Lunchtime Links 4-13

Apr 13, 2010 17:48 UTC

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.

Crack shack or mansion? (ht Kedrosky) I scored a 14 out of 16….lucky guesses all.

Imagine the bailouts are working (Sorkin, NYT) Well said. I would add that the government could make as much money as it wants to the degree its willing to borrow/inflate to drive up the price of assets it has purchased. But it faces its own peculiar liquidity constraint. Eventually accumulated assets have to be sold back to the market. Theoretically anyway. The more it accumulates, the more it must unload, putting more downward pressure on prices when the unwind gets into gear.

Fed’s Tarullo: Consider regular bank stress tests (Kaiser, Reuters) Great idea. The Breakingviews team agrees!

Wherein Kerry Killinger “takes responsibility” for WaMu’s collapse and then totally absolves himself of responsibility (Congressional testimony) He perpetuates the canard that WaMu was seized prematurely. Bull. Depositors were running and the bank was insolvent. It is the law of the land that regulators seize such banks in order to protect the Deposit Insurance Fund. The fact that a $300 billion insolvent bank was seized, sold off and cost the DIF nothing is, without doubt, FDIC’s greatest accomplishment of the crisis.

FDIC wants to extend new deposit insurance program (FDIC) Sheila Bair may want to extend it even further, beyond the December expiration according to comments at a public meeting.

FDIC is pitching this as a way to protect small banks. They point to this chart (click here to enlarge):


It shows how depositors in transaction accounts (which business use for things like meeting payroll) flew from small banks to protected TBTF banks in autumn ’08. The TAG deposit insurance program arrested that flight.

But expanding deposit insurance just deepens moral hazard. It would take an act of Congress to expand this program to 2013. Better that they put a tighter cap on the market share of deposits banks are allowed to hold.

Sheila Bair is well aware of the moral hazards created by TBTF banking. Yet she ignores the moral hazards created by her own agency…


You write:

“… the price of assets it has purchased. But it faces its own peculiar liquidity constraint.”

Couldn’t the Treasury issue $500 billion in extra
debt, get cash from the Fed, and buy up residential
properties on the cheap?

There’s already trillions in T-Bills worldwide,
plus US currency. And anyway, it seems US
cash should be accepted in many places, just
as long as the printing presses aren’t out of

The strange thing here is that US trading
partners seem to like the idea of a strong
US dollar (China, for instance). I guess
issuing more US Gov debt might be helpful
for some, and unhelpful for others.

Mr. T.

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Afternoon Links 4-12

Apr 12, 2010 20:14 UTC

MUST READHow 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.

Financials seek to soften Basel stance (Jenkins/Masters, FT) Hopefully regulator backbones stay stiff in the face of banker protests regarding tough new capital and liquidity requirements.

The DTA dodge (Alloway, Alphaville) Speaking of bank capital, Alphaville has an updated chart from Barclays showing deferred tax assets for the top U.S. banks.

Walking against Australia’s housing mania (Steve Keen) Keen lost a bet that Australian property prices would crater. Turns out he didn’t anticipate his government’s resolve to prop up the market. As a result he has to complete a 225km trek. It may take a few years, but I think Steve will have the last laugh…

CoCo goes to cable (Carter, Media Decoder)

VIDEO — After pitching 3 innings of scoreless relief in his second appearance, reliever Chan Ho Park explains to the media why his first appearance was terrible (YouTube)

2010 Pulitzers ( National Enquirer absolutely deserved one for breaking open the John Edwards sex scandal.

Hallucinogens have doctors tuning in again (Tierney, NYT)

10 Google tricks (Mackie, NYT)

Doing a barrel roll while pouring ice tea…(at end of video, though whole thing is entertaining)


Right on about the Enquirer, Rolfe. They helped prevent that liar from successfully climbing the political pole.

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Bank failure Friday

Apr 10, 2010 01:24 UTC

Looks like just one tonight….


—Failed bank: Beach First National Bank, Myrtle Beach SC
—Regulator: OCC
—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

Meanwhile, SNL Financial reports that bidding has been hot for failed bank assets. No wonder FDIC is pushing back on loss shares and looking to participate in the upside for publicly traded banks that submit winning bids…

Greenspan’s 15% survival formula

Apr 9, 2010 15:05 UTC

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.

-Alan Greenspan*
FCIC Testimony, 4/7/10

(Click here to enlarge)

greenspan TCE

It’s a question on everyone’s mind: how much capital must banks be made to hold? No other regulatory change can do as much to prevent another financial collapse. A bigger equity cushion not only buffers bank creditors from losses — preventing cascading bank runs — it by definition would reduce frothy lending that inflates bubbles in the first place.

The issue has new immediacy today, in the wake of revelations published by WSJ that major banks are masking their leverage. Because balance sheets are reported at a single point in time, i.e. the last day of the quarter, there’s an incentive to reduce risk around that particular day in order to present a pretty face to the world. Meanwhile, during the quarter banks are jacking up leverage in order to boost profits. While Lehman actually hid leverage (with Repo 105), other banks are temporarily reducing it, “understating debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five” quarters.

This is just another reason that, when setting new capital standards, regulators should err on the high side. Not only are banks sitting on large embedded losses with the help of extend and pretend accounting, there’s now strong evidence they’ll game whatever standards are set.

But what’s the right number? Few have been willing to commit to a figure. For instance, while the Basel Committee of international bank regulators has proposed strict new definitions for capital — and liquidity — it has yet to tender suggestions on precisely how much banks should be made to hold.

It’s notable that Alan Greenspan says 15% tangible equity would have been a good cushion for Lehman and Bear. Extrapolated across other major banks, the 15% figure implies they’d have to raise nearly $900 billion, a truly stupendous figure.

That’s so high, it’s hard to contemplate the implications. Suffice it to say, it’s not happening. Banks couldn’t come close to raising such sums even if they were commanded to by regulators. And such a draconian standard would hammer lending. I argued in my Breakingviews column yesterday (paywalled folks, sorry!) that regulators need to be concerned with raising capital standards, not lending levels, which are conflicting goals. But 15% TCE is a bit much.

But in setting a very high bar, Greenspan may have done regulators a favor. Perhaps it will give them cover to raise capital standards higher than they otherwise would. When banks inevitably complain, regulators can retort that they’re cutting them more slack than The Maestro would!


*Hat tip to HuffPo’s Shahien Nasiripour for spotting this in Greenspan’s testimony.


If you don’t simply give up and assume the Govt as LOLR, then you are left with expensive choices for the financial concerns. You will either have very large capital requirements or very expensive insurance. After all, since you’re trying to insure taxpayer losses in the face of a severe crisis, it’s bound to be awfully expensive. Indeed, that’s why investors in a crisis demand govt guarantees. The govt has or can get the money. Good luck with these little debt to equity schemes, which was also prove very expensive to incentivize.

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Home equity horror

Apr 8, 2010 16:54 UTC

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.

(Click here to expand)

Home equity exposures

Total home equity exposure at banks is pretty big. Amherst Securities has said commercial banks hold approximately $767 billion of the total $1.05 trillion of second mortgages outstanding, with the Big 4 holding over $400 billion alone.

But the key issue is what portion of these are at risk of writedowns. Most vulnerable are loans (or portions thereof) that are no longer backed by property. That is, the price of the underlying home has fallen below the balance on the loan. In banker shorthand: “loan-to-value” (LTV) is greater than 100%.

These are in peril because home equity loans are frequently structured with big principal payments on the back end, so even though many borrowers are currently making payments they’d need to stump up an awful lot of cash to pay off the balance. Unless housing miraculously recovers and they can sell or refinance at a price that will pay back all their debt, well, expect a spike in walk-aways…

CreditSights takes a stab at the potential writedown for the Big 4 banks and finds that Wells Fargo is particularly vulnerable.

The tricky part of the analysis is how much reserves banks have built against these loan books to absorb losses. There, disclosure varies by bank, so CS had to take a stab.

The truly dire scenario would be to mark down the entire portion of home equity debt that exceeds home values. Net of estimated reserves that would be:

—$37.2 billion for Wells
—$29.9 billion for JP Morgan
—$28.6 billion for BofA
—$11.5 billion for Citi

Banks would say this is overstating likely losses. And they’d be right. Plenty of other unsecured loans get paid down (credit cards, student loans) so unsecured home equity loan balances aren’t a total writeoff. But again, unless house prices come back, folks may have big trouble paying off balances.

By the way, it’s a testament to banks’ short-sightedness during the bubble that they held on to most home equity paper. They thought they were reducing interest rate risk by holding these loans, which carry higher, often variable rates. But they ignored credit risk, blithely assuming house prices would perpetually ascend allowing borrowers to perpetually refinance.

Luckily regulators are paying attention. In fact, they plan to dust off a new capital rule that was shelved during the crisis. Among other things it would force banks to hold more capital against home equity loans where LTV is above 90%.

Specifically, such loans would see their “risk-weighting” boosted from 100% to 150%. To be considered “well-capitalized” banks must hold capital equivalent to 10% of risk-weighted assets. So, for instance, Wells might have to hold an additional $3.1 billion (=$62.6bln*50%*10%). For the other three, see the graphic.

Even if banks hold more capital against these books, it may not be enough to avoid a substantial hit to their earnings…


I’ve heard that “commercial” banks, credit card companies and foreign banks hold more than 60% of our national debt. It is important to remember that this specific market represents about 7.3% of our nations GNP. It has been suggested that this is a cycle that the American banks are perpetuating to gain more concessions (cheap dollars) from the U.S. Gov. Sadly, it is the weak and naive who are going to be crushed. This may cause a well deserved revolt against greed.

If the American people ever allow private banks to control their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their prosperity until their children will wake up homeless on the continent their fathers conquered. — Thomas Jefferson

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Lunchtime Links 4-8

Apr 8, 2010 16:15 UTC

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%!

Gold hits record high — in euros (Pleven/Whittaker, WSJ)

How Visa predicts divorce (Ciarelli, Daily Beast) The article fails to answer that question, but it’s still pretty interesting…

California’s $500 billion pension time bomb (Crane, LA Times)

DOCFDIC rebuts WSJ op-ed (FDIC) This was in response to an op-ed yesterday that said FDIC has no experience resolving large institutions and therefore the resolution regime in the Dodd bill doesn’t make sense. I’m sensitive to arguments that FDIC may get in over its head, and yet, FDIC resolutions are the best way we know how to close failed financials. Losses are imposed on shareholders and creditors and the integrity of the financial system is protected.

Verily, Volcker avers VAT in vicinity (Pethokoukis, Reuters Breakingviews) Worth linking to just for the alliteration in the headline.

Bernanke sounds warning on deficit (Irwin/Montgomery, WaPo)

Tourists (imgur) This reminds me of Times Square, where folks think it’s interesting to be photographed in front of an Applebee’s marquee.

The first thing for trig (imgur) For math geeks!

Taiwanese boy does Whitney Houston (YouTube) Mind. Blown.


Just a reminder …

FACT #1: The official national debt now stands at $12.68 trillion — an amount equal to about 88.5% of all the goods and services our economy produces in an entire year.

FACT #2: Contingent obligations for Social Security, Medicare, Medicaid, veterans, and pensions now stand at an additional $108 trillion over and above the “official” national debt.

FACT #3: State, county and local governments are nearly $3 trillion in debt. Many can’t pay and will ultimately demand that Washington assume responsibility for that debt as well.

FACT #4: Total federal, state and local government indebtedness now stands at a mind-blowing $123.6 trillion.

FACT #5: Last year, Washington added $1.4 trillion to the debt. In this fiscal year, the Obama administration will add another $1.6 trillion!

FACT #6: In addition to funding the current trillion-dollar-plus deficits, the U.S. Treasury must borrow MORE each year to replace bills, notes and bonds that are maturing.

FACT #7: This record-shattering borrowing by the Treasury has resulted in a Mt. Everest of Treasury obligations being dumped onto the market, which naturally depresses bond prices and drives interest rates higher.

FACT #8: In a desperate attempt to keep interest rates low, the Bernanke Federal Reserve has created $1.25 trillion out of thin air to buy mortgage-backed securities … another $300 billion to buy U.S. Treasuries … and yet another $170.6 billion to buy other government bonds — a total of nearly $1.7 trillion in all.

FACT #9: From September 10, 2008 to March 10 of this year, Bernanke increased the nation’s monetary base from $850 billion to $2.1 trillion — a 250% increase in just 18 months.

FACT #10: Despite this massive money-printing, the yield on the benchmark 10-year Treasury note has STILL risen by more than one-fifth — from 3.2% to 3.86% — since December.

FACT #11: Because of this massive money-printing, the U.S. dollar has lost nearly 10% of its value in the past 12 months alone.

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Afternoon Links 4-7

Apr 7, 2010 21:02 UTC

$45 fee for carry-on luggage? (Peterson/Seetharaman, Reuters) Airlines gotta make money somehow!

Nearly half of households pay NO federal income tax (Ohlemacher, AP)

Citi: The mortgage underwriter’s tale (Felix)

ChartConsumer credit tumbles in February (Culp, Reuters) De-leveraging. Good.

Asset bubbles and implications for monetary policy (Dudley, NY Fed) At least now the Fed will admit bubbles exist. Difficulty in spotting them is no excuse for inaction Dudley offers, helpfully. He still punts on tightening monetary policy as a counterweight, arguing that regulation and supervision are better ways to contain bubbles. One way regulators can do more is substantially raising capital requirements. Meanwhile….

KC Fed’s Hoenig urges rate increases “soon” (CR) He wants to move towards a Fed funds rate of 1%.

Why not an annual bank stress test? (Cox, Reuters Breakingviews) Here’s a case where rinse/repeat would make sense…

FlashbackDid Greenspan add to subprime woes? (Ip, WSJ) I link to this old piece because, among other things, Greenspan today blamed the late Ed Gramlich for the Fed’s failure to get tough on subprime.  Greenspan said the Fed didn’t regulate subprime b/c Gramlich — the Fed’s expert on the topic — didn’t bring his concerns to the full board of governors. But as this old interview makes clear, Gramlich swallowed his concerns out of deference to Greenspan, who was clearly opposed. Unfortunate that Greenspan threw him under the bus like that.

Film Dept lowers IPO target (McNary/McClintock, Variety) They’ve pushed the offering date back at least twice. Still not a fan.

Quote of the Day — from Brooksley Born, confronting Greenspan about his refusal to regulate derivatives. Born said this after Greenspan argued CDS would have blown up AIG even if they’d been insurance policies. Paraphrasing:

Had [CDS] been sold as insurance products, they would have been regulated. There would have been a capital reserve requirement. There would have been an insurable interest requirement. There was no such regulation in the OTC derivatives market thanks to the President’s Working Group and Congress.

Booyah. Must have been cathartic. (Take a look at the authors of the PWG report.)

Kim Jong-Il: Fashion Icon (AFP)

Avatar…and predecessors (imgur) By the time I got to the last three rows I busted up.

The Canada bubble

Apr 7, 2010 13:49 UTC

So much for Canadian sobriety?

Recently the country’s chief bank regulator was in NYC to take a victory lap about successful bank regulation north of the border. Paul Krugman has argued that Canadian banks are superior to American banks because they are boring.

And yet a housing bubble is clearly inflating, and its cause — big household leverage — is familiar.

The latest news out of Vancouver, where the average price for a single detached home now exceeds $1 million, is that…

…prices have climbed 23.3% in just 12 months, and are now nearly 3% higher than they were before the housing market crashed.

But no one is worried according to Paul Kedrosky:

It’s okay, say local realtors and the like. Because of the economic rebound. And the Olympics. And the warm winter there. Vancouver is different.

Nor is the bubble limited to Olympic-site Vancouver, according to a previous article from Phred Dvorak in WSJ:

Dominic Carrasco first tried to sell his studio apartment [in Toronto] in January 2009. The only offers the 42-year-old massage therapist got were well below the 166,900 Canadian dollars he’d paid for it five years earlier.

Last month, Mr. Carrasco tried again. The condominium was snapped up by the woman in charge of posting the information to the real-estate listing site, for C$209,900, or US$196,003, 40% more than the highest bid last year.

The bubble has familiar causes as Simon White of Variant Perception told me in an e-mail recently:

household debt to income in Canada is now more than in the US.  All the usual metrics to gauge whether housing is overvalued, eg House Price/Income or House Price/Rent are at levels up to over 30% from their long-run average.  These are normally consistent with an overpriced market that is due for a correction; the question is when, as often these things persist for much longer than most people dare to guess.

If Canada’s banks are behaving so responsibly, where are households getting so much leverage?


“If Canada’s banks are behaving so responsibly, where are households getting so much leverage?”

The government. The CMHC is a crown corporation. The Canadian government directed them to insure hundreds of billions in mortgages. So the banks make the loans and immediately sell them to CMHC. They get all the fees and almost no risk.

Sound familiar?

Also, mortgage rates were higher here (and in Australia) to begin with due to the commodity boom. So when they fell, the impact was greater.

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Lunchtime Links 4-6

Apr 6, 2010 16:06 UTC

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.”

Blackrock warns banks on distressed mortgages (Van Duyn, FT) Blackrock says banks need to write-off borrower debts before they’ll consider extending new credit via private-label mortgage investments…

Greek Bond Vigilantes out in force (Papadimas, Reuters) Greek bond spreads are back at January highs. See the next link for where this may be coming from…

Greece seeks new investors to sidestep IMF (Coghill/Dahinten, Reuters) An earlier story said Greece wants to find new buyers for its debt so that it can sidestep tough austerity measures the IMF is likely to impose. One wonders who would actually buy dollar-denominated Greek debt, especially considering it could be a ploy to avoid getting the country’s budget in order. Perhaps the same folks who bought similar Russian debt circa 1997. My colleague Edward Hadas says a Greek default may be the answer….

Financial Crisis Inquiry Commission wrestles with setbacks (Chan/Dash, NYT)

Fannie/Freddie touch off swaps scrap (Patterson, WSJ) Cool. Fannie and Freddie will use their heft in the interest-rate swaps market to force them through clearinghouses. Exchanges would open up more competition, but clearinghouses are a start.

Chart40 years of the Canadian dollar (Culp, Reuters)

Baseball season! (YouTube) Too bad my Cubs are terrible. (This is a 5 yr old reciting Herb Brooks’ Miracle Speech)

Product placement (imgur)


By on April 6th, 2010 1:28pm Eastern Time
What a market! What a rally! Every single day since the February 5th, 2010 pivot low the major stock indexes have rallied. Every down tick intra-day is bought and the stock indexes move right back up. This morning was a perfect example as the SPDR S&P 500 ETF (NYSE:SPY) was gapped down at the open, only to rally higher from 9:30 am EST to the positive side by the lunch hour. This is typical action in this bull run spanning back from early February.

The SPDR S&P 500 ETF (NYSE:SPY) is now higher by more than 13% since early February. The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) is higher by more than 11% from the same time period. Commodities, energy stocks, financial stocks, and even micro caps, are all joining into this rally. So far the markets are saying all is well.

Every time since the beginning of the markets existence it has been easy money and low rates that have lead to a bubble. In 1929, it was easy credit and loose money that lead to massive speculation and the worst financial crisis ever know to America. If one looks back at 2001-2002 it was easy credit and loose money that lead to the second greatest financial crisis since the 1929 depression. Now the words “recovery” and “expansion” are being thrown around as they were back in 2003 – 2007. Back then, those words sounded great until that bubble burst in late 2007. Currently the Federal Reserve Bank’s Fed funds rate is at zero. It cannot go any lower from here. Assets of all classes are flying higher. Now we are hearing expansion and recovery on every television news program out there. We are even hearing the term “jobless recovery.” Is it not jobs that are needed to be a recovery?

In 2002, many of the jobs created were high paying jobs. There was an abundance of mortgage brokers, making small fortunes,as well as construction workers across the U.S. making a good solid wage. This housing boom trickled down to the local sandwich shop and restaurants who all saw increased business. Let us not forget about the money that was taken out the homes that had equity for the purpose of vacations and renovations. All of that is gone and is not going to return for a while.

As we speak, the market continues to climb the wall of worry. Countries in Europe such as Greece, Italy, Spain, Portugal, Ireland, and even England are facing huge debt problems, yet the markets do not care and climb higher. In the U.S. another wave of foreclosed homes is about to hit the market place in April 2010, even considering this home builder stocks are trading off their lows. Oil and gasoline are trading at very high levels and the market views it as a positive while the talking heads say that it is due to demand.

It is still amazing that someone does not question where the toxic assets that the banks were holding have gone? Ever since the FASB “mark to market” accounting changes the so called toxic assets have seemed to simply vanish. Forget the commercial real estate problem; yesterday it was reported that commercial real estate vacancies are at a 16 year high and climbing. However, stocks such as Simon Property Group Inc (NYSE:SPG), and Vornado Realty Trust (NYSE:VNO) are at new highs for the year, and 200% off their 2009 lows!

This is looking like a replay of 1929 and 2007 all over again. The markets declined in 2000 only to find a low in 2002. From that low it rallied into the 2007 top. This time the top should not take 5 years to form. There is much more internal damage today than there was back then. Unemployment is very high and the housing market is still in trouble. However, until the market stops climbing, the rally can continue. Use caution over the next couple of years as this story is not likely to have a happy ending.

Nicholas Santiago
Chief Market Strategist

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Lunchtime Links 4-5

Apr 5, 2010 15:11 UTC

Beyond bankruptcy and bailouts (Sheila Bair) The FDIC Chairman pens this good op-ed in the WSJ.

I saw the crisis coming. Why didn’t the Fed? (Burry, NYT) The glass-eyed Nostradamus who saw early the coming collapse of the subprime market, and was profiled in Michael Lewis’s book, does little more than take a victory lap in this op-ed. He doesn’t bother to address concerns that by investing in CDS, he was providing liquidity for the construction of synthetic CDOs. This perpetuated the bubble and made the collapse worse. Actually his question has a fairly easy answer in my view, which I’ll argue graphically later this week.

Hoenig says to break up megabanks (Nasiripour, HuffPo) The Kansas City Fed President would have been a better choice for Vice Chair of the Fed…

Thoughts on Maiden Lane III (Aleph) After the Fed released some details about the Maiden Lane portfolios last week, David Merkel has done some clever back-of-the-enveloping to estimate what the holdings of III are worth.

Pay of hedgies roared back last year (Schwartz/Story, NYT) Wow. David Tepper cleared $4 billion?!? That’s on the moral hazard trade, folks. He bet big that the gov’t wouldn’t let banks collapse. I originally misread this piece. I thought the opening paragraph said Tepper’s firm was up $4 billion for the year. No, that’s what he cleared apparently. Better than Paulson’s bet on subprime!

Intro to 13 Bankers (Johnson/Kwak) Johnson is now calling Jamie Dimon the most dangerous banker in America.

Crisis forgotten in bond buying frenzy (Crane, Reuters BV) My colleague Agnes writes about how fixed income investors are back to chasing risk…

Munis are the next potential crisis (Bookstaber)

Oil hits 18-month high (Johnson, Reuters) + Dow near 11,000 (Yahoo Finance) Beware asset bubbles….

Peep show (imgur) definitely sfw

JPMorgan’s crisis lead appears to have vanished

Apr 2, 2010 11:11 UTC

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.

JPMorgan’s market share in all three advisory businesses dipped in the first quarter of 2010, and not just from the same period last year, according to Thomson Reuters. More noticeably, they’ve fallen or stayed flat since the peak of the boom.

The damage firms like Citigroup and Merrill Lynch inflicted on themselves certainly helped JPMorgan solidify its position. Citi’s share of debt underwriting — a traditional strength — has dropped 4.5 percentage points since first quarter 2007. Bank of America Merrill Lynch  has lost 9 percentage points of market share in M&A.

But while rivals’ slides have slowed or stopped, JPMorgan’s started in the first quarter. In debt underwriting, it fell back to fourth place — and the same 8 percent market share it held in 2007. Dimon’s equity underwriting team has shed much of the business it held when conditions were at their worst. And the huge percentage of share JPMorgan snatched in the shrunken crisis M&A market has all been given back.

It’s not exactly a disaster just yet. This is only one quarter’s worth of data. Plus, JPMorgan is still top dog in equities. And it was just $14 billion behind BofA Merrill in the $1.5 trillion worth of debt capital markets activity for the quarter.

Still, the figures show how hard it is to stay ahead. JPMorgan’s ability to lend, relatively solid earnings and good press will only go so far. Clients ideally want a choice of middle-men with whom to work. Some may still be grumpy about having had only JPMorgan to turn to in the tough times, when the bank had the opportunity to stand firm on fees.

With the worst of the crisis apparently behind, Dimon’s fortress balance sheet has some competition. And judging by the first-quarter numbers, his rivals are coming back fighting.

Student debt keeps rising

Apr 1, 2010 20:09 UTC

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.

For other assets, it’s easy to sit out the borrowing arms race. Dwellings can be rented, savings parked somewhere besides frothy stocks or bonds. But every year there’s a new crop of 18 year-olds that have to pay the debt-inflated price of tuition.

(ht Stephen Culp, Reuters)


A simple way to value education is return on investment.

Private US colleges now deliver negative lifetime return on investment to most attendee. This post shows the calculation, using public data from the US Census and the College Board: ollege-become-a-bad-investment/

Obviously education has nonfinancial benefits, but if the system as a whole is delivering negative ROI, it is obviously broken.

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Lunchtime Links 4-1

Apr 1, 2010 18:00 UTC

Washington’s scrap dealers (Dash, Dealbook) A great profile of FDIC’s two top deal-makers.

Holy bubble: Churches struck down by foreclosures (Hals, Reuters)

Measuring the cost of “banking pollution”…up to $200 trillion (Andrew Haldane) In this not-too-long speech, the Bank of England’s Executive Director for Financial Stability seeks to quantify the costs of financial crises, and argues banks should be broken up. Indeed. He notes that “it is possible that no amount of capital or liquidity may ever be quite enough,” presumably to rescue us from an Armageddon-like financial collapse. My Reuters Breakingviews’ colleague Peter Thal Larsen shares his view here.

Fed releases holdings of the Maiden Lane portfolios (NY Fed) Some disclosure for folks who want to know what the Fed got during the Bear Stearns rescue (Maiden Lane), the AIG rescue (Maiden Lane II) and the AIGFP counterparty rescue (Maiden Lane III). This breaks down all the securities the entities hold, but good luck trying to figure out what it means. Even expert valuation shops might spend weeks trying to value of this stuff independently. Blackrock manages this portfolio for the Fed, why no disclosure of its marks?

Barney Frank permanently bans staff from communicating with aide-turned-lobbyist (Grim, HuffPo)

Hartford pays back TARP (Kotoky, Reuters) Few recall that during the depth of the crisis, the big insurers bought banks to qualify for TARP funds. Measured using tangible common equity, insurers’ leverage was actually worse than banks’. But insurers came through much better since they didn’t face the same liquidity pressures. Their big liabilities are insurance policies. Banks were far more vulnerable because depositors/creditors fled.

April Fool’s from Google…

Google is Topeka ( For a limited time…

Google Docs now stores everything ( “Ever wish you could CTRL+F your keys?”

Google searches now measured in, er, “microfortnights?” (imgur) Try searching yourself and see what comes up. I got “femtogalactic years.”

Google’s new Japanese keyboard (picasa)

Gaming CDS (non-)rules continues

Mar 31, 2010 16:06 UTC

In Wall Street’s Wild West, it’s OK to rob the stage coach because there’s no sheriff to enforce the law.

The Journal’s Kara Scannell has the story of defendants in an insider-trading case trying to get off on a technicality.* They claim swaps aren’t “securities” and therefore the SEC has no jurisdiction.

There’s a broader theme at play, which I note below. First the story…

The case has triggered a broader debate: Can federal securities regulators pursue insider-trading charges in the unregulated market for “credit-default swaps,” financial contracts that provide insurance against debt defaults. Banks, hedge funds and traders use them to bet on the likelihood of bonds or loans going bad. The SEC says it has purview over policing the market.

The defendants in the New York case argue, among other things, that swaps aren’t securities, but private contracts between financial players outside the SEC’s jurisdiction. Unlike most stocks, bonds and options, swaps aren’t traded on an exchange….

Insider trading occurs when someone makes an investment decision based on material information not available to the general public, and knows that information is coming from a person who has a responsibility to keep it private. The SEC traditionally has pursued insider-trading cases involving stocks, options and other securities. But as swaps have exploded in popularity in recent years, regulators have grown concerned that investors have been using inside information in trading them.

The broader theme is how those trading CDS continue to exploit regulatory loopholes wherever they can, sometimes making contradictory arguments.

This came up in the case of Ambac in Wisconsin last week, about which I wrote a column.

Buyers and sellers of credit default swaps have long argued CDS are executory contracts, not insurance policies. For accounting purposes, for tax purposes, for not-holding-capital-against-their-position purposes, they want it to be treated like a contract. But this is problematic when the sellers of CDS — the Ambacs/MBIAs/other monolines — run into trouble and face bankruptcy.

Executory contracts are junior to insurance policies in bankruptcy. For an insurance company like a monoline, that means capital might be sequestered in order to protect policy-holders over the life of their policies. What’s left after policies lapse can then be paid out to other creditors.

The monolines were mainly in the business of insuring municipal bonds, insurance policies that can run for decades.

But CDS holders want their money now. The mortgage-backed securities for which they bought protection are going bad now, so they’re getting paid now. Nevermind that payments on these CONTRACTS would wipe out what’s left of Ambac’s capital needed to back its municipal bond INSURANCE POLICIES.

Ambac’s regulator put a stop to payments on the contracts last week. A smart and entirely defensible move.

But CDS holders are unhappy because they think they should keep getting paid.

In this case, in other words, they want their contracts treated like insurance policies. But of course they’d never want CDS regulated as insurance, since this would burden them in other ways.

Derivatives reform is not a case where the “pendulum of regulation” is swinging too far. It’s a case where there’s virtually no regulation and a sensible baseline needs to be established.


*Previously Bloomberg’s David Scheer reported on these guys mounting a similar defense about the underlying Dutch Bonds (ht SMI).


I believe that monolines use a technical trick to be able to write insurance – Among other things, they need their counterparty to have an insurable claim; with CDS you dont know if you counterparty would lose money if the company defaulted.

To get around this problem, they set up “transformers” – companies which are set up solely to write CDS. They then insure the debt of the transformers (which they own).

Transformers were the coup that allowed monolines to write CDS in the first place; I think it was a questionable decision by regulators (and one they likely regret). Note to self – another case where regulators did a bad job and more regulation probably won’t help.

I think you could make a “piercing the corporate veil” argument – that the transformer is a sham corporation and the two companies should be treated as one – in a legal case where they tried to claim they are an insurer not a writer of CDS (or vice versa). But I’m not sure. I suppose you’d have to get into the details of the transformers – who owned the equity, etc.

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Lunchtime Links 3-29

Mar 28, 2010 19:53 UTC

ChartSavings 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)

consumer spending

Obamacare by the numbers Part 2 (Cassidy, New Yorker) This takes apart, piece by piece, the various assumptions that are used to pretend the healthcare bill will actually reduce the deficit. In reality, it’s likely to exacerbate it dramatically…

AT&T joins in health charges (Reilly/Schultz/Winslow, WSJ) One (small) good thing Obamacare seems to have accomplished: cutting tax subsidies to corporations that provide prescription drug coverage to employees. After the bill passed, corporate America is being forced to write off deferred tax assets on their balance sheet because the bill effectively raises their taxes over time. The article cites a Credit Suisse estimate that the S&P 500 will take a combined charge of $4.5 billion, representing future estimated tax savings that now won’t materialize.

WSJ editorial defends corporate welfare (WSJ) They liked the above subsidy. As it goes away, companies will either have to cut costs or raise prices. Boo hoo. In any other context this is precisely the kind of thing that WSJ editorial writers would rail against. There are plenty of good reasons to dislike Obamacare. This isn’t one of them.

Maybe we should end primary elections (Schieffer, CBS) Not many folks vote in partisan primaries. Those that do tend to be on the right and left fringes respectively. So they end up determining which candidates the rest of us get to vote on in general elections. It’s a shame, and might be changed if primaries were open to all voters. [Full disclosure: I've contributed to, an advocate of open primaries.]

Regulators probe “Christmas capital” rules (Kapner/Thomas, FT) Good and interesting piece.

NY helicopter commute for $200 a day signals Wall St. revival (Deprez, Bloomberg)

Online dating stats (Mashable, ht DH) A very interesting infographic.

Area 51 vets break silence: Sorry, no aliens/UFOs (Lacitis, Seattle Times)

We swear this isn’t what it looks like! (imgur)


dog tennis ball