naked capitalism Thu 2010-09-30 08:22 EDT

Why Backstopping Repo is a Bad Idea

The normally sound Gillian Tett of the Financial Times endorses an idea that is both dangerous and unnecessary, namely, government backstopping of the system of short-term collateralized lending called repo, for ``sale with agreement to repurchase.''...But the real problem is that the only securities that were once considered to be suitable were those of the very highest quality, namely Treasuries. The real problem is in widening the market beyond that. If you have absolutely impeccable collateral, you don't care if your counterparty goes belly up if you aren't at risk of losses on the assets you hold...the real problem is the use of low quality collateral...why would we possibly WANT a system that might down the road encourage the pledging of less than stellar instruments as repo?...we need to go back and look hard at why the need for repo has risen since 2001, and how much is related to legitimate activity. The fact that it grew much more rapidly than the economy overall suggests not...official efforts should proceed...to shrink the repo market (as we've recommended for a market that has contributed to the growth of repo, credit default swaps)...our efforts NOT to restrain banks leads to a tremendous tax on all of us...a banking industry that creates global crises is negative value added from a societal standpoint. It is purely extractive...

Backstopping Repo; Bad Ideas; naked capitalism.

Tue 2010-08-03 15:02 EDT

Economics of Contempt: Anatomy of Lehman's Failure, and the Importance of Liquidity Requirements

Remember the Lehman Examiner's Report? The 4000+ page report by the court-appointed examiner was lauded for a couple of weeks after it was released, and then largely forgotten. The media and blogosphere quickly moved on to the next outrage-du-jour...Well, I did not forget about it, and thanks to the uptick in flights -- and thus reading time -- in the last few months, I can now credibly claim to have read....well, not every single word in the Examiner's Report (some appendices are just pages of CUSIPs), but all of the substantive sections...Anton Valukas and the lawyers at Jenner & Block who wrote the Examiner's Report did a masterful job. I was, and continue to be, in awe of the quality and comprehensiveness of the report...think I have a pretty good handle on what went wrong at Lehman, and why it failed...they were misrepresenting their liquidity pool. In a huge way...the brazenness of their misrepresentation was shocking...Including the clearing-bank collateral in its liquidity pool was not only inappropriate, but also aggressively deceptive...Lehman was also including in its liquidity pool non-central bank eligible CLOs and CDOs. And they had the audacity to mark these CLOs and CDOs at 100 (par) for purposes of the liquidity pool, even though JPMorgan's third-party pricing vendor marked them at 50--60...

Anatomy; contempt; economic; important; Lehman's failure; liquidity requirements.

Sat 2010-07-24 16:13 EDT

Disequilibria: A Constant State Of Instability >> The Shadow Banking System

RueTheDay

What we saw from mid-2007 through early-2009 was a run on the shadow banking system. There were two primary channels by which the shadow banking system operated: the Money Market/Commercial Paper Channel and the Repo Channel...we have largely unregulated [money market funds (MMMFs)] taking deposits (largely withdrawable on demand and usually checkable) and making the equivalent of loans, in other words, acting as banks. Except that the MMMFs were not subject to much in the way of prudential regulation beyond some broad parameters that dictated what investments they could buy, did not have access to FDIC deposit insurance, and did not have lender of last resort access to the Fed's discount window. They were a disaster waiting to happen...Repos also became a very popular mechanism for raising funds in the pre-crisis days, with MMMFs becoming large buyers of repos (lenders) and the broker dealers becoming both buyers and sellers (borrowers and lenders)...during the crisis...the classic maturity mismatch situation...concerns about the quality of commercial paper...triggered by the collapse of Lehman...Without the traditional protection of deposit insurance and lender of last resort financing by the Fed, it turned into a full blown panic...Any meaningful financial reform must bring the shadow banking system out of the shadows. It must be treated as banking, and its institutions regulated as banks...

constant state; Disequilibria; instability; Shadow banks Systems.

naked capitalism Mon 2010-07-19 17:02 EDT

Elizabeth Warren in Treasury Crosshairs Again, Geithner Opposes Her as Head of Consumer Financial Services Protection Agency

To say there is no love lost between Treasury and Elizabeth Warren is probably putting it mildly. Treasury was gunning for her ouster in early 2009...During the period when the COP was openly and effectively critical of the TARP, there was also a full court press in the media against Warren. Warren is the obvious choice to head the otherwise-guaranteed-to-be-a-joke consumer financial services agency due to set up its shingle at the Fed. She has been a tireless consumer advocate, is trusted and well liked by the public at large, an effective communicator and a respected legal scholar, and is willing to stare down political opponents. All those qualities make her hugely threatening. Banksters and their lobbyist allies have been saying loudly and clearly that they are firmly opposed to having Warren head the new consumer agency. So, predictably, Geithner acts as their water-carrier...this Administration...may actually see loss of the Democrat majority in the House as a win (as in is finding creative ways to rationalize its fallen standing as a possible longer-term advantage). First, it allows Team Obama to blame whatever happens (or fails to happen) on the Republicans. Second, it gives the Administration plenty of air cover to become more openly corporatist (recall Clinton's famed move to the right after the 1994 mid term debacle).

Consumer Financial Services Protection Agency; Elizabeth Warren; Geithner opposes; Head; naked capitalism; Treasury Crosshairs.

Culture of Life News Mon 2010-04-26 18:42 EDT

Xenophobia Is Very Destructive

Elaine Supkis

Japan always interests me because it is at the center of the ZIRP system which is, in the Cave of Wealth and Death, the place where economies go to die. Despite a 50 year record of successfully preventing any US penetration of Japan's domestic market while selling higher and higher quality goods to the US, the country finds itself mired in a perpetual depression. The gap between the rich and poor are widening while the country struggles with xenophobia which prevents foreign influences from seeping in...

Culture; DESTRUCTION; Life News; Xenophobia.

Mon 2010-04-26 14:55 EDT

When Outsourcing Fails: One in Five German Firms Leaving China - SPIEGEL ONLINE - News - International

SPIEGEL ONLINE, Hamburg, Germany

Citing fast-climbing labor costs and pesky production quality problems, a growing number of German companies are doing an about face and pulling their manufacturing operations out of China. Some are searching for countries with lower wages while others are returning production to Germany...

German Firms Leaving China; International; news; Outsourcing Fails; Spiegel Online.

naked capitalism Wed 2010-04-07 19:38 EDT

Have Bloggers ``Won''? And Is That a Bad Thing?

...[MSM difficulties] Richard Kline: ...Most of the MSM is owned by large corporations which abhor any serious questioning of the status quo. Most of the MSM decided a generation ago to pitch their product at the soft middle of the demographic curve; that's `dumb down' to those ow you who need a scorecard. Most of the MSM went to recent journalism school and bought into the idea of false `balancing' which has castrated their editorial opinion in favor of whoever is driving debate by telling the latest Big Lie. Then there is the problem of self-interested 'sources,' hardly new, and manageable when journalists were allowed to have an opinion themselves, but deleterious when they are supposed to be `neutral,' i.e. readily maniplulatible. Then there is the issue that too many journalists have decided to become propagandists for the status quo of the moment, making their reportage the worst kind of bandwagon swillage. Then too, MSM has responded, or rather _not_ responded to the emergence of new kinds of media spreading current information reportage: just when the MSM needs established `quality brand' to fall back on they find that they gutted the brand to fellate large shareholders and the interests of the same.

bad things; bloggers; naked capitalism; won.

naked capitalism Sun 2010-02-28 13:13 EST

Das: Mark to Make Believe -- Still Toxic After All These Years!

Satyajit Das

n 2007, as the credit crisis commenced, paradoxically, nobody actually defaulted. Outside of sub-prime delinquencies, corporate defaults were at a record low. Instead, investors in high quality (AAA or AA) rated securities, that are unlikely to suffer real losses if held to maturity, faced paper -- mark-to-market (``MtM'') -- losses. In modern financial markets, market values drive asset values, profits and losses, risk calculations and the value of collateral supporting loans. Accounting standards, both in the U.S.A. and internationally, are now based on theoretically sound market values that are problematic in practice. The standards emerged from the past financial crisis where the use of ``historic cost'' accounting meant that losses on loans remained undisclosed because they continued to be carried at face value. The standards also reflect the fact that many modern financial instruments (such as derivatives) can only be accounted for in MtM framework. MtM accounting itself is flawed. There are difficulties in establishing real values of many instruments. It creates volatility in earnings attributable to inefficiencies in markets rather than real changes in financial position...

Das; Make-Believe; marked; naked capitalism; toxic; years.

naked capitalism Tue 2009-12-22 11:53 EST

``Basel III -- the OK, the Unfinished and the Ugly''

Richard Smith, who works for the London consultancy Cubematch whichspecialises in risk, collateral and change management

The BIS analysis of the 2007-09 banking crisis floats my boat. Here is their headline list of causes: excessive on- and off-balance sheet leverage, diminutive and low quality capital bases, insufficient liquidity buffers at banks.

Basel III; naked capitalism; Ok; ugly; unfinished.

zero hedge Mon 2009-12-21 19:54 EST

Cautionary Observations From A Chronological Analysis Of The S&P 500 Balance Sheet

...In essence the entire S&P is one big High Yield credit, and would likely be rated in the B2/B area by the rating agencies (assuming these had any credibility). As such, the cost of debt of the combined S&P if it were a standalone company would be around 7.5-8.5%. That it is currently much lower due to the Fed's intervention in the interest rate market is an aberration: look for cost of debt (and, by implication, overall capital) to spike broadly over the next several years, as normalcy (hopefully) returns. ...Both the return on assets (EBITDA/total assets) and return on equity (EBITDA/Shareholders' Equity) has plunged...companies are scrambling to beef up the asset side of their balance sheets even as debt continues to be a major threat. The problem, however, as this brief exercise has shown, is that incremental assets are of lesser and lesser quality (even assuming no major goodwill impairments in the future), and the actual cash they generate continues eroding.

Cautionary Observations; Chronological Analysis; P 500 Balance Sheet; s; Zero Hedge.

Willem Buiter's Maverecon Sat 2009-10-10 14:00 EDT

Expect little and you may yet be disappointed

Willem Buiter

...the most disappointing development this year was the performance of president Barack Obama and his administration - and my expectations were modest to begin with...On the fiscal side, Barack Obama is presiding over the biggest peace-time government deficits and public debt build-up ever. According to my back-of-the-envelope calculations there is about a 10 percent of GDP gap between the medium and longer-term spending plans of the Obama administration and the taxes the Congress is willing and able to impose. The reality that you cannot run a West-European welfare state (with decent quality health care, decent pre-school, primary and secondary school education for all), rebuild America's crumbling infrastructure, invest in the environment and fulfill your post-imperial global strategic ambitions while raising 33 percent of GDP in taxes, has not yet dawned on the Obama administration or on the American people at large...Clearly, the qualities one needs to get elected to high office in western democracies are not qualities that are likely to be helpful once you have achieved high office and are expected to govern and lead. To survive the selection process to become president you have to be able to stitch together a coalition of special interests that can provide sufficient financial and sweat equity resources to win this grueling race to the top. Once you get there, you should shed the unfortunate baggage you accumulated on your way up and govern in the interest of all the people. Few can do that. Apparently Obama is not one of them.

disappointment; expectations; Willem Buiter's Maverecon.

The Realignment Project Tue 2009-09-22 12:31 EDT

Making the Public (Transit) Beautiful

One of the rhetorical strategies of the economic right's cultural politics is to associate the free market with individual pleasure, aesthetic beauty, and technological progress, while associating the public sector with the oppression of the crowd, the spartan ugliness of ``civil service issue,'' and general associations with low-quality, outmoded, cheap machinery...the car, a luxury commodity associated with wealth and prestige, is an extension of your (now much cooler) person, it's fast and futuristic, and it's well-designed and new...By contrast, the dominant media image of mass transit plays up its worst qualities as a social nightmare: it's crowded, claustrophobic, there's no privacy and people and bumping into you, it's noisy and smells terrible, maybe it's dangerous, you're getting delayed again, this is what you take to get where you have to go, not where you want to go. And part of the cultural work of the left in championing the cause of the public must be to counter-act this kind of imagery. Because the public can and should be beautiful.

beauty; makes; public; Realignment Project; transition.

The Guardian World News Sun 2009-09-20 10:57 EDT

Sarkozy refuses to fret over GDP

Nicolas Sarkozy called for a "great revolution" in the way national wealth is measured today, throwing his weight behind a report which criticises "GDP fetishism" and prioritises quality of life over financial growth. Speaking days before the G20 summit in Pittsburgh, France's president urged the rest of the world to follow his example as he ordered a shake-up in research methods aimed at providing a more balanced reading of countries' performance. Endorsing the recommendations of a report given to him by Nobel prize winners Joseph Stiglitz and Amartya Sen, he said governments should do away with the "religion of statistics" in which financial prowess was the sole indicator of a country's state of health.

fret; GDP; Guardian World News; Sarkozy refuses.

Satyajit Das's Blog - Fear & Loathing in Financial Products Sun 2009-08-30 12:20 EDT

El-dollardo Economics

In the 1980s, the Japanese were taking over the world. In the 1990s, it was going to be an ?Asian? century. These days the pundits are betting on the ?Chinese Age?. Like all such glib predictions, despite their superficial appeal, they mask complex undercurrents and issues that require careful study. Business journalist Michael Schuman's The Miracle: The Epic Story of Asia's Quest for Wealth. Paul Midler's Poorly Made in China; quality fade. Underlying both `The Miracle' and `Poorly Made in China' is a view of the emerging world best captured by the term `Orientalism', associated with Edward Said...the West's view of the East was shaped by political power and unequal commercial exchange. Said's work built on George Orwell's criticism of colonialism. Former Chinese premier Zhao Ziyang's secret journal `Prisoner of the State' provides antidote to a Western view of East Asia.

El-dollardo Economics; fears; financial products; loath; Satyajit Das's Blog.

Tue 2009-04-21 00:00 EDT

Hussman Funds: Trading Volume Separates Bull Markets from Bear Rallies

``ew bull markets, whether at their inception or soon after, have a history of recruiting noticeable improvements in volume. So far this rally lacks that important quality.''

Bear Rally; Hussman Funds; Trading Volume Separates Bull Markets.

Tue 2009-01-06 00:00 EST

Hussman Funds: Low Quality's Round Trip

The bubble in low-quality stocks is the third to deflate, by William Hester

Hussman Funds; Low Quality's; trips.

Tue 2008-06-03 00:00 EDT

[ The Financial Ninja ]: Really Scary Fed Charts: MAY, False Alarm?

"ed has basically traded in high quality instruments, US treasuries, for low quality instruments that the market doesn't want at all"

False Alarm; Financial Ninja; Really Scary Fed Charts.

Fri 2008-05-30 00:00 EDT

Sudden Debt: The Bernanke Put: What Next?

Fed balance sheet quality deterioration

Bernanke Put; Sudden Debt.

Mon 2007-11-12 00:00 EST

Minyanville -

Minyan Peter: Bank Earnings Post Mortem (2007-10-26); originate for resale/securitization business model broken; balance sheets growing; credit quality deteriorating; formerly abundant credit becoming scarce resource

Minyanville.