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 |
1319.6 |
-2.8 |
-0.21% |
|
Eurostoxx Index |
2140.4 |
-35.0 |
-1.61% |
|
Oil (WTI) |
93.04 |
0.2 |
0.25% |
|
LIBOR |
0.467 |
0.000 |
0.00% |
|
US Dollar Index (DXY) |
81.59 |
0.218 |
0.27% |
|
10 Year Govt Bond Yield |
1.76% |
0.00% |
|
|
RPX Composite Real Estate Index |
175.6 |
0.1 |
|
Markets are lower this morning on a report in the Spanish press that Moody’s will downgrade the Spanish banks today and the continuing stand-off between the ECB and the Greek banks. The Spanish IBEX stock exchange is down 24% for the year and is at 9 year lows. Despite the headlines, Euro sovereign yields are flat / lower.
Initial Jobless claims came it at 370k, in line with expectations and we have good earnings from Wal-Mart and Sears. Later today, we will get Philly Fed. Bonds and MBS are up slightly.
Facebook prices tonight and should start trading tomorrow. Barry Ritholtz weighs in. David Einhorn took aim at AMZN at the Ira Sohn conference. His comments could have come from a Alan Abelson column in 1999. I expect to hear a lot of the same “you don’t get it” arguments on FB that we heard on AMZN back then.
The minutes of the April FOMC meeting were released yesterday afternoon. They note the possibility of “taxmageddon” – the expiration of the Bush tax cuts – as a sizeable risk to the economy. While they note the size of the shadow inventory and tight lending standards, they believe real estate prices have stabilized. Overall, there seem to be no major changes in this statement – the Fed remains open to QEIII should economic conditions warrant.
Ellie Mae released their latest Origination Insight Report. Ellie Mae provides loan processing software and handles about 20% of US mortgage loan origination. Typical profile of a denied loan? 702 FICO / 87 LTV / DTI 28/43. Talk about a tight mortgage market.
The problem with having a London Whale is that you have thousands of Ahabs shooting harpoons at you once you disclose you are in trouble with an oversized position. Dealbook is estimating that JP Morgan’s trading losses have increased from $2 billion to $3 billion in the last 4 days as every wise-guy hedge fund manager that missed the initial trade puts it on.
Filed under: Morning Report |
All Things in Moderation 
Phily Fed was a disaster. Leading Economic Indicators goes negative…
LikeLike
Deleted comment.
LikeLike
We had a crisis because we had a real estate bubble. Proprietary trading and inadequate capital did not cause the bubble.
Unfortunately, the post-mortem of the financial crisis continues to be a partisan affair.
LikeLike
Brent:
I couldn’t agree more.
LikeLike
I guess that puts this discussion to an end.
Later all.
LikeLike
big move in gold and silver today. Makes me wish I’d bought even more yesterday!
LikeLike
This might put the flap on JP Morgan in perspective:
http://www.forbes.com/sites/chunkamui/2012/05/11/less-hyperventilating-on-jp-morgan-chases-2b-loss-please/
A key bit: “The Journal also quotes Dimon as saying JP Morgan as a whole will earn $4 billion this quarter—that’s ‘billion,’ with a ‘b.’ Yes, that would be down from $5.38 billion in the first quarter, but JP Morgan will still be one of the most profitable companies in the world, after the trade debacle.”
Is this flap indicative of anything?
LikeLike
lms:
That’s why Dodd Frank is terrible legislation. the play was to separate commercial and investment banking, not try to control it in some magically genius way that won’t work.
LikeLike
“big move in gold and silver today.”
Anybody seen the Hunt brothers?
LikeLike
I guess to clarify:
We had a real estate bubble. Proprietary trading and inadequate capital did not cause the bubble.
When you have a residential real estate bubble, no amount of regulatory tinkering can prevent the financial system from imploding when the bubble bursts. Dodd / Frank, Glass / Steagall, the Volcker rule, etc would have not prevented the financial system from imploding after a residential real estate bubble. Even if the world had never seen a mortgage backed security, a credit default swap, or a CDO, the financial system would have imploded.
Unfortunately, the post-mortem discussion has largely fell on partisan lines, with the left going after “TBTF, “banksters”, and Glass Steagall, and the right going after Fannie Mae.
The biggest reasons for the bubble were (a) the natural human impulse to remember recent asset behavior and to assume the future will resemble the past, (b) a bi-partisan political decision to subsidize residential real estate, and (c) a Federal Reserve which didn’t believe in asset bubbles and is mandated to keep the pedal to the metal as long as inflation (as measured narrowly by the CPI) is kept in check.
LikeLike
At lunch, and I have a minute. Brent wrote:
When you have a residential real estate bubble, no amount of regulatory tinkering can prevent the financial system from imploding when the bubble bursts.
Brent, I think that is a half truth. In the early 80s the entire southwest was real estate booming fueled by lax S&L lending requirements and lots of building on spec (made possible by easy money). The bust of the late 80s and early 90s nearly bankrupted me and did bankrupt thousands from TX to SoCal. It also exposed the practices, both lawful and crooked, of the S&Ls that failed in record numbers. The FDIC analogue, the FSLIC, formed the Resolution Trust to clean up the foreclosure market, which took about six years. Thus a real estate bust caused a financial bust. But the financial bust was limited in scope, in part because it was contained in the primary lending system and could be managed by the RTC.
My point: tearing down the wall between commercial and investment banking [nod to banned], coupled with a proliferation of MBSs into a worldwide betting game of synthetic tertiary instruments [which Scott says help regulate the excesses of the primary market by reason of investor confidence or lack thereof – Scott, you will correct this – I am going from memory] made this bust a global affair.
At first, I did not understand why the RTC could not go into LV and Phoenix and parts of FL and CA and contain this, as they had done 19 years earlier. But the “float” was now too huge, too widespread.
Thus I think the old “wall” would be a damned good idea.
LMS, sorry I did not read your post from SJ earlier, but I am busy… . I will get to read Brent and Scott’s responses later – I know I don’t quite have Scott’s justification for naked trades [as opposed to hedges] down and I will read it attentively, when he re-posts it.
LikeLike
Mark:
I know I don’t quite have Scott’s justification for naked trades [as opposed to hedges] down
I have been contemplating making this the subject of a full-fledged post, but judging by the intense lack of interest in my post from this morning on a somewhat similar topic (I almost incorporated this topic into it), maybe I should just keep it as a brief comment.
Basically, for all intents and purposes, a liquid and efficient market for hedging risk cannot exist without “speculators” willing to take open, or “naked”, positions. Remember that at its most basic level, hedging consists simply of transferring existing risk to someone else. In order to be able to do that, you need to be able to find someone willing to take that risk off your hands. The only people who can do that who would not be “speculating” are people who have the exact opposite risk to you already, and who themselves are looking to hedge. At any given moment that could be a pretty small, and indeed conceivably empty, universe of potential counterparties, making hedging highly illiquid and inefficient. But if you introduce into that universe people who are willing to take a view on that risk, who want to own the risk not as a hedge, but because they think it is a good one that will likely make them money, then suddenly the universe of potential counterparties is vastly expanded, and hedging becomes much easier.
A point to remember here is that even the most fundamental of banking activities, borrowing and lending, involve the unavoidable creation of new risks that must be borne by someone, somewhere. If I am a bank and I lend money to you for 10 years for a fixed rate of X%, I have just taken on “naked” risk that interest rates might go up. If they do, I will lose money**. There are various ways in which I can hedge this risk, but only by transferring the risk to someone else willing to take it on. Again, it is risk that is going to be borne by someone, somewhere, and whoever has it will be open, and therefore could justifiably be labelled a “speculator”. These speculators are essential to a liquid and efficient market for hedging risks.
**This notion of losing money on a loan simply because of a change in interest rates may necessitate a discussion of the notion of mark-to-market accounting, but I will leave that for now.
LikeLike
I deleted my comment and link to Simon Johnson above. I doubt any of you read it or your comments would have reflected what he was actually saying not what you assumed he was saying.
Brent, I don’t disagree with anything you said at 9:24, but I was trying to figure out what if anything has changed, Johnson doesn’t think much has as evidenced by the JP Morgan risk management fiasco in terms of too big to fail and bailouts.
Banned, I didn’t celebrate when DF passed and am not celebrating now, we have a bunch of idiots in Congress AFAIC. I commented last week that it does look like there may be some bi-partisan interest in breaking up the big four but I doubt that will actually go anywhere.
Now, I’m out to do something useful.
LikeLike
For those curious about what lms has deleted, the the Simon Johnson interview she is speaking of is here.
I have to confess that it is difficult for me to see how anyone can both agree with what Brent said and also think that Johnson is raising relevant points.
LikeLike
Scott, I was referring to Brent’s a, b & c. I doubt Johnson would disagree with those either. I don’t however believe they tell the whole story. I have a lot of respect for Simon Johnson and know others here do as well so thought the link was appropriate and even non-controversial, I’m trying to stay away from that. Guess my partisan slip is still showing. This isn’t a site for moderates, it’s a site for moderate discussion, at least that’s what I thought when Kevin and I envisioned it.
I’m having trouble recognizing the place anymore. I thought all opinions were welcome I guess.
LikeLike
lms:
I doubt Johnson would disagree with those either.
I think it is almost a certainty that Johnson disagrees entirely with with what Brent said. At least that is the clear implication of what he has said in the interview. For example, he blames the financial crisis on “a small group of people who got you into a disaster and who are still powerful”. He says that the recent JPM losses “suggests that we are absolutely on the path towards another financial crisis.” He says that “deregulating or not regulating during the boom is exactly how you get into bailouts in the bust.” When asked if the financial crisis was “at heart a political crisis” he says “Yes, exactly.”
It’s hard for me to see how these beliefs of his can be squared with, for example, the notion that it was the housing bubble that caused the financial crisis.
so thought the link was appropriate and even non-controversial,
It’s certainly appropriate, but most of what he says in the interview strikes me as controversial.
I thought all opinions were welcome I guess.
I am sincerely curious…what opinion do you think isn’t welcome, and what exactly was said that leads you to that conclusion?
LikeLike
Lms, no amount of government regulation is going to prevent a politician from doing something stupid if they think a calamity will occur (and their re-election therefore jeopardized) if they don’t do it. No matter how broken up a group of companies get, no matter how much authority the Executive branch has to regulate something, if enough politicians become convinced that “something needs to be done,” then, most of the time unfortunately, something will be done.
LikeLike
” I thought all opinions were welcome I guess.”
This is where I get confused. Were your opinions and comments treated disrespectfully? It seemed that while there was disagreement with you, or with S.Johnson, it was thoughtful, sincere and not dismissive. It seems to me that the act of commenting on what you wrote and linked to, in a good faith way, is in fact a way of welcoming your opinion and introducing our own. I’m glad you put it up so we could talk about it.
LikeLike
McWing, none of it matters really.
This just doesn’t feel like a discussion to me.
We had a crisis because we had a real estate bubble. Proprietary trading and inadequate capital did not cause the bubble.
Unfortunately, the post-mortem of the financial crisis continues to be a partisan affair.
Edited as I hit post too quickly.
No big deal really, I’m absolutely trying to stay away from partisan talking points and if that’s what that was I’ll just apologize now and be done with it.
LikeLike
LMS, I read the Johnson interview. Yeah, he is right – Wall Street made some big bets. If JP Morgan would have collapsed because of this bet it would be a problem and the government would have stepped in. Fair enough.
He does make some logical mistakes (IMO). First, he talks about JP Morgan’s assets as a % of GDP. GDP (an wealth measure) and half of a bank’s balance sheet are not comparable. It is a ridiculous comment.
Second, he believes that prop traders get paid big bucks if they win and keep the money if they lose. The problem with that theory is that people are largely paid in stock which vests over time. So, if you blow up the bank, the vast majority of your earnings during your time at the bank vaporize. His theory would be correct if bankers were given a million dollar check every year. They aren’t. He is smart enough to know this, so it isn’t as if he is wearing his “smart, objective MIT professor” hat – he is wearing his “Paul Krugman the partisan economist” hat.
Do I think his prescription of re-instating Glass Steagall, breaking up the big banks, electing Elizabeth Warren to the Senate, and slashing banker pay would have prevented the housing bubble? Not in a million years.
Glass-Steagall was instituted to prevent investment banks from stuffing underwater bond issues with their captive commercial bank. The crisis didn’t occur because JP Morgan stuffed a bunch of crap CDOs with Chase Manhattan or Travelers.
Breaking up the big banks makes a difference if one bank puts on a position that no one else has. But that isn’t applicable here. In the financial crisis, everyone was long residential real estate, either directly or indirectly. If we turned JP Morgan back into JP Morgan, Chase Manhattan, Chemical Bank, and Manufacturer’s Hannover, it wouldn’t have made a difference if everyone is lugging the same lousy position.
You know what the unintended effect of that will be? Pretty much every investment bank except for Goldman would be unable to compete with Deutsche Bank, CSFB, UBS, and Barclay’s. “Wall Street” would be a foreign place indeed.
None of these prescriptions address the simple fact that we had a real estate bubble. They won’t prevent another one. Not that it matters to us – the next one will be experience by our great-grandkids. The problem is that when we start poking around the whole real estate bubble, we start getting close to a few sacred cows, especially for the Left – particularly affordable housing goals, the dual mandate of the Fed, and residential real estate subsidies in general. The right hates the CRA and Fannie / Fred, so they attack that. But the Left has a real vested interest in continuing to steer the conversation to the banks.
So, let me say Simon Johnson is largely right on the 10% of the problem he is focused on.
LikeLike
Thanks for at least reading it Brent.
LikeLike
“McWing, none of it matters really.
This just doesn’t feel like a discussion to me.”
It matters to me. What would a discussion look like given that some participants might disagree? In other words, what would a disagreeing comment in the context of a discussion look like?
LikeLike
Mark, I think the difference between the 80s and now was because the bubble was nationwide, not centered on one region of the country. Not only that, but it happened during the G-S era.
Your point of the S&L crisis is true, but it stemmed from DIDEMCA and Garn St Germain in the early 80s. You have to remember why we deregulated the banks and thrifts in the first place – it was because of disintermediation in the high interest rate 1970s – not because of some free-market ideology.
Re the proliferation of lax lending and derivatives causing the real estate bubble, I would point out that the historical relationship between real estate and incomes started breaking down in the late 90s, years before liar loans, CDO squared, credit default swaps, negative amortization loans, pick-a-pay loans etc ever entered the marketplace.
I believe that lax lending and financial innovation follow asset bubbles – they show up once the bubble is inflated. They don’t actually cause it.
Check out Manias Panics and Crashes by Charles Kindleberger. It is a fun beach read, and shows that asset bubbles are a part of human nature, and smart people sometimes get sucked in. Fun fact: Sir Issac Newton lost everything in the South Sea bubble.
LikeLike
“Facebook co-founder Eduardo Saverin has come under increased scrutiny following news that he had renounced his U.S. citizenship to become a resident of Singapore.
The move drew criticism as reports pointed out that the move would save Saverin — who owns a part of Facebook — millions of dollars in taxes after the company goes public.
.Saverin has denied that he is moving for tax purposes, and has said that his decision was based solely on his business investments.
On Thursday, Sens. Charles Schumer (D-N.Y.) and Bob Casey (D-Pa.) announced plans to introduce a bill to respond to Saverin’s move, which a news release from Schumer’s office called an “avoidance scheme.”
“The senators will call Saverin’s move an outrage and describe a plan to re-impose taxes on expatriates like Saverin even after they flee the United States and take up residence in a foreign country,” the release said, adding that the legislation would bar individuals like Saverin from re-entering the country.”
Ok who believes that anybody in congress understands what the constitution means by ex-post fact legislation or bills of attainder?
LikeLike
Treasuries back at their all time low, and will probably break the record next week. No debt ceiling crisis by the end of 2012, no how, no way.
LikeLike
“Ok who believes that anybody in congress understands what the constitution means by ex-post fact legislation or bills of attainder?”
Ron Paul probably does.
LikeLike
Paul is an interesting combination of all sort of opposing positions and horrible ideas in a gnome like package
LikeLike
maybe so. but i’d rather have a bunch of pauls running around than Schumer.
more seriously, this is just an extension of the “fair share” argument.
LikeLike
“lmsinca, on May 17, 2012 at 9:49 am said:
I deleted my comment and link to Simon Johnson above. I doubt any of you read it or your comments would have reflected what he was actually saying not what you assumed he was saying. ”
I always like reading Simon Johnson, so if for no other reason leave the link up for me.
I’ve been traveling for business again and I’ll be doing so through Monday so posting will be spotty from me until Tuesday.
I also want to respond again to the running bank regulation discussions and the detailed post that Scott put up, but not in a half-assed manner so that will have to be deferred until I have more time. That should not be misconstrued as a lack of interest on my part in the discussion.
LikeLike
“bannedagain5446, on May 17, 2012 at 12:36 pm said:
“The senators will call Saverin’s move an outrage and describe a plan to re-impose taxes on expatriates like Saverin even after they flee the United States and take up residence in a foreign country,” ”
I can think of a certain PL poster that fits this description.
LikeLike
jnc
Scott posted the link again in his 10:28 am on this thread. I’ll be glad when both you and Mark are back a little more consistently.
LikeLike
Matt Taibbi on an inadvertent document release by Goldman Sachs regarding naked short selling:
http://www.rollingstone.com/politics/blogs/taibblog/accidentally-released-and-incredibly-embarrassing-documents-show-how-goldman-et-al-engaged-in-naked-short-selling-20120515
Edit:
Bloomberg on the same story:
http://www.bloomberg.com/news/2012-05-15/goldman-merrill-e-mails-show-naked-shorting-filing-says.html
And the inside baseball details on the counsel who accidentally filed a response without proper redaction:
http://www.deepcapture.com/joe-floren-screws-the-pooch/
LikeLike
jnc:
Interesting story re Goldman. I do wonder, however, why Taibbi finds it necessary to injure his own credibility by saying such patently false things as that Goldman was “needing hundreds of billions of dollars in emergency fed loans and bailouts”. In fact Goldman got exactly $10bn in TARP funds and returned it, with interest, as soon as it was allowed to do so by the fed.
LikeLike
Thanks jnc, I read the first two yesterday but decided not to link here. I’m going to read the other one later tonight.
LikeLike
Oh my. Patrick Byrne is still banging the “naked short” drum after all of these years? His earnings conference calls in those days were pure comedy.
I remember the “Sith Lord” conspiracy theory, with Jim Cramer, Eliot Spitzer, the SEC, and some Sith Lord – some 80s financial criminal – who were conspiring to depress Overstock.com stock through naked shorting so they could take over the company cheap.
You can’t make that stuff up.
http://seekingalpha.com/article/83726-overstock-s-byrne-rewrites-history-on-the-sith-lord
Re Taibbi, as a market-maker, you have an exemption where you can short stock without a borrow in the act of bona-fide market making. Of course you can rack up a lot of billable hours debating the difference between bona-fide market making and speculation, but investment banks are given some leeway that ordinary investors are not.
LikeLike
Transcript from the Sith Lord conference call:
Click to access OSTK%20%288-11-05%29%20Transcript.pdf
LikeLike
jnc
That deepcapture piece is hysterical. How in the world did you come across that? I find some pretty obscure blogs, by following links to the very end when I get bored, but that was definitely insider stuff. Poor Joe.
LikeLike
Taibbi linked to it in a subsequent update to his original post. I thought the mechanics of the disclosure may have some interest to the lawyers (and others) here.
LikeLike