Regular readers may well have formed the impression that I am not a particular fan of The Suit...Timothy Geither, the Secretary of the Treasury of the United States. I'm not, but not even inmy nightmares could I have dreamed up a more self-serving, nonsensical, historically innacurate and completely partisian piece of rubbish that The Suit served up today on the op ed page of the Wall Street Journal. It is a panderinhg piece for the implementation of possibly the worst piece of legislation in the past 25 years, the Dodd/Frank consumer reform and protection act--and that's saying something. If not implemented he warns we will have learned nothing and forgotten everything relating to our most recent financial crisis caused, when you get right down to the bottom line, a lack of adaquate regulation. Perhaps we should explore The Suits unique positioning over the years that allows him to make this claim.
The Leader and his water carriers love to blame most of what occurred on financial deregulation, implying that it was the Republican Party that pushed for it. True, but what is forgotten that the real champion of deregulation was Mr. Clinton's Treasury Secretary, Robert Rubin and the deregulatory act was signed not by Mr. Bush but by Mr. Clinton on 1999. Central to that effort especially in dealing with the Congress was Mr. Rubin and his off-side? Why, none other than The Suit, who was deregulating every step of the way. In the clubbie little world of Goldman Sachs alumni, it was Mr. Rubin who recommended that The Suit became President of the NY Fed to the then Chairman, a sitting Goldman partner, who steared the nomination through the Board and thereby put The Suit in the chair where he was responsible for the most powerful and important financial oversight institution in the world. In this role he failed miserably, not because of lack of resources or authority, but because of lack of interest, knowledge and leadership. Understand this: the Fed needed no legislation; if you were reviewed and under the control of the Fed and told to jump, the only answer was, "how high?" Oh sure, you could drop a dime or two and maybe get cut a bit of slack but in the end you did as you were told. Problem was no one was told to jump. As an aside, the present President, Billy the Dud is also an alumnus of Goldman but that's another story.
In regard to The Suit, even his admirers...and there are many...will admit that his management approach is bottom up; not one to put himself in a position to take the first bullet is our boy. He is a consenus builder and when his Rabbis like the way things are going he's not going to be the one that points out 40x leverage might not be great for the system. Oh no. In the article he points out that he had no authority over the Bear Sterns and Fanny and Freddies of this world which is true in a strict lega; sense but the appalling exposure of Bear and Lehman was well known and debated within the Fed because of the counterparties who WERE regulated by the Fed...and debated, and debated, and debated. Nothing emerged but silence. He blames the derivative market as well which played little or no role in the events leading to the collapse but were a major cause for concern after the fact. And his claim that Dodd/Frank is not complex? He is made to look the fool by the testimony of Bernanke this week who informed the Congress that after a year there is still no firm timetable for implementation.
Have we ever seen the likes of a Secretary of the Treasury like this one? All one can ask is honesty and competence and in this we have neither. This is a political water-carrier rather than the primus inter pares of financial leadership in the western world. One almost wishes that MF Global never happened; in Corzine one had a real leader: of course he almost caused Goldman to go broke in '97 with his Russian bet, destroyed New Jersey and bankrupted MF Global. He was the replacement: just remember I did say "almost."
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Nothing happened in Euroland today...certainly nothing good. Thursday is the day. Have a great weekend.
Friday, March 2, 2012
Thursday, March 1, 2012
A DEFAULT BY ANY OTHER NAME...
I really want to see what happens to the CDSs out there and just how much of the Greek debt is covered by these things. But first we have to have a default and according to the ISDA, we don't have one...yet.
This morning, the ISDA ruled that the mere existence of a Collective Action Clause inserted by the Greeks ex post facto in bond indentures governed by Greek law does not constitute a default and neither does unequal treatment for the ECB in any write-down of Greek debt. Ok so far. But what happens if certain bond holder refuse to fold and do not join the restructuring even in the face of these clauses? Ah, that's a very different thing indeed...or at least that was indicated today in the announcement. Do we know or suspect any more than we did yesterday and if not why is this important? Well, that's because the Euros, whether by design or by accident, put themselves into a bit of a box. While all this was going on at the ISDA, the Euros announced that there would be no bail-out on March 9 unless all the private creditors agreed to the debt swap. With that comment and the comments from the ISDA today, I would think that bondholders holding CDS cover obtained a significant amount of leverage against agreeing to the swap. At some point they are going to get 30% on the face amount and if you were a speculative purchaser such as a hedge or vulture fund, your downside is probably limited. Sooooo...this could get very interesting over the next few days as the clock is really running. Let's see who blinks first.
I watched a bit of Mr. Bernanke today completing his second day of Congressional testimony, this time before the Senate. Not much to add. What struck me was that in two days none of our elected officials seemed overly concerned about the absolute flood of liquidity taking place all over the globe. It's astounding, really. There isn't a central bank around that isn't just shoveling money out the door and yet it doesn't appear to be a concerted action. Nor is there any expressed concern about rising inflation or commodity prices. Time once again to talk to with my Really Smart Friend, Larry, to get to the bottom of this. Bet he's as baffled as am I. Later.
This morning, the ISDA ruled that the mere existence of a Collective Action Clause inserted by the Greeks ex post facto in bond indentures governed by Greek law does not constitute a default and neither does unequal treatment for the ECB in any write-down of Greek debt. Ok so far. But what happens if certain bond holder refuse to fold and do not join the restructuring even in the face of these clauses? Ah, that's a very different thing indeed...or at least that was indicated today in the announcement. Do we know or suspect any more than we did yesterday and if not why is this important? Well, that's because the Euros, whether by design or by accident, put themselves into a bit of a box. While all this was going on at the ISDA, the Euros announced that there would be no bail-out on March 9 unless all the private creditors agreed to the debt swap. With that comment and the comments from the ISDA today, I would think that bondholders holding CDS cover obtained a significant amount of leverage against agreeing to the swap. At some point they are going to get 30% on the face amount and if you were a speculative purchaser such as a hedge or vulture fund, your downside is probably limited. Sooooo...this could get very interesting over the next few days as the clock is really running. Let's see who blinks first.
I watched a bit of Mr. Bernanke today completing his second day of Congressional testimony, this time before the Senate. Not much to add. What struck me was that in two days none of our elected officials seemed overly concerned about the absolute flood of liquidity taking place all over the globe. It's astounding, really. There isn't a central bank around that isn't just shoveling money out the door and yet it doesn't appear to be a concerted action. Nor is there any expressed concern about rising inflation or commodity prices. Time once again to talk to with my Really Smart Friend, Larry, to get to the bottom of this. Bet he's as baffled as am I. Later.
Wednesday, February 29, 2012
GOOD OR BAD?
Funny question to ask about 529 billion, isn't it? That's the number Helicopter Mario dropped into the Euro banks today. Direct deposits. Same day funds. Spend it as you will. Problem solved or merely an expression of how bad the problem really is? That's a trillion Euros in 3 months right out of thin air. I must say, the sheer audacity of it gives one pause. I guess that's what central banks are there for but when I said the Euros are going to bail out their banks I never conceived of such a series of steps. Breathtaking.
And yet, without growth in Euroland what has been accomplished? Despite brave talk, Greece is conceeded to be dying, Portugal sees no light ant the end of the tunnel, and as Carter points out in his note today, Spain missed all of it's targets and is warning of more misses in the future. Will the Finns, he askes, turn a light on the entire mess? I doubt it. They will follow their brother states recognizing perhaps that there is no reason for them to play the heavy when their view of the future is probably the future itself. The next few days will determine whether the Euro banks will begin to engage in the normal funding of the system or will the paralysis continue. If the decision is the latter the conclusion will be that the can continues to be kicked with the invariable result unchanged. I think, however, that we have finally reached the end game which has been so long predicted. Draghi indicated today that he is done. Whether that is his final word or that he is merely trying to scare the banks and governments remains to be seen. I think though that he must realize that if this doesn't work then there is little more he can do.
Meanwhile on the political front, the mutterings between nations continue. The Suit has once again jumped into the fray calling for trillions in Euros for a higher, stronger "ring fence" to the delight, I am sure, of Frau Merkel whose voters' money will make up the majority of any increase in the bail-out fund, and who has no intention of committing political suicide. A penny more and that's where the Finns will go tilt not to mention the Dutch and all the rest of that virtuous northern mob. Mr. Bernanke, in his mandated talk to the Congress today did little to improve upon the mood. Whilst he held that things were looking better they weren't looking that much better an he expected them to remain lousy through 2013. The job situation had improved but he reiterated what some observers have been saying for weeks now that the improvement in the job numbers reflects the fact that a whole bunch of people have permanently dropped out of the job search. Frankly, I don't know who to believe anymore but the mood down at the coffee shop seems slightly up beat. BUT, petrol hit $3.89 today which I know sounds awfully low to our European friends but is ugly to us Yanks especially in the fly-over zone which is a low price region. It's a big country and people think nothing of driving 60 miles round trip to work every day The distances are vast compaired, say, to Europe. Buses and trains don't work out here. I know we use a lot but understand, please, the differences.
In that vein, there is a very importand get-together this weekend in D.C. between The Leader and the Prime Minister of Israel. They hate each other. Subject: Iran. This overlay has yet to be factored in regard to the global economic climate to the extent I think it should be. We should watch this carefully for all the good it will do. And Monday's openings. As I write the temperature is 16C. We expect snow by midnight. Don't tell me things aren't troubled out there.
And yet, without growth in Euroland what has been accomplished? Despite brave talk, Greece is conceeded to be dying, Portugal sees no light ant the end of the tunnel, and as Carter points out in his note today, Spain missed all of it's targets and is warning of more misses in the future. Will the Finns, he askes, turn a light on the entire mess? I doubt it. They will follow their brother states recognizing perhaps that there is no reason for them to play the heavy when their view of the future is probably the future itself. The next few days will determine whether the Euro banks will begin to engage in the normal funding of the system or will the paralysis continue. If the decision is the latter the conclusion will be that the can continues to be kicked with the invariable result unchanged. I think, however, that we have finally reached the end game which has been so long predicted. Draghi indicated today that he is done. Whether that is his final word or that he is merely trying to scare the banks and governments remains to be seen. I think though that he must realize that if this doesn't work then there is little more he can do.
Meanwhile on the political front, the mutterings between nations continue. The Suit has once again jumped into the fray calling for trillions in Euros for a higher, stronger "ring fence" to the delight, I am sure, of Frau Merkel whose voters' money will make up the majority of any increase in the bail-out fund, and who has no intention of committing political suicide. A penny more and that's where the Finns will go tilt not to mention the Dutch and all the rest of that virtuous northern mob. Mr. Bernanke, in his mandated talk to the Congress today did little to improve upon the mood. Whilst he held that things were looking better they weren't looking that much better an he expected them to remain lousy through 2013. The job situation had improved but he reiterated what some observers have been saying for weeks now that the improvement in the job numbers reflects the fact that a whole bunch of people have permanently dropped out of the job search. Frankly, I don't know who to believe anymore but the mood down at the coffee shop seems slightly up beat. BUT, petrol hit $3.89 today which I know sounds awfully low to our European friends but is ugly to us Yanks especially in the fly-over zone which is a low price region. It's a big country and people think nothing of driving 60 miles round trip to work every day The distances are vast compaired, say, to Europe. Buses and trains don't work out here. I know we use a lot but understand, please, the differences.
In that vein, there is a very importand get-together this weekend in D.C. between The Leader and the Prime Minister of Israel. They hate each other. Subject: Iran. This overlay has yet to be factored in regard to the global economic climate to the extent I think it should be. We should watch this carefully for all the good it will do. And Monday's openings. As I write the temperature is 16C. We expect snow by midnight. Don't tell me things aren't troubled out there.
Tuesday, February 28, 2012
LOOKING BRIGHTER
Not the international financial situation of course, but for a blogger things are really beginning to look up. In the morning, the International Swaps and Derivatives Association, "ISDA", announced that they were to decide whether to meet to decide as to whether the loss of 70% on Greek bonds by investors who would be forced into the restructuring as a result of the retroactive effect of the Collective Action Clause inserted into all Greek Law bond debentures after the fact amounted to an event of default. Honest to God. Hours later they said they would on Thursday. You can't make this stuff up. Of course it's a default unless they say it isn't. Got it? Now if they say it isn't what does that do for CDSs in general, the market and pricing thereof and the risk assessments by managers who though they had things hedged by way of CDSs and suddenly wake up to find out that they my well be geared well above agreed-to covenants and considerably short of regulatory capital? Please Lord, make them say no. The blogisphere has material for months.
Oh, remember that agreement all the Euro states came up with...the gang of 17...to get and keep their fiscal house in order? Well, this afternoon, the Taoiseach--that's Prime Minister in the Irish--told his parliament that upon the advice of counsel, the decision to ratify what had been agreed would have to be put to a referendum. Now for the other Euros that's no big deal because only 12 states are needed to bring this thing into force...it's sort of like a collective action agreement...but if a member state ops out, the European bail out facility will not be made available if needed and that for Ireland could be a very big deal indeed The early polling as to whether this thing passes is slightly less than 50-50. Depending upon how much time is available to scare the populace, I think the referendum fails, so here's to you Carter, for suggesting that next up in the short the hell out of the sovereign debt game is Ireland. And things were going so well in the sense that Ireland was making slow but steady progress flying under the radar.
On top of all this the Euroland ministers postponed a meeting that was supposed to be held today to discuss the disbursement to 130 billion to Greece until Friday for reason that were unclear to say the least. Dissention in the group? Most probably. Remember, the money is supposed to go into a suspense account and dribbled out as Greece met it's targets. It seems that there has been no agreement as to what those targets might be so we're all working on those so we can get this ball rolling. Sure.
Anyway, things were really looking up until Massimo called around noon.
"You see the numbers from the banks today, Charlie? I tell you so, no?"
"You tell me so, yes, Massimo. The Italian banks borrowed big time from the ECB and bought Italian Bonds."
"And whatta that do, eh? The banks they make a fortune! For free. No capital!. It's what I tell you, no?"
"Yes Massimo, it's exactly what you told me."
"And we do it again for sure. I tell you Charlie, Mario do the right thing and we take care of Italia. Look at the yields. I tell you, no?"
"Massimo, for the last time, YES, YOU TOLD ME!"
"Eh, Charlie. You listen to your friend. You learn. How you say, we take care our own. Ciao, Charlie."
Massimo has been a friend since I got into this business...an insufferable friend sometimes but always a friend. I hate to admit it but he got this one right.
Oh, remember that agreement all the Euro states came up with...the gang of 17...to get and keep their fiscal house in order? Well, this afternoon, the Taoiseach--that's Prime Minister in the Irish--told his parliament that upon the advice of counsel, the decision to ratify what had been agreed would have to be put to a referendum. Now for the other Euros that's no big deal because only 12 states are needed to bring this thing into force...it's sort of like a collective action agreement...but if a member state ops out, the European bail out facility will not be made available if needed and that for Ireland could be a very big deal indeed The early polling as to whether this thing passes is slightly less than 50-50. Depending upon how much time is available to scare the populace, I think the referendum fails, so here's to you Carter, for suggesting that next up in the short the hell out of the sovereign debt game is Ireland. And things were going so well in the sense that Ireland was making slow but steady progress flying under the radar.
On top of all this the Euroland ministers postponed a meeting that was supposed to be held today to discuss the disbursement to 130 billion to Greece until Friday for reason that were unclear to say the least. Dissention in the group? Most probably. Remember, the money is supposed to go into a suspense account and dribbled out as Greece met it's targets. It seems that there has been no agreement as to what those targets might be so we're all working on those so we can get this ball rolling. Sure.
Anyway, things were really looking up until Massimo called around noon.
"You see the numbers from the banks today, Charlie? I tell you so, no?"
"You tell me so, yes, Massimo. The Italian banks borrowed big time from the ECB and bought Italian Bonds."
"And whatta that do, eh? The banks they make a fortune! For free. No capital!. It's what I tell you, no?"
"Yes Massimo, it's exactly what you told me."
"And we do it again for sure. I tell you Charlie, Mario do the right thing and we take care of Italia. Look at the yields. I tell you, no?"
"Massimo, for the last time, YES, YOU TOLD ME!"
"Eh, Charlie. You listen to your friend. You learn. How you say, we take care our own. Ciao, Charlie."
Massimo has been a friend since I got into this business...an insufferable friend sometimes but always a friend. I hate to admit it but he got this one right.
Monday, February 27, 2012
A LOSS FOR WORDS
There isn't a whole lot going on either here or over there. The G-20 met over the weekend in Mexico and came up with zilch. By the by, did you even notice that in February this mob always seems to get together some place where it's nice and warm on taxpayer dollars? And nothing ever seems to happen? Might it not be better to meet in, say, Moscow? Can't go out, bloody filthy. Nothing to do but stay inside and perhaps crank out a few agreements. Is that too much to ask? Don't answer.
One thing we did figure out, however, is that Germany has absolutely no interest in bigger bail out funds, IMF contributions or any such approach that would get the good Burgers back home madder than they already are. That means that all eyes will be on Super Mario and the ECB later in the week when word will emerge as to how much is going to be made available to the European banks in phase 2 of the Free Money program. Bet it's a bundle. Then the focus will shift as to just what the banks are going to do with it. Betcha that a bunch of it gets hoarded away rather than dangled in front of the credit starved European corporations. The rest will get arbed in governments with a positive yield--an exercise known as the "carry trade." In the mean time, the Euro is up (again), Italian yields are down, the Spanish held a couple of excellent auctions and love is in the air. It must be close to spring and I remain somewhat baffled by it all...
And while all of that is going on we shall find out who is going to play ball with the Greeks and who among those with bonds governed by English law isn't. More important is the decision regarding the CDSs out there: will whatever occurs be considered a "credit event" by whomsoever decides these things and if it is what will be effect upon the markets. The last estimate of CDS exposure that I saw was in the range of 3.5 billion Euros; not chopped liver but not all the money in the world either. Things will probably work out ok but if there is a concentration in one or two institutions...well, it could be fun time. Perversely, I hope there is. I know, I'm a rotter.
See you tomorrow.
One thing we did figure out, however, is that Germany has absolutely no interest in bigger bail out funds, IMF contributions or any such approach that would get the good Burgers back home madder than they already are. That means that all eyes will be on Super Mario and the ECB later in the week when word will emerge as to how much is going to be made available to the European banks in phase 2 of the Free Money program. Bet it's a bundle. Then the focus will shift as to just what the banks are going to do with it. Betcha that a bunch of it gets hoarded away rather than dangled in front of the credit starved European corporations. The rest will get arbed in governments with a positive yield--an exercise known as the "carry trade." In the mean time, the Euro is up (again), Italian yields are down, the Spanish held a couple of excellent auctions and love is in the air. It must be close to spring and I remain somewhat baffled by it all...
And while all of that is going on we shall find out who is going to play ball with the Greeks and who among those with bonds governed by English law isn't. More important is the decision regarding the CDSs out there: will whatever occurs be considered a "credit event" by whomsoever decides these things and if it is what will be effect upon the markets. The last estimate of CDS exposure that I saw was in the range of 3.5 billion Euros; not chopped liver but not all the money in the world either. Things will probably work out ok but if there is a concentration in one or two institutions...well, it could be fun time. Perversely, I hope there is. I know, I'm a rotter.
See you tomorrow.
Friday, February 24, 2012
...FUTURE CONTINUED
THERE IS A SURFEIT OF LIQUIDITY ON WALL STREET. IT GENERATES FEES AND SHORT TERM GAINS BUT HAS LITTLE SOCIAL WORTH. IT IS THE OPPOSITE OF USEFUL. IT DISAPPEARS WHEN MOST NEEDED AS IN THE 'FLASH CRASH' OF 2010, THUS EXACERBATING COLLAPSES." So wrote Mr. Eisinger and what he wrote is really important except he hadn't a clue.
The problem with folks like he they start their writing from a premise which is uniquely their own and all then follows whether correct or not. They are not reporters or educators in any sense but lecturers which is perfectly ok except when someone tries to apply like concepts to solve the wrong problem. Let me digress for just a bit to illustrate thepoint.
In late 2007, I called an old regulator buddy, since retired, on the subject of Goldman Sachs and their liquidity position. He told me that at the time he believed that Goldman had spare liquidity of over $100 billion dollars in committed facilities, meaning they were paying some sort of fee to insure availability. My comment was, "Until they need it." "Yeah," said he, "but nobody understands that." I don't think that Mr Eisinger does either because this little tale is merely the tip of the iceberg.
I've said something like this before but it bears repeating. Banking, at it's core is a pretty simple business. A bank takes deposits and makes loans profiting from what ever interset rate diffenential they can obtain. There is an old saying that banks "borrow short and lend long" meaning the duration of their deposit base is always shorter than the duration of the loan portfolio, and because of the duration difference they can borrow money (accept deposits) and a cheaper rate than that at which it is loaned back out. Of course that means that banks have to constantly roll over deposits for they fund the business and if they are smart, they put into place liquidity facilities to insure that they always have funding.
Over the centuries the business of banking has changed with new products, new business lines, even entirely new business, but what has not changed is that banks have to borrow money to fund all of these things and theydo BUT there are, today a hundred--well, perhaps not that many--way for banks to obtain funding. No longer does the banker rely upon Ma and Pa Kettle with their checking account, savings accound, certificate of deposit or Christmas Club. Today, bankers get their deposits from people and entities thousands of miles away and, if done through a broker or a money fund, people they do not know and will never meet. Whereas Ma and Pa's money was pretty much always there the duration of today's funding is often overnight and highly unreliable during any period of concern. But what of liquidity facilities such as the one over at Goldman you ask? When people get scared and you try to use them, committed or not, they aren't there. "But I Paid a Fee!" say you. "Sue Me," says the provider. Welcome to October 2008.
What Mr. Eisinger missed in his very interesting piece is the most important thing of all. The Volker Rule, indeed the whole pile of nonsense that is Dodd/Frank is supposed to regulate a multi-trillion dollar international banking system that is funded in exactly the same manner as was The Bank of New York at its founding in 1784! This is the risk on the street and not a word is devoted to it in Dodd/Frank. Good luck.
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Little Paulie Krugman was at it again in the Times this morning. Desperate to justify an increase in the national debt by $5 trillion in the past 3 years, he has been arguing that fiscal dicipline is the wrong way to go...just look at Europe. A few weeks ago he was effusive in his prais for Mario Draghi in opening the ECB with its version of Free Money For Everybody in order to stimulate the economy. Today, he tried to quote every Republican economist he could think of to support his case. Readers of this space will no doubt remember my opining that the real reason for Paulie's desperation was that the democratic socialism model of western Europe was about to end and with it The Leader's dreams for the U.S. Poor Little Paulie. While he was babbling away in the Times, Super Mario gave his first inerview in the Wall Street Journal. What did he say? Only that the European model had to end. Oops.
The problem with folks like he they start their writing from a premise which is uniquely their own and all then follows whether correct or not. They are not reporters or educators in any sense but lecturers which is perfectly ok except when someone tries to apply like concepts to solve the wrong problem. Let me digress for just a bit to illustrate thepoint.
In late 2007, I called an old regulator buddy, since retired, on the subject of Goldman Sachs and their liquidity position. He told me that at the time he believed that Goldman had spare liquidity of over $100 billion dollars in committed facilities, meaning they were paying some sort of fee to insure availability. My comment was, "Until they need it." "Yeah," said he, "but nobody understands that." I don't think that Mr Eisinger does either because this little tale is merely the tip of the iceberg.
I've said something like this before but it bears repeating. Banking, at it's core is a pretty simple business. A bank takes deposits and makes loans profiting from what ever interset rate diffenential they can obtain. There is an old saying that banks "borrow short and lend long" meaning the duration of their deposit base is always shorter than the duration of the loan portfolio, and because of the duration difference they can borrow money (accept deposits) and a cheaper rate than that at which it is loaned back out. Of course that means that banks have to constantly roll over deposits for they fund the business and if they are smart, they put into place liquidity facilities to insure that they always have funding.
Over the centuries the business of banking has changed with new products, new business lines, even entirely new business, but what has not changed is that banks have to borrow money to fund all of these things and theydo BUT there are, today a hundred--well, perhaps not that many--way for banks to obtain funding. No longer does the banker rely upon Ma and Pa Kettle with their checking account, savings accound, certificate of deposit or Christmas Club. Today, bankers get their deposits from people and entities thousands of miles away and, if done through a broker or a money fund, people they do not know and will never meet. Whereas Ma and Pa's money was pretty much always there the duration of today's funding is often overnight and highly unreliable during any period of concern. But what of liquidity facilities such as the one over at Goldman you ask? When people get scared and you try to use them, committed or not, they aren't there. "But I Paid a Fee!" say you. "Sue Me," says the provider. Welcome to October 2008.
What Mr. Eisinger missed in his very interesting piece is the most important thing of all. The Volker Rule, indeed the whole pile of nonsense that is Dodd/Frank is supposed to regulate a multi-trillion dollar international banking system that is funded in exactly the same manner as was The Bank of New York at its founding in 1784! This is the risk on the street and not a word is devoted to it in Dodd/Frank. Good luck.
---------------------------------------------------
Little Paulie Krugman was at it again in the Times this morning. Desperate to justify an increase in the national debt by $5 trillion in the past 3 years, he has been arguing that fiscal dicipline is the wrong way to go...just look at Europe. A few weeks ago he was effusive in his prais for Mario Draghi in opening the ECB with its version of Free Money For Everybody in order to stimulate the economy. Today, he tried to quote every Republican economist he could think of to support his case. Readers of this space will no doubt remember my opining that the real reason for Paulie's desperation was that the democratic socialism model of western Europe was about to end and with it The Leader's dreams for the U.S. Poor Little Paulie. While he was babbling away in the Times, Super Mario gave his first inerview in the Wall Street Journal. What did he say? Only that the European model had to end. Oops.
Thursday, February 23, 2012
BACK TO THE FUTURE
Well, the comments are in and it is no surprise that the vast majority of them range from how awful the thing is on its face and should be scrapped, to minute ways to fix it depending on who paid for the comments. What? What am I talking about? Oh, the Volker Rule of course, the final language for which is to be drafted into law in the coming weeks. Not surprisingly, the blogists and script writers have picked up as well most decrying the millions that have been spent by the industry in an attempt to demolish this abberation of legislation. One of the more interesting articles that has appeared was in the NY Times the other day by Jesse Eisinger, writing for Pro Publica which describes itself as, "an independent nonprofit newsroom." Esiinger is a pretty good writer.
His storybegins with, "...the Volker Rule is as good as dead." Now, depending of course on one's point of view the response could be "GOOD" or "WOE TO THE WORLD!" Your scribe would simply add, "what the hell did you expect?' Eisinger points out that with the public outrage which produced this legislation still pretty much in place, it was impossible for the "banks" (to use an all-encompassing word) to kill it outright but what they have managed to do is to bloat the language into, in his words, "a hopeless monstrosity." Gee, I thought I said that months ago? Why don't I get paid for that kind of insight?
Mr. Eisinger's solution to all of this is to simply ban prop trading the result being that the risky activities would cease because the lawyers wouldn't be able to rationalize any of the law's language. Interesting. Failing that, he would introduce "bright line rules" to clear things up. More interesting. Finally, he gets to the real point of his article. "There is a surfeit of liquidity on Wall Street" he writes. "It generates fees...but is of very little social worth. It disappears when it is most neaded." This is in answer to the argument that the Rule would reduce liquidity on the street. He continues in another paragraph: "Regulators, could if they wanted to, ban all market making at deposit taking institutions," and quotes Steglitz and Johnson in stating that the regulators could provide a absolutely simple rule.
All of the above is absolutely correct but unfortunately, comes to us as a result of a number of errors in analysis beginning, unfortunately, with the revered--in my mind at least- -Paul Volker. Looking back at the debacle, it struck me that Mr. Volker was actually musing that is the banks hadn't been freed by Glass Steagall none of this would have occurred...he was against the act being overturned in the first place. I don't think he had ever reached a firm position but in the heat of the moment but the "reformers" seized upon his comments and the Congressional ass-covering operation began culminating in Dodd/Frank in which was imbedded "The Volker Rule."
Who was buying, selling, making markets or doing anything else on the street had nothing to do with what happened. Had Loeb Rhodes been around it still would have occurred. When one has a complete mispricing of risk, lack of institutional controls, insufficient regulatory oversight, lack of buy-side dicipline, ignorance of the products on the part of management, and an atmosphere of over-the-top greed and hubris, there is a very good possibility a problem might develop. Prop trading was about as small a factor as there could possibly be in such a scenario. And yet, this has somehow morphed into the single most terrifying thing we must face and defeat.
Tall Paul, it has been said, is out of touch with today's market place. Sadly, that is somewhat true because his musing were in fact of a different time. One of the great difference between investment banking and commercial banking as it was then known was not in the business lines but in the corporate structures. Commercial banks were public institutions, investment banks were partnerships. There was a very real logic in allowing partnerships to perform the more "risky" parts of the business of finance because the reality of using one's own capital in a business is still the greatest risk management tool that has ever been invented. The threat we face today is the vast size of institutions and the interconnection of these beamoths in an international marketplace where transactional speed is meausred in nanoseconds, not in the business they do. The repeal of Glass Steagall was essentially meaningless; the switch from partnership status to corporate status was far more meaningful. In 2008, Goldman Sachs was a large as any "commercial" bank in the world. They took nary a deposit and oh, by the by, when people say "deposit taking institutions," they really mean retail banks and the deposits are from Mom and Pop. Last time I looked those deposits were guaranteed by the full faith and credit of the United States...er, well, ok...but that's better than nothing.
Nevertheless, in his article Mr Eisinger did hit on something that is REALLY important which we shall try to explore tomorrow or the next day. Big snow alert coming My till could turn into a shovel.
--------------------------------------------------
Carter my son, you are a true piece of work and a true cynic. Ireland? Not for a while. I think we'll play with Portugal first, it's easier and everybody likes the Irish. Of course if He With The Hottest First Lady In Town gets wacked in the elections, who knows. The next real fun dust-up according to my friend Massimo is going to be between Italy and Germany. Everybody north of the Rubicon is madder than hell and getting killed by Germany's undervalued currency. Riddle me that one.
His storybegins with, "...the Volker Rule is as good as dead." Now, depending of course on one's point of view the response could be "GOOD" or "WOE TO THE WORLD!" Your scribe would simply add, "what the hell did you expect?' Eisinger points out that with the public outrage which produced this legislation still pretty much in place, it was impossible for the "banks" (to use an all-encompassing word) to kill it outright but what they have managed to do is to bloat the language into, in his words, "a hopeless monstrosity." Gee, I thought I said that months ago? Why don't I get paid for that kind of insight?
Mr. Eisinger's solution to all of this is to simply ban prop trading the result being that the risky activities would cease because the lawyers wouldn't be able to rationalize any of the law's language. Interesting. Failing that, he would introduce "bright line rules" to clear things up. More interesting. Finally, he gets to the real point of his article. "There is a surfeit of liquidity on Wall Street" he writes. "It generates fees...but is of very little social worth. It disappears when it is most neaded." This is in answer to the argument that the Rule would reduce liquidity on the street. He continues in another paragraph: "Regulators, could if they wanted to, ban all market making at deposit taking institutions," and quotes Steglitz and Johnson in stating that the regulators could provide a absolutely simple rule.
All of the above is absolutely correct but unfortunately, comes to us as a result of a number of errors in analysis beginning, unfortunately, with the revered--in my mind at least- -Paul Volker. Looking back at the debacle, it struck me that Mr. Volker was actually musing that is the banks hadn't been freed by Glass Steagall none of this would have occurred...he was against the act being overturned in the first place. I don't think he had ever reached a firm position but in the heat of the moment but the "reformers" seized upon his comments and the Congressional ass-covering operation began culminating in Dodd/Frank in which was imbedded "The Volker Rule."
Who was buying, selling, making markets or doing anything else on the street had nothing to do with what happened. Had Loeb Rhodes been around it still would have occurred. When one has a complete mispricing of risk, lack of institutional controls, insufficient regulatory oversight, lack of buy-side dicipline, ignorance of the products on the part of management, and an atmosphere of over-the-top greed and hubris, there is a very good possibility a problem might develop. Prop trading was about as small a factor as there could possibly be in such a scenario. And yet, this has somehow morphed into the single most terrifying thing we must face and defeat.
Tall Paul, it has been said, is out of touch with today's market place. Sadly, that is somewhat true because his musing were in fact of a different time. One of the great difference between investment banking and commercial banking as it was then known was not in the business lines but in the corporate structures. Commercial banks were public institutions, investment banks were partnerships. There was a very real logic in allowing partnerships to perform the more "risky" parts of the business of finance because the reality of using one's own capital in a business is still the greatest risk management tool that has ever been invented. The threat we face today is the vast size of institutions and the interconnection of these beamoths in an international marketplace where transactional speed is meausred in nanoseconds, not in the business they do. The repeal of Glass Steagall was essentially meaningless; the switch from partnership status to corporate status was far more meaningful. In 2008, Goldman Sachs was a large as any "commercial" bank in the world. They took nary a deposit and oh, by the by, when people say "deposit taking institutions," they really mean retail banks and the deposits are from Mom and Pop. Last time I looked those deposits were guaranteed by the full faith and credit of the United States...er, well, ok...but that's better than nothing.
Nevertheless, in his article Mr Eisinger did hit on something that is REALLY important which we shall try to explore tomorrow or the next day. Big snow alert coming My till could turn into a shovel.
--------------------------------------------------
Carter my son, you are a true piece of work and a true cynic. Ireland? Not for a while. I think we'll play with Portugal first, it's easier and everybody likes the Irish. Of course if He With The Hottest First Lady In Town gets wacked in the elections, who knows. The next real fun dust-up according to my friend Massimo is going to be between Italy and Germany. Everybody north of the Rubicon is madder than hell and getting killed by Germany's undervalued currency. Riddle me that one.
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