Opinion

James Saft

JP Morgan, TBTF and ZIRP: James Saft

May 15, 2012 04:02 UTC

By James Saft

(Reuters) – JP Morgan Chase’s loss is the perhaps inevitable result of the interaction of two policies: too big to fail and zero interest rates.

JP Morgan lost $2 billion when trades put on by its chief investment office blew up, prompting a sell-off in its stock, an investigation by regulators and new calls to limit speculative activities by banks.

Too big to fail, the de facto insurance provided by the U.S. to financial institutions so big their failure would be disastrous, provides JP Morgan and its peers with a material advantage in funding and as counterparties. Depositors see it as an advantage, as do bondholders and other lenders. That leaves TBTF banks flush with cash.

At the same time, ultra-low interest rates make the traditional business of banks less attractive, naturally leading to a push to make money elsewhere. With interest rates virtually nothing at the short end but not terribly higher three, five or even 10 years out, net interest margins, once the lifeblood of large money center banks, are disappointingly thin. Given that investors are rightly dubious about the quality of bank earnings, and thus unwilling to attach large equity market multiples to them, this puts even more pressure on managers to look elsewhere for profits.

Investors believe, rightly, that the largest banks won’t be allowed to fail; what they also appear to believe is that they very well may not be able to prosper and that to the extent they do shareholders won’t fairly participate.

Saft on wealth: Much ventured, little gained

May 10, 2012 16:34 UTC

By James Saft

(Reuters) – Venture capital investors put their money down with dreams of backing the next Facebook, but the reality involves high fees and much disappointment.

A new study by the Kauffman Foundation, an entrepreneurship charity and a heavy and long-time backer of venture capital, makes disturbing reading oo.gl/eAp9E, detailing 20 years of disappointment, a failure by venture capital firms to deliver and of the foundation itself to take the needed steps to protect its own interests.

Kauffman, which has $249 million in venture capital, is providing insights which, because of tight disclosure agreements, are almost impossible to obtain elsewhere.

SAFT ON WEALTH: Much ventured, little gained

May 10, 2012 16:32 UTC

May 10 (Reuters) – Venture capital investors put their money
down with dreams of backing the next Facebook, but the reality
involves high fees and much disappointment.

A new study by the Kauffman Foundation, an entrepreneurship
charity and a heavy and long-time backer of venture capital,
makes disturbing reading oo.gl/eAp9E, detailing 20 years of
disappointment, a failure by venture capital firms to deliver
and of the foundation itself to take the needed steps to protect
its own interests.

Kauffman, which has $249 million in venture capital, is
providing insights which, because of tight disclosure
agreements, are almost impossible to obtain elsewhere.

An ungovernable slump: James Saft

May 8, 2012 04:06 UTC

By James Saft

(Reuters) – Received wisdom on Europe’s electoral results is that the throw-the-bums-out events in France and Greece represent a vote against austerity.

Here’s another possibility: it is an anti-reality vote.

That’s not to say that policies of austerity are helpful; they are not, especially when they are, as in the euro zone, taken as a futile means to support unsustainable debts in the financial system.

Rather, the elections illustrate a truth which will vex whatever policies are enacted next in all of the economies which are struggling with high amounts of total debt, be it corporate, banking, government or household. No one, no electorate, reacts well to the policies put in place during times when living standards are grinding slowly lower. Voters, just like investors, endow the things they can control, like who is in office and what they are doing, with far more power and ability to turn the course of events than they probably possess.

Chesapeake and the executive pay sell signal

May 3, 2012 21:58 UTC

By James Saft

(Reuters) – As Chesapeake Energy Corp shows, fat executive compensation all too often comes twinned with lousy investor returns.

Shares of Chesapeake have tumbled in the last two weeks after revelations by Reuters of unusual and disturbing pay and other arrangements between the company and its CEO and founder Aubrey McClendon. McClendon borrowed up to $1.1 billion to fund private investments he was allowed to make in company oil and gas wells under its “Founder Well Participation Program,” a hilarious euphemism if ever there was one.

He also was, at least from 2004 to 2008, actively helping to manage a $200 million hedge fund that speculated in commodities his company produced.

UK’s economic cheese and debt pickle: James Saft

May 3, 2012 04:04 UTC

By James Saft

(Reuters) – Pity poor Britain: their own currency to depreciate, their own central bank to print and buy government debt, and yet here we have the second recession in three years.

Not only did GDP shrink by 0.2 percent in the first quarter – the second consecutive contraction, but a sickly manufacturing survey and a drop in exports both indicate that there is a risk of something more sustained and deeper.

And it’s not as if labor hasn’t been sharing the burden; unemployment is high and wage earners are taking home less in inflation-adjusted terms than they were in 2005. That leaves many British households struggling with debts which haven’t really shrunk and must be repaid while earning, effectively, less. Inflation is high, leaving even less for consumption, and households continue to show a preference for paying back money rather than borrowing.

Europe’s credit crunch: James Saft

May 1, 2012 12:44 UTC

By James Saft

(Reuters) – Europe looks to be entering a credit crunch, with loans harder to get and those that are made coming on tougher terms.

Strikingly, banks are being tight despite falling demand for credit, pointing to a nasty interaction between the economy, its banking system and the choices of wary and indebted households and companies.

That this is all happening despite the massive efforts of the European Central Bank, which twice recently has made extraordinary amounts of nearly free money available to the banks, tells the grimmest tale of all.

Investing in the wretched: James Saft

Apr 27, 2012 18:22 UTC

By James Saft

(Reuters) – At a time when one super-stock, Apple, is driving returns and portfolio construction, it is important to remember that there is usually more to be gained from the widely derided than from the universally loved.

Choosing stocks like Apple, which makes great products and has the glow of success about it, is an easy and comfortable choice. Investors feel they are affiliating with something successful, and they get that blast of pleasurable chemicals to the brain every time they see a positive story in the press or a surge in share price.

That success comes with a price tag. A review of the literature shows that portfolios with stocks in widely admired companies usually underperform baskets of stocks with companies nobody much likes.

SAFT ON WEALTH: Investing in the wretched

Apr 27, 2012 18:15 UTC

April 27 (Reuters) – At a time when one super-stock, Apple,
is driving returns and portfolio construction, it is important
to remember that there is usually more to be gained from the
widely derided than from the universally loved.

Choosing stocks like Apple, which makes great
products and has the glow of success about it, is an easy and
comfortable choice. Investors feel they are affiliating with
something successful, and they get that blast of pleasurable
chemicals to the brain every time they see a positive story in
the press or a surge in share price.

That success comes with a price tag. A review of the
literature shows that portfolios with stocks in widely admired
companies usually underperform baskets of stocks with companies
nobody much likes.

Bonds living on one lung: James Saft

Apr 26, 2012 10:47 UTC

By James Saft

(Reuters) – Guess what, bond investors: just like the Federal Reserve, you are trapped.

The Fed on Wednesday said it was keeping rates on hold until at least late 2014 but failed to tip its intentions clearly about any possible additional round of quantitative easing. The Fed once again stressed the “significant downside risks” from “strains in global financial markets,” a nod to the backwash from euro zone issues, having eliminated this language from its last statement.

Going strongly into equities seems brave given the bumpy recovery and with continued risks of fallout from Europe, even with an implied promise of a safety net from the Federal Reserve. That leaves the rather unlovely option of government bonds, now 30 years into a bull market and offering low yields and the, distant, possibility of big losses when the Fed eventually hikes rates or gets behind the inflation curve.

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