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?

Hats off to Peter Wuffli

We salute Peter Wuffli at UBS for turning down a Sfr 12 million bonus entitlement out of solidarity with the bank's staff and shareholders. Would it not be nice if Chuck Prince and Stan O'Neal showed similar contrition?

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)

Values in Banking

'Banks must rediscover their Victorian values' (William Rees-Mogg, The Times, 27 Oct 2008)

100% retention bonuses for Brokers

It seems strange that BofA is ready to offer substantial retention bonuses for the retail brokers at Merrill Lynch. Apart from the image-problem that this generosity might create in the present political climate one has to ask the following questions: where would all these brokers move to if they would not receive a retention bonus of this magnitude? Would clients be comfortable moving their funds in these uncertain times? Does Merrill Lynch not have any adequate no-compete clauses in its terms of employment that prevent the brokers from taking their clients with them? And if the financial advisers get these juicy retention payments, what will their customers thing most of whom probably have lost a lot of money?

Are Banks on the way to become Utilities?

This weekend's reports that some major international banks may be interested in joining the bidding for Gatwick Airport here in the UK raises an interesting question: will the regulators allow banks to put their equity capital at risk in proprietary investments that are basically unrelated to their main business?
The lesson of the past 14 months should be that banks (and their cousins, in particular the major investment banks) have strayed too far from their raison d'etre which is intermediation in the credit or securities markets.
Instead, managements have pursued a strategy of gambling their capital on ever-rising asset values in a variety of asset classes - be it in property or 'private' equity.
If the banking and securities industry is to be put on a more stable footing it will be necessary to for both sectors to behave more utilities. If banking provides the basic 'plumbing' for a market economy the similarity between the banking and utility sector should be obvious.
26-Oct-08