"Dow, 30,000 by 2008": Why It’s Different This Time, by Robert Zuccaro, is, unfortunately, out of stock at Amazon.com, so you can’t buy it for its cover price of $24.95. But there are three used copies available. One is $48.79; the second is $182.23; and the third is $999. Maybe gag-gift demand has been particularly strong.
(HT: Josh)
Paulson & Co. Scores Again This Year: His three main funds are up between 15% and 25% this year.
FIG vs SHLD vs GS vs GLRE: The hedge-fund plays. If you’re down 40% in the past three months, that’s pretty much par for the course.
The Futile Quest for “Capitulation”: Yet another case of technical-analysis pseudopsychology going mainstream.
Sotheby’s 8-K: "In October 2008, the Company held an autumn sales series in Hong Kong and a sale of Contemporary Art in London… As a result of certain of the guaranteed property failing to sell or selling for less than the minimum guaranteed price, the Company incurred a principal loss of approximately $15 million (pre-tax)."
Bad Times for Banks Mean Boom Times for Credit Unions: But they’re increasingly reliant on finite wholesale funding, since there’s not much indication their deposit base is rising much if at all.
Credit Repair: How to Help Yourself: Anybody offering to do it for you is likely trying to pull a fast one.
The Meltdown (Part IV): "Pouring money into these banks, expecting they’ll turn around and lend to small businesses and Main Streets, is like pouring water into a dry sponge."
Iceland has three banks. Between them they have $61 billion in liabilities, or about 12 times Iceland’s GDP — which clearly makes it impossible for the Icelandic government to bail them out.
But who lent Iceland’s banks so much money? Would you believe — the Germans? At the end of June, German banks had $21 billion in exposure to Iceland, more than five times the exposure of UK banks. The Bavarian state bank alone lent €1.5 billion to Icelandic banks.
Why on earth would BayernLB do such a thing? The Icelandic banks weren’t nearly as active in Germany as they were in the UK and Scandinavia. And Iceland isn’t even part of the EU. One might understand sleepy German banks ignoring their counterparties’ credit risk back in 2006, but in mid-2008, that simply doesn’t wash as an explanation: one look at Iceland’s banks’ credit-default swaps would have told BayernLB that they were getting into a very risky bet. And as far as I know, there aren’t any cultural or historical reasons why Germans should lend tens of billions of dollars to Icelandic banks.
Maybe it’s just that Germany was running a massive current-account surplus, and needed to lend lots of money abroad, and that German banks as a consequence would lend to just about anyone. After all, the $21 billion in exposure to Iceland might be multiples of Iceland’s GDP, but it’s still a mere fraction of German banks’ $311 billion exposure to Spain, or their $241 billion exposure to Ireland.
(HT: Harrison)
Check out what happened to the pound today: it closed at $1.633, and dropped as far as $1.53 before rallying back in the UK afternoon. That’s a ridiculous move for what’s ostensibly one of the world’s major currencies. But if you think that’s crazy, just look at what happened to GBPJPY, which went from 154 to 139 in the space of five hours.
To put it another way: a ¥3 million car was worth £19,500 in the morning and £21,600 a few hours later, thanks only to currency fluctuations. I’m not sure what this kind of FX volatility means for international trade, but hedging costs are going through the roof, which can’t help one bit.
Update: Alea has the chart.
How did Mike Bloomberg end up changing the rules so that he could run for a third term as mayor? Let’s ask NYC speaker Christine Quinn:
“It’s a piece of legislation and a vote and a choice that is a difficult one, but it’s one we take at a different time, a time when our city is facing the worst fiscal crisis since the Great Depression,” she said.
I didn’t like McCain talking about this as a fiscal crisis, but in some ways this is even worse, because New York City actually had a real, honest-to-goodness fiscal crisis not so long ago, in the late 70s. And judging by its bond ratings right now, it’s nowhere near those levels yet.
So if Quinn had said that she was voting Bloomberg back in to prevent NYC’s worst fiscal crisis in 30 years, that might be one thing. But she didn’t. Yes, NYC is going to be in fiscal pain, now that Wall Street tax revenues have dried up for the foreseeable future. (This year’s losses will cover a lot of future years’ profits.) But scare-mongering about the Great Depression is not a constructive way of going about things.
Still, things are bad, even Felix Rohatyn says so, and he knows what a fiscal crisis looks like:
Offering a gloomily unsettling vision of New York City’s future, Felix G. Rohatyn said Friday that he believed the fiscal crisis of the late 1970’s might seem ”benign” compared to what the city is likely to endure in the next five years.
Oh, wait, that’s not Friday as in today, it’s Friday as in June 2, 1989. I guess I’m not the only Felix who gets things very wrong when I venture into econopunditry.
Wow. I go off the grid for one afternoon, and the world falls apart? Whatever force it was that caused my JetBlue flight to sit on the tarmac for hours yesterday clearly is much more malign than I’d thought, at least as far as its effect on global stock markets is concerned. TED isn’t spiking again — yet — but this isn’t a credit crisis any more, so much as an old-fashioned full-blown recession: the financial markets got us into this mess, but they can’t get us out, not in the short term, anyway.
But I know someone up there has a sense of humor: JBLU is actually up today.
I have to get on plane to Chicago, so don’t expect much more here any time soon. In the meantime, here’s an IM I just had with John Carney of Clusterstock about whether Treasury was right to let Lehman fail.
I thought it was the right decision at the time, but with hindsight I think it was clearly a mistake. Even Hank Paulson seems to think that it would have been a good idea to rescue Lehman, if only he’d been capable of doing so. But Carney still thinks that letting Lehman fail was the right thing to do.
John Carney:
I personally don’t get what the problem with letting lehman go bankrupt is. Everyone keeps saying it was a disaster.
Felix Salmon:
well, it cost well over a trillion dollars
in terms of the global bailouts needed as a result
John Carney:
How so.
Post hoc, ergo propter hoc?
Don’t buy it
Felix Salmon:
What’s the probability that bailouts of this magnitude wouldn’t have been needed if the implicit Treasury TBTF backstop had been shown to exist?
multiply that probability by the global cost of the bailouts, and you still get a number much bigger than the $60 billion or whatever that Treasury would have needed to bail out Lehman
John Carney:
First, I’m not sure $60 billion would have bailed out Lehman
Felix Salmon: "Lehman officials said they believed the firm had not one but two potential buyers: Bank of America and Barclays, the big British bank. But both had conditions. Bank of America wanted the Fed to make a $65 billion loan to cover any exposure to Lehman’s bad assets, according to one person privy to the discussions who did not want to be identified because of their sensitive nature."
John Carney:
Second, I just don’t see why propping up Lehman would have avoided all the other bailouts.
That is, we don’t have a confidence crisis.
We have a solvency one.
Morgan Stanley would still have failed
Felix Salmon: You can’t say that MS would have failed in the wake of a Lehman bailout with any certainty
John Carney: I have the facts on my side: it did fail.
Felix Salmon: Letting Lehman fail undoubtedly increased the risk that MS would fail
John Carney: My version is 1/2 counterfactual. The other is 100% counterfactual.
Felix Salmon: With hindsight, letting Lehman fail was clearly a mistake
John Carney: I just don’t understand why.
Felix Salmon: because bank creditors realized they could be wiped out
so no one wanted to lend to banks any more
including other banks
John Carney: That’s good
Felix Salmon: That’s not good, that’s bad
John Carney: Bank creditors need to be aware of risk
Felix Salmon: OK, fine, if you’re a moral hazard absolutist, that’s one thing. But for those of us more interested in saving the global economy and financial system, letting Lehman fail was a bad thing
John Carney: No. I’m trying to save the system, and the main thing we need is less reckless lending.
Your position is that we need more credit to solve problems of debt.
Felix Salmon: What you’re trying to do is put interbank lending on the "reckless" list, which is unhelpful, to say the least.
Having credit seize up helps no one. Do we need more credit than zero? Yes.
John Carney: A lot of interbank lending is or was innappropriate. For instance, lending to Lehman.
Allowing insolvent banks to fail creates more confidence that existing banks are solvent.
Felix Salmon: ha!
that’s exactly wrong
John Carney: I think the continued priceiness of interbank lending is a direct result of continued opacity about solvency caused by bailouts.
Felix Salmon: the opacity about solvency has been there for ages. It’s got nothing to do with bailouts.
But look: clearly a solvent but illiquid bank can fail, if its counterparties all desert it at once. And clearly that’s more likely in a feverish atmosphere where everybody’s worried about bank failures. So letting Lehman fail put solvent banks at risk, it didn’t install more confidence in any bank.
John Carney: I disagree. It strikes me that continuing to prop up the insolvent makes it impossible for market processes to operate to make solvency thru existence transparent.
Solvent banks can meet liquidity problems by borrowing from the Fed.
Felix Salmon: I have no idea where you get this idea that the market has a clear idea of how solvent banks are. It doesn’t. It does, however, have a clear idea of what any given bank’s borrowing costs are. That’s a liquidity issue, but it’s used as a proxy for solvency, precisely because no one knows what the real solvency situation is.
Incidentally, I have to get on a plane to Chicago, can I clean up this IM and post it as a blog entry?
I’ll give you the last word
John Carney: Yeah absolutely.
Felix Salmon: So you want to make one last point?
John Carney: The view that we make the financial system more stable rather than less by propping up insolvent banks is the real disaster.
Jim Surowiecki is wondering whether it would make sense to put money into CGM Focus, the formerly high-flying mutual fund run by Ken Heebner, which has managed to lose half its value in less than four months.
The answer, I think, is no. Ken Heebner strikes me as in many ways similar to Bill Miller: someone who was clearly a great bull-market fund manager, but who has come quite spectacularly unstuck in this bear market.
More generally, mutual funds aren’t like companies, which can become undervalued during a stock-market rout. They’re marked to market daily, and that mark is their value.
As far as I know, Heebner has not demonstrated any ability to catch a falling knife. Instead, he made a series of smart/prescient/lucky macro bets: short technology in 2000, long housing in 2001, and then a rotation out of housing and into energy and commodities in 2005. What are the chances that he’s going to make another smart/prescient/lucky bet right around now? No greater, I suspect, than the chances that any other fund manager will do likewise.
On the other hand, Heebner is a truly spectacular case study when it comes to the magazine-cover indicator. His Fortune cover came on the issue dated June 9 — pretty much the exact high point of his mutual fund.
I do wonder, now that Heebner has been shown to be human, whether he will still have the ability to move markets in stocks he’s not even recommending. My guess is yes — until the next hot mutual-fund manager comes along and takes his place.
Did you know that Hank Paulson is one of the most powerless finance ministers in the world? While his counterparties in other countries feel responsible for saving systemically-important banks, Paulson’s hands, until recently, were tied, and he could do nothing but sit and watch as Lehman Brothers failed.
With all options closed, he said, the government’s hands were tied. Although the Federal Reserve had helped bail out Bear Stearns — and was within days of bailing out the giant insurer American International Group — it could not help Lehman, even as its default threatened to wreak havoc on financial markets.
“We didn’t have the powers,” Mr. Paulson insisted, explaining a decision that many have since criticized — to allow Lehman to go bankrupt. By law, he continued, the Federal Reserve could bail out Lehman with a loan only if the bank had enough good assets to serve as collateral, which it did not.
“If someone thinks Hank Paulson could have made the Fed save Lehman Brothers, the answer is, ‘No way,’ ” he said…
“I didn’t want to see Lehman go,” Mr. Paulson said. “I understood the consequences better than anybody.”
Does Paulson seriously believe that anybody is going to swallow this — the idea that he didn’t want to see Lehman’s failure, but was powerless to prevent it? Ben Bernanke has said the same thing, and it’s an insult to the public’s intelligence — especially as this whole "we really wanted to, but it would have been illegal" argument was nowhere to be seen at the time.
Joe Nocera and Edmund Andrews of he NYT, to their credit, makes it clear that its reporters don’t buy Paulson’s revisionism either: they explain that Tim Geithner worked hard on a bailout plan for Lehman, and even quote Paulson, at the time, saying that “I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers”. It is a bit weird that he was talking about whether a bailout was appropriate when all along, he’s now saying, it would have been illegal.
I’m not sure why the meme of Paulson as Obama’s Treasury Secretary refuses to die: the chap has no credibility any more. (But this article will do no harm at all to Geithner’s chances of getting the job, should he want it.) Just consider this astonishing quote:
He also defended Treasury’s recapitalization plan against critics who say that he did not extract a high enough price from the banks getting taxpayers’ money. “I could not see the United States doing things like putting in capital on a punitive basis that hurts investors.”
He didn’t want to hurt investors? Tell that to shareholders in Bear Stearns: he was the person who forced Jamie Dimon to lower his initial bid. And, since when is "don’t hurt investors" an important priority of a Treasury Secretary facing a crisis?
When Paulson arrived in Washington, he had a reputation as a strong and smart technocrat with an ability to make things happen. He will leave, in January, with that reputation shredded. A keen environmentalist and amateur ornithologist, he’s said in the past that the next act of his career will be philanthropic. Which is about right, I think, since no one’s done a better job in reducing the US economy to something for the birds.
30-year Swaps: Look’s like we’ve got a bad transmittor: More craziness in the fixed-income markets.
Chartgame.com: How good are you at technical analysis?
Running A Country Can’t Be All That Difficult: Paul Wilmott thinks that butlers and footmen should be tax-deductible.
Threatening letters with white powder sent to banks: Come on, people. This is not helpful.
PowerShares Emerging Markets Sovereign Debt Portfolio: Is down again.
Committee Holds Hearing on the Credit Rating Agencies and the Financial Crisis: Lots of juicy stuff here; Kedrosky has some excerpts.
The Worldwide Centers of Commerce Emerging Markets Index: Of the top emerging-market cities. The program director, Michael Goldberg, answers my question about BRIC correlation here.
Finally, check out Henry Blodget’s comment here. Apparently executives did change their email habits thanks to him — "for about five minutes". People never learn.
Joe Wiesenthal points to a new paper from the Minneapolis Fed which seems to show that bank lending’s quite healthy. A lot of bank lending is going up, say the authors, and therefore the banking system can’t be in as much trouble as people think.
But surely it makes sense that at least at the beginning of a credit crunch, bank lending will go up.
When bond markets shut down, companies are forced to draw down their lines of credit at the bank, since they can’t roll over their bonded debt. And those aren’t the only credit lines which banks have outstanding: there are also Helocs and credit cards, and the balances on all of those credit instruments are surely rising.
What’s more, the authors look at rates rather than spreads, thereby making the credit crunch seem much less bad than it really is. If nominal interest rates stay flat even as the risk-free rate plunges, that’s a significant rise in credit spreads, and rate cuts aren’t having their desired effect.
And in any case, as the amount of loans outstanding increases, and as banks continue their deleveraging process, banks’ capacity to lend is bound to get ever more squeezed. The more they’ve lent in the recent past, the less they’ll be able to lend in the foreseeable future. That’s why Treasury’s recapitalization is so important. It’s not nearly big enough for the banks to start replacing the bond market as a source of funds. But with any luck it will turn out to be big enough to restore some confidence to the bond market, and open that funding window again.
On Sunday, I was quite rude about Karen Shaw Petrou, who thinks it would be a good idea to ban all CDS trading in the future: I explained that total CDS losses would skyrocket as a result, since no one could dynamically hedge or stop out of their positions any more.
But leave it to Ben Stein to come up with an even more idiotic notion:
I think the only rational possibility is for the federal government or the New York State government (because most of the CDS were entered into in New York) to simply annul the credit default swaps as void as being against public policy. After all, there was no insurable interest in most cases, which tends to void insurance contracts, which is what a CDS is.
Once that happens, the banks can breathe freely again, take risks, and the economy can revive.
Now I normally ignore Ben Stein’s Yahoo column, I have too much choler as it is and I just can’t bring myself to read his web-based ramblings on top of his NYT blather. But dear God is this a bad idea: he’s taking Petrou’s concept one further, and instead of banning hedges in the future, he’s banning hedges in the past!
There’s a good chance, just for starters, that every major bank in America would go bust overnight: after all, they’ve been packaging up and selling off the credit risk on their multi-trillion-dollar loan portfolios ever since Bistro, ten years ago. If Stein got his way, all that credit risk would suddenly reappear on the banks’ balance sheets, and there’s nothing they could do about it. Genius. Remember that those super-senior CDOs were the safest bits of the credit that they sold off. Just imagine what their balance sheets would look like if all the risky bits reappeared.
But maybe that’s what he means by breathing freely: being so massively insolvent that you’re beyond caring any more. Must be.
(HT: Fox)
Zubin reckons there’s reason to believe the originate-to-distribute business model wasn’t responsible for the subprime mortgage crisis. He might be right. But I’m not at all convinced by some of his arguments. Consider this one:
If you believe that incentives were misaligned, then you’d have to think that subprime originators would be decently protected when loans soured. But as the chart on this post shows, subprime lenders like Countrywide, Ameriquest, and Saxon were among those who bled the most.
I believe that incentives were misaligned, but I don’t believe that means originators were protected when loans soured. Instead, I believe that hundreds of small operators set themselves up as a limited-liability business which made lots of easy money in good times, and then simply shut down in bad times — they had enormous upside, and strictly-limited downside.
Now I’m not talking specifically about Countrywide here. Countrywide was a big company which was built for permanence. But cast your mind back to 2006, when the implode-o-meter was just getting started. Merit Financial closed in the spring; by December, much larger concerns like Ownit were closing.
But notice what happened with Ownit: its owners, including Merrill Lynch, simply stopped providing it with money, and you can’t originate mortgages if you don’t have wholesale money to lend. So Ownit closed and its employees were laid off. But its profits over the course of its prior existence were still in the pockets of its former owners; once Ownit closed, they had no liability any more.
Closing Ownit was an easy decision: if it had stuck around much longer, it would have been forced to buy back a bunch of loans which never generated any payments at all: those are known as first-payment defaults, and investors have the right to put them back to the originator. If the originator exists.
According to Zubin, the existence of that put option is evidence that incentives weren’t misaligned. But in most cases (and Countrywide, here, is a big exception), the originators never stuck around long enough to be seriously damaged by an influx of first payment defaults.
After all, as long as home prices were soaring and everybody was making money, very few people defaulted on their first payments. The minute that changed, the originators started closing. They might have taken a modest loss in their final quarter, but they were always in the moving rather than the storage business: they never had much in the way of assets. Past profits, after all, had been dividended up to the owners, since there was no need to reinvest them in the business.
Essentially what happened is that many businessmen (and for some reason they were nearly always men) founded companies which would make them millions of dollars a year for some unknown period of time. When the good times ended, they ended — but they were fun and profitable while they lasted.
Now consider the position of a much bigger company like Countrywide, faced with all this new competition. In order to maintain market share and profitability, it has to adopt the same business model of the fly-by-night operators. But the difference is that Countrywide did have assets and did have equity, and therefore was at risk of suffering the substantial losses which eventually transpired.
Eventually, big banks started wanting to get in on the game as well — hence such ill-fated deals as Wachovia’s acquisition of Golden West, which will go down in history as a classic case of suicide-by-acquisition. But all of these deals can be considered a special case of Gresham’s Law, which states that bad money drives out good. The banks were using good money, the fly-by-nights were using bad money, and the bad money, as it always does, won.
And the bad money was precisely the money which relied for its existence on the originate-to-distribute model.
So if you’re looking for misaligned incentives, don’t look at Wachovia or Countrywide. Look instead at Merit, Ownit, and their ilk. If you still think that incentives are aligned, then I’ll be much more convinced.
David Leonhardt’s column today is about moral hazard in the world of homeowner bailouts: how can we help people who are genuinely having difficulty making their mortgage payments, without needlessly bailing out any old homeowner who’d simply like to pay less?
One of Leonhardt’s proposed solution is the plan written about by Joe Nocera last weekend, under which banks would take over the ownership of underwater houses, and rent them back to their former owners at market rates. This is a great idea: market rents are much lower than mortgage payments, so it’s a savings to homeowners, who also get to stay in their houses. And it prioritizes affordable housing over homeownership, which is right and good.
There’s nothing new about this plan: Dean Baker and Andrew Samwick came up with something almost identical way back in August 2007. It made sense then, and it makes sense now. I’ve been wondering for a while why it hasn’t got any traction over the past year; maybe now that the likes of Leonhardt and Nocera are on the case, and investment bankers are pushing it rather than mere economists, and both presidential candidates are casting about for bright ideas to help solve the mortgage mess, it’ll have a better chance.
With the Dow down another 300 points this morning (yawn), we’re all getting used to stock-market volatility. Traders are all psychologists now:
"Psychology and emotion are a big part of what moves the market," said Andrew Brooks, head of stock trading at T. Rowe Price. "We are clearly in a highly emotional and schizophrenic point."
The weird thing is that this feels perfectly natural to me, coming as I do from the world of fixed income.
Bonds are easy things to value: plug a cashflow, a default probability, a recovery rate, and a risk-free rate into your Bloomberg, and it’ll happily spit out an unambiguous price which all bond traders can agree on. They might disagree on the inputs, but given the inputs, they won’t disagree on the outputs.
Equities, by contrast, are another world entirely. How do you even begin to value such a thing? Companies’ cashflows aren’t fixed, in the way bond cashflows are: by contrast, they’re highly uncertain. But investors can’t even agree on the cashflows they’re looking at: Ebitda? Earnings? Dividends? Theoretically, using any of these indicators should land someone in exactly the same place as using any of the others. In practice, that’s not the case — especially not if you start thinking about companies like Berkshire Hathaway which don’t pay any dividends at all.
And then of course there are all those other ways of valuing companies, too. Book value and Tobin’s Q, all manner of internal ratios, proprietary metrics which hedge funds never reveal. During the dot-com bubble, an entire industry sprang up devoted to reverse-engineering valuation models which could conceivably spit out the numbers seen in the stock market. It was a successful industry, too.
In most of these models, a small tweak of a growth rate here or there is likely to have an enormous effect on a stock price, and no one can possibly predict future growth rates with nearly enough accuracy to get a remotely useful bead on where any given stock should be trading. Ultimately, there’s only one reliable way of valuing a stock, and that’s to look at where it’s trading in the secondary market.
But given how uncertain a stock’s fundamental value is, there’s no reason why its secondary-market value should be precise to within a tiny margin like 1% either way. A move of 3% or 5% or even 9% in either direction is perfectly reasonable, especially when the macroeconomic outlook is hazier than ever. (You try finding anybody willing to forecast US GDP growth over the coming year with any confidence.)
So what’s happening now is that stocks are fluctuating in a very big grey zone — what you’d expect, given overall levels of doubt and uncertainty about the future. And now more than ever, the daily direction that stocks move doesn’t mean anything. They’re down today but they might have been up: whatever. It’s their nature to be fuzzy. You don’t need to be "highly emotional and schizophrenic" to get here, you just need to be clear-eyed about all the things you don’t know.
You know that "trader" who got a $2.1 million bonus in 2006 but is suing for another $150,000 on top? Well, he’s not really a trader at all: the FT says that he "has worked for the inter-dealer broking arm of France’s Compagnie Financière Tradition since 1997". Inter-dealer brokers, remember, take no risk, use no capital, and have no positions. Their job is nothing but matching buyers and sellers, who then transact between each other.
What’s more, the broker in question, Alexandre Mouradian, wasn’t even running the CDS desk — the really illiquid market where demand for brokers is greatest. He was in charge of exchange-traded options — exchange-traded, as in, you don’t even need to use a broker at all, if you don’t want to. Maybe he was just really, really, really good at taking traders out on the town and persuading them to go through him whenever they wanted to trade.
Bloomberg has changed its headline from the alarmist "Argentina Default Looms" to the slightly more sober "Argentine Bonds Sink as Pension Takeover Fuels Default Concerns". But it was right, the first time round, as is evidenced by the prices on Argentine bonds:
The yield on the government’s 8.28 percent bonds due in 2033 surged 3.2 percentage points to 27.91 percent at 9:14 a.m. in New York, according to JPMorgan Chase & Co. The bonds yielded 12.16 percent a month ago. The price dropped 4.11 cents to 25 cents on the dollar, leaving it down 11.91 cents in the past two days.
Yep, Argentina’s benchmark long bond is back to trading at 25 cents on the dollar, after having been the darling of emerging-market fixed-income investors for much of this decade. Argentina’s sovereign spread is now a whopping 1,627bp, CDS spreads are over 35 percentage points, and money is flooding out of the country: volume in the foreign-exchange market was a record $620 million yesterday, and for much of the day there was only one buyer of pesos — the central bank. In JP Morgan’s daily emerging-markets research note, Argentina analyst Florencia Vazquez said, ominously, that "mutual funds were sellers of central bank paper". One wonders what they’re buying: what’s safer than the central bank?
This morning, Argentina’s Merval stock index is down 12% at 922; that’s on top of an 11% fall yesterday. It was above 2,000 for most of 2007, and as recently as July of this year. The reason for the latest plunge is president Cristina Kirchner’s decision to privatize nationalize Argentina’s pension funds. The fear is that they will be forced to dump all their long-term holdings and buy sovereign debt instead: Argentina might need to borrow as much as $14 billion next year, and there’s no one willing to lend it that kind of money.
If Argentina does default on its foreign debt, as the markets seem to expect, that’ll raise very interesting questions about equal treatment of creditors, specifically as regards the relative treatment of new and old (defaulted) bonds. But that’s down the road. For the time being, Argentina is going through its second economic implosion in a decade, and it’s not a pretty sight. The only thing I can say for sure? If the goverment does default, Kirchner will be out. So she’s going to continue to attempt harmful measures like privatizing the pension funds before that happens; the next step might well be some kind of bank holiday or freeze on deposit accounts. I suspect the ferry to Montevideo is quite full, these days, with Argentines moving their savings to the much safer country across the River Plate.
Fed to Provide Up to $540 Billion to Aid Money Funds: Yet another indication the credit crunch is far from over.
Porsche, VW – and hedge funds: Did Porsche engineer a VW short-squeeze?
The past 20 years have not been a good time to be of Indian origin in Fiji. As a result, many Indians in Fiji have emigrated to Commonwealth countries such as Australia, New Zealand, and Canada, making use of their points-based immigration systems, which value transferrable skills. The most educated are the most likely to leave, and in fact have left, in enormous numbers: a classic case of "brain drain".
Except this story doesn’t end how you think it will. Satish Chand and Michael Clemens note that even in the face of this enormous brain drain, Fiji educated population, even among Indians, has increased:
While tertiary-educated Indians have been leaving in massive numbers, the stock of tertiary-educated Indians in Fiji has increased. Mass skilled-worker emigration has occurred alongside mass skill creation in Fiji.
By using the native Fijian population as a control group, Chand and Clemens manage to demonstrate causality: the brain drain actually caused Fiji to become better educated. "It is not economically meaningful," they write, "to speak of skilled-worker movement as necessarily representing a ‘loss’ to countries of origin." They continue, drily: "This throws into question the meaning of the term ‘brain drain’."
The instrument of causation is quite easy to understand: the more that educated Fijians emigrate to richer lands, the greater the perceived incentives to increase one’s level of education.
I suspect this is true of other countries, too, such as India. If many highly-educated Indians get jobs in the US, that will only increase demand at and for Indian universities. And more generally, the more H visas the US gives away, the better educated the world will become — not only within America’s borders, but outside them, too.
Maybe one of the best ways to improve global education is for countries like Canada to continue with their present immigration policies, and for other developed countries to follow their lead.
It’s Friday, March 14, and hedge fund adviser Tim Backshall is trying to stave off panic…
Bear Stearns Cos. shares have plunged 50 percent since trading began today, and his fund manager clients, some of whom have their cash and other accounts at Bear, worry that the bank is on the verge of bankruptcy. They’re unsure whether they should protect their assets by purchasing credit-default swaps, a type of insurance that’s supposed to pay them face value if Bear’s debt goes under.
Backshall, 37, tells them there are two rubs: The price of the swaps is skyrocketing by the minute, and the banks selling the insurance are also at risk of collapsing. If Bear goes down, he tells them, it may take other banks with it.
"There’s always the danger the bank selling you the protection on Bear will fail," Backshall says. If that were to happen, his clients could spend millions of dollars for worthless insurance.
Investors can’t tell whether the people selling the swaps – – known as counterparties — have the money to honor their promises, Backshall says between phone calls.
"It’s clearly a combination of absolute fear and investors really not knowing," he says.
Of course, the nightmare counterparty-default scenario didn’t happen in the case of Bear Stearns. Instead, it happened with Lehman Brothers. And the repercussions from that — well, let’s ask Tim Backshall.
Tuesday is the final day credit default swaps on Lehman’s debt can be paid out.
"It seems like a non-event," said Tim Backshall, chief strategist at Credit Derivatives Research in Walnut Creek, California.
No panic? No "absolute fear"? Guess not.
On Saturday, Brad Setser, following Peter Garnham, made the very important point that while the big countries’ central banks have each others’ backs, emerging-market countries are being left out in the cold.
For all the talk about how the G-7 has lost relevance, in a lot of ways the recent crisis has reinforced the G-7’s importance. Banks in G-7 countries that borrowed in dollars have access to unlimited dollar financing from their central banks – dollar financing that comes from the fact that the main G-7 central banks have access to large swap lines with the Fed.
Banks in emerging market countries have no such luck.
The result is economic chaos around the world: no one, it seems, is immune to the crisis which started in the US housing sector but which is now truly global in nature. Korea, Hungary, Ukraine, Pakistan, Russia, Kazakhstan — name the country, there’s probably a banking crisis there. And then, of course, there’s Iceland.
So I’m very puzzled by Dan Gross’s column in Slate, saying that a bunch of countries without Starbucks seem to have been "safe havens". He says that Spain, with 48 Starbucks in Madrid alone, is "grappling with the bursting of a speculative coastal real-estate bubble", in contrast to Brazil, which has only 14 Starbucks for the entire country.
Italy hasn’t suffered any major bank failures in part because its banking sector isn’t very active on the international scene. The number of Starbucks there? Zero. And the small countries of Northern Europe, whose banking systems have been largely spared, are largely Starbucks-free.
In what conceivable way can it be said that Brazil, Italy, and smaller Northern European nations have fared better than Spain in this crisis? Spain’s banks are well-regulated beacons of strength; the same can hardly be said of the big Brazilian banks — overburdened by loans to agriculture and commodity companies — or of entities like Unicredit or Fortis.
Maybe it’s unfair to call out Gross for describing Argentina as "a pocket of relative strength" just as its president decides to nationalize the country’s pension system, sending its stock market reeling. But Brazilian stocks have underperformed US stocks over the past few months, and its banks are no exception; Fortis, of course, ended up being nationalized.
Meanwhile, Spain’s Santander, which had an option to buy the 76% of Sovereign Bank that it didn’t already own at $38 per share, opportunistically swept in to buy it up at $3.81 a share instead. And then of course there’s Japan — full of Starbucks, but one of the few countries without a banking crisis.
But never mind Gross’s Starbucks conceit — does he have a bigger point?
Having a significant Starbucks presence is a pretty significant indicator of the degree of connectedness to the form of highly caffeinated, free-spending capitalism that got us into this mess. It’s also a sign of a culture’s willingness to abandon traditional norms and ways of doing business (virtually all the countries in which Starbucks has established beachheads have their own venerable coffee-house traditions) in favor of fast-moving American ones.
Nice idea, but it’s not true. Look at Germany: those stodgy, Starbucks-free, slow-to-spend capitalists have the largest banking-sector bailout of all.
And more generally, this is no replay of the dot-com crash, where investors in high-flying earnings-free technology stocks suddenly found themselves running on air. The biggest losses this time round haven’t been in high-risk assets: they’ve been in instruments which carried triple-A credit ratings and which were meant to be very low risk.
This is an equal-opportunity crisis: it’s hit rich countries and poor ones, importers and exporters, ultracapitalist risk-takers and boring state-owned savings institutions. Just about the only places relatively unscathed are the poorest of the poor, the bottom billion, who are seeing global food prices come down from starvation-inducing levels — the people who don’t have any savings to lose.
It’s not easy, being an airline. Thanks to high fuel costs, United lost $252 million in the third quarter, on an operating basis. On the other hand, United was hedged. And as a result of those hedges, United ended up losing, um, $779 million. As a result, United stock rose by 9% today, to $13.75 a share.
In case you were wondering, United’s annual earnings per share are -$24.61. And I can’t find a Q3 balance sheet, but at the end of Q2, UAL Corp had net tangible assets of -$3.3 billion — and it’s surely even deeper in the hole now. Who’s buying these companies with negative net worth? I have to admit I don’t get it at all.
Slide of the Day comes from John Mauldin, via Paul Kedrosky: he shows how estimates for the S&P 500’s 2009 earnings have come down from $81.52 in March to just $48.52 now. That’s a drop of 40% in seven months.
Here’s a list of S&P 500 earnings since 1960; the last time they were below $50 was 2002. So it’s probably perfetly reasonable that stock prices are back down to their 2002 levels as well.
I’m generally not a fan of stock buybacks. I’ve hated on the idea in the past, especially as regards high-flying tech stock Apple — but weirdly, I don’t have the same problem with the prospect of Google doing it.
CEO Eric Schmidt told Nat Worden that "the company is thinking about returning cash to shareholders" — something which prompted Martin Peers to say that Google "may be growing up", and Jeff Matthews to say that Schmidt is off his tree, since cash "is a valuable strategic asset that gives a company an enormous leg up when its competitors have had their legs cut out from underneath them".
I agree with Jeff that stock buybacks are a really bad way of trying to boost or support a company’s stock price. And I agree with him too that having billions of dollars of cash on one’s balance sheet is no bad thing in today’s economy. But in the case of Google, I can see an argument for a buyback.
Remember that in 2005, Google raised $4.18 billion with a secondary stock offering priced at $295 per share. In hindsight, that capital raise was not only unnecessary; it was also expensive. Google started throwing off billions of dollars in cash thereafter, and the $4 billion from the stock offering just disappeared into an ever-growing pool of low-yielding money — a pool which has now become a $14.4 billion lake.
Remember too that Google is explicitly not run for the benefit of its common shareholders. Votes and control are concentrated among a small group of insiders; the common shareholders merely choose to come along for the ride should they be so inclined. They don’t own the company, and they serve a pretty limited purpose: they put up a bunch of cash in Google’s two equity offerings, and they set a market price which enables the insiders to value their holdings.
But all those shares from the secondary offering don’t really need to be outstanding in order for those purposes to be served. Google doesn’t need that $4 billion any more, and in any case it’s been using its stock to buy companies like YouTube: the amount of common stock outstanding is going up.
With Google trading at about $375, it wouldn’t cost the company all that much, on net, to buy back the shares it needlessly issued in 2005. Now that it’s one of the biggest companies in America, people think of it increasingly as a blue-chip stock, rather than as the insider-controlled semi-private company which it really is. If those insiders started buying back the common stock, without any particular desire to increase the share price by so doing, that would actually be entirely in line with Google’s true nature.
Andrew Ross Sorkin gets an astonishing, if anonymous, quote this morning:
“It doesn’t matter how much Hank Paulson gives us,” said an influential senior official at a big bank that received money from the government, “no one is going to lend a nickel until the economy turns.” The official added: “Who are we going to lend money to?” before repeating an old saw about banking: “Only people who don’t need it.”
This is not good, clearly. The economy isn’t going to turn for some time yet — it could easily be another year before we start seeing sustainable positive growth rates. And if this sentiment holds, the government’s recapitalization plan really will be for the sole benefit of Wall Street, with Main Street getting nary a look-in.
On the other hand, it’s entirely possible that the sentiment won’t hold. Libor’s below 4% and TED’s down to 261bp, which means that interbank funds are finally moving again, albeit in small and intermittent quantities. And it might well be that the anonymous senior official in Sorkin’s story comes from an institution with more solvency worries than most.
But interbank lending still doesn’t help Main Street unless and until banks get around to real-world lending. And while bank credits are improving, thanks to implicit and explicit government bankstops, real-world credits are only getting worse, thanks to the worsening recession.
I must admit, too, that if I was a banker, I too would be cutting back on lending right now. There’s a lot of denial out there: I’ve spoken to a large number of people in recent days, for instance, who are still convinced that the best way to build wealth is to buy a home — even here in Manhattan, where prices have barely begun to fall. Inevitably, a large proportion of the people wanting to borrow from the bank will be the people most in denial about where their finances are going.
Given that we’re headed into uncharted macroeconomic territory, I wouldn’t have a huge amount of faith in my branch-level employees to be able to underwrite the kind of requests they were receiving — especially since, in recent years, they haven’t been allowed to underwrite loans, and have been little more than data-entry robots plugging numbers into computers. Yes, we need to move to a world where there are much stronger branch-level relationships. But no, that can’t be done overnight, especially not in the middle of a severe recession.
When we do start coming out of the recession, however, I have hopes that banks will start doing their jobs again, rather than using credit cards as their primary vehicle for extending credit to individuals and small businesses. The move to plastic was very profitable for the banking system, but it could go very sour very quickly now. It’s time to return to old-fashioned bank loans, extended and received by people rather than datasets. But that, of course, will take time.
