Category: Finance

Economics Update

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Well, Ben Bernanke went before Congress, and said that there needs to be an extended period of low rates to ensure that the recovery.

Of course, in terms of real estate, the question is whether or not the Fed continues its policies to keep mortgage rates low, and considering the fact that new home sales fell to the lowest level on record in January, and mortgage applications fell this week, with the purchase index hitting its lowest level since 1997, housing is still on life support.

For that matter, so is commercial real estate, with the architecture billings index falling in January.

In any case, Bernanke’s talk about continued low rates drove the dollar down, which in turn drove oil up.

Geithner Knifes Volker Rule

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Surprise, Geithner and his Treasury Department is giving the green light for Congress to gut the Volker rule, and allow federally insured institutions to gamble with our money.

Well, he never like Volker anyway:

The Obama administration lowered expectations Tuesday for the “Volcker rule” to curb risky trading by banks, emphasizing “limits” rather than an outright ban, as Congress shied from the original proposal.

The Treasury Department said in a statement that it supports “mandatory limits” on banks’ proprietary trading, in which they trade for their own accounts. The administration last month had called for an outright ban on such trading.

Seriously, the combination or regulatory capture and cowardice by the Obama administration is beginning to get to me.

Greenspan Calls Meltdown “Greatest Financial Crisis”

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Normally, I don’t listen to Alan Greenspan, but when he says the the financial meltdown is worse than the Great Depression, it bears noting:

Former Federal Reserve Chairman Alan Greenspan said on Tuesday the U.S. economic recovery was ‘extremely unbalanced,’ driven largely by high earners benefiting from recovering stock markets and large corporations.

Small businesses and the jobless are still suffering from the aftermath of a credit crunch that was ‘by far the greatest financial crisis, globally, ever’ — including the 1930s Great Depression, said Greenspan in an address to a Credit Union National Association conference.

(emphasis mine)

While I have very little confidence in judgment of Andrea Mitchell’s husband, the time that any economist of any note says “worse than the Great Depression,” it’s time to think about why we aren’t fixing this.

Quote of the Day

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Roger Ehrenberg, looks at a number of financial transactions, including the rather mundane one known as leasing nails what should be the core of any reform of the financial markets:

Both cash-market and derivative instruments should be put to the “business purpose” test. Accounting rule-makers, with support of the SEC, should move towards a “principles-based” system where common sense, and not black-and-white rules around which myriad loopholes can be found, should become the new paradigm. But let’s be clear. The issue isn’t derivatives; it’s all financial transactions whose objective is to deceive or to weaken financial transparency.

(emphasis mine)

He notes that a very old transaction, leasing, has been used for the same purpose for years:

Consider leasing, a transaction that has been popular for over 50 years. As the industry has evolved, transactions such as sale/leasebacks and “asset defeasance” have been used to synthetically borrow money without the obligation being reflected as debt on the balance sheet. The form of the transaction: a lease. The substance of the transaction: a borrowing. The multi-trillion dollar securitization industry has the same motivation: moving assets (and liabilities) off the balance sheet, while economic recourse still exists should asset values and/or debt ratings drop. This is what the market discovered when Citigroup’s multi-billion structured investment vehicles (SIVs) began to fail and the assets and liabilities came back onto its financial statements. What is the proper characterization of a contractually obligated stream of payments? Debt. How should a portfolio of assets and associated liabilities be treated if the risks and rewards of ownership haven’t been completely transferred? As never having left the balance sheet. Yet the accounting profession, with the SEC’s support, has enabled this charade to continue.

The idea of a business purpose rule is a very good one.

Signs of the Apocalypse, IMF Edition

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The IMF is coming out in favor of capital controls for developing nations:

International Monetary Fund economists, reversing the fund’s past opposition to capital controls, urged developing nations to consider using taxes and regulation to moderate vast inflows of capital so they don’t produce asset bubbles and other financial calamities. It said emerging markets with controls in place had fared better than others in the global downturn.

The recommendation is the IMF’s firmest embrace of capital controls and a reversal of advice it gave developing nations just three years ago. The IMF has long championed the free flow of capital, as a corollary to the free flow of trade, to help developing countries prosper. But the global financial crisis has prompted the fund to rethink long-held beliefs. It recently suggested the world might be better off with a higher level of inflation than central bankers now are targeting.

(emphasis mine)

I think that a lot of this has to do with the Asian financial crisis 13 years ago, and the fact that the only nation to implemented capital controls, Malaysia, was through the crisis with a lot less pain than their Asian neighbors.

It only took them 13 years, and an increasingly hostile response from the developing world, for them to get the message.

Well, it’s to their credit that it happened before some high level official visiting a 3rd world nation in crisis was actually lynched by an angry crowd, which puts them ahead of American investment bankers, Larry Summers, and Timothy Geithner, I guess.

I Said that This Would Happen

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I said that there would be blowback when GM decided not to sell Opel and suck up all the state aid itself, and it appears taht I was right

We are now seeing that the taskforce reviewing GM’s plans with Opel is saying that, they are inadequate, and aid should not be awarded:

General Motors’ restructuring plan for Opel/Vauxhall has been dealt a potentially serious setback on Wednesday after a German government taskforce said it had doubts about the scheme.

The US carmaker presented the turnaround plan for its lossmaking European operations last week and formally applied to Berlin for €1.5bn ($2bn) in loans or guarantees – the biggest portion of the €3.3bn it says it needs to finance its plan.

However, the federal task force advising Berlin on GM’s plans has deemed the proposals “unqualified for government loan guarantees”, three officials in German states with GM plants told the Financial Times on Wednesday.

(emphasis mine)

Part of the reason for this, though it is not explicitly spoken, is the belief that GM will strip mine Opel to support its US operations.

There has been a tepid denial from the board about this report, but I’m inclined to believe that they want guarantees that the money is not going to Detroit.

Deep Thought

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With Greece mired in a debt crisis of their own making, and coming to the EU for aid, perhaps one of the conditions for any aid should be for them to stop being so pissy about admitting Macedonia to the EU, because the Greeks want to claim Alexander the Great was “Greek.”

He was a Macedonian, who led a nation that did not speak Greek, though he, as a royal child, was tutored by the best Greek scholars, and doubtless spoke Greek, albeit with a foreign accent.

But, even if he were Greek, it was 2000 years ago, and the government of Greece needs to focus on the hear and now.

It Appears that $1,000,000.00+ a Year is not Enough to Do Your Damn Job

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Click for full size

Waiting for one of They Who Must Not Be Named to talk

At least not if you work in finance.

You see someone prominent gave a talk about personal transgressions, and they decided to take time off, and watch the TV.

You know, for the amount of money that you are making, I would suggest that you just Tivo it!

Seriously, I really need to go long on tarred and feathered bankers futures.

With the CPAC* Conference Going On

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The first rule of Investment Banking Club is,
you do not talk about Investment Banking Club.

You generally know where to look for selfishness and an immature sense of entitlement, but Moe Tkacik finds something that makes the folks at CPAC looking like Mahatma Ghandi.

Rather unsurprisingly, she finds it on wall street, where the bankers are, “As mad as hell,” about all the nasty things that people say about them ……… All while sucking down 7 figure salaries and bonuses.

You see, the bankers had a get together, and they invited her:

Still, I had heard of no plan for any sort of public up-close-and-personal plutocrat-on-plutocrat spectacle to give voice to the inchoate counterrevolution, no Millionaire’s March offering group catharsis to the angry wealthy white. But on Tuesday, Jan. 26, I received a mass e-mail from Schwartz Communications with the subject: “Wall Street Strikes Back at White House.”

It was held the trading floor of John Thomas† Financial, and (yet again) it defies belief, but suffice it to say that there was a Republican candidate for the US Senate, the bald guy is the head of the firm, Anastasios (Thomas) Belesis, who is a piece of work all on his own:

Belesis’s FINRA profile is similarly alarming. Investors have accused him of churning, fraud, excessive trading, breach of contract and other violations. Regulators have ordered him to repay investors more than a million dollars.

So, he’s mad as hell, and he’s not going to take it any more.

Of course, in a just world, he would be banned from the securities industry for life.

This story continues with epic tails of sexual harassment and the disposal whipped cream.

Just go read it.

*Conservative Political Action Comittee
†Yes, “John Thomas” is a bit of slang in Britain for a portion of the male anatomy, and it’s very apt here, and yes, there is a real investment bank by that name.

Sergey Aleynikov Pleads Not Guilty on Charges of High Frequency Trading Software Theft

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So, he is going to trial.

I’m surprised.

In my earlier examinations of this matter, it appeared that Goldman Sachs was considering letting it slide, because Mr. Aleynikov was requesting something that they did not want to provide.

The basics are fairly simple: High Frequency Trading (HFT) is basically a way to front run the entire market, and this guy was their head software guy in the process, so the trial should be interesting.

Taibbi On Wall Street (Again)

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I really cannot do justice to it.

He pens another gem, titled, “Wall Street’s Bailout Hustle,” where he juxtaposes Wall Street and street bunco games, and finds startling similarities:

The only reason such apathy exists, however, is because there’s still a widespread misunderstanding of how exactly Wall Street “earns” its money, with emphasis on the quotation marks around “earns.” The question everyone should be asking, as one bailout recipient after another posts massive profits — Goldman reported $13.4 billion in profits last year, after paying out that $16.2 billion in bonuses and compensation — is this: In an economy as horrible as ours, with every factory town between New York and Los Angeles looking like those hollowed-out ghost ships we see on History Channel documentaries like Shipwrecks of the Great Lakes, where in the hell did Wall Street’s eye-popping profits come from, exactly? Did Goldman go from bailout city to $13.4 billion in the black because, as Blankfein suggests, its “performance” was just that awesome? A year and a half after they were minutes away from bankruptcy, how are these assholes not only back on their feet again, but hauling in bonuses at the same rate they were during the bubble?

The answer to that question is basically twofold: They raped the taxpayer, and they raped their clients.

Just go read it.

Umm……Holy Crap?

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The Federal Reserve has just raised the interest rate on its discount window, an emergency lending facility used by banks, by 25 basis points, from ½% to ¾%, and shortened the term of the loans from 28 days to 24 hours. (The 28 days bit was an emergency measure, so the overnight duration is the pre-meltdown status quo)

This facility is used for short term lending, but it’s not frequently used, as generally, for overnight liquidity, etc., banks use the Federal Funds Rate, which dictates what rate banks use when they lend to each other.

The increase is on the difference between the discount window and the Federal Funds Rate. The discount window is more expensive, because its use is discouraged, the Fed prefers banks to deal in commercial money, not government money.

The Fed is saying that this does not represent a change in policy, and this is a small part of of the monetary picture, to be sure, but it is a tightening, and actions, as the saying goes, speak louder than words.

My guess, and my Federal Reserve Kremlinology is by no means authoritative, is that now that Bernanke has been safely confirmed by the Senate, he is looking toward creating an environment in which monetary policy can work.

Monetary policy, at least on the expansionary side of the equation, work now, because interest rates are below 1% and you can’t cut interest rates below 0%, at least not under the current regulatory environment.*

It’s called the “Zero Bound” problem, and I’m sure that Bernanke, as well as the whole Fed, wants to be back in a world where inflation and employment can be managed in both directions though monetary tools.

Krugman actually wants this too, he’s been clear on this.

I just think that this move is somewhat premature.

The full statement is after the break.

*Actually, you can, with inflation devaluing currency, as I have said many times, but raising inflation targets gives central bankers the hives.


Press Release
Federal Reserve Press Release

Release Date: February 18, 2010
For release at 4:30 p.m. EDT

The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.

Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve’s lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19.

In addition, the Board announced that, effective on March 18, the typical maximum maturity for primary credit loans will be shortened to overnight. Primary credit is provided by Reserve Banks on a fully secured basis to depository institutions that are in generally sound condition as a backup source of funds. Finally, the Board announced that it had raised the minimum bid rate for the Term Auction Facility (TAF) by 1/4 percentage point to 1/2 percent. The final TAF auction will be on March 8, 2010.

Easing the terms of primary credit was one of the Federal Reserve’s first responses to the financial crisis. On August 17, 2007, the Federal Reserve reduced the spread of the primary credit rate over the FOMC’s target for the federal funds rate to 1/2 percentage point, from 1 percentage point, and lengthened the typical maximum maturity from overnight to 30 days. On December 12, 2007, the Federal Reserve created the TAF to further improve the access of depository institutions to term funding. On March 16, 2008, the Federal Reserve lowered the spread of the primary credit rate over the target federal funds rate to 1/4 percentage point and extended the maximum maturity of primary credit loans to 90 days.

Subsequently, in response to improving conditions in wholesale funding markets, on June 25, 2009, the Federal Reserve initiated a gradual reduction in TAF auction sizes. As announced on November 17, 2009, and implemented on January 14, 2010, the Federal Reserve began the process of normalizing the terms on primary credit by reducing the typical maximum maturity to 28 days.

The increase in the discount rate announced Thursday widens the spread between the primary credit rate and the top of the FOMC’s 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point. The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve’s primary credit facility only as a backup source of funds. The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread.
2010 Monetary Policy Releases

Last update: February 18, 2010

Germany Gets It

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The German tax authorities have decided to pay €2.5 million to a whistle blower who stole information on 1500 accounts, with the payments being dependent on the data being real. (See also here, and here) in order to catch tax evaders.

They did this before, with Lichtenstein in 2008, where payment netted tax revenues in excess of €200 million.

The Swiss have a problem, because I bought a 4 Gig memory stick a year ago for $12, and it’s smaller than a pack of gum.

Even if you assume 100K per account, this stick can hold about 40,000 accounts on each memory stick, and with the going rate from German tax authorities of about €1,666 per account, that memory stick could net an insider well over €50 million, with a bulk discount.

Their style of bank secrecy is likely to go away, because it is unsupportable.

Now, Germany needs to learn about the “Perp walk”.

Bye-Bye Gold Bugs

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The IMF has had significant gold holdings, and it does not do them much good.

When you provide and loans, shoveling out gold does not work that well, you want to use currency of some sort, preferably something that can be transferred electronically, so they have been selling it off for some time.

Well, the, “central banks of India, Mauritius and Sri Lanka,” have been buying up gold, for reasons that appear to be tied to batsh%$ insane medieval monetary ideas, so the IMF gold has not effected the commercial markets for gold.

Well, it appears that, “India, Mauritius and Sri Lanka,” have finally had enough, and the IMF plans to sell 191.3 tons of gold, in order to be able to make low cost loans to poor nations that have been hurt from the financial crisis.

Basically, when everyone goes over crazy about an investment, it’s time to get out.

If you own gold for speculative purposes, it’s a good time to get out ………… Now.

If you are buying a gold wedding band, that’s still cool, but take my advice: Elope, and use the money saved for a party.

Economics Update

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Mortgage applications fell last week, with home purchases leading the way relative to refinancing on the way down.

Even so, housing starts rose sharply, though as Calculated Risk notes, a lot of this is likely from home builders trying to complete houses in time before the latest round of housing tax credits expire at the end of April.

In the world of actually making stuff, US industrial output rose more than expected in January.

In the “looming train wrecks” category, the newly released minutes from the Fed’s January meeting show increasing confidence in the economy, it appears that there are some strong voices for the Federal Reserve to significantly shrinking their balance sheet, would would likely result in a significant, probably in excess of 50 basis points (½%), increases in mortgage rates, which would make an already shaky real estate market even more problematic.

In any case, the news on housing starts and industrial output drove both oil and the dollar is higher.

Big Surprise

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What causes this?

Could it be ………… Satan?

Barry Ritholtz finds a rather delicious piece of information showing that fraud in earnings statements is rather widespread, to be fair, it originally came from the Wall Street Journal, but since that’s behind a pay wall, and Ritholtz summarizes nicely, he gets the link.

You see, when you look at companies reporting earnings per share, the general number is rounded to the whole cent, but when you delve deeper into the numbers you get fractions of a cent per share, and lo and behold, a fraction of 0.4¢ a share is conspicuously absent from these numbers?

Why would this be?

It’s not the work of Satan, but the work of accountants.

Basically, if your earnings are 13.4¢ a share, you announce earnings of 13¢ a share, but if they are 13.5¢ a share, you announce earnings of 14¢ a share.

This number is statistically significant.

If you saw this in a poll you would immediately conclude that someone was just making sh%$ up.

Quoting Ritholtz, quoting the Journal:

The study, which examined nearly half a million earnings reports over a 27-year period, reached its conclusion by going beyond the standard per-share earnings results that are reported in pennies and analyzing the numbers down to the 10th of a cent.

That deeper look showed that companies tend to nudge their earnings numbers up by a 10th of a cent or two. That lets them round results up to the highest cent. Investors often snap up shares of companies that beat earnings expectations, even by a cent, and, likewise, sell off shares of companies that don’t make their numbers.”

I love the euphemism “meet investor expectations” as opposed to the more colloquial “lie cheat and steal.”

It also points out the need for the SEC to develop a Department of Quantitative Analysis filled with math geeks and computers, doing nothing but sifting through data looking for investor fraud. I’d bet they would get more convictions than the rest of the SEC combined. (If someone in the SEC would call me, I’ll help you set it up).

(emphasis mine)

This is the sort of application of “quants” in finance that I could wholeheartedly get behind.