Wednesday, October 8, 2008
Missed It By That Much
My recent perusing of posts from earlier this year showed that even a knowledgeable, yet negative, pundit such as myself misjudged just how serious the bank situation was. I never thought that we would get to the point where preferred dividends suspensions and FDIC seizures would be commonplace. Alas, we have fell into the depths of despair. It will be difficult for me to ever suggest preferreds again. Stay far away, especially non-cumulative preferreds.
I Knew Then What We Know Now
Here is a repost of my March 10, 2008 blog:
Richard Bove of Punk Ziegel authored a report stating that today's mortgage / financial debacle is just as overblown as it was in 1990. The problem is that his data is incorrect.
First, he says that the banks have plenty of capital. Challenge! Not when they are borrowing money at egregious rates.
Secondly, he states that 30-year mortgage rates are around 4.88%. Challenge! rates are in the mid 6.00% area.
Thirdly, he says that there is no liquidity crisis as evidenced by three-month LIBOR at 3.00% (actually lower). Challenge! LIBOR is in the 2,90% area because the Fed has pumped massive amounts of liquidity via lower discount and Fed Fund rates and Term Auction Facilities (which the Fed just increased to $50 billion). Think three-month LIBOR would be below 3,00% if the Fed was not pumping this much liquidity into the system? I don't think so. If the Fed would tighten today, three-month LIBOR would probably be 5.00% - 6.00%.
Mr. Bove's poor assessment of the current situation is bad enough, but I am informed that the head of major brokerage house has given this piece to branch managers and has told them to distribute it to brokers.
When I confronted brokers as to why she would do this, I was told that they were told that clients need to be told something positive. This is classic sales B.S. Tell retail investors something comforting even if it is false so they don't move their assets. What great disservice to clients.
How about tell clients the truth. Tell them that the situation is bad, but not hopeless. Tell them that opportunities exist in municipal bonds, agency bonds and bank, high-quality MBS, foreign bonds and bank and finance bonds and preferreds, if one is willing to ride out continued volatility.
Failure to tell the truth is what caused much of the subprime and ARS pain among investors. In the coming weeks, those who are blowing sunshine up the asses of investors will look stupid and those victimized investors will be very angry and will in fact leave.
Richard Bove of Punk Ziegel authored a report stating that today's mortgage / financial debacle is just as overblown as it was in 1990. The problem is that his data is incorrect.
First, he says that the banks have plenty of capital. Challenge! Not when they are borrowing money at egregious rates.
Secondly, he states that 30-year mortgage rates are around 4.88%. Challenge! rates are in the mid 6.00% area.
Thirdly, he says that there is no liquidity crisis as evidenced by three-month LIBOR at 3.00% (actually lower). Challenge! LIBOR is in the 2,90% area because the Fed has pumped massive amounts of liquidity via lower discount and Fed Fund rates and Term Auction Facilities (which the Fed just increased to $50 billion). Think three-month LIBOR would be below 3,00% if the Fed was not pumping this much liquidity into the system? I don't think so. If the Fed would tighten today, three-month LIBOR would probably be 5.00% - 6.00%.
Mr. Bove's poor assessment of the current situation is bad enough, but I am informed that the head of major brokerage house has given this piece to branch managers and has told them to distribute it to brokers.
When I confronted brokers as to why she would do this, I was told that they were told that clients need to be told something positive. This is classic sales B.S. Tell retail investors something comforting even if it is false so they don't move their assets. What great disservice to clients.
How about tell clients the truth. Tell them that the situation is bad, but not hopeless. Tell them that opportunities exist in municipal bonds, agency bonds and bank, high-quality MBS, foreign bonds and bank and finance bonds and preferreds, if one is willing to ride out continued volatility.
Failure to tell the truth is what caused much of the subprime and ARS pain among investors. In the coming weeks, those who are blowing sunshine up the asses of investors will look stupid and those victimized investors will be very angry and will in fact leave.
Listen. Do You Want To Know A Secret
A major investment bank conducted a conference call for brokers and clients to discuss the credit crisis and bank exposure to toxic assets. The speaker on the call expressed his opinion is that banks really do have bad paper on their books.
Much of the toxic assets held on bank balance sheets will never be worth anything near par. The collateral has failed or is failing. Not marking their values lower only puts off the pain to a later date. The bottom line is that many banks are in trouble and need to be just plain bailed out or to be seized and have their assets sold to whatever banks survive.
Want to know how bad it is? Just look at the interbank lending market. It has stalled. Bank CEOs know that their balance sheet is full of glow-in-the-dark assets and need to hoard cash. The last thing they want to do is lend money to a bank which may be more troubled than their own. Folks, there are what I call "disaster banks". Some of them are large, same are more modest in size. These cancers must be cut out of the system before it kills our economy.
Much of the toxic assets held on bank balance sheets will never be worth anything near par. The collateral has failed or is failing. Not marking their values lower only puts off the pain to a later date. The bottom line is that many banks are in trouble and need to be just plain bailed out or to be seized and have their assets sold to whatever banks survive.
Want to know how bad it is? Just look at the interbank lending market. It has stalled. Bank CEOs know that their balance sheet is full of glow-in-the-dark assets and need to hoard cash. The last thing they want to do is lend money to a bank which may be more troubled than their own. Folks, there are what I call "disaster banks". Some of them are large, same are more modest in size. These cancers must be cut out of the system before it kills our economy.
Tuesday, October 7, 2008
Here We Come Again
Today's Wall Street Journal stated the following:
"Another myth is that exports to the rest of the world would somehow rescue the U.S. economy. This was the idea behind the devaluationists -- in Washington and at Harvard -- who pushed a weak dollar to promote exports to counter the U.S. housing slump. So much for that one. Yesterday's selloff was worse in Europe and Latin America than it was on the U.S. Trying to steal "demand" from the rest of the world was short-sighted in the way that beggar-thy-neighbor tactics always are. And with Europe and Japan already in recession, and China slowing down, the export contribution to U.S. GDP is likely to fall sharply."
"A third mistaken idea is that Federal Reserve rate-cutting would save the day. This is the poor sister of the weak-dollar lobby, popular on Wall Street and at Chairman Ben Bernanke's Fed. Despite a year of falling rates, the financial panic is worse than ever and now the real economy is getting hit. The Fed's rate cutting led to dollar flight that produced a commodity spike and oil as high as $147 a barrel. That only made a recession more likely as it sapped consumer discretionary income around the U.S. and worried families and business alike."
"The good news is that some in the Fed now seem to realize this, and the Open Market Committee has stopped its pell-mell flight to a 0% fed funds rate. Instead, the Fed is using its discount window to provide liquidity to banks seeking safety, including yesterday's addition of $600 billion to its Term Auction Facility, growing to $900 billion by November. That's a striking amount of money, but it is the right way for a central bank to manage a panic."
If these comments sound familiar, they should. I have been addressing the weak dollar and the folly of excessive rate cuts since the beginning of this blog. Lowering the Fed Funds rate did not help the situation one iota. The problem as not that money was too expensive, but that it was being hoarded. Banks do not want to lend. Banks need all the capital they can get to recapitalize damaged balance sheets. The only loans it will make are those which are GSE-eligible. The allows banks to recoup the borrowed funds by selling the loans to the GSEs. Banks will not loan to other banks. If you are a bank CEO you know the garbage you have on your balance sheet therefore, you have a pretty good idea what garbage other banks have on their balance sheet. Knowing that, you are reluctant to lend your precious capital to banks who may or may not be able to repay their debt.
Compounding the problem are the inconsistencies of how various corporate crises were handled by the Treasury, the Fed and the FDIC. There is no coincidence in the market and understandably so.
I recall speaking with a colleague in 2004 about what will happen when the non-conforming, subprime, adjustable-rated mortgages adjust higher. We were concerned back in 2004, before the excesses and price spikes seen in the period from 2005 to 2007. The situation became worse than we feared. It is amazing that Wall Street fell into the trap of the unsinkable ship.
The Titanic was once considered unsinkable. Man thought it had found away to account for any and every eventuality. Engineers and others did not, could not, account for the unknown, unknowns. During the past several years, Wall Street put BLIND FAITH in quantitative formulas in the belief that they could account for every eventuality. They forgot about the unknown unknowns. The rocket scientists hubristically believed they were infallible. Their fall to earth was most shocking.
"Another myth is that exports to the rest of the world would somehow rescue the U.S. economy. This was the idea behind the devaluationists -- in Washington and at Harvard -- who pushed a weak dollar to promote exports to counter the U.S. housing slump. So much for that one. Yesterday's selloff was worse in Europe and Latin America than it was on the U.S. Trying to steal "demand" from the rest of the world was short-sighted in the way that beggar-thy-neighbor tactics always are. And with Europe and Japan already in recession, and China slowing down, the export contribution to U.S. GDP is likely to fall sharply."
"A third mistaken idea is that Federal Reserve rate-cutting would save the day. This is the poor sister of the weak-dollar lobby, popular on Wall Street and at Chairman Ben Bernanke's Fed. Despite a year of falling rates, the financial panic is worse than ever and now the real economy is getting hit. The Fed's rate cutting led to dollar flight that produced a commodity spike and oil as high as $147 a barrel. That only made a recession more likely as it sapped consumer discretionary income around the U.S. and worried families and business alike."
"The good news is that some in the Fed now seem to realize this, and the Open Market Committee has stopped its pell-mell flight to a 0% fed funds rate. Instead, the Fed is using its discount window to provide liquidity to banks seeking safety, including yesterday's addition of $600 billion to its Term Auction Facility, growing to $900 billion by November. That's a striking amount of money, but it is the right way for a central bank to manage a panic."
If these comments sound familiar, they should. I have been addressing the weak dollar and the folly of excessive rate cuts since the beginning of this blog. Lowering the Fed Funds rate did not help the situation one iota. The problem as not that money was too expensive, but that it was being hoarded. Banks do not want to lend. Banks need all the capital they can get to recapitalize damaged balance sheets. The only loans it will make are those which are GSE-eligible. The allows banks to recoup the borrowed funds by selling the loans to the GSEs. Banks will not loan to other banks. If you are a bank CEO you know the garbage you have on your balance sheet therefore, you have a pretty good idea what garbage other banks have on their balance sheet. Knowing that, you are reluctant to lend your precious capital to banks who may or may not be able to repay their debt.
Compounding the problem are the inconsistencies of how various corporate crises were handled by the Treasury, the Fed and the FDIC. There is no coincidence in the market and understandably so.
I recall speaking with a colleague in 2004 about what will happen when the non-conforming, subprime, adjustable-rated mortgages adjust higher. We were concerned back in 2004, before the excesses and price spikes seen in the period from 2005 to 2007. The situation became worse than we feared. It is amazing that Wall Street fell into the trap of the unsinkable ship.
The Titanic was once considered unsinkable. Man thought it had found away to account for any and every eventuality. Engineers and others did not, could not, account for the unknown, unknowns. During the past several years, Wall Street put BLIND FAITH in quantitative formulas in the belief that they could account for every eventuality. They forgot about the unknown unknowns. The rocket scientists hubristically believed they were infallible. Their fall to earth was most shocking.
Monday, October 6, 2008
I've Seen Fire and I've Seen Rain
In my 20+ years I seen (counting the current debacle) nearly everything. There are some things I have seen several times. This includes "new economies" and the rise of foreign economies which will supplant the U.S. was the world's dominant economic player. It was Japan, then the EU and then China. Tomorrow it could be India, Brazil or whomever. What these new-age financial pundits repeatedly forget is that ALL global economies are linked to the U.S. economy.
The current stories are that Europe is suffering along with the U.S. as its financial institutions also invested in suspect mortgage-related vehicles. Making the European recovery job more difficult is that, rather than being a unified economic block, the EU is a loose confederation of states each with its own finance minister and bank oversight. Each nation will have to decide for itself how to deal with troubled financial institutions. Some much for a united Europe supplanting the U.S. as the world's leading economic power.
The same could be said for China. Now that the Olympic infrastructure boom is behind it and its main market for goods (the U.S.) is slumping, China is starting to slow down. The global economic slowdown is causing commodities prices to fall. This evidenced by the fall in oil prices.
Oil prices dropped below $90 per barrel today as a strengthening dollar and softening demand have a deflationary effect. My argument earlier this year was that a weaker dollar and speculators using oil as a dollar hedge helped to push oil prices higher. I also stated that higher oil prices would cause consumers to conserve and reduce demand (to some extent). Now we can see that as the dollar strengthens, oil prices fall. All of a sudden, spiraling demand forces are no longer mentioned.
Although fundamental factors started the bubble in oil prices, as with all bubbles, speculation inflated it to Zeppelin-like proportions. Look for gasoline to flirt with $3.00 in the near future. I would not get too giddy yet as a cold winter could increase the demand for home heating oil.
Have fun, drive carefully and stay warm.
The current stories are that Europe is suffering along with the U.S. as its financial institutions also invested in suspect mortgage-related vehicles. Making the European recovery job more difficult is that, rather than being a unified economic block, the EU is a loose confederation of states each with its own finance minister and bank oversight. Each nation will have to decide for itself how to deal with troubled financial institutions. Some much for a united Europe supplanting the U.S. as the world's leading economic power.
The same could be said for China. Now that the Olympic infrastructure boom is behind it and its main market for goods (the U.S.) is slumping, China is starting to slow down. The global economic slowdown is causing commodities prices to fall. This evidenced by the fall in oil prices.
Oil prices dropped below $90 per barrel today as a strengthening dollar and softening demand have a deflationary effect. My argument earlier this year was that a weaker dollar and speculators using oil as a dollar hedge helped to push oil prices higher. I also stated that higher oil prices would cause consumers to conserve and reduce demand (to some extent). Now we can see that as the dollar strengthens, oil prices fall. All of a sudden, spiraling demand forces are no longer mentioned.
Although fundamental factors started the bubble in oil prices, as with all bubbles, speculation inflated it to Zeppelin-like proportions. Look for gasoline to flirt with $3.00 in the near future. I would not get too giddy yet as a cold winter could increase the demand for home heating oil.
Have fun, drive carefully and stay warm.
Thursday, October 2, 2008
You Can't Always Get What You Want
In the years following World War II, as the result of the pre-war New Deal programs. This led to a culture of protectionism, less personal responsibility and, thanks to the the add-on Great Society programs of the 1960s, a society built on regulation and entitlement. During the 1970s, the U.S. economy and socialized economies around the world (see Great Britain) failed under the weight of heavy regulations and union power. It wasn't until Ronald Reagan freed the U.S. economy from the chains of government and labor unions in the 1980s. The future looked bright for America and business and financial innovators. This was the case for almost 25 years, until hubris and greed ended the golden age of the American economy.
Everyone who knows me can attest to my free market ideology. Low taxes, less government and free decision making gives people and businesses the incentive to reach for the stars. It creates an environment in which new products, services and efficient business practices improves the quality of life and prosperity for all, except those who wish to show up at work and collect a paycheck.
However, those who benefited from an era of deregulation and innovation took advantage to the situation to line their pockets and abuse the system. Now their misdeeds threatens to send us back to the stone age of 1946 - 1981. There have been cheers from the left that, finally, the worker will triumph again. Think again Trotskyites. In the era of a global economy (and there is no turning back), jobs will go where business can be done most efficiently, bit in terms of cost and efficiency.
What needs to be done is for those responsible for creating this financial mess should be held accountable. This is not done by letting banks fail, but by removing those executives responsible for this crisis from power. Don't stop there. Those who created these vehicles, traded them, marketed them and rated these vehicles (hear that Moody's and S&P analysts) should be banned from the business (Wall Street), permanently. Their bending the models to make them give the desired solution and the mismarketing of these pools of glow-in-the-dark collateral brought us where we are today.
Mortgage brokers and loan officers should also be pursued for potential fraud. Knowledge-based licensing should be required and a fiduciary responsibility should imposed on EVERYONE who sells, explains or recommends mortgage products.
If these reforms are not imposed, look for heavy regulation, high taxes, slow growth and housing projects in our future.
Everyone who knows me can attest to my free market ideology. Low taxes, less government and free decision making gives people and businesses the incentive to reach for the stars. It creates an environment in which new products, services and efficient business practices improves the quality of life and prosperity for all, except those who wish to show up at work and collect a paycheck.
However, those who benefited from an era of deregulation and innovation took advantage to the situation to line their pockets and abuse the system. Now their misdeeds threatens to send us back to the stone age of 1946 - 1981. There have been cheers from the left that, finally, the worker will triumph again. Think again Trotskyites. In the era of a global economy (and there is no turning back), jobs will go where business can be done most efficiently, bit in terms of cost and efficiency.
What needs to be done is for those responsible for creating this financial mess should be held accountable. This is not done by letting banks fail, but by removing those executives responsible for this crisis from power. Don't stop there. Those who created these vehicles, traded them, marketed them and rated these vehicles (hear that Moody's and S&P analysts) should be banned from the business (Wall Street), permanently. Their bending the models to make them give the desired solution and the mismarketing of these pools of glow-in-the-dark collateral brought us where we are today.
Mortgage brokers and loan officers should also be pursued for potential fraud. Knowledge-based licensing should be required and a fiduciary responsibility should imposed on EVERYONE who sells, explains or recommends mortgage products.
If these reforms are not imposed, look for heavy regulation, high taxes, slow growth and housing projects in our future.
Wednesday, October 1, 2008
Do You Smell Bacon
The financial system urgently needs help and the Senate passes a bill with more pork than a Denny's breakfast. This bill includes such helpful features such as a tax on toy arrows, mental health insurance coverage, AMT reform, R&D tax credits and some feature dealing with NASCAR. Even if one supports one of the non-related line items, one must question why a rescue bill which shores up the economy and holds banks and Congress (for its role with Freddie and Fannie) responsible. I say, fewer lawyers and more business people in government. Especially small business people as they need to be the most efficient.
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