Thursday, April 10, 2008
Thursday, February 14, 2008
Is Wall St. Taking Crazy Pills??
I feel like Wall St. has lost its mind. While many have accused me of being a perma-bull recently, I must concede that I am now terrified. Why? Read this article, then circle back.
Tuesday, February 12, 2008
Washington Chicanery in Insurance
This is just the type of situation that truly irks me. Unfortunately the always witty, insightful, and exceedingly sharp Equity Private said it better than I ever could.
This is a must read
This is a must read
Blame the ratings agencies? Not so fast.
Is there fault to be layed at the feet of the ratings agencies? Yes. I conceded that yesterday. But I want to revisit a line I "threw away", but probably should have made clearer:
Anyone who reads this site knows i am a pretty strong "libertarian" (I use quotes because liberatarian has a sh-t ton of connotations and some of the self-professed libertarians are anarchists in disguise or just crazy...im mainstream libertarian). That said, it is pretty obvious that i have a pretty strong disdain for government intervention in most instances. I believe a large part of this mess was created BY the government--and any attempts to "fix" this with new regulations will only push problems down the line.
If anyone recalls, Mikey Milken went off and sold junk bonds to the S&Ls under the guise of "if you diversify enough then you are getting a free lunch in junk rated paper" back in the 80s and 90s (hmm, sound familiar??). When they caved (sound familiar) and the S&Ls had to firesale them and be bailed out (sound familiar??) the government declared they could only buy "investment grade" paper and ordained the ratings agencies as ultimate arbiters of that investment/junk status. Since, if a bond is rated junk, there is an automatic reduction in willing (able) buyers. To circumvent Milken's method of selling individual junk bonds, then declaring that through diversification they are stable as a portfolio the ibks simply bundled them at the start. Why? Because then they could get investment grade status, and then institutions could purchase them (in a low yield environment).
Now let's take the contra-example. What if institutions weren't required to hold only investment grade paper? Well, then these CDOs would probably have been given more accurate (lower) ratings. It is the same crowding out effect as when you add a substantial amount of subsidised housing: all the housing around the area's price increases because of decreased supply. You are either subsidised (and thus cheap) or you arent (and thus expensive). With securities you are either investment (expensive) or junk (cheap). By negating a stratification of ratings the agencies were incented to rate things as either AAA or junk. You get a barbell, not a pyramid. This effect is only amplified by the basel accords and other regulations stating that reserve capital must be seen in terms of risk. As Carney said (and im simplifying) AAA securities didnt count as liabilities on European balance sheets, since they were seen as risk free.
This is not to say the gov't intervention is ALWAYS bad, but in the rush to seem like they're doing SOEMTHING regulators forget about secondary incentive cascades (see Carney's post on behavioral finance and regulation). Case in point: Dodd's new, rediculous mortgage market "fixer".
It is also important to remember that these subprime ARM borrows are not being forced out of THEIR homes. They are being forced out of the BANK'S (lender/servicer/etc) homes. If they put no money down, and payed, say 1/30 (1 year out of 30) they maybe "own" their bathroom...but that's it.
Anyone who reads this site knows i am a pretty strong "libertarian" (I use quotes because liberatarian has a sh-t ton of connotations and some of the self-professed libertarians are anarchists in disguise or just crazy...im mainstream libertarian). That said, it is pretty obvious that i have a pretty strong disdain for government intervention in most instances. I believe a large part of this mess was created BY the government--and any attempts to "fix" this with new regulations will only push problems down the line.
If anyone recalls, Mikey Milken went off and sold junk bonds to the S&Ls under the guise of "if you diversify enough then you are getting a free lunch in junk rated paper" back in the 80s and 90s (hmm, sound familiar??). When they caved (sound familiar) and the S&Ls had to firesale them and be bailed out (sound familiar??) the government declared they could only buy "investment grade" paper and ordained the ratings agencies as ultimate arbiters of that investment/junk status. Since, if a bond is rated junk, there is an automatic reduction in willing (able) buyers. To circumvent Milken's method of selling individual junk bonds, then declaring that through diversification they are stable as a portfolio the ibks simply bundled them at the start. Why? Because then they could get investment grade status, and then institutions could purchase them (in a low yield environment).
Now let's take the contra-example. What if institutions weren't required to hold only investment grade paper? Well, then these CDOs would probably have been given more accurate (lower) ratings. It is the same crowding out effect as when you add a substantial amount of subsidised housing: all the housing around the area's price increases because of decreased supply. You are either subsidised (and thus cheap) or you arent (and thus expensive). With securities you are either investment (expensive) or junk (cheap). By negating a stratification of ratings the agencies were incented to rate things as either AAA or junk. You get a barbell, not a pyramid. This effect is only amplified by the basel accords and other regulations stating that reserve capital must be seen in terms of risk. As Carney said (and im simplifying) AAA securities didnt count as liabilities on European balance sheets, since they were seen as risk free.
This is not to say the gov't intervention is ALWAYS bad, but in the rush to seem like they're doing SOEMTHING regulators forget about secondary incentive cascades (see Carney's post on behavioral finance and regulation). Case in point: Dodd's new, rediculous mortgage market "fixer".
It is also important to remember that these subprime ARM borrows are not being forced out of THEIR homes. They are being forced out of the BANK'S (lender/servicer/etc) homes. If they put no money down, and payed, say 1/30 (1 year out of 30) they maybe "own" their bathroom...but that's it.
Sunday, November 25, 2007
The Terrorists have Attacked our Imagination...
If by terrorists you mean the NYT, and by imagination you mean fantasy healthcare panacea...
http://justoneminute.typepad.com/main/2007/11/the-times-edito.html
Read the commentary, ignore my ramblings
http://justoneminute.typepad.com/main/2007/11/the-times-edito.html
Read the commentary, ignore my ramblings
Friday, November 23, 2007
What are you thankful for?
In the spirit of Thanksgiving a friend of mine emailed me and my cohorts to tell us what he was thankful for: "clubs and fistpumps."
Amen, brotha.
1-2
Amen, brotha.
1-2
Tuesday, November 20, 2007
NYT Capitulation
Heck, even the NYT can't claim Iraq is still a disaster...I wonder if anyone told Maureen Dowd.
http://www.nytimes.com/2007/11/20/world/middleeast/20surge.html?_r=1&hp&oref=slogin
http://www.nytimes.com/2007/11/20/world/middleeast/20surge.html?_r=1&hp&oref=slogin
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I was on our bank's hoot yesterday (and garnered a little more information today), so here are some important things to know:
1) This really is a shit-show. You could hear fear and confusion in everyone's voices.
2) These securities were sold as cash-equivilants, but (I swear to god) on the box they actually said to FAs "these should no longer be treated as cash/cash-equiv...they are now fixed income." This raises a few questions:
a) How many tort lawyers are crafting a class action suit against all the banks right now? 50? 100? This is going to be the next huge securities gold-mine for the legal begals.
b) Since these were expected to be extremely liquid, what happens to HNW clients who get PE capital calls and can't access their requisit cash? How will the PE firms handle multiple investor defaults?
c) What are firms who use ARCs/ARSs to manage intra-month cash supposed to do? These products haven't failed in years (if ever). If I am GE and use these products to manage cash *knowing* that they would roll-over every two weeks (say for payroll), how do i access the cash I need? Obviously you can borrow, but they're only giving you 50-80% release at an (expected) high interest rate. Instead of making money earning interest you are now paying for liquidity you don't have.
3) Word has it there are HFs out there who are buying this shit up like wild fire. They have excess cash and these products are going to be extremely high yielding so long as the markets won't clear, so they're taking their negative liquidity preference and being paid mightily by the banks to take these off their hands. Yet another example of how the "vultures" are actually keeping our system on track...for now.
4) Apparently the banks have been backstopping this market for 3 months now. 80-90% of these auctions would have failed without the underwriter taking on their unsold inventory, yet no one was made aware of this. Lesson: don't think that liquidity problems will go away if you just wait long enough--history shows they don't. As Keynes' said, "the market can remain irrational longer than you can remain solvent."
There are a plethora of other notes, but those are the main ones we've thrown around today. As an aside, even though i am being personally screwed (1/3 of my portfolio was in these for various reasons, none of which had to do with making an effort to enter the securities) I don't think anyone should be bailed out over this. I do not believe there should be more regulation, oversight, or help. Why? Because no one thought about the fact they were actually taking on risk; they should have. Heck, even i didn't read any of the print involving these--and I should have, since part of my job is due diligence on potential investments. There is a reason these had a higher yield than tresuries...they weren't risk-free...nothing is...and that's a lesson that must be re-learned.