Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktVital Statistics:
| Last | Change | Percent | |
| S&P Futures | 1390.7 | 0.0 | 0.00% |
| Eurostoxx Index | 2574.8 | 18.0 | 0.70% |
| Oil (WTI) | 106.48 | -0.2 | -0.22% |
| LIBOR | 0.4737 | 0.000 | 0.00% |
| US Dollar Index (DXY) | 80.5 | 0.307 | 0.38% |
| 10 Year Govt Bond Yield | 2.28% | 0.16% |
S&P futures are flat this morning after yesterday’s furious rally on the back of the FOMC comments. Europe is playing catch-up. Bonds continue to sink as the market re-asses the probability of QEIII. The 10 year has clearly fallen out of its 140-144 trading range, and it looks like 134 is the next stop. Mortgages are weaker as well. As the 10 year sells off, it will be interesting to see if the Fed can hold up MBS.
The Fed left rates unchanged, but noted the recent economic strength and low inflation (since food and energy prices don’t matter). They re-affirmed their intention to maintain exceptionally low interest rates through late 2014. Operation Twist and the MBS re-investment will continue. People hoping for clues to QEIII didn’t get much except for a bland statement that the Fed will continue to review its securities holdings and adjust as necessary.
After the close yesterday, the Fed released the results of its stress-tests of the banking system. Citi, Suntrust, Ally and Metlife flunked. The stress test was actually pretty tough – unemployment at 13%, a 50% crash in the stock market, and another 21% drop in house prices. 15 of the 19 banks examined would maintain capital ratios above regulatory minimums in that scenario. The detailed methodology is here.
This editorial from the NYT regarding Goldman reminds me of the way Michael Lewis described Salomon Brothers in Liar’s Poker.
Filed under: Morning Report |
All Things in Moderation 
Thanks, Brent, again. A comment and a question:
1] That op-ed about G-S is by a retiring young successful associate and it is devastating. I leave open the possibility of sour grapes. However, I think we all should click on that link.
2] Do you think the stress tests were realistic, or overly optimistic?
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Ezra Klein quoted a long excerpt from the GS editorial. I’d suspect some readers will feel like suckers. Would such an article be enough to trigger a class action suit, or is fiduciary duty a quaint anachronism that only the gullible and naive still believe in?
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Mark, I haven’t delved deep into the methodology of the stress test. The biggest problem with these stress tests is that they typically assume that markets will function as normal, just with lower prices. That isn’t necessarily the case. Sometimes you just can’t borrow money, no matter how much you are willing to pay, or sell as security no matter how low you are willing to go.
I would guarantee you that prior to the financial crisis, nobody thought about the commercial paper market freezing up, but it did. Unfortunately, most of this stuff is unmodelable.
Investment banks use Value at Risk, which is a deeply flawed risk measure, but it is one of the best tools we have at the moment. So in a lot of cases, these things function more as security blankets than anything else.
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Also the William Cohan book on GS.
Time to load up on volatility, now at 5 year lows. Nothing can be this smooth forever.
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John, what does that mean?
Brent, I guess we are using the best tools we have for predicting the past. It’s always that way…
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The machismo screw-the-clients world of of financial trading houses has been common knowledge since at least Michael Lewis’s Liar’s Poker, As the industry becomes more consolidated it’s no surprise that the situation has gotten worse, not better.
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yello:
The machismo screw-the-clients world of of financial trading houses has been common knowledge since at least Michael Lewis’s Liar’s Poker
Each of the investment banks had their own very distinct culture. This was especially true 20 and 30 years ago. You cannot extrapolate from Salomon (Liar’s Poker) to the rest of the houses.
As the industry becomes more consolidated it’s no surprise that the situation has gotten worse, not better.
Except that, if one is to believe the op-ed, this is a relatively new phenomenon at GS, not a worsening of a long-standing problem. This guy who is condemning them now in no uncertain terms talks about how he “loved” working there precisely because its culture for most of his 12 year tenure was the opposite of what he now says it has become. I suspect that this op-ed will be used to justify and reinforce long-held views about GS (your comment is a good example), but a close reading of it suggests it shouldn’t be.
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The VIX, also known as the fear index, is a measure of the pricing of options in the current market. Basically, the lower the VIX, the less people are hedging. Sentiment right now is all to the upside as if all the clouds had gone away for good.
If you believe in equillibriums, then you don’t expect this situation to last forever, and you choose one of the many ways to bet on a change to the upside.
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I left out a few words that might be necessary. A drop in the markets of any degree would cause a rise in the VIX itself, as it is basically an inverse relationship. Not sure if that was clear above.
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Since we are on the GS topic, latest from Matt Taibbi on them:
http://www.rollingstone.com/politics/blogs/taibblog/guy-who-rented-all-94-rooms-of-aspen-hotel-for-party-scores-awesome-new-goldman-job-20120312
Also, Vital Statistics is missing? (see someone pays attention to them)
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Unintentionally humorous Krugman quote of the day:
“It’s worth pointing out, by the way, that this time the Fed did all that Friedman denounced it for not doing in the 1930s. The fact that this wasn’t enough amounts to a refutation of Friedman’s claim that adequate Fed action could have prevented the Depression.”
http://krugman.blogs.nytimes.com/2012/03/14/macro-retrogression/
The last person to acknowledge the economy is doing better won’t be a Republican, it will be Paul Krugman, in that economic improvement without another massive stimulus program will do more to undermine his world view than the Republicans.
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I was so sure Friedman was right about the Depression when I was graduated with a degree in economics in 1964 that my faith in that cannot be shaken by the acute observation that following Friedman kept us out of Depression this time but failed, because it did not cause a boom.
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“Except that, if one is to believe the op-ed, this is a relatively new phenomenon at GS, not a worsening of a long-standing problem. This guy who is condemning them now in no uncertain terms talks about how he “loved” working there precisely because its culture for most of his 12 year tenure was the opposite of what he now says it has become. I suspect that this op-ed will be used to justify and reinforce long-held views about GS (your comment is a good example), but a close reading of it suggests it shouldn’t be.”
The conclusion I draw is that the firm’s culture changed as a result of it’s transition from a partnership to a corporation in 1999. As the old staff from the partnership has cycled out, so has the culture. This also matches the timeline that the Op-Ed cites.
http://en.wikipedia.org/wiki/Goldman_Sachs
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jnc:
The conclusion I draw is that the firm’s culture changed as a result of it’s transition from a partnership to a corporation in 1999.
I suspect that has a lot to do with it.
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Unusually good general interest NYT article on the rare earth trade yesterday, a pretty obscure subject, including some interesting what if’s.
http://www.cnbc.com/id/46726795
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“markinaustin, on March 14, 2012 at 9:01 am said: Edit Comment
I was so sure Friedman was right about the Depression when I was graduated with a degree in economics in 1964 that my faith in that cannot be shaken by the acute observation that following Friedman kept us out of Depression this time but failed, because it did not cause a boom.”
Preventing a Depression is not the same thing as eliminating the business cycle, which seems to be what Krugman implies that properly implemented Keynesian policy can do.
Friedman was right, and Bernanke deserves the most credit for acting to keep the money supply stable. Whether he went overboard with some of the later QE actions is debatable.
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Sometimes I think PK’s criticism of BB is merely generated by professional jealousy about the prof down the hall who got to run the biggest game in town.
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“markinaustin, on March 14, 2012 at 9:12 am said:
Sometimes I think PK’s criticism of BB is merely generated by professional jealousy about the prof down the hall who got to run the biggest game in town.”
The really interesting fight is between Paul Krugman and Kenneth Rogoff.
“To take an example: Ken Rogoff and I differ seriously on the relative risks of public debt and failure to spend on job creation. One of us is wrong , which means that the other is giving bad advice. (And yes, I’m personally sure that I’m right — but that’s a different argument). But this is an argument in good faith.”
http://krugman.blogs.nytimes.com/2012/03/08/a-brief-note-on-macroeconomics-and-ethics/
http://www.valuewalk.com/2011/08/debate-kenneth-rogoff-paul-krugman-economic-policy/
I fundamentally agree with Rogoff’s framing of the issue:
“Many commentators have argued that fiscal stimulus has largely failed not because it was misguided, but because it was not large enough to fight a “Great Recession.” But, in a “Great Contraction,” problem number one is too much debt. If governments that retain strong credit ratings are to spend scarce resources effectively, the most effective approach is to catalyze debt workouts and reductions.”
http://www.project-syndicate.org/commentary/rogoff83/English
I expect Rogoff will be the one vindicated, and “This Time is Different” will prove to have been the most prescient book on the 2007 financial crisis that was published.
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Friedman, as I recall, blamed tight money for strangling the recovery. Here, the limits of Bernanke’s and the Federal Reserve’s abilities to loosen money were stretched. While I think tight money at the Fed level would have strangled the recovery, the two facts that the banking system had changed enough that loose Fed money did not trickle down to small biz, and that it had changed enough to have attenuated global impact rather than focused local impact, kept loose money from doing as much as it would have done in the 30s. Still, it worked. Sometimes I don’t know what planet PK was on, these last few years. Unlike Rogoff, I do think that some focused federal spending [not huge new deficit spending] was useful and could still be useful. But I agree with his major point. This was a financial contraction. Debt is too large [by this he and I mean private debt, for the most part, but public debt plays into it as well, thus limiting the efficacy of deficit financing, but not totally making it irrelevant].
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Regarding the culture of WS, it has an “eat what you kill” compensation structure and that has a lot to do with it.
I have been on both sides of the business, working as an asshole block trader at Bear and an asshole arb trader at Elliott. Both sides of the phone are interested in extracting as much from the trade as they can. The buy-side clients are often more in the know than the sell-side trader, so it isn’t the “old lady retiree vs the Wall Street sharpie” dynamic that is often portrayed. A long time ago, the buy-side guys were less talented and made less than the sell-side guys. Hedge funds have turned that dynamic on its head. I don’t weep for Goldman’s clients – they can take care of themselves just fine. And no, I never worked for Goldman.
Regarding Bill Cohan – I have Bloomberg on all day, and I cannot stand that guy. All he does is complain about how much people make and pimp his book. He belongs on MSNBC with Dylan.
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Brent, could you add in the vital stats? We miss them. i think I know where to find them on Bloomberg and if I get a chance I will add them, but I am hoping you already filled out the matrix.
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updated. sorry.
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If you had loaded up on volatility this morning, you could take the rest of the week off, up 20-25% on the options.
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make that 35-40%. Who wants to go to the Olive Garden with me tonight?
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Marilyn Hagerty, restaurant reviewer from Grand Forks, ND, would love to join you.
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Here’s the original review.
http://www.grandforksherald.com/event/article/id/231419/
and buy the t-shirt at http://www.grandforksherald.com/event/article/id/232085/
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No grand forks in Grand Forks?
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“bannedagain5446, on March 14, 2012 at 12:15 pm said: Edit Comment
If you had loaded up on volatility this morning, you could take the rest of the week off, up 20-25% on the options.”
Anything ever come of MSJS post on uses for $15k? I’d still love to see an Iron Chef like competition between the various investment pro’s here and a model portfolio.
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jnc:
never saw that, wonder what she did
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“Marilyn Hagerty, restaurant reviewer from Grand Forks, ND, would love to join you.”
Well played.
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Back the goldman piece. The ironic thing is that as head of equity derivatives in Europe, I can say from experience that the majority of his business was structuring tax avoidance trades.
Which kind of begs the question about suitability. The client comes to GS and asks to do a dividend swap or set up a contract for differences in a UK stock. These are unsolicited trades where the client knows exactly what he wants. So where does suitability come in?
Suitability is more applicable to retail investors, where the broker is supposed to understand the client’s needs. No hedge fund is going to be candid with an institutional salesman – they don’t want anyone knowing what they are doing.
I’m sure this guy will have a tell-all book coming out and is angling for a spot on MSNBC where he can sit with Dylan Ratigan and shit all over the Street.
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Bloomberg editorializes on Greg Smith’s NYT op-ed about Goldman from yesterday.
Goldman and other investment banks do perform an important role in our economy, and Goldman bankers — most of them, at least — can hold their heads up high. But it is not charity work. Goldman’s clients are mostly very well-off. Smith’s lament that the bank no longer serves their needs above and beyond its own does not tug at our heartstrings.
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Some one a while back linked to Pearlstein’s Pulitzer winning columns. One that stuck with me was the about Blackstone Group going public as evidence that the Greater Fool Theory applied anytime a profitable partnership goes public. I suspect the same applied to Goldman-Sachs when they sold out.
One cannot deny their own culpability, but in the demise of Lehman Brothers I still subscribe to the theory that they didn’t jump as much as they were pushed. Goldman-Sachs fingerprints are all over that corpse.
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