What Is "Proprietary Trading" Anyway?
Much has been made recently of the belief that "proprietary trading" did not actually cause the demise of Bear Stearns or Lehman Brothers, and, thus, is of no consequence in the evolving FINREG bill.
I believe this is wrong. It takes too narrow a view of just what proprietary trading actually entails.
To me, proprietary trading may technically define or describe only those as-principal activities on an investment or commercial bank's trading desks which risk the firm's own capital.
However, the broader notion meant by people like Paul Volcker, in articulating his Volcker Rule is, I believe, that of the risking of a bank's capital on any underwriting, long term investments or high-frequency trading for its own account.
The key common element isn't the duration, which could rule out proprietary trading as the culprit of some now-defunct banks' woes, but, rather, the risking of the bank's own capital in market-valued instruments and activities.
When banks which do this are also in the business of taking insured deposits, then they are implicitly being backed by the FDIC and, ultimately, taxpayers.
Lehman was brought low, in part, by the poor quality of the commercial mortgage assets it chose to hold on its books. That was proprietary investment.
Bear Stearns was believed, by its commercial bank lenders, to have asset quality problems which made those overnight loans too risky.
Were the assets the result of trading, or underwriting, or investment? Doesn't really matter.
They were owned by the firm, and lost more value than there was equity to back them.
Trading...investment.....really, what's in a word, in this case? The time dimension isn't what is important when considering the reform of financial regulations and structure regarding a bank's risk exposure while also taking insured deposits.
The source of the risk capital is.
I believe this is wrong. It takes too narrow a view of just what proprietary trading actually entails.
To me, proprietary trading may technically define or describe only those as-principal activities on an investment or commercial bank's trading desks which risk the firm's own capital.
However, the broader notion meant by people like Paul Volcker, in articulating his Volcker Rule is, I believe, that of the risking of a bank's capital on any underwriting, long term investments or high-frequency trading for its own account.
The key common element isn't the duration, which could rule out proprietary trading as the culprit of some now-defunct banks' woes, but, rather, the risking of the bank's own capital in market-valued instruments and activities.
When banks which do this are also in the business of taking insured deposits, then they are implicitly being backed by the FDIC and, ultimately, taxpayers.
Lehman was brought low, in part, by the poor quality of the commercial mortgage assets it chose to hold on its books. That was proprietary investment.
Bear Stearns was believed, by its commercial bank lenders, to have asset quality problems which made those overnight loans too risky.
Were the assets the result of trading, or underwriting, or investment? Doesn't really matter.
They were owned by the firm, and lost more value than there was equity to back them.
Trading...investment.....really, what's in a word, in this case? The time dimension isn't what is important when considering the reform of financial regulations and structure regarding a bank's risk exposure while also taking insured deposits.
The source of the risk capital is.
Monday, May 03, 2010
The Demonization Of Goldman Sachs & The Profit Motive
One of the apparent casualties of last week's unprincipled bullying of Goldman Sachs personnel by a handful of Senators was the legitimacy of the profit motive in trading and investment banking.
Once you wade through the political posturing of the Senators, and their general inability to understand that which they excoriated, you are left with a Congressional disposition against professional investors in the capital markets making money by risking capital on positions over any timeframe.
To my recollection, nobody ever believed Salomon Brothers' original CMO activities, arranged between professional investors, were altruistic. Salomon was a hard-charging, take-no-prisoners investment bank. Nobody who traded with them as a principal, or bought their underwritings, thought the fixed-income titan was doing them a favor.
Simply put, trading with investment banks isn't a sport and it's not for naive or non-professional investors. And by "trading," I mean buying from an investment bank for the purpose of holding the security.
Every professional investor, including investment committees of unions and such, knows, or should know, that no investment bank underwrites or trades securities as a principal solely for the investor's benefit. The banks do these activities to make money. So that means they expect what they sell to fall in price, or rise less than what they buy, and what they buy to rise in price, or fall less than what they sell.
What is so hard to understand about this?
Unlike selling food, cars, or vacuum cleaners, the buying and selling of securities involves making judgements on the future performance of said securities. You buy food to eat. You buy securities as a store of value.
Thus, by definition, the seller of that store of value, if it is an investment bank acting for its own account, is implicitly telling you they have better options for their own money than holding that which they sell to you.
If the Abacus deal and subsequent witch hunts into Goldman Sachs' behavior by the SEC and Justice Department demonize the business of trading, as principals, by investment banks, we have a major disconnect between our elected and appointed dummies in Washington and the realities of capital markets.
Once you wade through the political posturing of the Senators, and their general inability to understand that which they excoriated, you are left with a Congressional disposition against professional investors in the capital markets making money by risking capital on positions over any timeframe.
To my recollection, nobody ever believed Salomon Brothers' original CMO activities, arranged between professional investors, were altruistic. Salomon was a hard-charging, take-no-prisoners investment bank. Nobody who traded with them as a principal, or bought their underwritings, thought the fixed-income titan was doing them a favor.
Simply put, trading with investment banks isn't a sport and it's not for naive or non-professional investors. And by "trading," I mean buying from an investment bank for the purpose of holding the security.
Every professional investor, including investment committees of unions and such, knows, or should know, that no investment bank underwrites or trades securities as a principal solely for the investor's benefit. The banks do these activities to make money. So that means they expect what they sell to fall in price, or rise less than what they buy, and what they buy to rise in price, or fall less than what they sell.
What is so hard to understand about this?
Unlike selling food, cars, or vacuum cleaners, the buying and selling of securities involves making judgements on the future performance of said securities. You buy food to eat. You buy securities as a store of value.
Thus, by definition, the seller of that store of value, if it is an investment bank acting for its own account, is implicitly telling you they have better options for their own money than holding that which they sell to you.
If the Abacus deal and subsequent witch hunts into Goldman Sachs' behavior by the SEC and Justice Department demonize the business of trading, as principals, by investment banks, we have a major disconnect between our elected and appointed dummies in Washington and the realities of capital markets.
Warren Buffett Dances Around Conflict of Interest Questions On CNBC This Morning
I've been watching/listening to Warren Buffett on CNBC this morning. It's pretty sickening to watch the network's anchors venerate Buffett and treat him with kid gloves, while he does his grandfatherly chortling act.
Nauseating. It's just nauseating and disgusting what major business media lets this guy get away with.
This weekend, of course, was the Berkshire Hathaway annual meeting. As usual, CNBC and the Wall Street Journal covered it as the carnival it has become, with Buffett as the center of all adulation and worship.
This morning, in one of her annual personal interviews with Buffett, Becky Quick managed to at least ask Buffett if backing Goldman, as he so strongly has, is not "talking his book?"
In response, Warren employed his now-famous 'as shucks' guffaw, and only said, to paraphrase,
'I'm answering because you asked me a question.'
In effect, actually ducking the key question.
Quick, of course, declined to pursue with a tougher follow up, and let Warren skate away looking magisterial as well as simple.
The truth is, of course, that Buffett was talking his book.
The Wall Street Journal article discussing Buffett's sudden interest in derivatives regulation and defense of Goldman only noted that "to an extent" Buffett could be expected to protect his investment.
My God!
Can't even the Journal just come out and say Buffett is stumping for his investments by backing Goldman Sachs and Lloyd Blankfein to the hilt? After all, if I'm not mistaken, Buffett got warrants along with a nice coupon rate on that big loan to Goldman.
When CNBC's Joe Kernen asked Buffett if the Senate crucifixion of Goldman Sachs' personnel this past week wasn't over the top, Buffett let loose with "the chuckle," then went on to 'aw shucks they're only bein' Senators, by gum' it past any serious remarks about the unseemly spectacle.
Why?
Well, that FINREG bill isn't finished yet. Buffett isn't about to enrage all those powerful Democratic Senators who could cost Berkshire so much money in constantly-marked-to-market derivatives. So Buffett is staying the hell away from any criticism of Congress. Or the administration, for that matter.
Then there was Buffett's defense, both in the Journal and on CNBC, again, this morning, of the Moodys and S&P ratings agencies. A blind man could see these firms were atrociously derelict in the execution of their Congressionally-granted franchise. Possibly even fraudulent, as they rated some mortgage-backed issues AAA way too early, in light of subsequent performance.
Why Buffett is defending these firms is harder to understand. Perhaps it's because he is worried that, if the ratings agencies are seriously impacted by regulation changes, a lot else in Buffett's world could change- and for the worse.
Honestly, it's sickening to see all the major business media treat Buffett like this. They all want access and advertising, so nobody will call Buffett on his double standards, special treatment, use of the country boy image to deflect hard, meaningful, potentially damaging questions.
Isn't anyone ever going to expose this guy for gaming the system while getting away with actions which would get others hauled before Congress?
Nauseating. It's just nauseating and disgusting what major business media lets this guy get away with.
This weekend, of course, was the Berkshire Hathaway annual meeting. As usual, CNBC and the Wall Street Journal covered it as the carnival it has become, with Buffett as the center of all adulation and worship.
This morning, in one of her annual personal interviews with Buffett, Becky Quick managed to at least ask Buffett if backing Goldman, as he so strongly has, is not "talking his book?"
In response, Warren employed his now-famous 'as shucks' guffaw, and only said, to paraphrase,
'I'm answering because you asked me a question.'
In effect, actually ducking the key question.
Quick, of course, declined to pursue with a tougher follow up, and let Warren skate away looking magisterial as well as simple.
The truth is, of course, that Buffett was talking his book.
The Wall Street Journal article discussing Buffett's sudden interest in derivatives regulation and defense of Goldman only noted that "to an extent" Buffett could be expected to protect his investment.
My God!
Can't even the Journal just come out and say Buffett is stumping for his investments by backing Goldman Sachs and Lloyd Blankfein to the hilt? After all, if I'm not mistaken, Buffett got warrants along with a nice coupon rate on that big loan to Goldman.
When CNBC's Joe Kernen asked Buffett if the Senate crucifixion of Goldman Sachs' personnel this past week wasn't over the top, Buffett let loose with "the chuckle," then went on to 'aw shucks they're only bein' Senators, by gum' it past any serious remarks about the unseemly spectacle.
Why?
Well, that FINREG bill isn't finished yet. Buffett isn't about to enrage all those powerful Democratic Senators who could cost Berkshire so much money in constantly-marked-to-market derivatives. So Buffett is staying the hell away from any criticism of Congress. Or the administration, for that matter.
Then there was Buffett's defense, both in the Journal and on CNBC, again, this morning, of the Moodys and S&P ratings agencies. A blind man could see these firms were atrociously derelict in the execution of their Congressionally-granted franchise. Possibly even fraudulent, as they rated some mortgage-backed issues AAA way too early, in light of subsequent performance.
Why Buffett is defending these firms is harder to understand. Perhaps it's because he is worried that, if the ratings agencies are seriously impacted by regulation changes, a lot else in Buffett's world could change- and for the worse.
Honestly, it's sickening to see all the major business media treat Buffett like this. They all want access and advertising, so nobody will call Buffett on his double standards, special treatment, use of the country boy image to deflect hard, meaningful, potentially damaging questions.
Isn't anyone ever going to expose this guy for gaming the system while getting away with actions which would get others hauled before Congress?
Friday, April 30, 2010
About Those Basel Accords & The Financial Crisis
George Melloan, a former Wall Street Journal columnist and editor, wrote a thought-provoking editorial in last weekend's edition of the paper.
Entitled "The Lesson of Basel's Bean Counters," Melloan's piece is a timely reminder that Basel's various accords afforded exactly zero systemic protection in the event of the actual financial dislocations of the past several years.
Melloan points out that Japanese banks, well-capitalized by Basel standards in 1990, never the less led the Japanese financial sector and economic collapse.
Lehman Brothers, he notes, had "close to triple the core capital required by the Basel standards when it crashed."
Mr. Melloan ends his piece with these passages,
"An assessment of Basel III is provided on the Web site of a London based organization called the Asymmetric Threats Contingency Alliance (ATCA), which came into being in 2001 to promote online discussion of global issues. It concludes, quite plausibly, that "Despite promises that regulators will be vigilant and central bankers more watchful, banks are certain to get into trouble again, as they always have throughout history. The way to protect taxpayers, the Basel III argument goes, is to compel banks to have buffers thick enough to withstand higher losses and longer periods of extreme volatility in financial markets before they call for government intervention."
As the ATCA paper notes, in the days before banks could rely on governments to save them they carried large capital buffers, with core capital sometimes as much as 15% to 25% of assets, as opposed to as little as 2% under current rule. Of course, that made banking more expensive, and bankers were choosier about risks than in today's world, where the U.S. government has chosen to treat some banks as worthy of taxpayer help because they are "too big to fail."
One thing seems certain, the promise of bailouts and better regulation is unlikely to restore better risk judgment to the profession of banking. The opposite is more likely."
Perhaps, before the US Senate and House pass FINREG, or anything like it, with its 1,336 current pages, cooler, wiser heads should consider Melloan's points. Even the decades-long Basel I, II and III accords have been unable to prevent a near-total, global financial meltdown.
If you were to ask me, I'd say less regulation and higher core capital levels on the order of 20% would do a great deal more to avoid, or mitigate, the next, inevitable financial crisis.
Sure, this will make banks less 'hot' in the sense of total return growth. But, in reality, banking has never been the kind of business which lends itself- pun intended- to the sorts of total return performances over time of an Apple, Google or even Home Depot.
Banking is a derivative business. It facilitates societal transaction, wealth transfers and accumulations. But it doesn't exist as and for itself.
I'm not sure banks should ever have become publicly-listed and -traded equities. But, having become so, they really should function and perform more like energy utilities, less like high-flying growth companies.
Entitled "The Lesson of Basel's Bean Counters," Melloan's piece is a timely reminder that Basel's various accords afforded exactly zero systemic protection in the event of the actual financial dislocations of the past several years.
Melloan points out that Japanese banks, well-capitalized by Basel standards in 1990, never the less led the Japanese financial sector and economic collapse.
Lehman Brothers, he notes, had "close to triple the core capital required by the Basel standards when it crashed."
Mr. Melloan ends his piece with these passages,
"An assessment of Basel III is provided on the Web site of a London based organization called the Asymmetric Threats Contingency Alliance (ATCA), which came into being in 2001 to promote online discussion of global issues. It concludes, quite plausibly, that "Despite promises that regulators will be vigilant and central bankers more watchful, banks are certain to get into trouble again, as they always have throughout history. The way to protect taxpayers, the Basel III argument goes, is to compel banks to have buffers thick enough to withstand higher losses and longer periods of extreme volatility in financial markets before they call for government intervention."
As the ATCA paper notes, in the days before banks could rely on governments to save them they carried large capital buffers, with core capital sometimes as much as 15% to 25% of assets, as opposed to as little as 2% under current rule. Of course, that made banking more expensive, and bankers were choosier about risks than in today's world, where the U.S. government has chosen to treat some banks as worthy of taxpayer help because they are "too big to fail."
One thing seems certain, the promise of bailouts and better regulation is unlikely to restore better risk judgment to the profession of banking. The opposite is more likely."
Perhaps, before the US Senate and House pass FINREG, or anything like it, with its 1,336 current pages, cooler, wiser heads should consider Melloan's points. Even the decades-long Basel I, II and III accords have been unable to prevent a near-total, global financial meltdown.
If you were to ask me, I'd say less regulation and higher core capital levels on the order of 20% would do a great deal more to avoid, or mitigate, the next, inevitable financial crisis.
Sure, this will make banks less 'hot' in the sense of total return growth. But, in reality, banking has never been the kind of business which lends itself- pun intended- to the sorts of total return performances over time of an Apple, Google or even Home Depot.
Banking is a derivative business. It facilitates societal transaction, wealth transfers and accumulations. But it doesn't exist as and for itself.
I'm not sure banks should ever have become publicly-listed and -traded equities. But, having become so, they really should function and perform more like energy utilities, less like high-flying growth companies.
Criminalizing Financial Sector Mortgage Finance-Related Activities of The Housing Boom
I happened to see a replay of CNBC's 2009 documentary House of Cards which aired last night. I first wrote posts about it last February, here and here. For fun, before writing the rest of this post, with my impressions from the program, post-Goldman Senate lynching, I am rereading my year-ago reactions to the excellent program.
After the re-read of the two prior posts, I can't say that I feel differently from last winter concerning House of Cards.
However, with the recent Senate star chamber event involving Goldman Sachs fresh in my mind, there are additional insights from viewing the CNBC documentary of the housing finance-led financial sector meltdown.
The first involves the obvious absence of regulators from the scene, as David Faber discovered in his on camera interviews. No federal watchdogs attempted to shut down Alt-A, a/k/a "liar loans," from being originated in the first place. No federal banking supervisors nor SEC personnel attempted to stop the firm which David Francis, a now self-employed mortgage banking consultant, back then a mid-level executive in the mortgage-backed security business, and his ilk from churning out CDOs backed by low-quality mortgages.
With so much hoopla over the FINREG bill, it's instructive to see, in the far-from-perfect, but fairly broad documentary, that the same agencies and people to whom sweeping new powers will be given failed miserably in the past decade to exercise their already considerable authority over the nation's financial system.
The CNBC documentary never went near the sins of Congress for mandating Fannie Mae and Freddie Mac to buy and securitize low-quality mortgages. Current NY AG, and odds-on favorite for the state's next governor, Andrew Cuomo, was culpable in this regard, during the Clinton years, as are several members of Congress- Barney Frank, Chris Dodd and Kent Conrad. The CNBC program, ever mindful of the parent network's need to remain on a friendly basis with these politicians, not to mention the parent company, GE's, being a convenient bedfellow of the administration, never dared to explore those governmental and quasi-governmental institutions which got the ball rolling.
The closest they came was in unedited footage of Alan Greenspan musing on what would have occurred, had he tried to pop the growing real estate bubble. I wrote of this in one of the two earlier posts, so I won't repeat it in this one.
What I found myself wondering aloud as I watched the bulk of the program was why, with all this on-air footage as evidence, the SEC and/or other governmental entities didn't pursue any of these other companies, as they have Goldman Sachs.
Specifically, many of the practices highlighted in the program occurred in dealing with mortgage borrowers, not professional investors. Why didn't the Senate choose to expose these people and institutions? Why not subpoena the CNBC documentary's producer, writers, researchers, etc.?
Another major reaction, different than last year's, was to Alan Greenspan's program-ending interview. In those closing moments, Greenspan responded to Faber's question regarding the need for new regulations and laws to prevent a repeat of the crisis.
Greenspan smiles and manages to stifle a laugh. However, he turns deadly serious when he utters words to the effect of either, 'good luck trying,' or 'don't bet on it,' when Faber asks, incredulously, again, if Greenspan really thinks better regulation wouldn't prevent a repeat?
Greenspan then assures Faber that, no matter what governmental actions are taken, a similar event will recur. Not in 10 years, but sometime in the future. Greenspan opines, quite serenely, that it's a function of greed, and is simply unstoppable when it gets going. See, again, my comments in one of last year's posts describing Greenspan explaining that, as Fed chairman, he would have been, actually was, intimidated by Congress into holding the regulatory reins loose during the housing bubble. This has largely been forgotten as Greenspan has been pilloried by Congress. But, back then, he confides, he knew the limits of his ability to intervene, lest Congress, with its populist bent, threaten him with a loss of Fed independence, should he attempt to stop the stampede to finance houses for lower-income Americans.
The House of Cards documentary billed itself as "the definitive" account of the mortgage-related economic crisis. But that's not at all true. It completely omitted any treatment of Clinton's HUD Secretary, Andrew Cuomo, Fannie Mae and its then-head, Franklin Raines, or Freddie Mac. All played key parts in starting the mess. And Congress urged them on.
Finally, the documentary showcased Kyle Bass as a sort of hero for doing his own homework in discovering the unbelievable bases on which rating agencies were classifying CDOs as AAA. Bass shared his concerns with the agencies and at least one investment bank, the now-defunct Bear Stearns.
Ironically, having aired in February of 2009, the now-famous hedge fund manager, John Paulson, wasn't even mentioned. Nobody knew who he was.
So much for the SEC's and Senate's focus on Abacus, ACA and Paulson. He wasn't even a public figure 15 months ago.
As for Kyle Bass, he was portrayed as diligent, honest and ethical for betting against fraud. His fund's 600% return wasn't met with horror or charges of unethical practices or poor sportsmanship for betting against the American dream or the economy.
Now, John Paulson is so reviled.
Where's the fairness in that?
If anything, viewing House of Cards now shows both how much it exposed, and how much it kept hidden, about the housing finance mess that exploded into a global financial crisis.
Today, over two years after Bear Stearns' demise, and nearly three years after the collapse of its two mortgage-backed securities-related hedge funds, we still have no complete, honest and objective account of how and where the housing finance-related financial debacle actually originated, grew and unfolded.
Only its end seems to be obvious, and that still isn't really well-understood.
After the re-read of the two prior posts, I can't say that I feel differently from last winter concerning House of Cards.
However, with the recent Senate star chamber event involving Goldman Sachs fresh in my mind, there are additional insights from viewing the CNBC documentary of the housing finance-led financial sector meltdown.
The first involves the obvious absence of regulators from the scene, as David Faber discovered in his on camera interviews. No federal watchdogs attempted to shut down Alt-A, a/k/a "liar loans," from being originated in the first place. No federal banking supervisors nor SEC personnel attempted to stop the firm which David Francis, a now self-employed mortgage banking consultant, back then a mid-level executive in the mortgage-backed security business, and his ilk from churning out CDOs backed by low-quality mortgages.
With so much hoopla over the FINREG bill, it's instructive to see, in the far-from-perfect, but fairly broad documentary, that the same agencies and people to whom sweeping new powers will be given failed miserably in the past decade to exercise their already considerable authority over the nation's financial system.
The CNBC documentary never went near the sins of Congress for mandating Fannie Mae and Freddie Mac to buy and securitize low-quality mortgages. Current NY AG, and odds-on favorite for the state's next governor, Andrew Cuomo, was culpable in this regard, during the Clinton years, as are several members of Congress- Barney Frank, Chris Dodd and Kent Conrad. The CNBC program, ever mindful of the parent network's need to remain on a friendly basis with these politicians, not to mention the parent company, GE's, being a convenient bedfellow of the administration, never dared to explore those governmental and quasi-governmental institutions which got the ball rolling.
The closest they came was in unedited footage of Alan Greenspan musing on what would have occurred, had he tried to pop the growing real estate bubble. I wrote of this in one of the two earlier posts, so I won't repeat it in this one.
What I found myself wondering aloud as I watched the bulk of the program was why, with all this on-air footage as evidence, the SEC and/or other governmental entities didn't pursue any of these other companies, as they have Goldman Sachs.
Specifically, many of the practices highlighted in the program occurred in dealing with mortgage borrowers, not professional investors. Why didn't the Senate choose to expose these people and institutions? Why not subpoena the CNBC documentary's producer, writers, researchers, etc.?
Another major reaction, different than last year's, was to Alan Greenspan's program-ending interview. In those closing moments, Greenspan responded to Faber's question regarding the need for new regulations and laws to prevent a repeat of the crisis.
Greenspan smiles and manages to stifle a laugh. However, he turns deadly serious when he utters words to the effect of either, 'good luck trying,' or 'don't bet on it,' when Faber asks, incredulously, again, if Greenspan really thinks better regulation wouldn't prevent a repeat?
Greenspan then assures Faber that, no matter what governmental actions are taken, a similar event will recur. Not in 10 years, but sometime in the future. Greenspan opines, quite serenely, that it's a function of greed, and is simply unstoppable when it gets going. See, again, my comments in one of last year's posts describing Greenspan explaining that, as Fed chairman, he would have been, actually was, intimidated by Congress into holding the regulatory reins loose during the housing bubble. This has largely been forgotten as Greenspan has been pilloried by Congress. But, back then, he confides, he knew the limits of his ability to intervene, lest Congress, with its populist bent, threaten him with a loss of Fed independence, should he attempt to stop the stampede to finance houses for lower-income Americans.
The House of Cards documentary billed itself as "the definitive" account of the mortgage-related economic crisis. But that's not at all true. It completely omitted any treatment of Clinton's HUD Secretary, Andrew Cuomo, Fannie Mae and its then-head, Franklin Raines, or Freddie Mac. All played key parts in starting the mess. And Congress urged them on.
Finally, the documentary showcased Kyle Bass as a sort of hero for doing his own homework in discovering the unbelievable bases on which rating agencies were classifying CDOs as AAA. Bass shared his concerns with the agencies and at least one investment bank, the now-defunct Bear Stearns.
Ironically, having aired in February of 2009, the now-famous hedge fund manager, John Paulson, wasn't even mentioned. Nobody knew who he was.
So much for the SEC's and Senate's focus on Abacus, ACA and Paulson. He wasn't even a public figure 15 months ago.
As for Kyle Bass, he was portrayed as diligent, honest and ethical for betting against fraud. His fund's 600% return wasn't met with horror or charges of unethical practices or poor sportsmanship for betting against the American dream or the economy.
Now, John Paulson is so reviled.
Where's the fairness in that?
If anything, viewing House of Cards now shows both how much it exposed, and how much it kept hidden, about the housing finance mess that exploded into a global financial crisis.
Today, over two years after Bear Stearns' demise, and nearly three years after the collapse of its two mortgage-backed securities-related hedge funds, we still have no complete, honest and objective account of how and where the housing finance-related financial debacle actually originated, grew and unfolded.
Only its end seems to be obvious, and that still isn't really well-understood.
Thursday, April 29, 2010
Tuesday's Senate Hearings On Goldman Sachs
Tuesday's post, written midday, didn't take into account the later appearances of Goldman Sachs' CFO, as well as its CEO, Lloyd Blankfein.
By now, some of the shock of the day-long hearings featuring former and current Goldman Sachs employees of varying degrees of seniority has worn off. For me, several things seem clear through the calmer hindsight of the Senate hearings.
First, the Goldman employees were very well coached and, being very intelligent, did an amazing job of both carefully responding to over-reaching, deliberately entrapping questions, plus a few of them actually adapted to the questions over time, becoming increasingly more adroit at finding ways to make positive statements either about Goldman's role or actions, or the process of the securities markets in which the actions took place.
Second, the Senators themselves behaved differently toward more senior Goldman officials. By the time Blankfein appeared, well into the evening, after markets had closed, Senators were going out of their way to give him the benefit of the doubt in answering their questions. Nobody bullied nor attacked Blankfein the way they had lower-level employees, such as Swenson, Sparks and Birnbaum, earlier that day.
Third, the entire context and process of such a Congressional investigation sub-committee hearing should give any business person pause about doing other than relying on fifth amendment protections when appearing, as ordered.
For example, Carl Levin used a particularly obnoxious tactic. He would ask a heavily-contexted, detailed question about a single exhibit from a book literally several inches thick which had been provided to each Goldman witness. When any, which is to say, all, of the Goldman employees would either take time to verify the proper exhibit, or ask a clarifying question, Levin would explode with anger, declaring that the witness was either simply wasting time, in order to 'run out the clock,' or deliberately avoiding giving a direct response.
Never mind that Levin would often ask questions, the answers to which were simply not within the capability of the witnesses to answer with known veracity. Knowing they were under oath, and that their testimony could be used in civil and criminal legal actions, each Goldman witness had to allow themselves to become whipping boys and appear guilty of whatever behavior of which a Senator decided to accuse them. Most Senators would end their question time with a non sequitor, constituent-oriented summary statement which typically accused Goldman's actions of rendering 'millions' of either US residents or their constituents homeless, penniless and jobless.
Fannie Mae and Freddie Mac were never, of course, mentioned by any Senator of either party, at least while I watched.
The very nature of these investigations leaves business people looking guilty of something, if only attempting to be profitable during whatever crisis may have been occurring. It's a near-perfect coincidence of defenseless business witnesses and omnipotent politicians who control the agenda. There is simply no way any witness from a business which Congress has decided to crucify is going to be able to leave an impression of innocence in that venue.
Finally, despite all the posturing, biased and wrongly-framed questions, and other tricks calculated to make Senators look serious and concerned, even crusading for 'the truth,' and Goldman and its employees look guilty of something, if not clearly anything actually illegal, a few things did become clear.
First, despite Blankfein's insistence that the firm went public reluctantly, and only to remain competitive, much of the root of Goldman's current predicament stems from its going public, then skating to the edge of solvency, and, then, falling upon the Fed to allow it to become a chartered commercial bank, and taking TARP funds.
Much of what transpired Tuesday would have been unremarkable had Goldman been either, or both, a privately-owned investment bank and had not taken TARP funds.
In discussions with a colleague yesterday, I noted that Blackstone did not need a TARP-funded bailout.
I suspect much of Goldman's conflicts of interest, due to their proprietary activities, will not be avoidable without the firm splitting itself into pieces, so that underwriting and proprietary activities aren't co-domiciled. That said, there will always be sophisticated counterparties and even underwriting clients who don't have problems with Goldman's internal conflicts of interest. Those firms are capable of making their own decisions regarding risks and positions with respect to all manner of asset classes.
Rather, it is most likely a large group of less-sophisticated clients, including, perhaps, many state and municipal entities, which will now shy away from Goldman Sachs.
In any case, Goldman has not just a public relations problem to manage, but a real problem of conflicts to manage. Not conflicts among clients who may be competitors, both of whom for which Goldman Sachs wants to do underwriting or advisory work.
No, the conflict is that, on one hand, Goldman may represent the firms to the market, underwriting their securities, while, in proprietary activities, explicitly selling the same securities which another part of the firm is soliciting the firm's clients to purchase.
There's no way even Lloyd Blankfein can convince most of America that this is a viable combination. He can talk until he's blue in the face about how clients wish to purchase risk and take positions opposite those of Goldman. But that won't convince most people that Goldman's mix of businesses puts it in a position to, quite often, sell from its own account, because of a belief that the value of an instrument has peaked, that which it is, elsewhere, convincing its clients to purchase and hold.
The Senators' grilling of the various Goldman employees may well be the most extreme example of hard questions regarding Goldman's actions. They may have been over the top, poorly-framed, asked from positions of near-total lack of understanding of the businesses involved.
But the questions did raise discomforting issues for Goldman. Being exposed for selling securities which were thought, internally, to be of poor quality, just looks very bad, and is hard to explain.
Clearly, per yesterday's lead staff editorial in the Wall Street Journal, regulatory 'reform' can't seriously require underwriters or brokers of securities to guarantee that the value of those securities will rise.
But it's hard to see how such reform won't, and probably shouldn't, attempt to force underwriters to disclose opinions about the quality of the securities. Perhaps requiring all underwriters to hold some minimal percentage of the securities for a specified amount of time.
In the final analysis, Goldman Sachs brought the SEC suit and Senate investigation upon itself as a result of having run into the arms of the government for help in 2008. Having made that pact with the devil, it is now having to pay the price.
Perhaps, in retrospect, Goldman would have been better off filing for bankruptcy, as it faced imminent insolvency when credit lines would have been curtailed, in order to have had time to reorganize, restructure funding, and emerge in a better-financed condition.
There's no denying that the firm is now paying for its poor judgement in asking the federal government to rescue it when it was on the edge of collapse.
By now, some of the shock of the day-long hearings featuring former and current Goldman Sachs employees of varying degrees of seniority has worn off. For me, several things seem clear through the calmer hindsight of the Senate hearings.
First, the Goldman employees were very well coached and, being very intelligent, did an amazing job of both carefully responding to over-reaching, deliberately entrapping questions, plus a few of them actually adapted to the questions over time, becoming increasingly more adroit at finding ways to make positive statements either about Goldman's role or actions, or the process of the securities markets in which the actions took place.
Second, the Senators themselves behaved differently toward more senior Goldman officials. By the time Blankfein appeared, well into the evening, after markets had closed, Senators were going out of their way to give him the benefit of the doubt in answering their questions. Nobody bullied nor attacked Blankfein the way they had lower-level employees, such as Swenson, Sparks and Birnbaum, earlier that day.
Third, the entire context and process of such a Congressional investigation sub-committee hearing should give any business person pause about doing other than relying on fifth amendment protections when appearing, as ordered.
For example, Carl Levin used a particularly obnoxious tactic. He would ask a heavily-contexted, detailed question about a single exhibit from a book literally several inches thick which had been provided to each Goldman witness. When any, which is to say, all, of the Goldman employees would either take time to verify the proper exhibit, or ask a clarifying question, Levin would explode with anger, declaring that the witness was either simply wasting time, in order to 'run out the clock,' or deliberately avoiding giving a direct response.
Never mind that Levin would often ask questions, the answers to which were simply not within the capability of the witnesses to answer with known veracity. Knowing they were under oath, and that their testimony could be used in civil and criminal legal actions, each Goldman witness had to allow themselves to become whipping boys and appear guilty of whatever behavior of which a Senator decided to accuse them. Most Senators would end their question time with a non sequitor, constituent-oriented summary statement which typically accused Goldman's actions of rendering 'millions' of either US residents or their constituents homeless, penniless and jobless.
Fannie Mae and Freddie Mac were never, of course, mentioned by any Senator of either party, at least while I watched.
The very nature of these investigations leaves business people looking guilty of something, if only attempting to be profitable during whatever crisis may have been occurring. It's a near-perfect coincidence of defenseless business witnesses and omnipotent politicians who control the agenda. There is simply no way any witness from a business which Congress has decided to crucify is going to be able to leave an impression of innocence in that venue.
Finally, despite all the posturing, biased and wrongly-framed questions, and other tricks calculated to make Senators look serious and concerned, even crusading for 'the truth,' and Goldman and its employees look guilty of something, if not clearly anything actually illegal, a few things did become clear.
First, despite Blankfein's insistence that the firm went public reluctantly, and only to remain competitive, much of the root of Goldman's current predicament stems from its going public, then skating to the edge of solvency, and, then, falling upon the Fed to allow it to become a chartered commercial bank, and taking TARP funds.
Much of what transpired Tuesday would have been unremarkable had Goldman been either, or both, a privately-owned investment bank and had not taken TARP funds.
In discussions with a colleague yesterday, I noted that Blackstone did not need a TARP-funded bailout.
I suspect much of Goldman's conflicts of interest, due to their proprietary activities, will not be avoidable without the firm splitting itself into pieces, so that underwriting and proprietary activities aren't co-domiciled. That said, there will always be sophisticated counterparties and even underwriting clients who don't have problems with Goldman's internal conflicts of interest. Those firms are capable of making their own decisions regarding risks and positions with respect to all manner of asset classes.
Rather, it is most likely a large group of less-sophisticated clients, including, perhaps, many state and municipal entities, which will now shy away from Goldman Sachs.
In any case, Goldman has not just a public relations problem to manage, but a real problem of conflicts to manage. Not conflicts among clients who may be competitors, both of whom for which Goldman Sachs wants to do underwriting or advisory work.
No, the conflict is that, on one hand, Goldman may represent the firms to the market, underwriting their securities, while, in proprietary activities, explicitly selling the same securities which another part of the firm is soliciting the firm's clients to purchase.
There's no way even Lloyd Blankfein can convince most of America that this is a viable combination. He can talk until he's blue in the face about how clients wish to purchase risk and take positions opposite those of Goldman. But that won't convince most people that Goldman's mix of businesses puts it in a position to, quite often, sell from its own account, because of a belief that the value of an instrument has peaked, that which it is, elsewhere, convincing its clients to purchase and hold.
The Senators' grilling of the various Goldman employees may well be the most extreme example of hard questions regarding Goldman's actions. They may have been over the top, poorly-framed, asked from positions of near-total lack of understanding of the businesses involved.
But the questions did raise discomforting issues for Goldman. Being exposed for selling securities which were thought, internally, to be of poor quality, just looks very bad, and is hard to explain.
Clearly, per yesterday's lead staff editorial in the Wall Street Journal, regulatory 'reform' can't seriously require underwriters or brokers of securities to guarantee that the value of those securities will rise.
But it's hard to see how such reform won't, and probably shouldn't, attempt to force underwriters to disclose opinions about the quality of the securities. Perhaps requiring all underwriters to hold some minimal percentage of the securities for a specified amount of time.
In the final analysis, Goldman Sachs brought the SEC suit and Senate investigation upon itself as a result of having run into the arms of the government for help in 2008. Having made that pact with the devil, it is now having to pay the price.
Perhaps, in retrospect, Goldman would have been better off filing for bankruptcy, as it faced imminent insolvency when credit lines would have been curtailed, in order to have had time to reorganize, restructure funding, and emerge in a better-financed condition.
There's no denying that the firm is now paying for its poor judgement in asking the federal government to rescue it when it was on the edge of collapse.
Wednesday, April 28, 2010
Sheila Bair's Self-Serving Support Of Dodd's FINREG Bill
I happened to see FDIC chairman Sheila Bair interviewed at length on CNBC last Friday.
If you ever need proof of how regulators become captive to the majority in Washington, and learn not to express their true views, this interview was it.
Asked about the deeply-flawed Dodd FINREG bill, Bair of course supported it. Keeping mum about the actual open door to bailouts of creditors of failed banks, and the FDIC's favored status as the 'resolution authority,' Bair just nodded slowly, sagely, allowing how it would be an improvement over current regulation.
What did the CNBC co-anchors expect? Bair's agency won the fight to be the go-to outfit for financial sector liquidations. And there aren't even any rules or guidelines to restrain the FDIC, under the bill, from declaring any firm they choose to be in trouble and, therefore, closed.
Continuing their wide-eyed, naive trust in all government officials towing the ruling party line, the CNBC staff listened with rapt attention to every word Bair uttered. Never questioning her motives or her agency's ability to handle failed institutions that aren't small or midsized banks?
Peter Wallison, in a recent Wall Street Journal editorial, noted that the FDIC has no skills in handling the variety of businesses in a modern investment bank like the now-defunct Lehman. His point, of course, was that if the FDIC had been responsible for closing and managing Lehman, it would have been hopelessly overwhelmed by the firm's complexity.
And that's going to be true of the very large financial firms which Dodd's bill envisions failing.
It's gotten to where you really cannot trust the bulk of CNBC's on-air personnel to ask anyone real hardball questions that might provide real insights or truth.
If you ever need proof of how regulators become captive to the majority in Washington, and learn not to express their true views, this interview was it.
Asked about the deeply-flawed Dodd FINREG bill, Bair of course supported it. Keeping mum about the actual open door to bailouts of creditors of failed banks, and the FDIC's favored status as the 'resolution authority,' Bair just nodded slowly, sagely, allowing how it would be an improvement over current regulation.
What did the CNBC co-anchors expect? Bair's agency won the fight to be the go-to outfit for financial sector liquidations. And there aren't even any rules or guidelines to restrain the FDIC, under the bill, from declaring any firm they choose to be in trouble and, therefore, closed.
Continuing their wide-eyed, naive trust in all government officials towing the ruling party line, the CNBC staff listened with rapt attention to every word Bair uttered. Never questioning her motives or her agency's ability to handle failed institutions that aren't small or midsized banks?
Peter Wallison, in a recent Wall Street Journal editorial, noted that the FDIC has no skills in handling the variety of businesses in a modern investment bank like the now-defunct Lehman. His point, of course, was that if the FDIC had been responsible for closing and managing Lehman, it would have been hopelessly overwhelmed by the firm's complexity.
And that's going to be true of the very large financial firms which Dodd's bill envisions failing.
It's gotten to where you really cannot trust the bulk of CNBC's on-air personnel to ask anyone real hardball questions that might provide real insights or truth.
Tuesday, April 27, 2010
Today's Senate Witch Hunt: The Goldman Sachs Hearings
As I'm working this morning, I am listening to/watching the bullying of Goldman employees by several Senators in the venue of a Congressional hearing.
It's disappointing to see Michigan's Carl Levin and Maine's Susan Collins embarrass themselves by displaying their inability to understand how a modern investment bank works. However, nobody involved in these hearings so far has come off looking both intelligent and honest. The Senators look stupid, while the Goldman employees look evasive.
Levin, during his remarks, kept banging away at how the mortgage market collapsed while Goldman took legitimate proprietary trading positions to benefit from this. He tried to portray the firm as doing something illegal by doing this.
Where Levin did, however, score some points, was in linking the internal Goldman emails depicting one mortgage-backed security as "one shitty deal," with its subsequent appearance as a priority deal to be sold to Goldman clients. The Goldman employees fell largely silent as it became clear to viewers of the inquisition that the firm clearly pushed its institutional fixed income sales force to sell securities which the firm itself viewed as being of poor quality.
Mr. Sparks, a former Goldman employee, attempted to note that institutional clients had every opportunity to make their own assessments of the value of such securities. But I'm sure this was lost on most viewers. The lingering impression is that Goldman's institutional sales force operates in the same manner as a 'pump and dump' penny-stock boiler room operation.
Susan Collins, on the other hand, has said nothing to indicate she has the slightest idea of what she is saying. She has continually attempted to ask institutional traders whether they had a duty to look out for their institutional clients' welfare?
What Collins, and, for that matter, Levin, never bother to explain, and I don't actually think understand, is that the entire matter about which they are grilling the Goldman employees was between sophisticated institutional buyers and sellers. And, as several of the Goldman employees note, but is lost on Collins and Levin, is that they were acting as principals, not agents nor brokers.
That is, they were understood by their counterparty to own the securities in question.
Even now, at 11:53AM, Levin is accusing the Goldman parties of stalling and attempting to avoid answering questions, and, therefore, threatening that the hearings will last until the Senators get answers to all of their questions.
Of course, both Levin and Collins have been asking questions of the sort that equate to,
"When did you stop beating your wife?"
They demand incriminating responses to questions which aren't phrased appropriately or relevantly, given the context of the subject matter and the role of Goldman in the particular instances.
I'm quite sure that most business people watching the proceedings see the Senators as hapless, clueless idiots. I certainly do.
However, that doesn't change the clear sense one gets that the Goldman people are all embarrassed by the evidence that they pushed securities which they, privately, thought were of very poor quality.
Of course, it goes without saying that at no time has any Senator gone near the topic of asking why 'stated income' loans, or other questionable mortgages, were originated in the first place. That is, the role of Congress in pushing Fannie and Freddie to securitize such loans, thus making them common currency in the mortgage-backed markets.
Right now, another Senator is grilling Mr. Sparks about securitizing a Washington Mutual mortgage pool that contained so-called 'liar loans.' But he's not interested in learning that the GSEs were the entities that favored these creations. Nor that, having spurred their origination, it was only natural for investment banks to join in the effort to resell them to investors.
After all, what do these Senators think was going to happen to all of these mortgages, if not resold from the GSEs to investors?
All around, the hearings are a farce and an embarrassment to the notion of honest, intelligent, well-informed inquiries into such practices.
It's disappointing to see Michigan's Carl Levin and Maine's Susan Collins embarrass themselves by displaying their inability to understand how a modern investment bank works. However, nobody involved in these hearings so far has come off looking both intelligent and honest. The Senators look stupid, while the Goldman employees look evasive.
Levin, during his remarks, kept banging away at how the mortgage market collapsed while Goldman took legitimate proprietary trading positions to benefit from this. He tried to portray the firm as doing something illegal by doing this.
Where Levin did, however, score some points, was in linking the internal Goldman emails depicting one mortgage-backed security as "one shitty deal," with its subsequent appearance as a priority deal to be sold to Goldman clients. The Goldman employees fell largely silent as it became clear to viewers of the inquisition that the firm clearly pushed its institutional fixed income sales force to sell securities which the firm itself viewed as being of poor quality.
Mr. Sparks, a former Goldman employee, attempted to note that institutional clients had every opportunity to make their own assessments of the value of such securities. But I'm sure this was lost on most viewers. The lingering impression is that Goldman's institutional sales force operates in the same manner as a 'pump and dump' penny-stock boiler room operation.
Susan Collins, on the other hand, has said nothing to indicate she has the slightest idea of what she is saying. She has continually attempted to ask institutional traders whether they had a duty to look out for their institutional clients' welfare?
What Collins, and, for that matter, Levin, never bother to explain, and I don't actually think understand, is that the entire matter about which they are grilling the Goldman employees was between sophisticated institutional buyers and sellers. And, as several of the Goldman employees note, but is lost on Collins and Levin, is that they were acting as principals, not agents nor brokers.
That is, they were understood by their counterparty to own the securities in question.
Even now, at 11:53AM, Levin is accusing the Goldman parties of stalling and attempting to avoid answering questions, and, therefore, threatening that the hearings will last until the Senators get answers to all of their questions.
Of course, both Levin and Collins have been asking questions of the sort that equate to,
"When did you stop beating your wife?"
They demand incriminating responses to questions which aren't phrased appropriately or relevantly, given the context of the subject matter and the role of Goldman in the particular instances.
I'm quite sure that most business people watching the proceedings see the Senators as hapless, clueless idiots. I certainly do.
However, that doesn't change the clear sense one gets that the Goldman people are all embarrassed by the evidence that they pushed securities which they, privately, thought were of very poor quality.
Of course, it goes without saying that at no time has any Senator gone near the topic of asking why 'stated income' loans, or other questionable mortgages, were originated in the first place. That is, the role of Congress in pushing Fannie and Freddie to securitize such loans, thus making them common currency in the mortgage-backed markets.
Right now, another Senator is grilling Mr. Sparks about securitizing a Washington Mutual mortgage pool that contained so-called 'liar loans.' But he's not interested in learning that the GSEs were the entities that favored these creations. Nor that, having spurred their origination, it was only natural for investment banks to join in the effort to resell them to investors.
After all, what do these Senators think was going to happen to all of these mortgages, if not resold from the GSEs to investors?
All around, the hearings are a farce and an embarrassment to the notion of honest, intelligent, well-informed inquiries into such practices.
FINREG's Bailout Provisions Explained
The recently-stalled Senate financial regulation bill, designed, badly, by retiring Senator Chris Dodd, has a particular weakness about which either lies have been told by various Democratic Senators and administration officials, or those people grossly misunderstand what the provisions actually will do.
As Peter Wallison and others have written in the Wall Street Journal editorial pages numerous times over the past several weeks, the Dodd proposal creates a dangerous process, rather than clear law, which may, at the whim of an administration, supersede bankruptcy.
The "resolution authority," as it is named, is to be the FDIC. But, under the terms of the bill, the FDIC may use this authority arbitrarily, which is one major weakness.
But the authority has been defended in the past week by both Austin Goolsbee, the administration's chief economic adviser, and newly-elected Democratic Senator Mark Warner, from Virginia, in interviews on CNBC.
Goolsbee blathered on at length about how there was "no bailout" provision in the bill, because any firm which was seized by the resolution authority would have its managers fired and its shareholders' equity eliminated.
This morning, on CNBC, Warner portrayed the resolution authority as being so distasteful that no firm would willingly prefer it to bankruptcy.
Ah, but Warner omitted the key point. The firm couldn't choose which option, because, under Dodd's absurdly-flawed proposal, the FDIC would do the choosing. Thus, it becomes arbitrary, ripe for occasions of bribery and influence, and the very antithesis of a clear-cut law.
As to Goolsbee, he either lied, or is just so naive as to not understand what Wallison and others, including me, realize about the resolution authority process.
As Wallison wrote in yesterday's Wall Street Journal,
"The Dodd bill has one answer. It says that the FDIC "may make additional payments," over and above what a claimant would be entitled to in bankruptcy, if these payments are necessary "to minimize losses" to the FDIC "from the orderly liquidation" of the failing firm.
This practice is a straightforward bailout of all creditors, and it has been criticized by Congress over the years. Yet here it is, back again, in the guise of an innocuous power to make additional payments to some creditors, coupled with virtually unlimited authority to borrow from the Treasury."
Either Goolsbee is really inept, and unable to understand this provision, or he's lying about it, in order to claim that there is 'no bailout' in the bill.
Nobody who claims there can be a 'bailout' ever meant shareholders.
No, we all refer to the bailout of creditors who were counterparties to debts of the failing firm.
We need look no further than tax-filing-challenged Treasury Secretary Tim Geithner's misguided payments of AIG's debts, in full, to all creditors, especially Goldman Sachs and a large french bank, when bankruptcy proceedings would have treated them much more harshly.
This is the genesis of the charge that those banks viewed by investors as "too big to fail" will be perceived as likely to be handled by the FDIC's proposed "resolution authority" and, thus, be eligible for its counterparties being repaid in full for their debt instruments. Thus, those banks will naturally enjoy lower interest rates, because their lenders will assume they have no principal risk from the transaction.
It's a backdoor GSE clause. The large bank is presumed to have Treasury backing, via the FDIC, in the event of the failure of the very large bank.
That's the bailout. Not of the firm's owners or managers, but its creditors.
And this is, of course, for a financial firm, a much larger amount of capital than its equity. If anything, we should wish the Dodd bill rescued the owners, rather than the counterparties. It would be, though totally illogical, much cheaper for the taxpayer.
Anyway, don't be fooled by any pundits or politicians you hear babbling about the Dodd bill being misrepresented, misunderstood, and/or containing absolutely no "bailout" provisions.
It's just a variant of that old magician's trick where your eyes are drawn to something other than where the real action is happening.
In the case of the Dodd bill, its defenders dwell on the draconian treatment of managers and owners of failed- well, actually, not necessarily failed, but merely firms an administration wishes to close, for any reason- firms, in order to draw your attention away from its overly-generous guarantees of repayment to such a firm's creditors.
If those defenders really don't understand this, they are foolish and inept. If they do, they're lying to the public.
Which do you think it is?
As Peter Wallison and others have written in the Wall Street Journal editorial pages numerous times over the past several weeks, the Dodd proposal creates a dangerous process, rather than clear law, which may, at the whim of an administration, supersede bankruptcy.
The "resolution authority," as it is named, is to be the FDIC. But, under the terms of the bill, the FDIC may use this authority arbitrarily, which is one major weakness.
But the authority has been defended in the past week by both Austin Goolsbee, the administration's chief economic adviser, and newly-elected Democratic Senator Mark Warner, from Virginia, in interviews on CNBC.
Goolsbee blathered on at length about how there was "no bailout" provision in the bill, because any firm which was seized by the resolution authority would have its managers fired and its shareholders' equity eliminated.
This morning, on CNBC, Warner portrayed the resolution authority as being so distasteful that no firm would willingly prefer it to bankruptcy.
Ah, but Warner omitted the key point. The firm couldn't choose which option, because, under Dodd's absurdly-flawed proposal, the FDIC would do the choosing. Thus, it becomes arbitrary, ripe for occasions of bribery and influence, and the very antithesis of a clear-cut law.
As to Goolsbee, he either lied, or is just so naive as to not understand what Wallison and others, including me, realize about the resolution authority process.
As Wallison wrote in yesterday's Wall Street Journal,
"The Dodd bill has one answer. It says that the FDIC "may make additional payments," over and above what a claimant would be entitled to in bankruptcy, if these payments are necessary "to minimize losses" to the FDIC "from the orderly liquidation" of the failing firm.
This practice is a straightforward bailout of all creditors, and it has been criticized by Congress over the years. Yet here it is, back again, in the guise of an innocuous power to make additional payments to some creditors, coupled with virtually unlimited authority to borrow from the Treasury."
Either Goolsbee is really inept, and unable to understand this provision, or he's lying about it, in order to claim that there is 'no bailout' in the bill.
Nobody who claims there can be a 'bailout' ever meant shareholders.
No, we all refer to the bailout of creditors who were counterparties to debts of the failing firm.
We need look no further than tax-filing-challenged Treasury Secretary Tim Geithner's misguided payments of AIG's debts, in full, to all creditors, especially Goldman Sachs and a large french bank, when bankruptcy proceedings would have treated them much more harshly.
This is the genesis of the charge that those banks viewed by investors as "too big to fail" will be perceived as likely to be handled by the FDIC's proposed "resolution authority" and, thus, be eligible for its counterparties being repaid in full for their debt instruments. Thus, those banks will naturally enjoy lower interest rates, because their lenders will assume they have no principal risk from the transaction.
It's a backdoor GSE clause. The large bank is presumed to have Treasury backing, via the FDIC, in the event of the failure of the very large bank.
That's the bailout. Not of the firm's owners or managers, but its creditors.
And this is, of course, for a financial firm, a much larger amount of capital than its equity. If anything, we should wish the Dodd bill rescued the owners, rather than the counterparties. It would be, though totally illogical, much cheaper for the taxpayer.
Anyway, don't be fooled by any pundits or politicians you hear babbling about the Dodd bill being misrepresented, misunderstood, and/or containing absolutely no "bailout" provisions.
It's just a variant of that old magician's trick where your eyes are drawn to something other than where the real action is happening.
In the case of the Dodd bill, its defenders dwell on the draconian treatment of managers and owners of failed- well, actually, not necessarily failed, but merely firms an administration wishes to close, for any reason- firms, in order to draw your attention away from its overly-generous guarantees of repayment to such a firm's creditors.
If those defenders really don't understand this, they are foolish and inept. If they do, they're lying to the public.
Which do you think it is?
Monday, April 26, 2010
Warren Buffett Sings A New Tune On Derivatives As His Ox Is About To Be Gored
Isn't it interesting that Saint Warren of Buffett, the government's favorite billionaire investor, is suddenly pressuring Congress to exempt his firm's derivatives dealings from pending legislation?
Yes, and others like his firms', too, of course.
But the point is, when Buffett's corporate ox is about to be gored, suddenly no amount of lobbying is too small. No exemption from the regulation of hated derivatives is too trivial.
This is the same Buffett who so famously referred to derivatives as "toxic," crediting them for turning financial markets into a "casino."
Well, to paraphrase Churchill, we now know what Buffett is, only his price is left to be determined, isn't it?
Maybe Buffett should have made more nuanced, informed comments when dissing all derivatives. Because you can bet he's now singing a different tune. He's no doubt extolling the necessity of reinsurance and insurance firms using derivatives to hedge their legitimate business risks.
Yes, all true. But not what Warren was saying for the past decade, is it?
No, as losses from new regulatory compliance loom, Buffett is getting a new religion.
If this doesn't sour people on this false "oracle," from Omaha, what will? He's shown himself devoid of real principles when it's crunch time. His views echo his and his firm's P&L, nothing more.
Yes, and others like his firms', too, of course.
But the point is, when Buffett's corporate ox is about to be gored, suddenly no amount of lobbying is too small. No exemption from the regulation of hated derivatives is too trivial.
This is the same Buffett who so famously referred to derivatives as "toxic," crediting them for turning financial markets into a "casino."
Well, to paraphrase Churchill, we now know what Buffett is, only his price is left to be determined, isn't it?
Maybe Buffett should have made more nuanced, informed comments when dissing all derivatives. Because you can bet he's now singing a different tune. He's no doubt extolling the necessity of reinsurance and insurance firms using derivatives to hedge their legitimate business risks.
Yes, all true. But not what Warren was saying for the past decade, is it?
No, as losses from new regulatory compliance loom, Buffett is getting a new religion.
If this doesn't sour people on this false "oracle," from Omaha, what will? He's shown himself devoid of real principles when it's crunch time. His views echo his and his firm's P&L, nothing more.
CNBC Doing The Government's Work This Morning
I caught some of this morning's CNBC programming, to my continuing disappointment.
Despite allegedly being a business channel, the network relies heavy doses of biased so-called reporting from 'Red John' Harwood, who is also a New York Times political columnist.
Thus, during what was supposed to be a discussion of the wisdom of the current financial markets regulatory bill, pseudo-economics reporter Steve Liesman parroted Red John's apparent earlier interview with the co-anchors.
Liesman, who has great difficulty getting basic economics right, and rarely, if ever, refrains from approving liberal economic palliatives and dismissing free market initiatives, chose to spend all of his time approving and rehashing Harwood's earlier statements. Those evidently consisted largely of trashing Republican Majority Leader McConnell for leading the 41 GOP Senators to oppose the current bill because of its provision for explicitly bailing out large financial firms in the future.
A guest on this morning's program, former Paulson Treasury aide and Assistant Secretary Neel Kashkari pointed out that it would make a lot of sense to wait for the admittedly-political Congressionally-appointed blue-ribbon panel investigating the financial mess of the last few years to finish their job before moving forward on any legislation.
In how many businesses would recent failures be handled the way Washington is handling this one? Having experienced a failure, what competent CEO and senior executive team would make significant changes before having agreed upon at least a tentative explanation for that failure?
For their reticence in rushing to redesign the US financial system, Republicans are once again being castigated for counseling delay and examination of the recent problems in the US financial sector.
Later on, Pennsylvania Democratic Representative Paul Kanjorski decried delays in passing the Dodd bill, criticized former President George W. Bush as not understanding economics, despite the fact that he is the only President who earned and MBA, and from a major program.
What I took away from this morning's bizarrely political focus on CNBC is that the network has chosen to push the Dodd bill, despite several obvious facts.
First, Dodd allowed himself to be influenced by sector participants to look the other way on many dangerous practices while heading the Senate committee overseeing the sector.
Second, none of the majority party's leaders or members have admitted to Fannie's and Freddie's role as origins of the financial problems, nor of the current majority party's mandating those GSEs to securitize low-quality mortgages.
Third, the panel appointed by Congress to explore and explain the reasons for and process by which the financial sector problems occurred is months away from any conclusions.
With knowledge of these facts, who in their right mind would rush to legislate a solution? And who in the media would omit some facts, distort political coverage and generally paint a false picture in order to facilitate the passage of such premature, ill-conceived and flawed 'reform?'
CNBC, I guess. Which tells you a lot about what to believe on that network. If it's not straight, factual business news, or opinions about business from an apolitical source, consider it propaganda.
Despite allegedly being a business channel, the network relies heavy doses of biased so-called reporting from 'Red John' Harwood, who is also a New York Times political columnist.
Thus, during what was supposed to be a discussion of the wisdom of the current financial markets regulatory bill, pseudo-economics reporter Steve Liesman parroted Red John's apparent earlier interview with the co-anchors.
Liesman, who has great difficulty getting basic economics right, and rarely, if ever, refrains from approving liberal economic palliatives and dismissing free market initiatives, chose to spend all of his time approving and rehashing Harwood's earlier statements. Those evidently consisted largely of trashing Republican Majority Leader McConnell for leading the 41 GOP Senators to oppose the current bill because of its provision for explicitly bailing out large financial firms in the future.
A guest on this morning's program, former Paulson Treasury aide and Assistant Secretary Neel Kashkari pointed out that it would make a lot of sense to wait for the admittedly-political Congressionally-appointed blue-ribbon panel investigating the financial mess of the last few years to finish their job before moving forward on any legislation.
In how many businesses would recent failures be handled the way Washington is handling this one? Having experienced a failure, what competent CEO and senior executive team would make significant changes before having agreed upon at least a tentative explanation for that failure?
For their reticence in rushing to redesign the US financial system, Republicans are once again being castigated for counseling delay and examination of the recent problems in the US financial sector.
Later on, Pennsylvania Democratic Representative Paul Kanjorski decried delays in passing the Dodd bill, criticized former President George W. Bush as not understanding economics, despite the fact that he is the only President who earned and MBA, and from a major program.
What I took away from this morning's bizarrely political focus on CNBC is that the network has chosen to push the Dodd bill, despite several obvious facts.
First, Dodd allowed himself to be influenced by sector participants to look the other way on many dangerous practices while heading the Senate committee overseeing the sector.
Second, none of the majority party's leaders or members have admitted to Fannie's and Freddie's role as origins of the financial problems, nor of the current majority party's mandating those GSEs to securitize low-quality mortgages.
Third, the panel appointed by Congress to explore and explain the reasons for and process by which the financial sector problems occurred is months away from any conclusions.
With knowledge of these facts, who in their right mind would rush to legislate a solution? And who in the media would omit some facts, distort political coverage and generally paint a false picture in order to facilitate the passage of such premature, ill-conceived and flawed 'reform?'
CNBC, I guess. Which tells you a lot about what to believe on that network. If it's not straight, factual business news, or opinions about business from an apolitical source, consider it propaganda.
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