Financial System Reform: Is A Necessary Convergence Finally Occurring? [View article]
Seeking Truth - - -
I am amazed that I keep coming across posts in various places that proclaim there is nothing wrong with the "private enterprise" banking system, all problems are due to government interference. We are going to post a few of these as guest articles on our web site so our readers can get a "balanced view". I may have to edit the word selection in the comments.
As noted in my article, Goldman said a China rebound second half 2011 is a possibility. Therefore, I'd say this is clearly a trade call, not a long-term investment call.
1. Both you and GS are using a rear view mirror, GS to project the future and you to Monday morning quarterback.
2. GS obviously, in the forward looking part of their process, has come to the conclusion in the past few weeks that China's efforts to put the brakes on budding inflation will slow their economy more than previously thought.
With regard to the second point, 2011 is the year of yin-yang for China (see Dirk Ehnts - econintersect.com/b2ev...). The yin is the need for a weak yuan to support export business and the yang is the need for a strong yuan to fight inflation and increase domestic living standards and consumption. Dirk developed this theme very succinctly.
This year will see some crossroads. Some think they will be crossroads of crisis. (See GEFIRA annual report econintersect.com/b2ev....)
MBS Putbacks, Basel III, Insufficient Loss Provisions: How Many More Problems for Banks? [View article]
Tom - - -
I am making the tacit assumption that a healthy asset ratio is 80% or higher. That was what was seen 1993-2008. The ratios seen below 80% before 2003 are associated with the S&L crisis and all the stress put on the banking system as a result. I have read comments from banking experts that many banks were actually insolvent back then, but regulators gave them enough slack so they could earn their way out of the problem in the boom years of the 1990s.
We now have similar poor ratios in what appears to me to be a much bigger problem (it certainly is in dollar terms) and no apparent prospects for another boom decade like the 1990s. That makes me very negative on bank earning prospects for several years or more TBTF bank failures if we don't successfully muddle through, to use John Mauldin's term.
bbro - - -
We have discussed this before and I respect your considered opinion. To avoid problems I believe we must avoid another major recession (or a series of closely spaced smaller recessions) and get a GDP growth rate north of 2.5% (even better above 3%) compounding for several years. This will only happen if we are adding 1.5 million jobs a year (or more to get above 3%). That is what it will take to stop the bleeding in housing which is still a bleed out path for the banks if home prices continue to fall.
My problem is that I am currently unable to rationalize a pathway to get the sustained job growth.
Banks are Still at the Derivatives Casino [View article]
gakushi - - -
The source of the number is Agora Financial whose graphic I used to start my discussion. They attribute the data to U.S. Office of the Comptroller of the Currency. It can be found in Table 1, near the end of www.occ.treas.gov/ftp/....
The Office of the Comptroller of the Currency attributes their data to corporate 10Qs. At this point I don't know how to reconcile the differences between to BAC 10Q yahoo.brand.edgar-onli... and the government data.
More Prosecutions of Investment Banks Coming? [View article]
There will be hesitancy to pursue these cases too vigorously because the capitalization of banks might not withstand too much activity in these areas. The extend and pretend strategy of the Treasury and the Fed could be washed out with devastating results.
Justice is supposed to be blind but I expect that at least one eye will be open in these cases.
What is quite likely is that a few selected cases will be brought at a time and they will be determined on the basis of who is the most able to withstand the financial stress. This maintains a charade of "going after the crooks" while allowing most of them to escape timely prosecution. After some time has passed the public fervor for justice will fade and it may be that many miscreants will go unpunished.
A Brief History and Analysis of Equity Market Correlations vs. My Analysis [View article]
Reggie - - -
Very nice study.
The time variation of correlations is a very valuable metric and I believe is much under utilized. Your added work on the interactions of relative volatility with correlations is genius.
It is interesting that beta increases with volatility - that is what one intuitively expects based on the basic concepts of Modern Portfolio Theory, which has been discredited in some other areas of its application, especially areas depending on the time stability of correlations.
Goldman Gets About One-Third of Revenues From Derivatives [View article]
Edward - - -
More proof that we have wolves (hedge funds) in sheep's (banks') clothing. I remember when GS was an investment banking partnership seeking profitable investment of their own and clients' money. Now they have a significant portion of their business gambling with funds guaranteed by the public.
TARP: What Happened and Does Anyone Care? Part 2 [View article]
Elliott - - -
Another good piece of research. I have one summary comment to add.
You show a total of $933 billion in debt coming due but only $768 billion in liabilities on the balance sheet. Is that due to assumed debt rollovers? If I assume that $768 billion is the net total debt, the $15 billion in income (after debt service - interest), it would more than 50 years to retire the debt from income.
If I take your lower number for income ($10 billion), it takes over 75 years to retire the debt.
What is the average interest on debt? At 5% (I doubt anyone would lend to AIG at that rate - unless it's Uncle Sam), the annual debt service cost is nearly $4 billion. At 10%, it's $8 billion. In a future high interest rate environment, debt service cost could double. Much of the earnings that we have assumed to be available to retire debt could disappear.
It is easy to see a 100+ year scenario to retire AIG debt. Even at a 50 year workout, the company is not viable. Any changes are likely to impact the workout negatively. AIG is simply a dismemberment project and once all viable parts have been sold, the government investment will likely be recovered at cents on the dollar. Private investments will be recovered at similar or lower ratios.
These projections become null and void if there is high inflation. In that case the debt dollars become worth much less and both income and asset sales inflate. The sale value of assets would be the key to workout because debt could be retired cheaply with devalued dollars as asset sale proceeds would escalate on a nominal scale. The higher interest rates needed for rollover would be avoided because the debt would be retired, not rolled over.
TARP: What Happened and Does Anyone Care? Part 1 [View article]
Elliott - - -
Thanks for this comprehensive update. This is an ongoing saga of the financial crisis. The unofficial problem bank list at Calculated Risk is now up to 792 (about 200 more than the beginning of the year) in spite of 103 banks being removed from the list by reason of failure and FDIC take-over. So 300 more banks are in deep trouble than could be identified from public records seven months ago. This increase is more than the total FDIC bank closures to date in this crisis. See seekingalpha.com/insta...
We may be waiting a long time for these programs to be completed. Although it applies to a different concept, I am reminded of an old saying: "Payback is hell."
I am a former Columbia Funds holder and I don't believe I ever received any of that investor settlement. I could be wrong because over the years I have received a large number of pittances resulting from class action suits.
Understandably GS did not mention the overhang of potential tort cases from other "clients" who lost money on Goldman investment products. When they contemplate the compensation ACA and RBS received from the Abacus case, they will be coming after GS to get theirs.
There is an updated version of this article at piedmonthudson.wordpre.../ which includes an additional section summarizing Barry Ritholtz's more constructive view of the settlement. The update was written before Barry posted the article you linked. His earlier posts were combined to create today's article.
Financial System Reform: Is A Necessary Convergence Finally Occurring? [View article]
I am amazed that I keep coming across posts in various places that proclaim there is nothing wrong with the "private enterprise" banking system, all problems are due to government interference. We are going to post a few of these as guest articles on our web site so our readers can get a "balanced view". I may have to edit the word selection in the comments.
Goldman Reversal: Avoid China [View article]
As noted in my article, Goldman said a China rebound second half 2011 is a possibility. Therefore, I'd say this is clearly a trade call, not a long-term investment call.
Goldman Reversal: Avoid China [View article]
There are two unrelated factors involved:
1. Both you and GS are using a rear view mirror, GS to project the future and you to Monday morning quarterback.
2. GS obviously, in the forward looking part of their process, has come to the conclusion in the past few weeks that China's efforts to put the brakes on budding inflation will slow their economy more than previously thought.
With regard to the second point, 2011 is the year of yin-yang for China (see Dirk Ehnts - econintersect.com/b2ev...). The yin is the need for a weak yuan to support export business and the yang is the need for a strong yuan to fight inflation and increase domestic living standards and consumption. Dirk developed this theme very succinctly.
This year will see some crossroads. Some think they will be crossroads of crisis. (See GEFIRA annual report econintersect.com/b2ev....)
MBS Putbacks, Basel III, Insufficient Loss Provisions: How Many More Problems for Banks? [View article]
I am making the tacit assumption that a healthy asset ratio is 80% or higher. That was what was seen 1993-2008. The ratios seen below 80% before 2003 are associated with the S&L crisis and all the stress put on the banking system as a result. I have read comments from banking experts that many banks were actually insolvent back then, but regulators gave them enough slack so they could earn their way out of the problem in the boom years of the 1990s.
We now have similar poor ratios in what appears to me to be a much bigger problem (it certainly is in dollar terms) and no apparent prospects for another boom decade like the 1990s. That makes me very negative on bank earning prospects for several years or more TBTF bank failures if we don't successfully muddle through, to use John Mauldin's term.
bbro - - -
We have discussed this before and I respect your considered opinion. To avoid problems I believe we must avoid another major recession (or a series of closely spaced smaller recessions) and get a GDP growth rate north of 2.5% (even better above 3%) compounding for several years. This will only happen if we are adding 1.5 million jobs a year (or more to get above 3%). That is what it will take to stop the bleeding in housing which is still a bleed out path for the banks if home prices continue to fall.
My problem is that I am currently unable to rationalize a pathway to get the sustained job growth.
Banks are Still at the Derivatives Casino [View article]
The source of the number is Agora Financial whose graphic I used to start my discussion. They attribute the data to U.S. Office of the Comptroller of the Currency. It can be found in Table 1, near the end of www.occ.treas.gov/ftp/....
The Office of the Comptroller of the Currency attributes their data to corporate 10Qs. At this point I don't know how to reconcile the differences between to BAC 10Q yahoo.brand.edgar-onli... and the government data.
Any thoughts?
More Prosecutions of Investment Banks Coming? [View article]
Justice is supposed to be blind but I expect that at least one eye will be open in these cases.
What is quite likely is that a few selected cases will be brought at a time and they will be determined on the basis of who is the most able to withstand the financial stress. This maintains a charade of "going after the crooks" while allowing most of them to escape timely prosecution. After some time has passed the public fervor for justice will fade and it may be that many miscreants will go unpunished.
A Brief History and Analysis of Equity Market Correlations vs. My Analysis [View article]
Very nice study.
The time variation of correlations is a very valuable metric and I believe is much under utilized. Your added work on the interactions of relative volatility with correlations is genius.
It is interesting that beta increases with volatility - that is what one intuitively expects based on the basic concepts of Modern Portfolio Theory, which has been discredited in some other areas of its application, especially areas depending on the time stability of correlations.
Top notch work here. Congratulations.
Goldman Gets About One-Third of Revenues From Derivatives [View article]
More proof that we have wolves (hedge funds) in sheep's (banks') clothing. I remember when GS was an investment banking partnership seeking profitable investment of their own and clients' money. Now they have a significant portion of their business gambling with funds guaranteed by the public.
TARP: What Happened and Does Anyone Care? Part 2 [View article]
Another good piece of research. I have one summary comment to add.
You show a total of $933 billion in debt coming due but only $768 billion in liabilities on the balance sheet. Is that due to assumed debt rollovers? If I assume that $768 billion is the net total debt, the $15 billion in income (after debt service - interest), it would more than 50 years to retire the debt from income.
If I take your lower number for income ($10 billion), it takes over 75 years to retire the debt.
What is the average interest on debt? At 5% (I doubt anyone would lend to AIG at that rate - unless it's Uncle Sam), the annual debt service cost is nearly $4 billion. At 10%, it's $8 billion. In a future high interest rate environment, debt service cost could double. Much of the earnings that we have assumed to be available to retire debt could disappear.
It is easy to see a 100+ year scenario to retire AIG debt. Even at a 50 year workout, the company is not viable. Any changes are likely to impact the workout negatively. AIG is simply a dismemberment project and once all viable parts have been sold, the government investment will likely be recovered at cents on the dollar. Private investments will be recovered at similar or lower ratios.
These projections become null and void if there is high inflation. In that case the debt dollars become worth much less and both income and asset sales inflate. The sale value of assets would be the key to workout because debt could be retired cheaply with devalued dollars as asset sale proceeds would escalate on a nominal scale. The higher interest rates needed for rollover would be avoided because the debt would be retired, not rolled over.
TARP: What Happened and Does Anyone Care? Part 1 [View article]
Thanks for this comprehensive update. This is an ongoing saga of the financial crisis. The unofficial problem bank list at Calculated Risk is now up to 792 (about 200 more than the beginning of the year) in spite of 103 banks being removed from the list by reason of failure and FDIC take-over. So 300 more banks are in deep trouble than could be identified from public records seven months ago. This increase is more than the total FDIC bank closures to date in this crisis. See seekingalpha.com/insta...
We may be waiting a long time for these programs to be completed. Although it applies to a different concept, I am reminded of an old saying: "Payback is hell."
Great Day for Goldman [View article]
I am a former Columbia Funds holder and I don't believe I ever received any of that investor settlement. I could be wrong because over the years I have received a large number of pittances resulting from class action suits.
Goldman Sachs Starts Looking Human [View article]
Great Day for Goldman [View article]
There is an updated version of this article at piedmonthudson.wordpre.../ which includes an additional section summarizing Barry Ritholtz's more constructive view of the settlement. The update was written before Barry posted the article you linked. His earlier posts were combined to create today's article.
Great Day for Goldman [View article]
Great Day for Goldman [View article]
I agree with your point, but I am not an attorney either. Hopefully some who are will comment.