Ok, interesting...
http://www.businessspectator.com.au/bs.nsf/Article/SCOREBOARD-$pd20090224-PJS5Z?OpenDocument&src=sph
The markets had a bad day on Monday, they weren't convinced by the whole "stress-testing" thing either, it seems. Here's why:
http://www.informationarbitrage.com/2009/02/citigroup-the-difference-between-dramatic-action-and-drama.html
http://www.businessspectator.com.au/bs.nsf/Article/UPDATE-1-US-regulators-stand-ready-with-more-bank--PJJYZ?OpenDocument
http://www.bloomberg.com/apps/news?pid=20601087&sid=a94Scjej8WNs&refer=home
So basically once these stress-tests are done, the government money will be provided as follows:
1. The banks issue convertible preferred shares to the government.
2. If the stress testing shows a problem, the amount of needed capital is determined and that amount of these preferred shares will be converted into normal shares, with the main payment to the bank occuring at that point.
The idea is that the taxpayer only has to pay once there is a problem, and the convertible shares don't necessarily constitute a dilution of the common equity holding before then. As I said before, and everyone else seems to be saying, still no clear line on who is expected to suffer here. They act like a few hundred billion dollars worth of dodgy investments aren't out there to be paid for.
Speaking of which: http://www.bloomberg.com/apps/news?pid=20601109&sid=aGqIiR1PCrq8&refer=home
http://www.ft.com/cms/s/0/50bcd2cc-01e5-11de-8199-000077b07658,s01=1.html?nclick_check=1
http://www.businessspectator.com.au/bs.nsf/Article/21st-century-banking-$pd20090223-PHQCM?OpenDocument&src=sph
http://www.businessspectator.com.au/bs.nsf/Article/Banks-play-battleships-$pd20090224-PJS9G?OpenDocument&src=sph
I like these articles. I had been thinking about this sort of area (information asymmetry brought about by dodgy accounting rules as contributing to credit crunches) as a thesis topic, but I moved away from that a little bit.
Meanwhile, the real economy all over the world is getting more and more out of shape:
http://www.businessspectator.com.au/bs.nsf/Article/The-return-of-capital-controls-$pd20090223-PJ7FE?OpenDocument&src=sph
Eastern Europe is falling to pieces, there is talk about capital controls now to prevent currency collapses set to rival those of the Asian Financial Crisis. It will certainly be interesting to see how the EU reacts to that sort of thing - strictly speaking a lot of these countries are meant to be future members of the euro zone and are very important trade partners. Monetary policy in these countries is heavily influenced by Frankfurt (the seat of the ECB) and Brussels. If they don't do anything, or end up being blamed for anything, you would expect any prospects of European integration to slow down dramatically.
And as for the US, people are still struggling to grasp the seriousness, for the most part. "Black Swan" author Taleb is of course on the other side of that particular divide.
At any rate:
http://www.bloomberg.com/apps/news?pid=20601109&sid=aAZzcqBRclVE&refer=home
http://www.bloomberg.com/apps/news?pid=20601087&sid=aDhMMI9EMl5Q&refer=home
http://www.businessspectator.com.au/bs.nsf/Article/Macquarie-$pd20090223-PJ6AG?OpenDocument&src=sph
Tuesday 24 February 2009
Sunday 22 February 2009
Weekend Stress
So, what's going on this weekend?
On by far the most important front, the US banking "rescue", we have some news about the form these so-called "stress tests" will take. The idea is that in order to make sure no one gets funny ideas about the banks possibly being insolvent (which they are) they have quick and proactive access to taxpayer funds whenever necessary.
http://www.businessspectator.com.au/bs.nsf/Article/UPDATE-2-US-bank-stress-tests-to-show-capital-need-PH358?OpenDocument
Of course the details are scarce at this point, just as all the details about the plan as a whole. The reason for that, I suspect, is that they have no idea about the details. The situation is dire: many banks (not all of them, mind you) have had the assets wiped from their balance sheets, and because they can't be allowed to just collapse and take everyone else with them, the government has stepped in to keep them alive. But that's hardly enough - now they are stuck in a zombie-like state with no choice but to try and bring their leverage ratios down: so grab as much cash as they can and hold on to it without taking many risks. The by-product of this is that they don't lend to anyone, and where there is no lending there is no investment and no job creation.
But so far the plan has been no different in design and execution from the ones Paulson put forward: Bad communication, no clear position on who will take the losses that someone is going to have to suffer and no urgency in actually making it happen.
At any rate, these stress tests seem to be meant to serve as an automatic stabiliser for banks that move towards the wrong side of zombie-ness, thus hopefully avoiding bank runs like the one that brought down Bear Stearns.
http://money.cnn.com/2009/02/20/news/companies/boa.merrill.reut/index.htm?postversion=2009022020
More details of the disgraceful way in which the Merrill takeover by BofA was handled are emerging as well. As some of you would have heard, Merrill CEO Thain and his top people essentially paid themselves billions in bonuses early in order to get as much money out of the banks' carcass as they could before selling it to BofA. That bank's CEO Ken Lewis it now turns out apparently knew of this scam and was happy with it, presumably because he wanted to keep as many of the talented Merrill staff on board as possible. As people have found in the past, combining investment bankers with their distant retail relatives tends not to work, with the former leaving in droves.
Which now means: Ken Lewis let Thain spent billions of BofA shareholder capital on a rather questionable cause. But I suppose that's okay...I heard that BofA is now worth less in terms of market capitalisation than the government money it already received, so in a way its main shareholders are the US taxpayers. And they're quite a harmless bunch, it turns out.
http://www.businessspectator.com.au/bs.nsf/Article/Foreclosure-fury-$pd20090220-PF5HT?OpenDocument&src=sph
The politics meanwhile continue unabated. The discussion on whether or not Average Joe should be bailed out of a mortgage they can't afford is probably not really that important from an economic policy perspective. Fact of the matter is that the US in aggregate was borrowing on a massive scale compared to their actual income, egged on by measures to mitigate risks (or perceptions thereof, as it turned out) and low interest rates. Even leaving aside the anecdotal evidence of questionable sales practices when it came to handing mortgages to people, I think we can safely say that the people caught up in the housing bubble on the buying side were probably no less irresponsible than those institutions who thought loading massive amounts of CDOs on their balance sheets was a good idea. And just as much as it hurts one's sense of justice to bail out a bank that should obviously be bankrupt, we might just have to bite the bullet and be pragmatic about the fact that any recovery is not going to be accelerated by tens of millions of bankrupt people who can never again get a loan for anything.
Of course, the question of whether an effective plan to deal with the foreclosures can actually be developed, given its linkages with the financial system, is an entirely different matter.
And as far as the next few years are concerned? Things aren't looking too flash to me. Stimulus packages tend not to be of much use if the banking system can't distribute capital normally, and so the apparent urgency with which the Obama administration pushed the thing through stands in stark, and inexplicable, contrast to the time they're taking to do anything about the financial system - and especially the lack of information on the progress they're making with it.
Maybe it's got to do with the fact that despite some of the recent rhetoric, the powers-that-be are still being too optimistic.
http://www.federalreserve.gov/newsevents/press/monetary/fomcminutes20090128.pdf
The Fed seems to think that we're looking at positive US economic growth in 2010. Apparently someone there thinks they'll get 4.5% that year! You have to wonder how some of these guys are appointed.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aB0FYEQkR4Es&refer=home
And in a similar bout of optimism (hope?) Barack Obama wants to bring the US budget deficit down to 3% of GDP by the end of his term, that is in 2013. I'm not sure how that works...take a deep breath...huge financial crisis, 10%+ unemployment, a truly crappy healthcare system (which I believe he promised to expand to cover more people more cheaply at one point), two wars that aren't over yet and presumably won't be for some time (at least one of them, at any rate), a banking rescue, an auto rescue, a mortgage foreclosure rescue, investment in infrastructure and building a new, green economy.
Somehow I think getting out of Iraq and raising taxes on rich people isn't going to do it. I continue to be somewhat bearish on US treasuries over the medium to long term.
http://money.cnn.com/2009/02/20/news/companies/bank_failures/index.htm?postversion=2009022022
And just to underscore a point, people (equity research people, necessarily more optimistic than risk management research people) think we're looking at a 1,000 US banks failing over the next five years. They're small and medium-sized ones, not headline material, but it's hundreds of billions of dollars nonetheless.
On by far the most important front, the US banking "rescue", we have some news about the form these so-called "stress tests" will take. The idea is that in order to make sure no one gets funny ideas about the banks possibly being insolvent (which they are) they have quick and proactive access to taxpayer funds whenever necessary.
http://www.businessspectator.com.au/bs.nsf/Article/UPDATE-2-US-bank-stress-tests-to-show-capital-need-PH358?OpenDocument
Of course the details are scarce at this point, just as all the details about the plan as a whole. The reason for that, I suspect, is that they have no idea about the details. The situation is dire: many banks (not all of them, mind you) have had the assets wiped from their balance sheets, and because they can't be allowed to just collapse and take everyone else with them, the government has stepped in to keep them alive. But that's hardly enough - now they are stuck in a zombie-like state with no choice but to try and bring their leverage ratios down: so grab as much cash as they can and hold on to it without taking many risks. The by-product of this is that they don't lend to anyone, and where there is no lending there is no investment and no job creation.
But so far the plan has been no different in design and execution from the ones Paulson put forward: Bad communication, no clear position on who will take the losses that someone is going to have to suffer and no urgency in actually making it happen.
At any rate, these stress tests seem to be meant to serve as an automatic stabiliser for banks that move towards the wrong side of zombie-ness, thus hopefully avoiding bank runs like the one that brought down Bear Stearns.
http://money.cnn.com/2009/02/20/news/companies/boa.merrill.reut/index.htm?postversion=2009022020
More details of the disgraceful way in which the Merrill takeover by BofA was handled are emerging as well. As some of you would have heard, Merrill CEO Thain and his top people essentially paid themselves billions in bonuses early in order to get as much money out of the banks' carcass as they could before selling it to BofA. That bank's CEO Ken Lewis it now turns out apparently knew of this scam and was happy with it, presumably because he wanted to keep as many of the talented Merrill staff on board as possible. As people have found in the past, combining investment bankers with their distant retail relatives tends not to work, with the former leaving in droves.
Which now means: Ken Lewis let Thain spent billions of BofA shareholder capital on a rather questionable cause. But I suppose that's okay...I heard that BofA is now worth less in terms of market capitalisation than the government money it already received, so in a way its main shareholders are the US taxpayers. And they're quite a harmless bunch, it turns out.
http://www.businessspectator.com.au/bs.nsf/Article/Foreclosure-fury-$pd20090220-PF5HT?OpenDocument&src=sph
The politics meanwhile continue unabated. The discussion on whether or not Average Joe should be bailed out of a mortgage they can't afford is probably not really that important from an economic policy perspective. Fact of the matter is that the US in aggregate was borrowing on a massive scale compared to their actual income, egged on by measures to mitigate risks (or perceptions thereof, as it turned out) and low interest rates. Even leaving aside the anecdotal evidence of questionable sales practices when it came to handing mortgages to people, I think we can safely say that the people caught up in the housing bubble on the buying side were probably no less irresponsible than those institutions who thought loading massive amounts of CDOs on their balance sheets was a good idea. And just as much as it hurts one's sense of justice to bail out a bank that should obviously be bankrupt, we might just have to bite the bullet and be pragmatic about the fact that any recovery is not going to be accelerated by tens of millions of bankrupt people who can never again get a loan for anything.
Of course, the question of whether an effective plan to deal with the foreclosures can actually be developed, given its linkages with the financial system, is an entirely different matter.
And as far as the next few years are concerned? Things aren't looking too flash to me. Stimulus packages tend not to be of much use if the banking system can't distribute capital normally, and so the apparent urgency with which the Obama administration pushed the thing through stands in stark, and inexplicable, contrast to the time they're taking to do anything about the financial system - and especially the lack of information on the progress they're making with it.
Maybe it's got to do with the fact that despite some of the recent rhetoric, the powers-that-be are still being too optimistic.
http://www.federalreserve.gov/newsevents/press/monetary/fomcminutes20090128.pdf
The Fed seems to think that we're looking at positive US economic growth in 2010. Apparently someone there thinks they'll get 4.5% that year! You have to wonder how some of these guys are appointed.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aB0FYEQkR4Es&refer=home
And in a similar bout of optimism (hope?) Barack Obama wants to bring the US budget deficit down to 3% of GDP by the end of his term, that is in 2013. I'm not sure how that works...take a deep breath...huge financial crisis, 10%+ unemployment, a truly crappy healthcare system (which I believe he promised to expand to cover more people more cheaply at one point), two wars that aren't over yet and presumably won't be for some time (at least one of them, at any rate), a banking rescue, an auto rescue, a mortgage foreclosure rescue, investment in infrastructure and building a new, green economy.
Somehow I think getting out of Iraq and raising taxes on rich people isn't going to do it. I continue to be somewhat bearish on US treasuries over the medium to long term.
http://money.cnn.com/2009/02/20/news/companies/bank_failures/index.htm?postversion=2009022022
And just to underscore a point, people (equity research people, necessarily more optimistic than risk management research people) think we're looking at a 1,000 US banks failing over the next five years. They're small and medium-sized ones, not headline material, but it's hundreds of billions of dollars nonetheless.
Saturday 21 February 2009
Intro
Hi everyone,
the idea behind this blog is to make a variety of news and opinions regarding economics, finance and politics easily available to a number of people who asked me for it. The background is that I wrote email updates similar to the posts that will follow (if I turn out not to be too lazy to do it) while I was working as an intern with an investment bank to other interns, and I figured I might as well continue to do it.
My own academic background is in economics, with my particular interest in monetary policy and its link to the financial system. Not exactly novel these days I admit (there certainly seem to be plenty of armchair experts out there), but for what it's worth, I can claim at least some degree of formal training in these matters. :p
To get things out of the way and make them clear right from the off: my political leanings are towards classical liberalism, ie the fundamental idea that humans have rights by virtue of what they are and should be free to act in the way they want provided they don't cause harm to others. In other words, my maxim is that there is no right not to be offended, and thus the only morally valid laws are negative, that is they protect people from harm done to them by others. So that means that I'm not a fan of laws locking in place social norms (ie I'm in favour of things such as gay rights, drug legalisation and the right to have an abortion on demand) or trying to redistribute from some to others (in effect declaring the interests or values of one group within society to be more important than those of others). I've also grown extremely cynical when it comes to politics and politicians. I'm not exactly alone in that of course, so I don't expect many annoyed comments on that front.
But this is not meant to be a blog discussing my political philosophy, I just want to make sure that whatever biases I have are out in the open.
So there we go. Enjoy.
the idea behind this blog is to make a variety of news and opinions regarding economics, finance and politics easily available to a number of people who asked me for it. The background is that I wrote email updates similar to the posts that will follow (if I turn out not to be too lazy to do it) while I was working as an intern with an investment bank to other interns, and I figured I might as well continue to do it.
My own academic background is in economics, with my particular interest in monetary policy and its link to the financial system. Not exactly novel these days I admit (there certainly seem to be plenty of armchair experts out there), but for what it's worth, I can claim at least some degree of formal training in these matters. :p
To get things out of the way and make them clear right from the off: my political leanings are towards classical liberalism, ie the fundamental idea that humans have rights by virtue of what they are and should be free to act in the way they want provided they don't cause harm to others. In other words, my maxim is that there is no right not to be offended, and thus the only morally valid laws are negative, that is they protect people from harm done to them by others. So that means that I'm not a fan of laws locking in place social norms (ie I'm in favour of things such as gay rights, drug legalisation and the right to have an abortion on demand) or trying to redistribute from some to others (in effect declaring the interests or values of one group within society to be more important than those of others). I've also grown extremely cynical when it comes to politics and politicians. I'm not exactly alone in that of course, so I don't expect many annoyed comments on that front.
But this is not meant to be a blog discussing my political philosophy, I just want to make sure that whatever biases I have are out in the open.
So there we go. Enjoy.
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