Unstructured Finance

By Matthew Goldstein and Jennifer Ablan

We may not be TV people but there’s something to be said for just sitting down and doing a video interview to discuss the big issues of the day. And that’s just what we did as part of this year’s Reuters Investment Outlook Summit and it’s something we hope to keep doing as  a regular feature going forward into the new year.

In advance of this year’s summit, we did videos with noted short-seller Carson Block, bond guru Dan Fuss, OWS bank leader Cathy O’Neill, FBI heads April Brooks and David Chaves, Avenue Capital’s Marc Lasry, economist Henry Kaufman and Steven Gluckstern of eminent domain fame. The videos were frank discussions and to make them seem more natural we went outside the environs of our Reuters newsroom in NYC and conducted them in places like the  middle of Times Square, an ice ream shop and a park.

But best of all these videos broke some news. For instance, we learned the FBI is now using Twitter as an investigative tool and that Carson Block is thinking about starting a short only hedge fund.

So far we’ve posted four videos online, with the ones with Fuss and Lasry still to come. We’ll update this post once those are out as well.

One other thing,  we must give a big thanks to Reuters digital editor Chrystia Freeland for suggesting the idea of doing videos for the summit and online editor Ken Li. And also a huge shot-out to the Reuters video team of Jonathan O’Beirne, Dan Colarusso, and Barclay Palmer and their crew for putting these videos together.

By Matthew Goldstein and Jennifer Ablan

It’s been almost six months since we first reported on the plan by Mortgage Resolution Partners to find a community willing to use eminent domain to condemn and restructure underwater mortgages and pay a handsome fee to the private investment group for overseeing this process. The proposal has generated a lot interest, debate and heat, but so far  no community is yet willing to go down this road.

Still, Steven Gluckstern, chief executive of the San Francisco-based group, said he’s confident that by early next year some community–most likely one in California–will go forward with the idea of condemning underwater mortgages and rewriting them so cash-strapped homeowners can afford the payments and stay in their homes.

But Gluckstern, in an interview with ReutersTV as part of the Reuters Investment 2013 Outlook Summit, was also a bit realistic and said if nothing gets done in the first-half of next year it may be time for his group to pack it in. In the interview, Gluckstern said he and his investors were a little taken aback by the organized opposition from investors in mortgage-backed securities, who would take a financial hit in any condemnation proceeding.

By Matthew Goldstein and Jennifer Ablan

About a year ago, Nobel Prize-winning liberal economist Joseph Stiglitz made a surprise appearance at the Occupy Wall Street camp site in Zuccotti Park, giving a speech to rally the protestors and support their causes of bringing attention to the economic divide between the 1 percent and everyone else in the U.S.

Today, the protestors in lower Manhattan have all but disappeared with the attention on Occupy Wall Street gone along with it.

Stiglitz said the effort wasn’t for nothing, however.

“I think Occupy Wall Street served a function in that it brought to the attention of the American public two things…the distortion of our economy and inequality,” Stiglitz told Reuters TV this week in a wide ranging interview (led by Jenn) at Columbia University, where his a professor. Stiglitz said the protests helped serve notice that while a small group of Americans are doing far better than the other 99 percent, “we all have to get together” for the country to truly prosper.

The following is a contribution from our chief Federal Reserve reporter, who is out in the field  at The Economist magazine’s annual economics conference:

By Jonathan Spicer

What is the most overvalued asset across the world’s advanced economies? Vincent Reinhart, the chief U.S. economist at Morgan Stanley, posed that rhetorical question on Thursday at one of New York’s signature economics conferences. After a pause: “The answer is, voters’ expectation of the net present value of the entitlements they … are expecting. Why? Because they by and large don’t have a tax system to support that,” Reinhart said.

It was a cold shot of reality as the United States roars toward the so-called “fiscal cliff” on Jan. 1, when a series of automatic tax rises and spending cuts will take hold and seriously damage the economy – unless lawmakers step in to prevent them. Most economists and investors are still betting the worst of the cliff will be avoided, probably by putting off tough questions on tax reform and longer-term government spending. That means Congress kicking the can down the road – yet again – on finally setting a plan to meaningfully reduce the massive U.S. debt after three straight years of budget deficits topping $1 trillion.

Greg Smith, the ex-Goldman Sachs salesman who stunned the investment bank with a scathing public resignation in March, is now on the defense.

Smith, whose book, “Why I Left Goldman Sachs” hits bookstores today, has been facing the wrath of Goldman, media critics, and online commenters since last week, when bits and pieces of his book began to leak out and Goldman quickly jumped at the chance to characterize him as an undistinguished ex-employee with an ax to grind.

Goldman said Smith quit because he didn’t get the raise or position he wanted. It has also tried to cast doubt on the veracity of his claims by making other current and ex-Goldman employees available for media interviews to dispute Smith’s characterization of events in his book anecdotes.

It was a good third quarter for Wall Street profits and an even better one for employees: Goldman Sachs and Morgan Stanley set aside another $7.6 billion in compensation during the period, with year-to-date pay for the average employee up 15 percent at Goldman and 3 percent at Morgan Stanley.

Total comp accruals for both firms so far this year are up to $23 billion, 2 percent higher than the amount set aside a year ago. That equates to or 47 percent of adjusted net revenue, down from 50 percent for the first nine months of 2011, but still much higher than the pay levels some shareholders are demanding.

The data are a little befuddling, since New York State Comptroller Thomas DiNapoli recently said he expects Wall Street to lose jobs this year, and for pay to drop. Recruiters and Wall Street pay consultants have also said they expect pay to either decline or remain relatively flat for many kinds of traders and bankers this year. And JPMorgan’s investment bank has already started chopping down banker pay.

By Matthew Goldstein and Jennifer Ablan

All year the big money has been talking up one of the more intriguing trades to emerge from the housing crisis: buying up foreclosed homes in large scale and rent those out for several years and then unload them when the price is right. But questions about the so-called rent-to-own trade are being raised now that an early mover in the space, hedge fund giant Och-Ziff Capital, is looking to cash in its chips now and is abandoning the idea of operating foreclosed homes as rental properties for years to come.

Now we’re not quite ready to declare the foreclosed home rent-to-own trade is dead as the tireless, prolific financial bloggers at ZeroHedge did in a good riff on our exclusive story on Och-Ziff’s decision. But Daniel Och’s concern that the income to be generated from renting out foreclosed homes may not be as high as originally anticipated bears close scrutiny because it could spell trouble for other hedge funds, private equity firms and smaller money managers counting on rental income to generate an annual 8 pct or greater return on investment.

Way back in March, when we first wrote about all the big money that was racing into the foreclosed home market, we noted that some were concerned that a lot of the newer entrants might not really up to the challenge of managing and renting single-family homes for the long haul. Historically, the business of buying, rehabbing and renting foreclosed homes has been a mom-and-pop endeavor, conducted by people with strong community roots. The skeptics wondered whether institutional players were too blinded by the potential to capture yield and overlooking the challenges that comes with bringing often vacant foreclosed homes up  to code and habitable conditions.

By Sam Forgione

This week’s Weekend Reads may drive you back to the big news of the week: The Debates.

Just as the candidates’ tone and tenor seemed to drive judgments as to who won and lost, some stories were written about sparring between politicians and bankers, billionaires on whether a bankrupt Mexican company should be let off the hook, the banks and the foreclosed-upon, and the more milder subject of volatility investing. In the case of the Foreign Policy and DealBook links, the attitudes of the parties involved seem more important than their logic. And a winner and a loser probably won’t come to you. At least here, unlike in the voting booths, you can stay undecided.

From Foreign Policy:

Mohamed El-Erian writes that politicians and bankers should stop putting each other down and start averting the next crisis.

Fall really arrives in NYC this weekend. What better time then for Sam Forgione’s weekend reads. Have a whale of a time.

From The New York Times:

Susan Dominus long read about Ina Drew, the “natural” risk manager, who oversaw JP Morgan’s $6 billion trading loss.

From Vanity Fair:

More on Jamie Dimon and JPMorgan from the writing team of William D. Cohan and Bethany McLean

By Katya Wachtel

Last year was a sorry one for the $2 trillion hedge fund industry, when funds lost 5 percent on average. This year managers are doing better, up more than 5 percent for the year, according to the latest tracking data.

But those returns are a far cry from the 16.4 percent rise achieved by the S&P 500 this year, so what will hedge fund managers – who are supposed to be the smartest, savviest market players on the Street – do to juice returns?

For now at least, they’re not levering up in the hunt for yield. Certainly, they’re not ratcheting up portfolios to the levels seen pre-Lehman implosion, when returns were bountiful, and hedge fund managers reported leverage of 3.4, on average.