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The Problem Isn't Explaining Derivatives; It Is That the Policy Is Dangerously Flawed

April 1, 2009

Analysis of: "Daddy, tell me, what exactly is a derivative?" | www.ft.com

The article is an example of the confusion that prevails in Washington over the relationship between Public Relations, which is the dominant activity, and Public Policy, which tends to get lost in the fog of what amounts to propaganda.  Carville understands that money has been showered on corrupt bankers, but there is a tendency to downplay policy failures by portraying them as communication problems, or worse, as problems of perception. The predicament that has snared Obama is that after promising change and that his administration would be free of the influence of lobbyists and special interests, he has continued the policy of bailing out insolvent. Too Big To Fail, financial institutions and has installed Tim Geithner, one of the principal architects of the failed and flawed policies of previous administrations, to run it.

A Flawed Monetary Policy Model Caused the Housing Bubble and Will Cause Another

March 30, 2009

Analysis of:Did the Fed Cause the Housing Bubble? | online.wsj.com

This article is important because it provides a variety of expert views as to the causes of the housing bubble that led to the current financial crisis.  Most of the analyses contribute valuable insights but miss the mark.  One can use these essays to speculate as to how the next bubble will develop, given that the flawed model that produced previous bubbles is still in place.

Geithner Plan Creates New GSE Model (C, BAC, JPM, WFC, AIG, GS, MS)

March 27, 2009

Analysis of:Battles Over Reform Plan Lie Ahead, by Edmund L. Andrews | nytimes.com

The looming struggle over financial regulation will put in play all of the business models and regulatory relationships that affect the domestic and international financial services industry. The purpose of the plan seems to be to provide cover for the ad hoc actions of the Bush and Obama Treasury departments and to validate existing industry practices by Restoring Confidence in the securities markets so that they can return to securitization as usual. At Thursday's hearing featuring Sec. Geithner, several Members warned that the identification of a number of companies as Systemically Significant will create incentives for those companies to leverage their special relationship with the government to crowd out competitors.  When their strategies run their course, taxpayers will be left with more bills, and the international financial system will be threatened yet again.

Supremes Step Into Murky Area of Mutual Fund Governance

March 16, 2009

Analysis of:Supreme Court takes case on mutual fund fees | www.chicagotribune.com

Given the performance of the stock market, it is logical that mutual funds would be of great interest, and it is an old cliche that the Court reads the newspapers. Experts like John Bogle have long questioned the mutual fund model and whether customers get value in return for their fees. The House Committee on Education and Labor is expected to take up the question of mutual funds as an investment vehicle for workers. If this model is overturned, it would affect both the business and the flow of funds into stocks.

Analysts and Investors Can Ignore WF Chief's Call to Stress Cash Flow Over Value

March 16, 2009

Analysis of:FASB Moves Toward Giving Banks More Flexibility on Fair Value by Ian Katz, Bloomberg | www.bloomberg.com

FASB responded ASAP to the demand by the House Financial Services Committee last Thrusday for immediate action to provide bankers relief from Mark to Market accounting. FASB has proposed guidance to allow banks to separate Credit risk from Liquidity risk in order to attenuate writedowns they might otherwise have to take on hard-to-value financial assets. An avowed purpose of the proposal is to close some of the gap between industry capital as stated by the regulators, which investors do not trust, and Tangible Net Equity, which banks contend entails an excessively severe markdown of assets banks claim they can hold to maturity. However, banks may not have sufficient capital, unless it is supplied by the government, to continue to hold these assets.

Banking Industry Jawbones for MTM Change

March 11, 2009

Analysis of:SEC won't suspend mark to market - source | money.cnn.com

Because the financial crisis is the most controversial issue now and likely to remain so indefinitely, the question of how assets are valued on the books of large financial institutions is of great importance.  Hundreds of billions of dollars has alread been spent on a number of programs designed to aid troubled banks by injecting funds into them, and the authorities have vowed to implement the original purpose of the rescue program, which is to buy troubled assets.  For many years, the banking industry has insisted on wide latitude in the valuation of securities and other assets that have declined in value during the crisis.  As values have declined, the demands for relief from Mark to Market rules have become more shrill.  Lately bankers have proposed that Congress empower the Federal Reserve to change the accounting rules, on the ground that the other agencies with jurisdiction have refusted to provide relief.  Chairman Bernanke's words did not totally dispel this notion.

Stress Tests Will Raise More Questions and Delay Crisis Resolution

March 2, 2009

Analysis of:GLG News Commentary: Stress tests and temporary nationalization of US banks | www.bloomberg.com

Ms. Christie's article is of great importance, because the actions of the authorities in dealing with this phase of the ongoing financial crisis will largely determine how long it goes on and how much damage it does. There is confusion over the very nature of capital, let alone its amount and over the proper roles of government and the banks in the economy.

Financial Regulators Persist in Recycling Models That Have Repeatedly Failed

February 4, 2008

Analysis of:Will 6 Be a Lucky Number for Halston? (NYT-Feb. 3) | www.nytimes.com

The article lays out a scenario in the fashion industry that has led to repeated failure.  A similar scenario has played out in the financial services industry, causing hundreds of billions to be lost each time. Quoting from the article:  "But millions and millions of dollars went down the drain anyway.  Offices were rented and refurbished.  Publicists called editors, and editors wrote articles and dug out photos of Halston in his white-raincoat-and-black-turtleneck phase, the photos serving as talismans or warnings -- oh, what did it matter.  Sooner or later someone decided that Halston the label was too much trouble, and another set of lawyers and accountants was called to undo everything. "In 1993, just three years after Halston's death, in California, Amy Spindler, of NYT, conveyed the hope and cynicism in seeing the label revived.  She said it was `the fasion equivalent of reuniting the Beatles.'"

Microsoft May Be Floundering, but Big Banks Are Lost

February 4, 2008

Analysis of:Yahoo Deal Is Big, but Is IT the Next Big Thing? (NYT-Feb. 3) | www.nytimes.com

1.  The article questions whether Microsoft's pursuit of Yahoo means that it has lost its ability to innovate and is instead trying to catch up by looking backward at a company that competes for online advertising, a business that may be eclipsed by an unknown startup. 2.  The article refers to the culture of Silicon Valley, where one day's leaders are challenged by startups, and Joseph Schumpeter's theory of Creative Destruction is allowed to operate.

Intrigue Persists As Regulators Press Monoline Bailout

February 4, 2008

Analysis of:8 Banks Discuss Aid for Bond Insurer (NYT-Feb. 2) | www.nytimes.com

1.  Inconsistent statements are coming from NY and WI insurance regulators. 2.  Commentators also differ on the condition of the monolines. 3.  If these companies need rescue, there are implications for other financial companies that rely on ratings of Moody's and S&P.

RiskMetrics IPO Raises Intriguing Questions

January 31, 2008

Analysis of:Collapse of the Subprime Mortgage Market Shines Spotlight on Risk Management and RiskMetrics | biz.yahoo.com

The article is important because it relates to questions of high interest regarding how to respond to the need for more transparency and better governance in financial companies.

Law and Order: SIV -- Intrigue in MS Case

January 29, 2008

Analysis of:Morgan Stanley Reclassifies Assets, Receives Subpoenas on Subprime Debt | online.wsj.com

There are important implications in three areas: 1.  Financial. 2.  Regulatory. 3.  Political.

Time Will Tell Re Monoline Model

January 29, 2008

Analysis of:MBIA, Ambac Downgrades May Cost Market $200 Billion | www.bloomberg.com

The article is important because it highlights the assumptions that are being made as to the future of the monoline insurers, based on the degree of confidence in the risk management practices the companies have followed in the past versus what the subprime crisis has revealed to have been lacking in risk management across the board as all actors in the chain that composes the originate-to-securitize model pursued volume and fees at the expense of prudence.

Private Equity Could Be Part of Answer As Big Banks Consolidate

January 28, 2008

Analysis of:What's Next for the Banks? by Andy Kessler (WSJ - Jan. 24., p. A17) | www.wsj.com

1.  Banks have difficulty making the returns investors demand without taking undue risk. 2.  Kessler predicts that investment banks will lead the consolidation he foresees.  However, private equity could play a key role.  

Source of Premature Rumors of Monoline Bailout Decries Rumors

January 28, 2008

Analysis of:Word Of Bond Insurer Bailout Plan Premature: Says Dinallo | www.propertyandcasualtyinsurancenews.com

1.  The collapse of the leading monoline stocks, MBIA (MBI) and Ambac (ABK) have been cited as an important contributor to recent market turmoil. 2.  The stocks stage a recovery on rumors, generated by the NY Insurance Commissioner but now disavowed by him, that he was on the case and prepared to orchestrate a bailout. 3.  An old cliche is that the market abhors uncertainty.  This situation could not be more uncertain.

Stimulus Package Is a Mistake

January 24, 2008

Analysis of:Bernanke Says Fiscal Stimulus Could Revive Expansion | www.bloomberg.com

The article presents the conventional view about the merits of a stimulus package to give a short-term boost to the economy.  The numbers have already been overtaken by events, as there has already been an extraordinary 75bp reduction in the FFR, and the Bush proposal is at least twice the number mentioned in the article.

Senate Banking Committee Chairman Dodd Proposes Buying Distressed Mortgages

January 24, 2008

Analysis of:Key U.S. senator proposes company to buy mortgages | www.reuters.com

The proposal was made in the context of Dodd announcing his plans for the Senate Banking Committee for the coming congressional session as an idea for bossting the economy beyond measures contained in the pending stimulus package.  A new GSE would be capitalized initially with $10b to $20b that would buy troubled mortgages, mark them down, and pass the savings on to homeowners.  The new mortgages would be backed by Freddie Mac, Fannie Mae, or FHA.

Senate Banking Committee Chairman Dodd Vows Early Action To Curb ILCs

January 24, 2008

Analysis of:Home Depot hopes for bank as ILC freeze winds down | www.reuters.com

The article provides a useful summary of the utility of an ILC charter to promote certain business models, such as home improvement, and it identifies some of the major companies that already have ILCs:  Merrill Lynch (MER), General Electric (GE), Toyota Motor Co., UnitedHealth Group (UNH). As for the prospects that pending applications will be acted upon, the article notes that the FDIC will allow "wiggle room" for congressional action after the moratorium expires, and it will take time to consider the applications.  HD's application has been pending since 2006.

Fed Action Will Cause Problems Later

January 23, 2008

Analysis of:Asia Markets Sink Amid Pessimism Over US | biz.yahoo.com

This is a classic case of the Fed scrambling to fight a fire and contributing to future inflation. The problem is not a recession per se but that the locus of the crisis is within the financial sector.  The crisis is likely to persist for several years, because future downgrades of credit instruments are baked in the cake.

Another Example of Failure of the Credit Rating Model

January 23, 2008

Analysis of:The next banking crisis on the way | articles.moneycentral.msn.com

To the extent that CDS swaps were insured or decisions to invest in them were made on credit ratings, the subprime experience shows that those ratings have proven to be faulty. Various instruments will be downgraded over the next several years, and as they are, the financial and legal systems will be challenged anew.

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