The Origins of the Next Crisis (Ed Harrison) Great post. Long, yes, but also wise. Understanding the distinction between stocks and flows is very helpful.
MUST READ — How One hedge fund kept the bubble going (Eisinger/Bernstein, ProPublica) Yves Smith broke open the Magnetar story in Chapter 9 of her book. Bottom line, one hedge fund called Magnetar was able to use a little bit of cash to sponsor the creation of ultra-toxic CDOs, which they turned around and bet against via credit default swaps. Imagine building a house on top of a fire-pit and then over-insuring it. (This is why I’ve argued CDS should be regulated as insurance.) Meanwhile, the CDO departments at banks were happy to do the deals because it meant bigger bonuses for them. Bank executives and risk managers higher up the chain hadn’t the first clue how these exotic instruments were structured so they agreed to warehouse some of the riskiest parts of the securities on their own balance sheets in the name of getting the deals done.
Looks like just one tonight….
—Failed bank: Beach First National Bank, Myrtle Beach SC
—Acquiring bank: Bank of North Carolina, Thomasville NC
—Vitals: assets of $585.1 million, deposits of $516.0
—Transaction: loss share covering $497.9 million of assets
—Estimated DIF damage: $130.3 million
I believe that during the past 18 months, there were very few instances of serial default and contagion that could have not been contained by adequate risk-based capital and liquidity. I presume, for example, that with 15% tangible equity capital, neither Bear Sterns nor Lehman Brothers would have been in trouble. Increased capital, I might add parenthetically, would also likely result in smaller executive compensation packages, since more capital would have to be retained in undistributed earnings.
By now everyone knows that big banks have A LOT of second lien loans on their balance sheet. But how much is at risk of being written off? CreditSights put out a report that helps answer that question (no link). In the meantime, regulators may dust off a shelved capital rule so that they’ve more capital to deal with the problem.
Greenspan: Lehman would have needed $68 billion more capital (Nasiripour, HuffPo) Great find from Shahien. Greenspan said in written testimony that “with 15% tangible equity capital, neither Bear Sterns nor Lehman Brothers would have been in trouble.” 15% is a boat load. As of May 31st 2008, Lehman had just 4.3%. They’d have needed an additional $68 billion of capital to be at 15%!
DB’s $1 billion financing for Riga (Wood, Risk Mag) From the folks that originally broke the Greece/Goldman derivatives issue way back in 2003: “A financing transaction arranged for Riga by Deutsche Bank shows how local authorities can lay their hands on spending money without reporting it as debt.”
Cross-posted from Friday’s NYT.
By Rolfe Winkler and Antony Currie
JPMorgan’s crisis lead appears to have vanished. Jamie Dimon’s investment bank was crowned king of the downturn. Last year, it sat atop the debt and equity underwriting league tables, and was number two in merger work. But it looks as though the edge is proving hard to keep.
No de-leveraging here…
(Click here to enlarge)
The vast majority of loans come from the government. It’s doing students more harm than good offering them. More debt on offer to pay for an asset — whether a house, a security, or a college education — just inflates its price.
Chart — Savings rate declines (Culp, Reuters) Consumers appear to be heeding Paul Krugman’s advice: Boosting savings should be done “in the long run,” not now, he recently reiterated. Of course, the long-run never comes. Output is a measure of spending. If savings climb, spending/output falls. That’s a “recession” and is never to be tolerated, according to economists like Krugman, because it leads to higher unemployment. Never mind that “growth” driven by borrowing is unsustainable… (Click link above to enlarge in new window)