Incompetent Regulators

'Catastrophic interaction of governmental and managerial incompetence that led to the collapse of Fannie Mae and Lehman Brothers' (Anatole Kaletsky, The Times, 12 Jan 2009)

Spending no solution to debt problem

Jim Rogers - in-depth Bloomberg interview. In case you also wonder if spending more is the right way to reduce the debt mountain.

Alan Greenspan - long on Words, short on Insight

That is what he produced for years, and Media and Investors were hanging on his every uttering. It went so far that the gullible Commentariat even tried to get a glimpse of his suitcase when he walked from the Fed to Congress and tried to devine what the 'Sage' might intend to say based on correlation with previous events.
We are grateful for this gem of a quote we found on the Marketoracle: I think further comment is not required.
“Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants… With these advances in technology, lenders have taken advantage of credit scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers… Where once more marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending,… fostering constructive innovation that is both responsive to market demand and beneficial to consumers.”-- Alan Greenspan, April 2005

Alan Greenspan - long on Words, short on Insight

That is what he produced for years, and Media and Investors were hanging on his every uttering. It went so far that the gullible Commentariat even tried to get a glimpse of his suitcase when he walked from the Fed to Congress and tried to devine what the 'Sage' might intend to say based on correlation with previous events.
We are grateful for this gem of a quote we found on the Marketoracle: I think further comment is not required.
“Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants… With these advances in technology, lenders have taken advantage of credit scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers… Where once more marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending,… fostering constructive innovation that is both responsive to market demand and beneficial to consumers.”-- Alan Greenspan, April 2005

Rating Agencies - only radical reform will do

An interesting interview with the CEO of Assured Guaranty (Bankstocks.com, 24 Nov 2008) reminded me that - despite all the hot air from regulators, politicians and industry practitioners - the problem of rating agencies and their role in the financial markets is as far from solution as ever.
The Number 1, 2 and 3 Priority must be to prohibit the issuers to pay the rating agencies. That will introduce a major reality check and clip their wings substantially - apart from helping to prevent more abuse.
90% of the ratings process can be based on numbers anyway and with the ease of access to number-crunching software most investors should be able to do most of the research themselves. After all, that is what they get the management fees for in the first place and any self-respecting investment institution has a credit research department in place already to do this task.
Credit research basically follows a 'margin of safety' approach. So calculating various key rations should be a great first step to filter out suitable investments. Subjective Analysis belongs more to the equity analysts and investors.
Most current reform proposals are just a waste of time, for example registering agencies in Europe - a favourite pastime for the Commissars in the EU and their hangers-on. It suits their Stalinist mindset.

Paulson as market indicator

Paulson - A Bumbling Giant - every time he speaks it seems to pay to short the market

Dangers of Derivatives

Martin Mayer wrote this article in 1999 and it shows that the risks associates with derivatives was not only foreseen by Warren Buffet. Now it is up to the regulators to make sure that this cannot happen again.

Iceland to get $10 Billion in bail-Out loans - who is to benefit?

Only four weeks ago we learned - already in disbelief about that number - that the IMF would give a $2 Billion bail-out package to Iceland. Latest announcements in the press have - again - raised this number to an even more staggering 10 (!!) billion US Dollars. We are not surprised by anything anymore. Who said that you could never go wrong underestimating the intelligence of civil servants (especially when they spend other people's money)?
Iceland has a population of just 320,000 inhabitants. Now that the IMF has generously decided to give a $6 Billion loan to the country it is worth putting these numbers in perspective: a simple calculation tells you that every man, woman and child in the country will have to bear the burden of about $20,000 in debt which translates to around $75,000 for the average family.
Just imagine - if the United States would be the recipient of this bailout it would translate into the staggering sum of $6 Trillion - that is $6,000,000,000,000 for those not yet too familiar with trillions - as the population of the US is about 1000times larger.
Anna Schwartz just raised serious doubts about the US rescue package - in particular about its transparency and efficacy. We agree with her and would raise the same question: who really benefits from the Iceland loan? Does it benefit the country or is it supposed to bail out imprudent lenders that advanced more loans to the country than it could ever have serviced in the light of level-headed credit appraisals?

Lack of Disclosure

'There's clearly not enough disclosure to show if [the policymakers] are approaching the problem in a systematic manner or are playing favourites' (Anna Schwartz, Barron's, 27 Oct 2008)

Double Standards of Regulators

'When the going gets tough, the tough in commerce, industry and particularly finance get going -- fast as their corporate jets will carry them to Washington, begging to be rescued' (Alan Abelson, Barron's, 20 Oct 2008). Lehman executives are served with subpoenas - but when will the regulators be called to account?

Lessons from the Credit Crunch

It is too early to fully understand how it could happen that the World's Financial System got close to a global meltdown during the past 12 months. Some blame greedy bankers, others lay the blame squarely at the foot of the (US) consumers. Institutional Investors also appear entangled as they allowed managements too much leeway and even egged them on to pursue ever-more risky expansion plans. However, we tend to think that regulators - and their paymasters the politicians - may have to take a large part of the blame.
Unfortunately they are the party that is the least likely to bear the full cost of their mistakes. Shareholders have to suffer from dramatically shrunken share prices, scores of bankers have lost their jobs, or are about to in the near future. Bureaucrats are happily engaged in the blame game and are joined by academics and media people who often are also less than objective in their judgement.

Impact of taking the King's Shilling

It is too early to assess the impact of the various bank rescue packages on the future structure of the banking and securities industry. The obvious inconsistencies, however, will put a serious spanner in the works for all those firms that will take the King's Shilling. While we are not condoning the excesses of the financial service industry we think that the way the regulators handled the developing crisis since the summer of 2007 was disgraceful and added fuel to the fire instead of containing it.

Iceland gets $2 Bio bailout from IMF

But who bails out homeowners pushed out of their homes?

Mortgage Reform - one aspect overlooked by George Soros

While I agree with most points that Soros makes today (Wall Street Journal, 10 Oct 2008) I think that he should have focused more on one important aspect: there have to be limits on the amount mortgage providers are allowed to lend against property. In previous times it was just inconceivable that anyone - let alone 24 year olds barely out of school - was able to borrow more than a conservative amount (60-70%) against the value of a property. In addition there were strict limits on the multiple of income and this income was also much more carefully documented. These lending policies would be simple to monitor by senior bank management and regulators alike - no need to rocket scientists or highly paid risk managers! It would also be appropriate if similar regulations would be applied to commercial property lending where (near) 100% mortgages were also available to persuasive property 'tycoons' during the height of the asset bubble.

Short Selling - Argument against

Several Hedge Funds and their industry representative today make thinly-veiled threats that they might consider to move their business away from London if the ban on short-selling the shares of financial service companies is not lifted soon. We had quite a lively reaction from a number of readers and business partners. They argue that this may mean that national regulators would let themselves be pushed into a 'race to the bottom' in terms of regulatory standards. The consequence might then be that international regulations will be introduced to avoid this. In addition, one correspondent pointed out that the argument about the pros and cons of short selling could only be resolved by a detailed forensic analysis of all the transactions involving the shares of banks during the past 14 months. This would have to include equity and credit derivatives and all related off-balance sheet instruments.

Maturity Mismatch - obvious starting point for reform

Regulators are running around like head-less chicken, applying completely arbitrary principles when deciding on an ad-hoc basis what to do in each individual problem case and therefore just fanning the flames of the credit bushfire.
A key feature of the ongoing banking crisis is the fact that institutions that may well have balance sheets that in the long run would turn out to be more than viable are facing the equivalent of a 'run on the bank'. Is Hypo Real Estate, to pick just one example, really ready for the knackers yard or is the fact that it cannot roll over short-term financing nothing but a short-term liquidity problem?
Whichever way this sorry saga ends one simple lesson must be learned: it is just not enough to force banks to finance themselves if possible with more genuine retail deposits but they must be made to finance their assets with liabilities that are matching by maturity. Only small deviations from this principle should be allowed. Monitoring this should be a relatively simple task for regulators and therefore eminently practicable. It just is lunacy to finance long-term mortgage lending with funds raised in the Inter-Bank market on an overnight basis.

Inept Regulators allow bank run

Every Age has his prophet, but 'Houdini' misses the key point: the Credit Crunch is a bush-fire where inept regulators allowed a bank-run to develop.

London and New York after the Credit Crunch

Both Cities may well remain the dominant financial centres after the credit crunch has been consigned to history. The common language will continue to be the language of commerce for decades, the financial, legal and accounting brains will not decamp en masse, but the shine will be less intense than before. Just looking at a financial portal in India - a country that we know very little about - the other day brought home the fact that in that country alone forces are at work that will create a marketplace that will dwarf most other domestic markets in the near future. Who will be a big beneficiary? While London may well be one of them we would also give good chances to Singapore and Dubai as they are much nearer to the action and possess more cultural affinity. In a similar vein China and Russia will develop internal markets that will pull business away from the old centres and in Europe we can envisage a multi-polar network of regional centres that can stand their own against the gravitational pull of London and New York. Property Developers take note: with communication costs at rock bottom you should not bank of continued expansion in these two cities.

Short Selling - Argument in favour

Arturo Bris argues (Wall Street Journal, 29 Sept 2008) that the ban on short sales of financial shares should be lifted. We think that the argument is not convincing. The real question that would have to be asked is: what would have happened to the shares of financial companies if there would have been no short selling? The level of short interest that Bris quotes in the article is truly enormous (19.1 % of outstanding shares in March 2008!). We just cannot accept that this amount of short selling did not have a substantial influence on the level of share prices of banks and investment dealers.
That the market in shares where short selling has been banned after the Lehman collapse is now less liquid should not surprise anyone. It is only to be expected - and maybe desired - that there will be less trading when short sellers are out of the market. They are likely to be the most active market participants - some of them are reputed to have turned over their portfolio up to two times (!!) EVERY DAY.
For an interesting detailed rejoinder to Bris' argument you may wish to read a post on www.deepcapture.com. The blog also exposes the incomprehensible - not to stay stupid - attitude of the SEC with respect to abusive short selling.

Credit is always scarce

With respect to the current credit crisis Ann Pettifor claims (Financial Times, 30 Sept 2008) that 'there are no intrinsic reasons for the scarcity of capital'. The quote is taken from Keynes' General Theory. The quote may make sense if read in context but it makes little sense when applied like this to offer a solution to the credit crisis. It just panders to the public's general desire for free - or nearly free - credit when the economic problem is just the opposite: allocation of scarce resources to their best use. Interestingly, when trying to find out more about the author we spotted that in 2006 she wrote a book entitled 'The coming First World Debt Crisis' - now that might be an interesting read!