Tuesday, June 30, 2009
KILLER DAY
It's close to six. I've just finished with house painters, tree men, electricians--all of whom began showing up at 0745--and a near-insane bride. I have nothing further to say. A Martini awaits. See you tomorrow
Monday, June 29, 2009
A STAND UP GUY AND OTHER MUSINGS
Bernie caught 150 years today. The max. But right to the end Bernie was a stand up guy. He didn't roll over on anybody to the point where some people are beginning to suggest that maybe--just maybe--he pulled this off all by himself. Forgive me if I don't believe that it would have been possible. The saga is of course far from over and it will be fascinating to watch what is revealed and argued in the coming months. Way back in the last century I took the New York State Bar exam. On it there was a essay question (there were 12 in those days) on bankruptcy and the jurisdictional issues posed by the facts in the case as between two Federal Districts. No one with whom I spoke after the exam knew what the hell was going on. Amazingly, they through the entire question out grading only the remaining eleven. That's why I passed; that's why most of my friends passed. This mess has more issues than that question. What goes 'round...but if you think there are regulatory issues involving banking how 'bout the SEC in this one? As the kids would say, "Like, DUH!" Back in the Great Depression, FDR hired Joe Kennedy as the first SEC commissioner. He rational was that it was best to send a crook to catch a crook. Wise. The Leader, who seems to be channeling up FDR at every turn should perhaps take heed.
Missed in all of the deaths and sentencing over the last few days was the restatement of the Chinese position that the world needs a new reserve currency to replace the dollar. With more force and conviction this time SDR's were brought to the fore. Now there are a bunch of really smart guys out there that keep saying don't worry, the Chinese will still hold the Dollar because they have no alternative. Then again, the Chinese have never been a bunch for idle chatter. Most statements by that government are for a purpose although, admittedly, opaque at times. I can't seem to get over this great uneasy feeling that they are telling us something and we are not listening. I don't like it, I really don't
In a few days, we will find out how the banks did in the second quarter. We already know about Goldman; gangbusters. As stated here, if you're a trading institution with a big capital markets business with this kind of a yield curve your organs could be in the midst of being harvested and you could still make money. I don't know how they do it, I really don't. Oh, I don't mean how they make money, that's easy. A few years back, some wag asked Bill Gates who was his greatest competition. His answer? Goldman Sachs. Remember, pay peanuts, you get monkeys. Pay over the top? You get really smart people. That's how they make money. No, what I'm talking about is how do they come up smelling like a rose every time they fall in poo-poo. The got the outrageous bail-out in AIG even when they were prancing about claiming that they were fully hedged and in 1997, who had the opportunity to front-run Long Term Capital Management? Why none other than Goldie again whose then-Chairman John Corzine was the overseer of the wind down of LTCN's positions. Chinese wall? Sure. And I have a bridge for sale. Smell a bit of rot, Horatio? I do.
Finally, no sooner does your humble scribe point out that banks' balance sheets tend to look a bit different in the middle of a reporting period than at the end of one, comes Scott Patterson in last Thursday's WSJ in his "Ahead of the Tape" column pointing out the same thing. His solution? Quoting Lou Crandall, chief Economist of Wrightson ICAP, Scottso thinks that all banks should report a daily average balance ; I assume he wishes to add "sheet" to his idea. I've always felt that one of the best definitions for "mixed emotions" was watching a bus load of economists going over a cliff and realizing that there are three empty seats. Daily reporting? Think about it.
Missed in all of the deaths and sentencing over the last few days was the restatement of the Chinese position that the world needs a new reserve currency to replace the dollar. With more force and conviction this time SDR's were brought to the fore. Now there are a bunch of really smart guys out there that keep saying don't worry, the Chinese will still hold the Dollar because they have no alternative. Then again, the Chinese have never been a bunch for idle chatter. Most statements by that government are for a purpose although, admittedly, opaque at times. I can't seem to get over this great uneasy feeling that they are telling us something and we are not listening. I don't like it, I really don't
In a few days, we will find out how the banks did in the second quarter. We already know about Goldman; gangbusters. As stated here, if you're a trading institution with a big capital markets business with this kind of a yield curve your organs could be in the midst of being harvested and you could still make money. I don't know how they do it, I really don't. Oh, I don't mean how they make money, that's easy. A few years back, some wag asked Bill Gates who was his greatest competition. His answer? Goldman Sachs. Remember, pay peanuts, you get monkeys. Pay over the top? You get really smart people. That's how they make money. No, what I'm talking about is how do they come up smelling like a rose every time they fall in poo-poo. The got the outrageous bail-out in AIG even when they were prancing about claiming that they were fully hedged and in 1997, who had the opportunity to front-run Long Term Capital Management? Why none other than Goldie again whose then-Chairman John Corzine was the overseer of the wind down of LTCN's positions. Chinese wall? Sure. And I have a bridge for sale. Smell a bit of rot, Horatio? I do.
Finally, no sooner does your humble scribe point out that banks' balance sheets tend to look a bit different in the middle of a reporting period than at the end of one, comes Scott Patterson in last Thursday's WSJ in his "Ahead of the Tape" column pointing out the same thing. His solution? Quoting Lou Crandall, chief Economist of Wrightson ICAP, Scottso thinks that all banks should report a daily average balance ; I assume he wishes to add "sheet" to his idea. I've always felt that one of the best definitions for "mixed emotions" was watching a bus load of economists going over a cliff and realizing that there are three empty seats. Daily reporting? Think about it.
Thursday, June 25, 2009
BATTLIN' BEN & THOUGHT FROM ANOTHER TIME
Well, Ol' Ben got up in front of the Congress today and beat the hell out of them. Confident, tough and obviously smarter, he broached no insult and put on a command performance. The road forward will not be easy, however. The Republicans don't like him more for his easy money positions than for his role in the financial mess of last year. Apparently, they don't seem to realize that the man waiting in the wings would probably end any semblance of independence at the central bank which as loyal readers know I feel has already been seriously compromised. But credit where credit is due: he did a hell of a job.
I said I would talk about regulation today. What I have chosen to do is to give you a peek at a letter I wrote to a friend, a VERY senior official at one of our regulatory agencies. It's now over four months out of date and very long but in re-reading it I said to myself, "Self, you're pretty good." The names have been changed to protect the guilty. Enjoy.
February 5, 2009
Dear xxxxx ,
You asked that I send you my views on what I perceive to be the state of supervision in today's financial sector. While I am delighted to comply, I must first apologize for being unable to approach this topic from the standpoint of purity of purpose as I do not believe that the role of supervision stands alone from the overall state of the financial system but that it is intimately related to the history and present state of the same. A further apology: I am not without bias. I have for some time held the view that the supervisiory role is far more placebo-like in it's existence than worthwhile in its effect and that the present state of the financial system makes it even more placebo-like today.
Way back in the last century I can remember the visits to the xxxxxxxx xxxxx Co. of your colleague, Tom McQueeny, still accurately (and fondly, I might add) referred to by my former colleague M.B Kelly as, “a tough Irish Cop” (I guess a Kelly should know). Tom was good at his job and could smell a rat like any good cop, but there were few occasions when he actually caught the rat; even in those days there were simply too many rat holes. Banking even then was a complex business; today it is a mind-bending complexity of products, markets, personalities, nationalities and political pressures far beyond the ability of a small group of people charged with the responsibility of oversight of the far-flung operations of today's financial supermarkets. Indeed, I would argue that the size and breath of today's institutions makes them not only impossible to supervise but almost impossible to manage except in the fantasy of some egomaniac's mind (a few come to mind who shall remain nameless) but who have been exposed by recent events.
Mores have changed as well. In my time there was of course an awareness that we and the supervisor were on different sides but there was civility about it: it calls to mind a conversation with a friend, a very senior member of the Metropolitan Police in London. Ray said that in the old days, if you caught a villain in the act it was, “Right, fair nick, Gov,” and you took him off to the local jail. Today, says Ray, be prepared for a fight, a knife or a gun.
Different times in our business as well and although I hate to say it, my old shop was at the cutting edge in the growth of the lack of civility which, existing today, makes the supervision task even more impossible. It's a war out there with a very clear view within the industry as to who are the bad guys.
Consider as well the change in the nature of the business, in the players and in the nature of the competition. In my time, bankers took deposits and made loans. Investment banks, on the other hand, did other things. Today, there is no distinction between the two; indeed, the latter no longer exists in any meaningful way. The melding of the two cultures (and the cultures were VERY different) has created problems unforeseen at the time of deregulation. Before, institutions competed among themselves: today, institutions compete within themselves—the “commercial” bankers vs. the “investment” bankers, brought together in the unholy alliance of many of the mergers we have seen with the prize being amounts of remuneration never before envisioned.
There is an incredible drive to “innovate” simply to keep one's self ahead of one's competition-
whether internal or external-which has resulted in the creation of an vast number of complex and opaque financial instruments all designed to enable what is often financial results which are later proven to be unnecessary or untested or unreal. Unintelligent people were not employed in this exercise: indeed, the “Valley of the Quants” existed in many institutions—extraordinarily bright, highly educated individuals—but not individuals brought up in the mores of the past where the client generally came first and, as the words above the old Stock Exchange in London stated, “My word is my bond.”
They were not short on hubris either. Indeed, their confidence in their products was overwhelming. The only problem was that understanding the product...and by extension the risk related thereto was far beyond the capacity of ordinary men. As I have told you, I once expressed the “Average Intelligent Man” theory of risk; if an average intelligent man couldn't understand it, it was to much. I was nearly fired for my efforts. But that did not stop internal risk managers from expressing their understanding of the risks being taken (they do not lack hubris either) and elaborate and highly sophisticated profiles being drawn up at every major institution in the world and being followed to the letter in the internal monitoring of risk. Thus was born structured products and there is where it went all wrong.
Into this comes bravely the representatives of the oversight bodies of the world who are expected to monitor the nature of, and the extent of the risk being taken by the institutions to which they are assigned. Few, I suspect, have on their c.v. a Ph.D in mathematics from M.I.T. It is an impossible task so what they do is to approach the creators of the products and are told that they have proven the variation in result is no more than two standard deviations from the norm and therefor, the risk is quantified at x. They are happy. Mind you, in a global institution, risk is being taken in every major (and minor) financial center in the world. Unquantifiable risk in certain instances such as credit default swaps (which are among the simplest). I sit here in the fly-over zone viewing this and have become convinced that I should have retired to Bedlam. There is more sanity there than for the regulatory authorities around the world to believe that they knew the state of their financial institutions.
But there was always the chance that the quants were completely correct. What truly amazes me is that there was ample evidence to the contrary. Ten years ago LTCM was wrecked by the very same kind of reasoning and there it was proven that within a very short period of time the foundation of every risk theory in existence—the existence of a functioning market—could disappear. I am hardly in a position to know for certain but it appears to me that the only difference in ten years is the velocity at which catastrophe can occur. If there is no historical perspective in the monitoring of financial institutions, there is no point to the exercise. A further case in point: the financial state of Eastern Europe and the causes thereof is NO DIFFERENT that the sovereign meltdowns that we have witnessed in our business lifetimes. Remarkable.
To this point, supervision has always been more of an exercise in locking the barn door rather than the preservation of the herd. The situation is even more dire today. I suspect that unlike the past when an examiner could look for loan performance, concentration and total exposure, WHAT to look for today is basically unknown. You do not possess enough examiners of sufficient background, training and education to possible carry out the oversight tasks assigned to you. As to a solution, allow me to digress for a moment.
The tragedy of the past year is that we have witnessed another example of unintended consequences. For years banks have made loans and syndicated substantial portions thereof, but for many of those years it was somewhat of an unwritten rule that the originating bank maintain a portion of the loan in its own portfolio for servicing purposes and in order to give comfort to smaller institutions who were participants. For a variety of reasons, that practice, which had many benefits, disappeared and with the explosion of securitization and the expansion of a vast number of different institutions playing the role of investors, the practice of maintaining “some skin in the game” has all but disappeared. We now have pure originators and pure purchasers. In addition, the change in accounting requiring a “mark to market” treatment of practically all assets has made it imperative that all assets created be distributed as quickly as possible. I shall not discuss the abject stupidity in my view of requiring a asset with a conceived life of 30 years to be marked to a market that may disappear overnight, but it is important to understand that faced with the knowledge that you are not going to own it at the end of the day human nature will undoubtably suggest to an originator that getting the deal done is somewhat more important than getting it done RIGHT. After all, as the risk of owning it is only two standard deviations (or some such calculation) so who cares. Makes sense does it? It short, in an attempt to create “transparency” a stake was driven in to the weakly beating heart of credit culture.
But of course we have the rating agencies. They have, throughout this exercise been given a total pass and in my view that is outrageous. But that is not the subject of this paper and I shall return from this digression with the simple thought that a public execution, in the words of Rousseau often is useful, “Pour l'encouragement des autres.”
At the risk of understatement, the future is dismal. From conversations I have had the state of supervision has not progressed much further than the time when I was active, not because of a lack of dedication but because of a lack of trained people in adequate numbers to deal with an industry of far greater complexity in both instruments and business lines. Further, it is my understanding that the cooperation between various agencies charged with the same or overlapping responsibilities has not improved; it remains poor. Unfortunately, from my standpoint, government involvement is bound to be far more intrusive and this will only make things worse as throughout these past few months politics has shown to be at it's most dangerous when aligned with ignorance.
One thing that can happen, however, with government help is the creation of about the only thing that I can see as being useful and that is a financial Executive Service Corporation. Unless you are inside a financial corporation you simply do not know what is really occurring and no number of examiners can be parachuted in to fulfill an oversight mission. For many years, the Bank of England placed a senior retired from on of the Clearers into every new bank in London to monitor best practices. It was a different time of course but it was useful. I believe we need this type of oversight today and I suggest two (out of I am sure many other) thoughts:
1.1.A form of Executive Board of oversight with whom management would be directed to consult on the nature, form and extent of risk. The Board would be appointed by the appropriate oversight institution and report to the same.
1.2.A “Bank of England” executive, or executive, but not a retired banker but a banker seconded from a competitor for a period of time to oversee credit activities deemed at risk by the overseer. The individual or individuals would continue to be paid by the 'lending” institution but would have no contact with their employer and would report to the oversight insight institution in a manner to be agreed.
I rather like #2 as it is deliciously nasty but if one stops to think it might well be the most effective method available given the amount or resources at your disposal. It also, to a degree, leaves the oversight within the system and places a very high degree of cooperation between not only yourselves and you “clients” but insures that the oversight is performed by people who know what they are doing and who for what they should be looking. Hope this helps in some small way. Sorry for the “vent” but it felt good.
Charlie
Nothing proposed over the past few weeks has changed my view as of the state of play to any great degree. The issues have been politicized and beaurocracy has triumphed over reason and motion has once again been confused with progress. Weekend reading. Send me your thoughts. See you on Monday.
I said I would talk about regulation today. What I have chosen to do is to give you a peek at a letter I wrote to a friend, a VERY senior official at one of our regulatory agencies. It's now over four months out of date and very long but in re-reading it I said to myself, "Self, you're pretty good." The names have been changed to protect the guilty. Enjoy.
February 5, 2009
Dear xxxxx ,
You asked that I send you my views on what I perceive to be the state of supervision in today's financial sector. While I am delighted to comply, I must first apologize for being unable to approach this topic from the standpoint of purity of purpose as I do not believe that the role of supervision stands alone from the overall state of the financial system but that it is intimately related to the history and present state of the same. A further apology: I am not without bias. I have for some time held the view that the supervisiory role is far more placebo-like in it's existence than worthwhile in its effect and that the present state of the financial system makes it even more placebo-like today.
Way back in the last century I can remember the visits to the xxxxxxxx xxxxx Co. of your colleague, Tom McQueeny, still accurately (and fondly, I might add) referred to by my former colleague M.B Kelly as, “a tough Irish Cop” (I guess a Kelly should know). Tom was good at his job and could smell a rat like any good cop, but there were few occasions when he actually caught the rat; even in those days there were simply too many rat holes. Banking even then was a complex business; today it is a mind-bending complexity of products, markets, personalities, nationalities and political pressures far beyond the ability of a small group of people charged with the responsibility of oversight of the far-flung operations of today's financial supermarkets. Indeed, I would argue that the size and breath of today's institutions makes them not only impossible to supervise but almost impossible to manage except in the fantasy of some egomaniac's mind (a few come to mind who shall remain nameless) but who have been exposed by recent events.
Mores have changed as well. In my time there was of course an awareness that we and the supervisor were on different sides but there was civility about it: it calls to mind a conversation with a friend, a very senior member of the Metropolitan Police in London. Ray said that in the old days, if you caught a villain in the act it was, “Right, fair nick, Gov,” and you took him off to the local jail. Today, says Ray, be prepared for a fight, a knife or a gun.
Different times in our business as well and although I hate to say it, my old shop was at the cutting edge in the growth of the lack of civility which, existing today, makes the supervision task even more impossible. It's a war out there with a very clear view within the industry as to who are the bad guys.
Consider as well the change in the nature of the business, in the players and in the nature of the competition. In my time, bankers took deposits and made loans. Investment banks, on the other hand, did other things. Today, there is no distinction between the two; indeed, the latter no longer exists in any meaningful way. The melding of the two cultures (and the cultures were VERY different) has created problems unforeseen at the time of deregulation. Before, institutions competed among themselves: today, institutions compete within themselves—the “commercial” bankers vs. the “investment” bankers, brought together in the unholy alliance of many of the mergers we have seen with the prize being amounts of remuneration never before envisioned.
There is an incredible drive to “innovate” simply to keep one's self ahead of one's competition-
whether internal or external-which has resulted in the creation of an vast number of complex and opaque financial instruments all designed to enable what is often financial results which are later proven to be unnecessary or untested or unreal. Unintelligent people were not employed in this exercise: indeed, the “Valley of the Quants” existed in many institutions—extraordinarily bright, highly educated individuals—but not individuals brought up in the mores of the past where the client generally came first and, as the words above the old Stock Exchange in London stated, “My word is my bond.”
They were not short on hubris either. Indeed, their confidence in their products was overwhelming. The only problem was that understanding the product...and by extension the risk related thereto was far beyond the capacity of ordinary men. As I have told you, I once expressed the “Average Intelligent Man” theory of risk; if an average intelligent man couldn't understand it, it was to much. I was nearly fired for my efforts. But that did not stop internal risk managers from expressing their understanding of the risks being taken (they do not lack hubris either) and elaborate and highly sophisticated profiles being drawn up at every major institution in the world and being followed to the letter in the internal monitoring of risk. Thus was born structured products and there is where it went all wrong.
Into this comes bravely the representatives of the oversight bodies of the world who are expected to monitor the nature of, and the extent of the risk being taken by the institutions to which they are assigned. Few, I suspect, have on their c.v. a Ph.D in mathematics from M.I.T. It is an impossible task so what they do is to approach the creators of the products and are told that they have proven the variation in result is no more than two standard deviations from the norm and therefor, the risk is quantified at x. They are happy. Mind you, in a global institution, risk is being taken in every major (and minor) financial center in the world. Unquantifiable risk in certain instances such as credit default swaps (which are among the simplest). I sit here in the fly-over zone viewing this and have become convinced that I should have retired to Bedlam. There is more sanity there than for the regulatory authorities around the world to believe that they knew the state of their financial institutions.
But there was always the chance that the quants were completely correct. What truly amazes me is that there was ample evidence to the contrary. Ten years ago LTCM was wrecked by the very same kind of reasoning and there it was proven that within a very short period of time the foundation of every risk theory in existence—the existence of a functioning market—could disappear. I am hardly in a position to know for certain but it appears to me that the only difference in ten years is the velocity at which catastrophe can occur. If there is no historical perspective in the monitoring of financial institutions, there is no point to the exercise. A further case in point: the financial state of Eastern Europe and the causes thereof is NO DIFFERENT that the sovereign meltdowns that we have witnessed in our business lifetimes. Remarkable.
To this point, supervision has always been more of an exercise in locking the barn door rather than the preservation of the herd. The situation is even more dire today. I suspect that unlike the past when an examiner could look for loan performance, concentration and total exposure, WHAT to look for today is basically unknown. You do not possess enough examiners of sufficient background, training and education to possible carry out the oversight tasks assigned to you. As to a solution, allow me to digress for a moment.
The tragedy of the past year is that we have witnessed another example of unintended consequences. For years banks have made loans and syndicated substantial portions thereof, but for many of those years it was somewhat of an unwritten rule that the originating bank maintain a portion of the loan in its own portfolio for servicing purposes and in order to give comfort to smaller institutions who were participants. For a variety of reasons, that practice, which had many benefits, disappeared and with the explosion of securitization and the expansion of a vast number of different institutions playing the role of investors, the practice of maintaining “some skin in the game” has all but disappeared. We now have pure originators and pure purchasers. In addition, the change in accounting requiring a “mark to market” treatment of practically all assets has made it imperative that all assets created be distributed as quickly as possible. I shall not discuss the abject stupidity in my view of requiring a asset with a conceived life of 30 years to be marked to a market that may disappear overnight, but it is important to understand that faced with the knowledge that you are not going to own it at the end of the day human nature will undoubtably suggest to an originator that getting the deal done is somewhat more important than getting it done RIGHT. After all, as the risk of owning it is only two standard deviations (or some such calculation) so who cares. Makes sense does it? It short, in an attempt to create “transparency” a stake was driven in to the weakly beating heart of credit culture.
But of course we have the rating agencies. They have, throughout this exercise been given a total pass and in my view that is outrageous. But that is not the subject of this paper and I shall return from this digression with the simple thought that a public execution, in the words of Rousseau often is useful, “Pour l'encouragement des autres.”
At the risk of understatement, the future is dismal. From conversations I have had the state of supervision has not progressed much further than the time when I was active, not because of a lack of dedication but because of a lack of trained people in adequate numbers to deal with an industry of far greater complexity in both instruments and business lines. Further, it is my understanding that the cooperation between various agencies charged with the same or overlapping responsibilities has not improved; it remains poor. Unfortunately, from my standpoint, government involvement is bound to be far more intrusive and this will only make things worse as throughout these past few months politics has shown to be at it's most dangerous when aligned with ignorance.
One thing that can happen, however, with government help is the creation of about the only thing that I can see as being useful and that is a financial Executive Service Corporation. Unless you are inside a financial corporation you simply do not know what is really occurring and no number of examiners can be parachuted in to fulfill an oversight mission. For many years, the Bank of England placed a senior retired from on of the Clearers into every new bank in London to monitor best practices. It was a different time of course but it was useful. I believe we need this type of oversight today and I suggest two (out of I am sure many other) thoughts:
1.1.A form of Executive Board of oversight with whom management would be directed to consult on the nature, form and extent of risk. The Board would be appointed by the appropriate oversight institution and report to the same.
1.2.A “Bank of England” executive, or executive, but not a retired banker but a banker seconded from a competitor for a period of time to oversee credit activities deemed at risk by the overseer. The individual or individuals would continue to be paid by the 'lending” institution but would have no contact with their employer and would report to the oversight insight institution in a manner to be agreed.
I rather like #2 as it is deliciously nasty but if one stops to think it might well be the most effective method available given the amount or resources at your disposal. It also, to a degree, leaves the oversight within the system and places a very high degree of cooperation between not only yourselves and you “clients” but insures that the oversight is performed by people who know what they are doing and who for what they should be looking. Hope this helps in some small way. Sorry for the “vent” but it felt good.
Charlie
Nothing proposed over the past few weeks has changed my view as of the state of play to any great degree. The issues have been politicized and beaurocracy has triumphed over reason and motion has once again been confused with progress. Weekend reading. Send me your thoughts. See you on Monday.
Wednesday, June 24, 2009
CHANGING PLANS
This is going to be quite short. I was going to continue our discussion on the re-regulation of the financial system but today's events intervened. Rep. Darrell Issa, Rep. of Ca issued a statement today to the effect that the Fed and its Chairman, Mr. Bernanke used undue pressure against our buddy Ken to force him to complete the acquisition of Merrill Lynch and then covered up their actions as well as the information concerning the true state of affairs at Merrill for a number of weeks. On the face of it, this is a serious charge and one which certainly got a good deal of press for Rep. Issa.
Speculation was immediate as to what motivated Rep. Issa to come out so publicly at this time just before the on-going hearings of the committee on which he sits is scheduled to continue tomorrow. The speculation has taken two directions: one is that it is the opening salvo in an attempt to unseat Mr. Bernanke which, to me at least, seems a bit foolish coming from a Republican as the next logical choice would be Larry Summers who one would think would be anathema to the GOP. The other, in which I put more credence, is that it is an opening salvo against the Fed who, at this stage at least has emerged as the clear winner in the great regulatory raffle. By denigrating the role of the Fed during the crisis, this would appear to reopen the discussion of who does what to whom going forward. Of course it also puts a serious hurt on Brother Ben to the point that if he is to be replaced the independence of the institution is brought into even greater question. And that, I promise, will be the subject of tomorrow's discussion. As for my opinion on the entire mess, I think they scared the livin' hell out of our buddy Ken. Given what they believed to be the severity of the situation I probably wodda done the same. Don't make me a bad person either. We'll be watchin' things for ya.
Speculation was immediate as to what motivated Rep. Issa to come out so publicly at this time just before the on-going hearings of the committee on which he sits is scheduled to continue tomorrow. The speculation has taken two directions: one is that it is the opening salvo in an attempt to unseat Mr. Bernanke which, to me at least, seems a bit foolish coming from a Republican as the next logical choice would be Larry Summers who one would think would be anathema to the GOP. The other, in which I put more credence, is that it is an opening salvo against the Fed who, at this stage at least has emerged as the clear winner in the great regulatory raffle. By denigrating the role of the Fed during the crisis, this would appear to reopen the discussion of who does what to whom going forward. Of course it also puts a serious hurt on Brother Ben to the point that if he is to be replaced the independence of the institution is brought into even greater question. And that, I promise, will be the subject of tomorrow's discussion. As for my opinion on the entire mess, I think they scared the livin' hell out of our buddy Ken. Given what they believed to be the severity of the situation I probably wodda done the same. Don't make me a bad person either. We'll be watchin' things for ya.
Tuesday, June 23, 2009
MY FRIEND DICK
Dick left us over 10 years ago. He was the father of a colleague and one of my best friends. In the world of finance, he was a giant; a managing partner of a major investment bank, an advisor to one of the richest families in the world, a member of too many corporate boards to mention, the head of the board of trustees of one of the world's greatest universities and the founding partner of the first--yes the first--private equity fund that ever existed and still exists today, and one of the most successful I might add. He literally made billions for a lot of people, many of whom were not household names. He made a lot of money for himself as well, most of which he gave away. He was always gracious, polite beyond belief and solicitous of all. In a moving tribute to his father his son said at Dick's memorial service, "There is a carving in Latin above the old London Stock Exchange which translated into English says, '"My word is my bond."' "That would describe my father."
David Rockefeller also spoke at the same ceremony...not as well, I might add. He did say one telling thing, however. It went something like this:
"We were having a bad run at the Chase Manhattan Bank when one day Dick walked into my office."
'David," he said. "I'm sorry to tell you this but unless the performance of the bank improves I suspect the board is going to be forced to ask for your resignation."
"He got my attention."
Were there none like my friend Dick who sat on the boards of all of these financial institutions over the past number of years? Were there none who could exercise the brutally frank and honest opinion of the real situation that their job demanded and for which they were being compensated even though it be to a close friend?
Were there none who took the time to understand what was the true nature of the business?
Were there none who could separate their duty to the shareholders from their friendships?
Were there none who understood the meaning of trust.
Were there none whose word was their bond?
Were there no more Dicks left?
This business is all about people; always was, always will be. With all of the wonderful sounding messages The Leader likes to leave with us there has yet to be one relating to the importance of the role of corporate governance and the qualities that are required in the people who are placed in the management and oversight positions of public corporations. Not a word. I suspect that being a politician he himself doesn't understand what is required. It is the opposite of everything that Washington represents. One can write all the laws, all the regulations, all the guideline and create all the nonsensical oversight panels and watchdog committees in the world and without the people you have little. Somehow, the public and the shareholders must be made to appreciate how critical this critical. Somehow, the focus must be shifted to proper governance. Somehow, we have to raise a new generation like my friend. Somehow. I just don't quite know how.
Tomorrow, more comments on the new proposed regs...for what that's worth. Oh, Dick's son is fighting his own battle these days. Remember him would you?
David Rockefeller also spoke at the same ceremony...not as well, I might add. He did say one telling thing, however. It went something like this:
"We were having a bad run at the Chase Manhattan Bank when one day Dick walked into my office."
'David," he said. "I'm sorry to tell you this but unless the performance of the bank improves I suspect the board is going to be forced to ask for your resignation."
"He got my attention."
Were there none like my friend Dick who sat on the boards of all of these financial institutions over the past number of years? Were there none who could exercise the brutally frank and honest opinion of the real situation that their job demanded and for which they were being compensated even though it be to a close friend?
Were there none who took the time to understand what was the true nature of the business?
Were there none who could separate their duty to the shareholders from their friendships?
Were there none who understood the meaning of trust.
Were there none whose word was their bond?
Were there no more Dicks left?
This business is all about people; always was, always will be. With all of the wonderful sounding messages The Leader likes to leave with us there has yet to be one relating to the importance of the role of corporate governance and the qualities that are required in the people who are placed in the management and oversight positions of public corporations. Not a word. I suspect that being a politician he himself doesn't understand what is required. It is the opposite of everything that Washington represents. One can write all the laws, all the regulations, all the guideline and create all the nonsensical oversight panels and watchdog committees in the world and without the people you have little. Somehow, the public and the shareholders must be made to appreciate how critical this critical. Somehow, the focus must be shifted to proper governance. Somehow, we have to raise a new generation like my friend. Somehow. I just don't quite know how.
Tomorrow, more comments on the new proposed regs...for what that's worth. Oh, Dick's son is fighting his own battle these days. Remember him would you?
Monday, June 22, 2009
HE WHO HESITATES...
Damn! I listened to my son again. He tells me that nobody read blogs over the weekend so don't worry about not writing one on Fridays. So I listened to him, got involved watching the U.S. Open and got scooped.
Today, the Wall Street Journal's second editorial was about the elephant in the room, the rating agencies. It is absolutely astounding that throughout all this discussion of overhaul of the financial system, the rating agencies get nary a mention and yet so much of the ill that occurred can be traced directly to the reliance of the marketplace to the ratings of debt issues provided by the agencies. A quick explanation of their function might well be in order.
One should keep in mind that the agencies do not rate companies per se. What they rate are debt obligations of the companies and these obligations are rated individually. Therefore, a senior debt issue of a company might be rated in one manner whilst a subordinated debt issue might well have an entirely different rating. These rating are vitally important to the distribution mechanism because often by law or corporate governance many investors are limited in regarding to ratings as to the type of investment they can make. Therefore, if a pension plan for example can invest in only single-A rated issues the market for triple-B rated issues is greatly diminished. Hence, get the rating you need. In addition many investors do not have staffs capable of analyzing the huge number of debt issuance such as occurred over the past few years and therefore, reliance upon the ratings provided by the agencies became commonplace. On two levels, therefore, the rating agencies became vital to the workings of the system.
Now one would think that those who relied upon this expertise would pay for it; think again. The agencies were paid for their service not by the investors but by the issuers. Conflict of interest you say? Perhaps. There is certainly a risk of that. However, more importantly, one must question whether the sheer volume of issuance over the past five years was simply too great for the few agencies charged with the protection of the investors--by Congress, mind you--to fully and professionally perform their duties...especially when they are paid by the number of ratings issued. And now we begin to se why, perhaps, the elephant went unnoticed; whenever anything can be traced back to a Washington involvement it tends to disappear. Odd, that.
The relationship between issuers and the rating agencies is a close one. It is not a, "Hey Joe, what kind of rating will this get?" Oh no. It's more like, "Hey Joe, I need a triple-A for my client base. How do I get there?" If there were hard and fast rules, that might be one thing, but as we have seen, the incredibly complexity of the instruments created in the near-past made the rating of every issue bespoke and entailed a great deal of input just from the standpoint of what was being created and how from the issuers/creators. It was a system rife with the threat of misunderstanding and misuse. And of course it got worse. It wasn't long before folks began to look at CDSs issued by Triple-A issuers such as AIG as carrying the same credit rating. We know how that movie ended. And as the WSJ pointed out due to the Basel rules relating to bank capital, banks holding Triple-A rated paper could include the same within their capital base thereby presenting a false picture as to the health of the system.
Amazingly, little has changed despite the disaster this system created. For certain there was inappropriate collusion between issuers and rater but at the end of the day it was laziness on the part of investors that should be blamed for what occurred and the system that encouraged it. They made it too easy. While at present there is a heightened awareness, it is still too easy. In a few short years the awareness will have diminished and unless this part of the play is rewritten, Act II is going to be ugly.
Tomorrow, let's talk about corporate governance and my friend, Dick.
Today, the Wall Street Journal's second editorial was about the elephant in the room, the rating agencies. It is absolutely astounding that throughout all this discussion of overhaul of the financial system, the rating agencies get nary a mention and yet so much of the ill that occurred can be traced directly to the reliance of the marketplace to the ratings of debt issues provided by the agencies. A quick explanation of their function might well be in order.
One should keep in mind that the agencies do not rate companies per se. What they rate are debt obligations of the companies and these obligations are rated individually. Therefore, a senior debt issue of a company might be rated in one manner whilst a subordinated debt issue might well have an entirely different rating. These rating are vitally important to the distribution mechanism because often by law or corporate governance many investors are limited in regarding to ratings as to the type of investment they can make. Therefore, if a pension plan for example can invest in only single-A rated issues the market for triple-B rated issues is greatly diminished. Hence, get the rating you need. In addition many investors do not have staffs capable of analyzing the huge number of debt issuance such as occurred over the past few years and therefore, reliance upon the ratings provided by the agencies became commonplace. On two levels, therefore, the rating agencies became vital to the workings of the system.
Now one would think that those who relied upon this expertise would pay for it; think again. The agencies were paid for their service not by the investors but by the issuers. Conflict of interest you say? Perhaps. There is certainly a risk of that. However, more importantly, one must question whether the sheer volume of issuance over the past five years was simply too great for the few agencies charged with the protection of the investors--by Congress, mind you--to fully and professionally perform their duties...especially when they are paid by the number of ratings issued. And now we begin to se why, perhaps, the elephant went unnoticed; whenever anything can be traced back to a Washington involvement it tends to disappear. Odd, that.
The relationship between issuers and the rating agencies is a close one. It is not a, "Hey Joe, what kind of rating will this get?" Oh no. It's more like, "Hey Joe, I need a triple-A for my client base. How do I get there?" If there were hard and fast rules, that might be one thing, but as we have seen, the incredibly complexity of the instruments created in the near-past made the rating of every issue bespoke and entailed a great deal of input just from the standpoint of what was being created and how from the issuers/creators. It was a system rife with the threat of misunderstanding and misuse. And of course it got worse. It wasn't long before folks began to look at CDSs issued by Triple-A issuers such as AIG as carrying the same credit rating. We know how that movie ended. And as the WSJ pointed out due to the Basel rules relating to bank capital, banks holding Triple-A rated paper could include the same within their capital base thereby presenting a false picture as to the health of the system.
Amazingly, little has changed despite the disaster this system created. For certain there was inappropriate collusion between issuers and rater but at the end of the day it was laziness on the part of investors that should be blamed for what occurred and the system that encouraged it. They made it too easy. While at present there is a heightened awareness, it is still too easy. In a few short years the awareness will have diminished and unless this part of the play is rewritten, Act II is going to be ugly.
Tomorrow, let's talk about corporate governance and my friend, Dick.
Thursday, June 18, 2009
DODGING DODD
Our Hero was pretty good today. He was pleasant, prepared, amusing and knowledgeable in discussing the brave new world of finance in testimony before the Senate Finance Committee. So give credit where credit is due unlike the administration's proposals which will probably have the effect of reducing credit where ever it is needed. This show is going to play for a long time up on the Hill so I thought I might try to break down some of the salient points regarding banking and regulation and go over some of the issues we have already discussed in light of the proposed regulatory framework.
What Our Hero and our Man in Waiting, Larry Summers have been emphasizing is the all encompassing desire to reduce leverage and add capital within the system. You know my views in regard to capital as it pertains to banks: it's a regulatory myth unless one removes for once and for all the concept of too big to fail. As what is being proposed is a regulator for those institutions that present a systemic risk--as yet to be identified--by definition the concept of increased capital adequacy is crap. The word has already gone forth to a new generation of bankers that we are going to try in the future to keep you out of trouble but in the end will will bail you out if we fail in that goal, and of course, as of yet, we have no idea how to do that. So, dismissing capital as a concept we move on to leverage which is defined as total assets multiple of capitalwhich we have already decided is not real important anyway.
The new concept in this game that everyone has glomed onto is trading for one's own account. Simply explained this means putting capital at risk irrespective of carrying out the wishes of a client in an attempt to make money in market operations. No lesser a person that my hero Paul Volker has mused that institutions that accept deposits from the public should not be able to trade for their own account. Behind all this is the theory that if this is allowed to occur an institution will gear (leverage) itself up to maximize volume and therefore, profits. So therefore, let us have strict gearing ratios. True. Now for the real world.
In the real world, An institution that may have a balance sheet with total footings at the end of a month or of a quarter or of a year of, say $1 trillion, might well look a good deal different in the middle of any of those periods. Indeed, those footings may be double in the middle of any week. This is a result of trading that occurs--yes, for one's own book but also as a result of customer operations that cause the institution to hold positions in order to best service customers or the market. Remember our discussion of what is a market maker? If you are one...and by the by a Primary Dealer in U.S. treasury securities is a market maker...you have to be prepared with a bid AND an offered price on the instrument in which you make a market. By the very nature of the business a market maker does not always have the luxury of ending the day square in its position or always within the limits of its gearing ratio. Further, financial institutions often take advantage of movements within a market place that cry out for a large position and for periods of time their gearing may be well above a "safe" limit. Keep in mind that profit and loss in trading operations is measured as a result of tiny movements in price, and hence, one must deal in "size" as the traders like to say to show meaningful results. However, it is important to note that positions such as this are mostly short in nature and profit and loss PARAMETERS can be more or less accurately defined. A regulator could of course, require an institution to report its gearing on a daily basis but the difficulty in so doing given the 24 hour nature of today's market place might well make such an exercise meaningless as well as to simply add an unacceptable degree of volatility as positions would be essentially "day traded." In any case, it was not the gearing of "systemic institutions" that caused the problem of the past 9 months but the very nature of the products created and the misunderstanding within the system of their distribution that in no little manner was was exacerbated by some of the regulation in place that was designed to protect the system. Confused yet? Well it gets worse. Tune in tomorrow as we explore who did what to whom and the elephant in the room that somehow remains unmentioned.
What Our Hero and our Man in Waiting, Larry Summers have been emphasizing is the all encompassing desire to reduce leverage and add capital within the system. You know my views in regard to capital as it pertains to banks: it's a regulatory myth unless one removes for once and for all the concept of too big to fail. As what is being proposed is a regulator for those institutions that present a systemic risk--as yet to be identified--by definition the concept of increased capital adequacy is crap. The word has already gone forth to a new generation of bankers that we are going to try in the future to keep you out of trouble but in the end will will bail you out if we fail in that goal, and of course, as of yet, we have no idea how to do that. So, dismissing capital as a concept we move on to leverage which is defined as total assets multiple of capitalwhich we have already decided is not real important anyway.
The new concept in this game that everyone has glomed onto is trading for one's own account. Simply explained this means putting capital at risk irrespective of carrying out the wishes of a client in an attempt to make money in market operations. No lesser a person that my hero Paul Volker has mused that institutions that accept deposits from the public should not be able to trade for their own account. Behind all this is the theory that if this is allowed to occur an institution will gear (leverage) itself up to maximize volume and therefore, profits. So therefore, let us have strict gearing ratios. True. Now for the real world.
In the real world, An institution that may have a balance sheet with total footings at the end of a month or of a quarter or of a year of, say $1 trillion, might well look a good deal different in the middle of any of those periods. Indeed, those footings may be double in the middle of any week. This is a result of trading that occurs--yes, for one's own book but also as a result of customer operations that cause the institution to hold positions in order to best service customers or the market. Remember our discussion of what is a market maker? If you are one...and by the by a Primary Dealer in U.S. treasury securities is a market maker...you have to be prepared with a bid AND an offered price on the instrument in which you make a market. By the very nature of the business a market maker does not always have the luxury of ending the day square in its position or always within the limits of its gearing ratio. Further, financial institutions often take advantage of movements within a market place that cry out for a large position and for periods of time their gearing may be well above a "safe" limit. Keep in mind that profit and loss in trading operations is measured as a result of tiny movements in price, and hence, one must deal in "size" as the traders like to say to show meaningful results. However, it is important to note that positions such as this are mostly short in nature and profit and loss PARAMETERS can be more or less accurately defined. A regulator could of course, require an institution to report its gearing on a daily basis but the difficulty in so doing given the 24 hour nature of today's market place might well make such an exercise meaningless as well as to simply add an unacceptable degree of volatility as positions would be essentially "day traded." In any case, it was not the gearing of "systemic institutions" that caused the problem of the past 9 months but the very nature of the products created and the misunderstanding within the system of their distribution that in no little manner was was exacerbated by some of the regulation in place that was designed to protect the system. Confused yet? Well it gets worse. Tune in tomorrow as we explore who did what to whom and the elephant in the room that somehow remains unmentioned.
Wednesday, June 17, 2009
I SHOUDA STAYED IN BED
Well, all was revealed today. Somehow, I don't feel very good about it although there were few surprises. The Fed appears to have come out ok, the Office of Thrift Supervision is no more, another new, massive government agency is to be created and we are supposed to believe that capitalism has been saved from itself. The Leader continues to give good speeches although do you get the feeling that in keeping with his Green bent a lot of the language is being recycled? There wasn't much by way of detail (as usual), but it sounded good.
For the life of me, I don't know how you go about regulating individual corporations but these clowns are about to have a go. Much better that one tries to regulate products or activities but I am afraid that is not what the real agenda is all about. Despite all the rhetoric about not wanting to run this or run that that is exactly what this administration seeks to do through its actions and the financial sector appears to be the next part of the economy not to be run by The Leader and his mob.
The thin ray of hope appears to be the positioning of the Fed to look after the systemic part of the financial sector as the Fed has up to this point been a fairly independent body rather than a newly created Clown House such as that envisioned for the consumer part of the business. Now how the hell one goes about defining what is what inasmuch as a systemic player such as J.P. Morgan Chase has one hell of a big consumer business is beyond me unless one is prepared to let the Clown House oversee the consumer bank and the Fed look after the wholesale and capital markets businesses. Now will not that be fun? But scarier yet, The Leader seemed to be saying that it will be Congress who draws up the rules of governance irrespective of the identity of the regulator. Once that camel gets its nose under the tent it's all over but the shouting...or perhaps wailing and gnashing of teeth is a better image. Further, the Fed--or perhaps Mr. Bernanke--has showed less and less interest in jealously guarding the independence of the institution than some would hope. If the tea leaves are correct, in a year's time it may well be Larry Summers in that role and while he has been spending the last few weeks trying to convince every man, woman and child that The Leader's administration does not have a socialist bent, no one really believes that an independent central bank is high on his agenda. Then again, if he becomes its chairman, who knows where his ego will lead him. Either way it's not a happy picture.
Anyway, the future is certainly an industry operating under greater regulatory oversight which, if crafted by the steady hands of Messrs. Dodd and Frank, is certain to be restrictive and useless at the same time. In the mean time the lawyers and lobbyists are going to make a fortune. Throughout all this everyone has seemed to have forgotten that the business of finance is hardly the private playground of American bankers. I used to joke that you never had to be smart to be Swiss; just have the right banking regulations and you could make a lot of money. Never will this be more true than in the future of finance where the Great American Competition is directed by politicians. We stand to lose a lot sportsfans both in the private sector and in the public arena as well, as this new page will surely have an impact on the dollar and its status in the world. But of course the systemic risk will be removed....then again, weren't Fanny and Freddie systemic? And weren't their regulators Barney and Chris? Oh well...
For the life of me, I don't know how you go about regulating individual corporations but these clowns are about to have a go. Much better that one tries to regulate products or activities but I am afraid that is not what the real agenda is all about. Despite all the rhetoric about not wanting to run this or run that that is exactly what this administration seeks to do through its actions and the financial sector appears to be the next part of the economy not to be run by The Leader and his mob.
The thin ray of hope appears to be the positioning of the Fed to look after the systemic part of the financial sector as the Fed has up to this point been a fairly independent body rather than a newly created Clown House such as that envisioned for the consumer part of the business. Now how the hell one goes about defining what is what inasmuch as a systemic player such as J.P. Morgan Chase has one hell of a big consumer business is beyond me unless one is prepared to let the Clown House oversee the consumer bank and the Fed look after the wholesale and capital markets businesses. Now will not that be fun? But scarier yet, The Leader seemed to be saying that it will be Congress who draws up the rules of governance irrespective of the identity of the regulator. Once that camel gets its nose under the tent it's all over but the shouting...or perhaps wailing and gnashing of teeth is a better image. Further, the Fed--or perhaps Mr. Bernanke--has showed less and less interest in jealously guarding the independence of the institution than some would hope. If the tea leaves are correct, in a year's time it may well be Larry Summers in that role and while he has been spending the last few weeks trying to convince every man, woman and child that The Leader's administration does not have a socialist bent, no one really believes that an independent central bank is high on his agenda. Then again, if he becomes its chairman, who knows where his ego will lead him. Either way it's not a happy picture.
Anyway, the future is certainly an industry operating under greater regulatory oversight which, if crafted by the steady hands of Messrs. Dodd and Frank, is certain to be restrictive and useless at the same time. In the mean time the lawyers and lobbyists are going to make a fortune. Throughout all this everyone has seemed to have forgotten that the business of finance is hardly the private playground of American bankers. I used to joke that you never had to be smart to be Swiss; just have the right banking regulations and you could make a lot of money. Never will this be more true than in the future of finance where the Great American Competition is directed by politicians. We stand to lose a lot sportsfans both in the private sector and in the public arena as well, as this new page will surely have an impact on the dollar and its status in the world. But of course the systemic risk will be removed....then again, weren't Fanny and Freddie systemic? And weren't their regulators Barney and Chris? Oh well...
Tuesday, June 16, 2009
JUST THINKIN' ABOUT TOMORROW...
Charity golf yesterday. Won a putter for the longest on the 18th. hole. Rolled in a nasty, downhill, sliding, 26 footer for a bird. Absolutely pure--and in when I hit it. As for the rest of the day, we stank, but for a bunch of old guys we didn't embarrass ourselves.
The big announcement is scheduled for tomorrow; i.e. the restructuring of the financial system from the standpoint of regulation. I suspect this is going to be more of a within the Beltway event with battles between entrenched interests awaiting the opening bell but I may well be wrong. I shall therefore await the announcements before commenting but the early editions seem to report that the Federal Reserve may well emerge as the "Primus inter Paris" of the assorted agencies, which, if true, would not be a bad thing. The Leader let it be known today that there will be a new agency formed expressly to protect consumers...from themselves I suppose...which will have the undoubted result of making everything more confused and expensive without doing much at all to protect anything other than the bureaucracy itself. The New York Times will applaud. We wait in joyful hope and bless that they who run in circles shall be known as wheels.
In the mean time, there was a delicious little story in the Journal last week concerning a texas based hedge fund that apparently put a big hurt on some of the smart guys up in New York. Seems as though the SG's got it into their head that they could make a quick turn on some credit default insurance the Texas boys were peddling on some stinko mortgage-backs. Convinced that the securities in question were about to go belly up, they purchased protection from the Texas boys at a really high number--like 90% of face confident that they would make a quick 10% when the securities were declared worthless. Don't mess with Texas. Seems as if the Texas boys paid--or as the lawyers like to say--caused the securities to be paid in full leaving the default insurance essentially worthless. Anyway, the smart guys paid out 90 cents on the dollar for an insurance policy they they are wearing. Win some, lose some. In the great scheme of things this does't amount to anything but it does illustrate brilliantly what we were talking about in the case of AIG just a few short days ago.
If the smart guys had purchased protection on securities that they owned, all would be fine as they would have gotten all their money back and then some. But they were not the owners; they were pure speculators trying to make a fast buck, for in order to purchase insurance protection in this market, one needn't be the owner of the underlying security just like the owners of AIG CDSs were not the owners of the underlying. So I ask again: why the hell did those speculators--and that's all they were--get bailed out? Had the regulators just put out a bid for the underlying they would have created, in effect, the greatest short squeeze in the history of the world on the non-actual holders of the underlying of the CDSs issued by AIG. Obviously, I don't know much of what transpired but if you run into your favorite regulator one day ask him why the hell he (or her...you know who I mean) aint as smart as some Texas Yeahoo. Then ask how we taxpayers are going to get the $200 billion-odd in AIG back. Then duck.
I'll be tossing an turning all night awaiting the dawn of a new financial day.
The big announcement is scheduled for tomorrow; i.e. the restructuring of the financial system from the standpoint of regulation. I suspect this is going to be more of a within the Beltway event with battles between entrenched interests awaiting the opening bell but I may well be wrong. I shall therefore await the announcements before commenting but the early editions seem to report that the Federal Reserve may well emerge as the "Primus inter Paris" of the assorted agencies, which, if true, would not be a bad thing. The Leader let it be known today that there will be a new agency formed expressly to protect consumers...from themselves I suppose...which will have the undoubted result of making everything more confused and expensive without doing much at all to protect anything other than the bureaucracy itself. The New York Times will applaud. We wait in joyful hope and bless that they who run in circles shall be known as wheels.
In the mean time, there was a delicious little story in the Journal last week concerning a texas based hedge fund that apparently put a big hurt on some of the smart guys up in New York. Seems as though the SG's got it into their head that they could make a quick turn on some credit default insurance the Texas boys were peddling on some stinko mortgage-backs. Convinced that the securities in question were about to go belly up, they purchased protection from the Texas boys at a really high number--like 90% of face confident that they would make a quick 10% when the securities were declared worthless. Don't mess with Texas. Seems as if the Texas boys paid--or as the lawyers like to say--caused the securities to be paid in full leaving the default insurance essentially worthless. Anyway, the smart guys paid out 90 cents on the dollar for an insurance policy they they are wearing. Win some, lose some. In the great scheme of things this does't amount to anything but it does illustrate brilliantly what we were talking about in the case of AIG just a few short days ago.
If the smart guys had purchased protection on securities that they owned, all would be fine as they would have gotten all their money back and then some. But they were not the owners; they were pure speculators trying to make a fast buck, for in order to purchase insurance protection in this market, one needn't be the owner of the underlying security just like the owners of AIG CDSs were not the owners of the underlying. So I ask again: why the hell did those speculators--and that's all they were--get bailed out? Had the regulators just put out a bid for the underlying they would have created, in effect, the greatest short squeeze in the history of the world on the non-actual holders of the underlying of the CDSs issued by AIG. Obviously, I don't know much of what transpired but if you run into your favorite regulator one day ask him why the hell he (or her...you know who I mean) aint as smart as some Texas Yeahoo. Then ask how we taxpayers are going to get the $200 billion-odd in AIG back. Then duck.
I'll be tossing an turning all night awaiting the dawn of a new financial day.
Thursday, June 11, 2009
HERE COME THE JUDGE
Wooo-ee! Billy-Bob here! Did you our good ol' boy Ken up thar on the Hill again today talkin' about what happened when he went out and bought Merrill Lynch? Damn iffin are neighbor didn't look like a Coon up a tree with a bunch ah hound dawgs a yappin' and ascratchin down below. Cept wasn't no dawg there but this little piss-ant fella from O hi o Nama Kuncinich wit a whole bunch ah question written by some damn lawyer designed to do nuttin but get good ol' Ken on the record so that they can come after him later fo' lying to Congress bout who the hell knows what and who the hell cares. I think this Kuncinich boy--or whatever his name be--lives in Cleveland, which shows you how smart he is; All kinds of people be FROM Cleveland but hell, I don't know nobody who still LIVES there!
Anyway it seems that when our Ken be going after Merrill, the damn situation there and everywhere was goin' down faster than a man comin' out of a bedroom winda when the husband come home early. Now ever-damn-body in the world it seems wants to know what Ken knew and when did he know it. And if he knowed Merrill was riper than a two day cow paddy in August, why the hell didn't he back out? Seems that this deal had what these boys was callin' a MAC attached to it. Now I'm askin' my self what in hell does a hamburger got to do with buyin' a bank but it turns out it aint that kind of MAC. No siree, this here MAC is a Material Adverse Change Clause which I guess lets you walk away if stuff happens. So the question was why didn't you walk away Ken, but it turns out that the #1 revenuer--some boy by the name of Paulson and this here Bernanke guy plus the guy who's the head revenuer now, that be Geithner, said un uh. Seems like they said to our boy Ken: "Ken, now you listen up, you hear? It may be material and it may be adverse, but IT AIN'T MATERIALLY ADVERSE! Well, I'll tell you whats the truth; you in this business and those sorts start tellin' you to jump, I figger the onliest thing you better be thinkin' 'bout is where the hell you gonna land when you come down...IF you come down. So poor ol' Ken and his boys figgure these guys got us by the shorts so we better do what they want and they go ahead and buy the damn thing. 'Corse in a month or two they gotta write down some hellacious amount of money so they wind up with the whole world and then some pissed off to all get-out.
Well, that would be bad enough but it seems that the piss-ant and all of his buddies not only want a piece of Ken but they wants a piece of everybody else too! All of a sudden they realize that they don't know who to get 'cause the politics are a little mixed up here. Other thing be if they get this Bernanke guy they might wind up with some fella named Summers who 'parentky pisses off HALF the world jest by wakin' up in the morning. But they stay at it and ask Ken if he felt at all in-tim-a-dated by the revenuers. I'll be damned if Ken don't take a bullet right then and there!!! Didn't say he wasn't but didn't say was neither. Now I got me this Eye-talian friend who would call Ken a stand-up guy. Meebe he's right but could be that he ain't too bright either. It didn't go well fo' Ken but what saved him was that most of those boys along for the ride with the piss-ant were as thick as two fence posts and where I comes from, THAT'S THICK. Anyway I got this here friend of mine who be livin' in the mid-west somewhere and knows something 'bout this. I'm gonna give him a call and find out what he thinks happened. Damned if I can figger it out.
Anyway it seems that when our Ken be going after Merrill, the damn situation there and everywhere was goin' down faster than a man comin' out of a bedroom winda when the husband come home early. Now ever-damn-body in the world it seems wants to know what Ken knew and when did he know it. And if he knowed Merrill was riper than a two day cow paddy in August, why the hell didn't he back out? Seems that this deal had what these boys was callin' a MAC attached to it. Now I'm askin' my self what in hell does a hamburger got to do with buyin' a bank but it turns out it aint that kind of MAC. No siree, this here MAC is a Material Adverse Change Clause which I guess lets you walk away if stuff happens. So the question was why didn't you walk away Ken, but it turns out that the #1 revenuer--some boy by the name of Paulson and this here Bernanke guy plus the guy who's the head revenuer now, that be Geithner, said un uh. Seems like they said to our boy Ken: "Ken, now you listen up, you hear? It may be material and it may be adverse, but IT AIN'T MATERIALLY ADVERSE! Well, I'll tell you whats the truth; you in this business and those sorts start tellin' you to jump, I figger the onliest thing you better be thinkin' 'bout is where the hell you gonna land when you come down...IF you come down. So poor ol' Ken and his boys figgure these guys got us by the shorts so we better do what they want and they go ahead and buy the damn thing. 'Corse in a month or two they gotta write down some hellacious amount of money so they wind up with the whole world and then some pissed off to all get-out.
Well, that would be bad enough but it seems that the piss-ant and all of his buddies not only want a piece of Ken but they wants a piece of everybody else too! All of a sudden they realize that they don't know who to get 'cause the politics are a little mixed up here. Other thing be if they get this Bernanke guy they might wind up with some fella named Summers who 'parentky pisses off HALF the world jest by wakin' up in the morning. But they stay at it and ask Ken if he felt at all in-tim-a-dated by the revenuers. I'll be damned if Ken don't take a bullet right then and there!!! Didn't say he wasn't but didn't say was neither. Now I got me this Eye-talian friend who would call Ken a stand-up guy. Meebe he's right but could be that he ain't too bright either. It didn't go well fo' Ken but what saved him was that most of those boys along for the ride with the piss-ant were as thick as two fence posts and where I comes from, THAT'S THICK. Anyway I got this here friend of mine who be livin' in the mid-west somewhere and knows something 'bout this. I'm gonna give him a call and find out what he thinks happened. Damned if I can figger it out.
Wednesday, June 10, 2009
WHEN I GROW TOO OLD TO DREAM...
It hasn't happened yet but I'm getting close. The Supremes got cold feet and ruined my dream of intervention in re the Great Chrysler Grab. I can see why as the amount involved was quite small and the fall-out would have been quite large. Perhaps they are saving their powder for GM where the same issue might well resurface with a far greater number attached to it. By the by, did you see GM's new CEO's answer to the question, "What do you know about cars?" Answer: "Nothing." OoooooooK.
Anyway, the papers got signed today and Chrysler is now Fiat by fiat. As stated in the past, Fiat does know a thing or two about cars and as the price of oil just passed $71 a barrel they may get lucky trying to sell the little things they have on the shelf. It's really going to be interesting to watch the surviving dealers switch sales pitches from Hemmis, 442s and four-on-the-floor to, "Ah che bella picalina macchina!" But back to finance.
Lots and lots of stuff. The Treasury agreed to allow a bunch of banks to pay back the Tarp money and released the numbers on the latest actions by Citi to become, "One of the world's best capitalized banks," in the words of their CEO, the besieged Mr. Pandit. This is coming about through the conversion of approximately $68 billion in preferred shares into common equity which will give Our Hero's shop about a 38% ownership in the joint that never sleeps. Now do you remember way back a few months ago when I stated that the concept of equity and capital adequacy involving banks was a myth? From a dog's breakfast, Citi, through the magic of accounting has been transformed into "one of the world's best capitalized banks" WHILE NOT ANOTHER DIME OF CAPITAL HAS BEEN ADDED! Thank you Mr. Geithner for making me look good again. God, sometimes I even scare myself! The amazing part is people and especially the media, the watchdogs of society, continue to fall for this crap.
Of course, this has given our girl friend, Ms. Bair, yet another reason to continue to yap. Now her pitch is the management of Citi must be changed to protect the investment of the American taxpayer in the common shares and to put in some, "Good, old credit managers," who she believes to be lacking in Citi's strength. For a change she may be right as Sandy Weil destroyed the great credit culture that had been a hallmark of the Bank for years while putting together a totally unmanageable mismash of businesses and strategies. Ol' Sandy went so far as to fire his fair haired boy, Jamie Diamond, now CEO of J.P. Morgan Chase after Jamie fired Sandy's daughter (who by all accounts was a first class pain in the ass). How delicious is that? But while Shelia may be on to something, the situation was hardly unknown among regulators with a brain which is why the merger with Wachcovia made considerable sense as it would have brought to Citi a solid group of domestic bankers and a large, solid core of domestic deposits which Citi sorely needed...not to mention some handy tax consequences. Of course it was Ms. Bair, in an outrageous act of conflict of roles, queered the deal while ADVISING Wells Fargo as to their strategy for capturing Wachcovia.
That's our girl.
Our Hero had a tough one today as well. Seems as though The Leader and his gang got hammered by the Wall Street guys on the issue to pay guidelines so they sent poor Tim out to tell the press that the administration was no longer thinking of proposing anything and that they would simply punt it over to Congress. Bad hair day all around. Of course this gives Barney Frank the ball but now the whole thing gets caught in the middle of both houses so it looks like a win for the execs.
The Leader is now telling folks that Congress is going to be under a strict "Pay as you Go" spending restraint--right after he spends all the money in the world over the next few months. This is a charade and a half, but I guess we have come to expect it. The bond market certainly has. Last time I looked the 10 year had ticked up to 3.96%. If summer comes can winter be far behind? Tune in tomorrow. Ciao!
Anyway, the papers got signed today and Chrysler is now Fiat by fiat. As stated in the past, Fiat does know a thing or two about cars and as the price of oil just passed $71 a barrel they may get lucky trying to sell the little things they have on the shelf. It's really going to be interesting to watch the surviving dealers switch sales pitches from Hemmis, 442s and four-on-the-floor to, "Ah che bella picalina macchina!" But back to finance.
Lots and lots of stuff. The Treasury agreed to allow a bunch of banks to pay back the Tarp money and released the numbers on the latest actions by Citi to become, "One of the world's best capitalized banks," in the words of their CEO, the besieged Mr. Pandit. This is coming about through the conversion of approximately $68 billion in preferred shares into common equity which will give Our Hero's shop about a 38% ownership in the joint that never sleeps. Now do you remember way back a few months ago when I stated that the concept of equity and capital adequacy involving banks was a myth? From a dog's breakfast, Citi, through the magic of accounting has been transformed into "one of the world's best capitalized banks" WHILE NOT ANOTHER DIME OF CAPITAL HAS BEEN ADDED! Thank you Mr. Geithner for making me look good again. God, sometimes I even scare myself! The amazing part is people and especially the media, the watchdogs of society, continue to fall for this crap.
Of course, this has given our girl friend, Ms. Bair, yet another reason to continue to yap. Now her pitch is the management of Citi must be changed to protect the investment of the American taxpayer in the common shares and to put in some, "Good, old credit managers," who she believes to be lacking in Citi's strength. For a change she may be right as Sandy Weil destroyed the great credit culture that had been a hallmark of the Bank for years while putting together a totally unmanageable mismash of businesses and strategies. Ol' Sandy went so far as to fire his fair haired boy, Jamie Diamond, now CEO of J.P. Morgan Chase after Jamie fired Sandy's daughter (who by all accounts was a first class pain in the ass). How delicious is that? But while Shelia may be on to something, the situation was hardly unknown among regulators with a brain which is why the merger with Wachcovia made considerable sense as it would have brought to Citi a solid group of domestic bankers and a large, solid core of domestic deposits which Citi sorely needed...not to mention some handy tax consequences. Of course it was Ms. Bair, in an outrageous act of conflict of roles, queered the deal while ADVISING Wells Fargo as to their strategy for capturing Wachcovia.
That's our girl.
Our Hero had a tough one today as well. Seems as though The Leader and his gang got hammered by the Wall Street guys on the issue to pay guidelines so they sent poor Tim out to tell the press that the administration was no longer thinking of proposing anything and that they would simply punt it over to Congress. Bad hair day all around. Of course this gives Barney Frank the ball but now the whole thing gets caught in the middle of both houses so it looks like a win for the execs.
The Leader is now telling folks that Congress is going to be under a strict "Pay as you Go" spending restraint--right after he spends all the money in the world over the next few months. This is a charade and a half, but I guess we have come to expect it. The bond market certainly has. Last time I looked the 10 year had ticked up to 3.96%. If summer comes can winter be far behind? Tune in tomorrow. Ciao!
Tuesday, June 9, 2009
BACK HOME AGAIN IN INDIANA...!
Well, the Hoosier State threw a real spanner in the works. As of 5:00 pm the stay against the Chrysler bankruptcy plan still stands with no clear indication as to how Justice Ginsburg or all of he colleagues will come down on what has been somewhat overlooked as one of the critical constitutional and business issues that has arisen in many a year. The United States has always had one immutable thing that has set it apart from all other nations save perhaps England; the absolute dominance of the rule of law and the consistency with which it has been applied. This has been an enormous advantage over the ages; the greatest advantage perhaps that we enjoy. Individuals of any nation and corporations regardless of their origin stand equal before the bar in this country. No other nation in history can claim this equality. The law has always been fairly and equally applied.
Some weeks ago we joked that Fiat may not understand their relationship with the government of the United States as its relationship with the various governments of Italy have been, shall we say, cozy. This suit, brought by the Attorney General of the State of Indiana on behalf of Indiana government investors against the Chrysler bankruptcy plan is IMHO in the finest of traditions of American jurisprudence. One and all should watch the disposition of this case. It may well prove critical not only in the specific incidence but as to what kind of a system under which we shall go forward. Are we to have a free market society in which the sanctity of contract and the rule of law stand unabated, or will we live under a different understanding of the definition of rights? All societies evolve but not always to the general benefit. Is this one of those moments? We shall see.
$35 Billion in new auctions and refundings this week in the 3, 10 and 30 year maturities. No one seems to be too concerned as to their success but the 10 year benchmark continues to creep upward towards the important--at least from an emotional standpoint--to the 4.00% level.
As this is being written, Oil is well-bid at $70.54 a barrel, up over 2 bucks from the open. Commodities continue to move higher and the dollar in getting crushed. One talking head mused whether these actions might impede the recovery. It would be funny if not so sad. There is no recovery: unemployment is up, the lower advance figure is present only because people now realize the temp jobs number is way up, income levels are down across the board; unemployment has pushed through the 9% level with some Federal Reserve Banks hinting at 10-11.5% by next year. The Leader's plan, after five months has been a failure heading towards a catastrophe with spending out of control and a new czar for some segment of the economy being created daily seeming without any Congressional oversight. Results and improvement need to be shown quickly or confidence, which showed a nice up-tick in March will begin to quickly erode. I fear that this may well be a lost year leaving the country even more vulnerable to exogenous shocks. One hopes one is wrong.
Meanwhile, Our Hero s getting some of his money back as a number of TARP institutions are going to be allowed to repay the advances most of them didn't want in the first place. How nice. But here's a goodie: the TARP funds were allocated by Congress for a specific purpose. The monies to be returned seem to be destined for some sort of "rainy day fund" that Our Hero can use for whatever his little heart desires. Where is Barnie and his "oversight" when you really need it?
Finally, The Leader, Our Hero and their entire mob have apparently decided that the regulatory mechanism presently in place needn't be rejiggered; what we have is ok, what we need is better regulation. So much for Shelia Regina...or is it too soon to announce her demise? Methinks somebody better have a wooden stake close by. This is going to be a hell of a summer.
Some weeks ago we joked that Fiat may not understand their relationship with the government of the United States as its relationship with the various governments of Italy have been, shall we say, cozy. This suit, brought by the Attorney General of the State of Indiana on behalf of Indiana government investors against the Chrysler bankruptcy plan is IMHO in the finest of traditions of American jurisprudence. One and all should watch the disposition of this case. It may well prove critical not only in the specific incidence but as to what kind of a system under which we shall go forward. Are we to have a free market society in which the sanctity of contract and the rule of law stand unabated, or will we live under a different understanding of the definition of rights? All societies evolve but not always to the general benefit. Is this one of those moments? We shall see.
$35 Billion in new auctions and refundings this week in the 3, 10 and 30 year maturities. No one seems to be too concerned as to their success but the 10 year benchmark continues to creep upward towards the important--at least from an emotional standpoint--to the 4.00% level.
As this is being written, Oil is well-bid at $70.54 a barrel, up over 2 bucks from the open. Commodities continue to move higher and the dollar in getting crushed. One talking head mused whether these actions might impede the recovery. It would be funny if not so sad. There is no recovery: unemployment is up, the lower advance figure is present only because people now realize the temp jobs number is way up, income levels are down across the board; unemployment has pushed through the 9% level with some Federal Reserve Banks hinting at 10-11.5% by next year. The Leader's plan, after five months has been a failure heading towards a catastrophe with spending out of control and a new czar for some segment of the economy being created daily seeming without any Congressional oversight. Results and improvement need to be shown quickly or confidence, which showed a nice up-tick in March will begin to quickly erode. I fear that this may well be a lost year leaving the country even more vulnerable to exogenous shocks. One hopes one is wrong.
Meanwhile, Our Hero s getting some of his money back as a number of TARP institutions are going to be allowed to repay the advances most of them didn't want in the first place. How nice. But here's a goodie: the TARP funds were allocated by Congress for a specific purpose. The monies to be returned seem to be destined for some sort of "rainy day fund" that Our Hero can use for whatever his little heart desires. Where is Barnie and his "oversight" when you really need it?
Finally, The Leader, Our Hero and their entire mob have apparently decided that the regulatory mechanism presently in place needn't be rejiggered; what we have is ok, what we need is better regulation. So much for Shelia Regina...or is it too soon to announce her demise? Methinks somebody better have a wooden stake close by. This is going to be a hell of a summer.
Monday, June 8, 2009
ELEMENTARY MY DEAR...
So I slept on it...and slept and slept.
Got a call from a buddy
"You were wandering in you thoughts."
"No *&^% Sherlock."
"It's elementary, really."
"Oh is it?"
"Yes of course it is. Your point is that if you leave it to machines and formulae you ignore the greatest human strength."
"Which is?"
"What is found only in humans but often lacking."
"Common sense?"
"Of course. As I said, elementary."
"*&^%!"
He was right of course. It matters little who or what is appointed or designated as the overseer of risk. It all comes down to the INDIVIDUALS performing the task and their experience, not only with the area, the products but with the people involved. Let me explain:
A baseball manager with a man on first and needing a run to tie the game may well leave it to the runner as to whether he attempts o steal second based on the runner's experience and past performance. A risk manager may well, within agreed maximum perimeters, allow considerable more leeway to one individual than to another. In a sense, the first law of banking, "know your customer," is applied to the most important level of action within the institution, the art of taking risk. BUT, this requires substantial experience and knowledge; the risk managers within an institution must be among the most professional and knowledgeable of all employees. I am afraid that in some cases that is not always the case or that risk management, while deemed important, is actually regarded and compensated as a lesser job where no rain makers are found. Profit and the making of the same is all important.
Another problem is easily found upon inspection. There is often an enormous amount of pressure to, in all cases, get the deal done. This leads to the close calls that most often result in the problems that rise up only at a later date. Most deal-doers are convinced that they can structure their way around a problem and will go to great lengths to convince risk management that the issues raised have been resolved but their structuring brilliance. In some cases this is true; in others the result is layer upon layer of complexity that in itself creates addition risk that should never be undertaken. Sometimes the ultimate reward is worth the additional risk. Sometimes. The problem, however, is that too often every risk is deemed the ultimate deal. They never are. Intelligence and EXPERIENCE is what makes a really good risk management team.
There is another problem that is not often seen or recognized. Risk managers are like all other humans; they like to be loved and wanted. Saying "no" to colleagues with whom one shares a corporate existence or setting parameters which limit the taking or risk (and hence, profit and pay) is a difficult existence. A simple example from my past. I was asked to approve a simple risk on an interest rate swap for a western hemisphere country with whom we had little business. It was a one-off transaction that had no business being done for a variety of reasons (not the least of which was that the country was on the wrong side of the swap given the direction of interest rates). I approved the transaction nevertheless primarily because the risk to the institution was small but if I were to be honest because I liked my colleagues and wanted to help. This happens all the time. The desire to be seen within the institution as being "constructive" is a huge motivator as well. At the end of the day, all went well except for the country who would have been better off by not doing anything but as a wise man once said, "do not mislead a client, but if he is determined to make an honest mistake on his own that benefits you, accept the gift." Make your own call on that little gem.
In any case I think the function of risk management in financial institution should be as divorced from the general management line as possible. Risk managers should be independent, reporting to, perhaps, a sub-committee of the board and directed by a separate line of management. I would not at all be opposed to external direction of some sort. In the good old days in London, the Bank of England used to assign a retired senior British banker to newly opened foreign institutions in London just to make sure things were done the "right" way. Not a bad idea. For those institutions deemed to present a "systemic" risk (you know who you are) a cadre of risk managers in specific areas might be assigned by the regulator from a pool of proven professionals trained in risk management either independently or at oversight institutions, and their reporting line would be to the institutions not the regulator. Their pay, given their environment would be commensurate with the private sector levels in the institutions to which they are assigned. Remember, you pay peanuts, you get monkeys. They could even be moved between institutions after a period of time to insure independence. On Monday, J.P Morgan could have a risk manager who worked for Citibank on the previous Friday. Now wouldn't that be a kick? Think about it.
Coming up tomorrow, a little discussion on our girl friend Ms. Bair who, moving with her usual grace undoubtably planted the story on Citibank management problems in the WSJ last week, and other Potomac follies to which we have alluded. In the mean time the Supremes allowed the stay in the Chrysler bankruptcy this afternoon. Could it be that Ruthie, a lovely Yiddisha girl with her female experience came to a better decision than Rahm, a nice Yiddisha boy? We shall see.
Got a call from a buddy
"You were wandering in you thoughts."
"No *&^% Sherlock."
"It's elementary, really."
"Oh is it?"
"Yes of course it is. Your point is that if you leave it to machines and formulae you ignore the greatest human strength."
"Which is?"
"What is found only in humans but often lacking."
"Common sense?"
"Of course. As I said, elementary."
"*&^%!"
He was right of course. It matters little who or what is appointed or designated as the overseer of risk. It all comes down to the INDIVIDUALS performing the task and their experience, not only with the area, the products but with the people involved. Let me explain:
A baseball manager with a man on first and needing a run to tie the game may well leave it to the runner as to whether he attempts o steal second based on the runner's experience and past performance. A risk manager may well, within agreed maximum perimeters, allow considerable more leeway to one individual than to another. In a sense, the first law of banking, "know your customer," is applied to the most important level of action within the institution, the art of taking risk. BUT, this requires substantial experience and knowledge; the risk managers within an institution must be among the most professional and knowledgeable of all employees. I am afraid that in some cases that is not always the case or that risk management, while deemed important, is actually regarded and compensated as a lesser job where no rain makers are found. Profit and the making of the same is all important.
Another problem is easily found upon inspection. There is often an enormous amount of pressure to, in all cases, get the deal done. This leads to the close calls that most often result in the problems that rise up only at a later date. Most deal-doers are convinced that they can structure their way around a problem and will go to great lengths to convince risk management that the issues raised have been resolved but their structuring brilliance. In some cases this is true; in others the result is layer upon layer of complexity that in itself creates addition risk that should never be undertaken. Sometimes the ultimate reward is worth the additional risk. Sometimes. The problem, however, is that too often every risk is deemed the ultimate deal. They never are. Intelligence and EXPERIENCE is what makes a really good risk management team.
There is another problem that is not often seen or recognized. Risk managers are like all other humans; they like to be loved and wanted. Saying "no" to colleagues with whom one shares a corporate existence or setting parameters which limit the taking or risk (and hence, profit and pay) is a difficult existence. A simple example from my past. I was asked to approve a simple risk on an interest rate swap for a western hemisphere country with whom we had little business. It was a one-off transaction that had no business being done for a variety of reasons (not the least of which was that the country was on the wrong side of the swap given the direction of interest rates). I approved the transaction nevertheless primarily because the risk to the institution was small but if I were to be honest because I liked my colleagues and wanted to help. This happens all the time. The desire to be seen within the institution as being "constructive" is a huge motivator as well. At the end of the day, all went well except for the country who would have been better off by not doing anything but as a wise man once said, "do not mislead a client, but if he is determined to make an honest mistake on his own that benefits you, accept the gift." Make your own call on that little gem.
In any case I think the function of risk management in financial institution should be as divorced from the general management line as possible. Risk managers should be independent, reporting to, perhaps, a sub-committee of the board and directed by a separate line of management. I would not at all be opposed to external direction of some sort. In the good old days in London, the Bank of England used to assign a retired senior British banker to newly opened foreign institutions in London just to make sure things were done the "right" way. Not a bad idea. For those institutions deemed to present a "systemic" risk (you know who you are) a cadre of risk managers in specific areas might be assigned by the regulator from a pool of proven professionals trained in risk management either independently or at oversight institutions, and their reporting line would be to the institutions not the regulator. Their pay, given their environment would be commensurate with the private sector levels in the institutions to which they are assigned. Remember, you pay peanuts, you get monkeys. They could even be moved between institutions after a period of time to insure independence. On Monday, J.P Morgan could have a risk manager who worked for Citibank on the previous Friday. Now wouldn't that be a kick? Think about it.
Coming up tomorrow, a little discussion on our girl friend Ms. Bair who, moving with her usual grace undoubtably planted the story on Citibank management problems in the WSJ last week, and other Potomac follies to which we have alluded. In the mean time the Supremes allowed the stay in the Chrysler bankruptcy this afternoon. Could it be that Ruthie, a lovely Yiddisha girl with her female experience came to a better decision than Rahm, a nice Yiddisha boy? We shall see.
Thursday, June 4, 2009
HOME TOWN FAVORITES
Big wind from the East blew in on Tuesday quite unexpectedly. Neighbors and dear friends from long ago. Two days of laughs, food and a cocktail or six, hence no blog for two days. Sorry...well, I'm not, really. It was great to see them.
The Leader is off by the pyramids proclaiming the gifts to the world of the Muslim world over the ages. For some of these gifts to have occurred Islam would have had to have had a 3000 year history but no matter, it was a fine speech. Great words and delivery. He'll probably be called Ozymandias throughout the Middle East from here on out.
Meanwhile, back at home a group of Banks and money-runners submitted a proposal to a number of regulatory bodies regarding the future treatment of derivatives no doubt as a response to the very suggestion made on these pages a few days ago. Wise move for the issues are now being framed from both sides which means we may get more intelligent regulation than if it were to come down a one-way street. As I suggested, there is probably going to be a clear division of such things such as credit default swaps and the more bespoke types of derivatives used by global financial institutions. Transparency will be a key buzz-word but one wonders whether this will really improve things a whole lot because given the complexity and context in which many of these products are created the understanding of the true risks will remain extremely difficult for and outsider to grasp. Nevertheless, the exercise when completed will allow all involved, especially the politicians, to proclaim success and wax poetic as to how the future has been fixed...until the next time.
It's a terrible thing to say but if people still believe that Uncle is going to bail them out, bad things will continue to happen. The too big to fail thing has to be put to bed and whatever rules and regulations are put into place will not prevent a recurrence of the catastrophe of last year. More important I think is dealing with the internal controls at institutions of "systemic" size in an attempt to create a system on good practices which will do far more to prevent such a reoccurrence than any series of rules, regulations or reporting mechanisms.
Risk management is far more of an art rather than a science. While dealing with financial products which can be expressed in quantitative form, one must remember that these products are not self-creations; they are created by people and in the end, as my old mentor expressed to me so many years ago, it is always about the people. I see this discussion of risk moving too far back into the world of quants which moves it further and further away from the real control mechanism which is the taking of responsibility by real, live people. In the past few months we have heard a great deal of discussion of "why didn't the product or structure work the way it was supposed to work," as if these products were living beings with the right to choose as to whether they would be successful or not. The confidence that "my algorhythem is flawless" is pervasive throughout the industry and that is correct..until it isn't. You had better know the people...it is always about the people...and knowing them does not mean their academic accomplishments or measurable skills. It is much more subtle and yet much more difficult than that. The oversight function is one of the toughest jobs in any institution, especially a financial institution. I'll try to explain more about this tomorrow. I want to sleep on my thoughts.
Oh, a big shout-out to Ms. Merkel who got it exactly right the other day. Guess she's been reading the blog as well.
The Leader is off by the pyramids proclaiming the gifts to the world of the Muslim world over the ages. For some of these gifts to have occurred Islam would have had to have had a 3000 year history but no matter, it was a fine speech. Great words and delivery. He'll probably be called Ozymandias throughout the Middle East from here on out.
Meanwhile, back at home a group of Banks and money-runners submitted a proposal to a number of regulatory bodies regarding the future treatment of derivatives no doubt as a response to the very suggestion made on these pages a few days ago. Wise move for the issues are now being framed from both sides which means we may get more intelligent regulation than if it were to come down a one-way street. As I suggested, there is probably going to be a clear division of such things such as credit default swaps and the more bespoke types of derivatives used by global financial institutions. Transparency will be a key buzz-word but one wonders whether this will really improve things a whole lot because given the complexity and context in which many of these products are created the understanding of the true risks will remain extremely difficult for and outsider to grasp. Nevertheless, the exercise when completed will allow all involved, especially the politicians, to proclaim success and wax poetic as to how the future has been fixed...until the next time.
It's a terrible thing to say but if people still believe that Uncle is going to bail them out, bad things will continue to happen. The too big to fail thing has to be put to bed and whatever rules and regulations are put into place will not prevent a recurrence of the catastrophe of last year. More important I think is dealing with the internal controls at institutions of "systemic" size in an attempt to create a system on good practices which will do far more to prevent such a reoccurrence than any series of rules, regulations or reporting mechanisms.
Risk management is far more of an art rather than a science. While dealing with financial products which can be expressed in quantitative form, one must remember that these products are not self-creations; they are created by people and in the end, as my old mentor expressed to me so many years ago, it is always about the people. I see this discussion of risk moving too far back into the world of quants which moves it further and further away from the real control mechanism which is the taking of responsibility by real, live people. In the past few months we have heard a great deal of discussion of "why didn't the product or structure work the way it was supposed to work," as if these products were living beings with the right to choose as to whether they would be successful or not. The confidence that "my algorhythem is flawless" is pervasive throughout the industry and that is correct..until it isn't. You had better know the people...it is always about the people...and knowing them does not mean their academic accomplishments or measurable skills. It is much more subtle and yet much more difficult than that. The oversight function is one of the toughest jobs in any institution, especially a financial institution. I'll try to explain more about this tomorrow. I want to sleep on my thoughts.
Oh, a big shout-out to Ms. Merkel who got it exactly right the other day. Guess she's been reading the blog as well.
Monday, June 1, 2009
WHAT'S GOOD FOR GENERAL MOTORS...
The Leader, at the end of his press conference today quoted this famous American "truism" in a different context. Back in 1953 when Charlie Wilson, then GM's Chairman first used the phrase at his Senate hearing concerning his nomination for Defense Secretary, he was excoriated by the political left in the harshest of terms. Not so this morning as the United States taxpayers became the owner of GM thanks to the Obama Administration. To call the Leader's little speech today crap would be boarding on the statement of an untruth but I suppose that suggestion is better here that to suggest the same in regard to the President of the United States. It was simply appalling. How the hell anyone can believe this...ah...crap is beyond me. "GM will be run by its management and an independent board of directors..." Yeah, until the decision as to what kind of cars to make and where to make them comes up. Then, as Mr. Gettlefinger admitted on TV the other day with nary a query from the adoring press, it will be made by the UAW and the White House. "GM will make the kind of cars the American people want..." Gang I live in the midwest and regularly drive 200 miles to visit the grandkids over some of the most heavily traveled highways in this country. I do not want to travel those roads in a Fiat Cinque Cento or in an Obamamobile. And that view is not going to change in the future---like after the 2010 elections--when the federal gasoline tax is raised to a level deemed sufficient to FORCE consumers to buy the kind of cars The Leader wants built. A bad day. By the by, where does he find those people to stand behind him during these moments? This some kind of, "got your back" thing?" Shouldn't they be working?
Now POTUS is one thing, but I think I can call Paul Krugman more or less a liar. You know the Leader's mob is getting worried about how things might turn out when they start finding new people to blame for what is about to happen and Krugman is more than happy to prostitute himself once more to the cause. If this doesn't work, we can blame Ronald Reagan. His column today in the Times is a compilation of half-truths, misrepresentations and outright lies. Time and space prevents one from commenting fully so all I can do is suggest that the column be read, keeping in mind a few inconvenient facts (from Mr. Krugman's standpoint) while so doing. Among these might be the Viet Nam War (guns and butter), The Great Society, Jimmy Carter, the Community Re-Investment Act, the difference between debt as a percentage of GDP (GDP rose tremendously during Reagan's administration) and the actual number and the fact that the major regulations placed on financial institutions in the Depression were overturned by Bill Clinton and his Sec of Treasury, Bob Rubin who went on to even greater accomplishments at Citicorp. Liar, liar, pants on fire!
On the left side, the leading article is entitled, "Owning G.M." In this, the editorial board of the Times states, "The administration's insistence that it has no intention of getting involved in the day-to-day decisions of General Motors is a reasonable response to concerns that the vagaries of the political process could run the company into the ground." The Times has always been more concerned with words than actions. They continue: "The decisions of G.M.'s new managers should not become entangled with the government's other policy priorities--such as maximizing employment in the United States or reducing job losses in Michigan." In other words, it should not be the decision of management to build fuel efficient cars in the most economical place but to insure that they are built in Michigan at a couple of billion dollar tool-up cost under labor rules and costs that insure every vehicle made is sold (if at all) at a dead loss. Stupidity such as this is breathtaking (one of the Time's favorite words) even for the Times.
Finally in the Observer section, someone named Cohen uses the Pringle case in England to support the nomination of Ms. Sottomayor to the SC. and the cause of liberal jurisprudence. I often wondered why the Times does not have a section for comic strips. With writings like those found today, there is no need.
Sorry, got wound up over the events of the day. I'll get back on track tomorrow.
Now POTUS is one thing, but I think I can call Paul Krugman more or less a liar. You know the Leader's mob is getting worried about how things might turn out when they start finding new people to blame for what is about to happen and Krugman is more than happy to prostitute himself once more to the cause. If this doesn't work, we can blame Ronald Reagan. His column today in the Times is a compilation of half-truths, misrepresentations and outright lies. Time and space prevents one from commenting fully so all I can do is suggest that the column be read, keeping in mind a few inconvenient facts (from Mr. Krugman's standpoint) while so doing. Among these might be the Viet Nam War (guns and butter), The Great Society, Jimmy Carter, the Community Re-Investment Act, the difference between debt as a percentage of GDP (GDP rose tremendously during Reagan's administration) and the actual number and the fact that the major regulations placed on financial institutions in the Depression were overturned by Bill Clinton and his Sec of Treasury, Bob Rubin who went on to even greater accomplishments at Citicorp. Liar, liar, pants on fire!
On the left side, the leading article is entitled, "Owning G.M." In this, the editorial board of the Times states, "The administration's insistence that it has no intention of getting involved in the day-to-day decisions of General Motors is a reasonable response to concerns that the vagaries of the political process could run the company into the ground." The Times has always been more concerned with words than actions. They continue: "The decisions of G.M.'s new managers should not become entangled with the government's other policy priorities--such as maximizing employment in the United States or reducing job losses in Michigan." In other words, it should not be the decision of management to build fuel efficient cars in the most economical place but to insure that they are built in Michigan at a couple of billion dollar tool-up cost under labor rules and costs that insure every vehicle made is sold (if at all) at a dead loss. Stupidity such as this is breathtaking (one of the Time's favorite words) even for the Times.
Finally in the Observer section, someone named Cohen uses the Pringle case in England to support the nomination of Ms. Sottomayor to the SC. and the cause of liberal jurisprudence. I often wondered why the Times does not have a section for comic strips. With writings like those found today, there is no need.
Sorry, got wound up over the events of the day. I'll get back on track tomorrow.
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