from Ian Bremmer:
New world, new rules
By Paul Smalera
Welcome to the new world of volatility, globalization and a host of emerging markets. Merrill Lynch Chief Investment Officer Lisa Shalett and Eurasia Group President Ian Bremmer tell me, Reuters' Deputy Opinion editor Paul Smalera, their views on how best to navigate today's economy. To learn more about the report, including Bremmer's analysis of debtor nations and creditor nations, and the tremendous GDP growth among developing world nations in recent years, watch the video below. To read the entire report, check out ML.com.
Buffett cash won’t solve Bank of America’s problems
By Keith Mullin, Editor at Large, International Financing Review The views expressed are his own.
Warren Buffett’s $5 billion injection will not stop the rot at Bank of America.
If anything, it proves that the bank’s naysayers were right to be wary.
In the aftermath of the news, dealers aggressively marked BofA’s CDS levels tighter, and the stock leapt from $6.99 at Wednesday’s close to an intra-day high of $8.80 Thursday. But the stock slid all the way back down to close at $7.65. Even at that momentary intra-day high, it was still down 38 percent YTD and 81.5 percent off the long-term high of October 2007. Hardly inspiring.
Frankly I expected a bit more enthusiasm, but then again given the extent of the bank’s longer-term issues, perhaps my expectations were overdone. CEO Brian Moynihan still has a lot of work to do to avoid the slow grind to ignominy. I think the Buffett episode actually undermines Moynihan and makes him look a bit, well if not a bit of a fool, then certainly desperate.
This is, after all, the man who said publicly that the bank didn’t need to access capital markets, and that he would get the bank up to higher capital adequacy levels and stabilise the ship via a combination of retained earnings (tough in a potentially recessionary environment), disposal of risk-weighted assets ($150 billion or so), lay-offs, and the sale of non-core businesses.
Not only has Moynihan been forced to take in new capital, he clearly gave the impression that his only option was to go cap in hand to Buffett and accept a very expensive deal: cumulative prefs with a 6 percent dividend plus a ton of discounted warrants. And he can only get out on payment of a chunky exit premium that’ll cost him $250 million. I reckon that’s pretty embarrassing. I can’t imagine that existing shareholders are happy that an interloper has come in through the back door and got the better of them on price.
Michael Lewis’ Big Short an unsettling experience
Henry Paulson didn’t see it coming. Nor did Timothy Geithner foresee the meltdown of the financial markets. According to Standard & Poor’s President Deven Sharma, testifying before Congress in the fall of 2008: “Virtually no one – be they homeowners, financial institutions, ratings agencies, regulators, or investors – anticipated what is occurring.”
Why? Perhaps “it took a certain kind of person to see the ugly facts and react to them – to discern, in the profile of the beautiful young lady, the face of an old witch,” says Michael Lewis, author of numerous best-sellers including 1980s Wall Street memoir Liar’s Poker and now The Big Short: Inside the Doomsday Machine (W.W. Norton, $27.95).
Lewis’ new volume is an entertaining and very edifying look at several such insightful people — the tiny handful of investors “for whom the trade became an obsession.” These were unusual, “almost by definition odd” folks, soon to make big money on the cataclysm: There is Steve Eisman, the former Oppenheimer analyst who regularly demonstrated a prodigious “talent for offending people,” notably in a tendency to trash subprime originators as early as 1997.
Next up is Michael Burry, a compulsive, “one-eyed money manager,” a man profoundly uncomfortable around other people who could only work alone in his office with the door closed and the shades drawn. Poring over obscure corporate documents, Burry saw the insanity in the financial markets and in 2005 began prodding big Wall Street firms to offer credit default swaps, or financial insurance policies, against the failure of mortgage-backed derivatives. Finally, there’s the “weirdly like-minded” threesome who made up the money-management outfit they called Cornwall Capital Management. They were “sweet-natured, disorganized, inquisitive” –”the kind of guys who might turn up at their fifteenth high school reunions with surprising facial hair and a complicated life story.”
This band-of-outsiders conceit is familiar — reminiscent of everything from Huckleberry Finn to The Dirty Dozen – and if The Big Short were no more than a collection of such profiles, it would satisfy many readers. But Lewis’ volume has lots more to offer thanks to its clear explication of exotic derivatives and meltdown events.
Much of this may be familiar to regular readers of the financial press, and may remind some of Wall Street Journal writer Gregory Zuckerman’s much lauded account of hedge-fund trader John Paulson’s $15 billion coup, The Greatest Trade Ever. But even these readers are likely to admire the lucidity of Lewis’ book. Here, for example, is how Lewis explains the two financial instruments at the heart of the mess. The subprime mortgage-bond-backed collateralized debt obligation, or CDO, was “so opaque and complex that it would remain forever misunderstood by investors and rating agencies.”
It was a bunch of mortgage bonds, often rated triple-B, used to construct an entirely new tower of bonds, which ratings firms like Moody’s and Standard & Poor’s were persuaded to rate triple-A. The CDO, which hid huge risks via obfuscation, “was a machine that turned lead into gold” for Wall Street, writes Lewis. The credit default swap, meanwhile, was effectively an insurance policy with semiannual premium payments – but also an asymmetric bet. As in roulette, “the most you could lose were the chips you put on the table; but if your number came up you made thirty, forty, even fifty times your money.”
Anyone know how to get in touch with Cornwall Capital? I’m really impressed by their methods and I’m looking into establishing my own derivative based hedgefund.
from Rolfe Winkler:
SEC should get tougher with BofA
In the Bank of America Merrill Lynch bonus imbroglio, the SEC has proposed a settlement in which, once again, the defendants neither admit nor deny wrongdoing.
Once again, the corporation would pick up the fine while responsible individuals escape uninjured. And once again, the public would be left wondering what actually happened. This isn't justice, nor will it deter fraud.
These were the frustrations expressed by Judge Jed Rakoff in court yesterday. He refused to approve the settlement because he wants to know the truth: Who was responsible for misleading shareholders, and how did they settle on a fine of $33 million?
He told both sides to return to court with more details in two weeks. For the public's sake, it's a good thing he did.
In this case, it isn't just shareholder's money at stake. It's taxpayers'. Our bail-out cash saved the bank, and we deserve to know what went on.
What the judge can accomplish isn't clear. But the simple exercise of forcing the SEC to provide more details of its case would be very valuable.
The SEC's eagerness to settle without naming names is particularly frustrating. It insists Bank of America, not executives, misled shareholders about Merrill bonuses by deliberately omitting relevant documents from its public filings.
Yay, Rolfe – in the spirit of Show Me The Money, you already had me at “The SEC should get tougher…”
Should it however turn out that the SEC lacks the cojones, willpower and integrity to do its job properly as is apparent, the freedom-loving People of the United States may yet join forces with honest bankers (wherever they may be) to launch injunction and suit for massive damages against BofA for having besmirched the formerly good name of the nation, and of banking, for decades.
Until then, BofA commits institutional flag-burning daily while the SEC fiddles and plays dumb. How’s that for history repeating itself?
On the Bernanke interrogation
– James Pethokoukis is a Reuters columnist. The views expressed are his own –
Ben Bernanke’s testimony to Congress about his involvement in the Bank of America-Merrill Lynch merger was a lot like an FOMC statement: short and unadorned, yet open to much interpretation.
When the Federal Reserve chairman wasn’t repeatedly saying “I don’t remember” or “I don’t recollect,” he was matter-of-factly stating that he didn’t intend to threaten Bank of America CEO Ken Lewis with termination if he didn’t go through with the Merrill deal.
Yet both Republicans (all) and Democrats (some) seemed astonished that Bernanke wouldn’t admit that having the Fed outline all the negative repercussions of invoking the “material adverse change” clause to escape the Merrill deal was a de facto threat to BofA management.
Whether or not Bernanke actually believed his script was impossible to prove, since the Republicans, particularly Representative Darrell Issa of California, didn’t have evidence that Bernanke did intend to directly threaten Lewis.
It was Issa who said on television that Bernanke was engaged in a “cover-up” to disguise his actions in pushing the merger. Great claims require great proof. And Issa didn’t have great proof, just a bit of hearsay.
Yes, there was an email showing that Richmond Federal Reserve President Jeffrey Lacker claimed he told Lewis, after having a long talk with Bernanke, that BofA management was “gone” if it played the MAC threat. But Bernanke said that was a misinterpretation of his chat with Lacker.
“Of course, another criticism of the Fed as super-regulator would be that such a role would overly politicize the central bank. Indeed, it did seem weird that after grilling Bernanke for three hours and implying that he was lying, one Republican offered up a question about M2 and monetary policy.
Perhaps the one bit of evidence that did come out of the Bernanke interrogation was that having the Fed regulate banks and conduct monetary policy is a bad idea if you care about central bank independence.”
Independence is a loaded word James used in this context.
Despite the ‘appearances’ before congressional leaders
The Fed is not simply independent… it is autonomous.
Former Chairman Greesnpan declares it during an interview
with Jim Lehrer on PBS video HERE: http://www.youtube.com/watch?v=ol3mEe8TH 7w
Chairman Bernake alludes to this independent power, that rightfully
belongs only to our government, in his testimony on video HERE:
http://www.youtube.com/watch?v=rjULF_Xg6 Ps
The seeds of economic collapse we are confronting today were planted long ago. M.W. Walbert masterfully describes the nature and scope of our nations
National Banking system in his 1899 treatise titled : “The Coming Battle”.
PDF HERE: http://www.inlibertyandfreedom.com/PDF/B ankingSystem.pdf
from Commentaries:
Fink reaches for Wall Street’s crown
You have to marvel at the seemingly Midas touch of Larry Fink.
The BlackRock Inc. chief executive avoided taking over the helm of Merrill Lynch -- something John Thain probably wishes he had done. Fink's firm emerged from the financial crisis as the Federal Reserve's favorite private money manager, with BlackRock getting the lion's share of the government's work for managing troubled assets. And the $13 billion deal Fink just reached with Barclays Global Investors has turned BlackRock into the outright titan of the asset management world with $2.7 trillion in other peoples' money under management.
It's often been said Jamie Dimon is the new king of Wall Street. But one can argue that the 56-year-old Fink, who started BlackRock as a small bond investment shop two decades ago, can also rightfully lay claim to that honor. Even as the Obama administration is about to announce its plan for managing so-called "too big to fail" financial institutions, Fink's BlackRock is getting bigger and more consequential than ever.
The deal puts BlackRock's fingers firmly into every significant asset class-corporate bonds, mortgage-backed securities, mutual funds, stocks, cash, hedge funds and now the ever popular exchange traded funds -- a stock index-like security. Barclays now joins Bank of America and PNC Financial in having major equity stakes in BlackRock and a vested interest in the money manager's long-term health.
The danger, of course, in creating a money management firm the size of BlackRock is that it puts a lot of people's retirements at risk if the firm were to collapse, or its investment funds were to implode. To put BlackRock's size in perspective, it's now bigger than the combined assets managed by mutual fund giant Fidelity Investments and the entire hedge fund industry.
Wall Street historian Charles Geisst says money managers traditionally have not posed the same kind of risk to the financial system as a commercial bank or investment. But Geisst worries whether Wall Street is laying the groundwork for a new kind of systemic risk, if the BlackRock deal with Barclays encourages a consolidation of too much pension and retirement money into the hands of just a few players. "We could have big problems with these huge asset managers down the road," he says.
To be sure, BlackRock is not too big to fail in the way that phrase came to be used during the current crisis. The firm is not a primary lender to other institutions and BlackRock is not widely leveraging its own balance sheet to fund its operations. The firm has just $1 billion in debt on its balance sheet. More significant, the investments that BlackRock manages aren't insured by the federal government -- so a collapse of its many investment vehicles wouldn't require any direct payout by taxpayers. And it's hard to imagine all of BlackRock's many funds going south at the same time.
