Jim Hawthorne

Surprise, Surprise, Surprise: Positive Economic News Everywhere

A word of caution: while I agree that we have seen some positive news and as Bespoke reports, earnings are beating analyst expectations at a high rate, let's pause and look at the much more depressing YoY drops in earnings and sales!!! There is no doubt that this year's rally has been a great ride, but it looks more and more like we are approaching overextended territory here!
We took welcome profits and moved back into cash on Friday in a move that was purely based on capital preservation! At this stage of the rally, we can make up for lost opportunities much more readily than we can make up for lost cash!

Bank Liabilities: Why the Discussion Isn't Explicit

Excellent comments, 366653!

I agree that we cannot survive a collapse of our financial system. I also agree that our 'financial system' has been hijacked and held hostage by some of the entities you mention.

Unfortunately, there is no realistic way to 'punish' these guys without also punishing you and I and the guy down the block. (if there is, I'd love to hear it!)

However, it is also time that some of the 'too big to fail' banks were split up so that they will be able to return to a focus on their core business (as you had to do back in the 70's)!

The system will not simply repair itself, even with TARP, TALF and the Feds; just as we cannot expect the individual banks that caused this debacle to voluntarily turn themselves around and start to behave in the sort of ethical manner that should be required of institutions on which the fabric of our society is so dependent.

Therein lies the dilemma; the repurcussions of shutting down the major banks and insurers that you name are even more destructive than were their original crimes.

I don't think we should lose sight of the fact that as vital as some of these institutions might be to our financial system, any and all solutions must derive from a broad-based consensus among the citizens of America. Justice must not only be done, it must also appear to be done.

I can't shake the nagging suspicion that if we take care of the folks on Main Street, Wall Street will take care of itself.

On Mar 07 02:40 PM User 366653 wrote:
& etc........
>We can survive high levels of unemployment, as we did during the
> early eighties. We can survive high levels of foreclosures, as we
> did during the early nineties. WE CAN NOT SURVIVE A COLLAPSE OF OUR
> FINANCIAL SYSTEM.
>
> Those of you who think we can let the major financials fail, and
> just let the private market pick up the pieces, are not doing the
> math.
>
> JPMorgan was able to absorb Bear Stearns, with government help, because
> JPM was substantially larger and stronger than Bear. Same with WAMU.
> Wells was able to absorb Wachovia for the same reason. Since none
> of the banks stepped in to buy IndyMac, it took the FDIC six months,
> and a 30% loss, to finally find a consortium of investors to buy
> what was left of a 33 billion dollar bank.
>
> Who is large enough, or strong enough, to absorb Citi and B of A
> and Wells?. (about 4 trillion in assets between them) How many hundreds
> or thousands of small banks are large and strong enough to absorb
> tiny pieces of these mega institutions. How many years would it take
> to accomplish this redistribution? How much more damage would be
> inflicted as our crisis just keeps spinning out of control?
>
> Wishful thinking, or strict application of rigid ideologies, will
> not solve this problem. The crisis needs to be suspended, and we
> need to buy time for the system to repair itself.
>
> If you think I'm wrong, please don't just spout platitudes about
> punishing the bad guys, or letting the free market take care of itself.
> Please provide your strategy for dealing with the repurcussions of
> shutting down AIG, Citigroup, and Bank of America, Wells Fargo, Morgan
> Stanley, JPMorgan, and Goldman Sachs. All of these companies, and
> more, would have been forced out of business months ago if not for
> Tarp and the aggressive actions of the Fed.

Bank Liabilities: Why the Discussion Isn't Explicit

Generally agree with you on at least some of the solvent banks and insurers.

Ford, GM & Chrysler, mot so much. There is a good case that only chapter 11 will allow them to restructure with a more realistic set of pension and benefit demands and other costs of production.

On Mar 07 12:29 PM User 366653 wrote:

> Just a dumb question for you folks who think we should let all the
> banks, brokers, insurance companies and auto companies fail:
>
> How many decades do you think it would take for our economy to recover?
> Using your approach, most cities, counties and states will go bankrupt
> - as will nearly every company in the country. Unemployment would
> likely exceed 50%. Do we assume that we return to a rural agricultural
> model?
>
> Our economy is much more leveraged now than it was in the 1920s,
> so we can pretty easily figure that a systemic failure of our financial
> system today would result in far deeper pain than we experienced
> in the 1930s.
>
> If you disagree, please present your case for survival of our system.
> So far, I haven't heard one from the "let the chips fall" crowd.

Bank Liabilities: Why the Discussion Isn't Explicit

Nick, generally speaking, yes!
(see this transcript's reference to mark-to-market losses at Scotia Bank):
seekingalpha.com/artic...

The mark-to-market issue is a thorny one. Mark-to-market does have weaknesses in terms of trying to place a value on entities that may be distressed right now but may have enormous worth in the future. On the other hand, what do we have to take its place? Simply having the banks assign some magical arbitrary valuation on what may very well be worthless entities is no solution either; and the banks have lost our trust...

As traditionally, the banks have always embraced risk as a justification for profits, it seems odd that they now want to flee from risk by having the taxpayer assume the burdens of any losses.

A neat racket this; privatize your success and socialize your losses. Certainly there are times when creditors deserve protection. Is this such a time? And to what degree? And what guarantees does the taxpayer get?

On Mar 06 10:47 PM Nick Waddell wrote:

> Does anyone know if Canadian banks mark to market?

Fundamentals, Valuations and Technicals Stress Need for Patience

Thanks for an exceptionally well-researched and well-balanced analysis, Chris!

In the absence of fundamental improvements, we have a market driven by government interventions, rumor and rapid sector shifts in which nothing offers much stability over anything but short time frames.

Technically, intra-day, daily, weekly, and monthly charts all appear equally 'fugly', and while we wait for some kind of seismic shift, we see a frothy sea of 'pop and drop' mini-rallies that can rip your face off if you're caught leaning the wrong way. It is indeed a trader's market, and this is to be expected when prices are mired so far below 200-day MA's with downside risk far from diminishing.

The picture you paint is not encouraging, but it is certainly realistic!

Recent Government Support: A Summary

A thought-provoking article; thanks! You have clearly stated ONE of the dilemmas woven into the current crisis.

The depth of the taxpayer's wallet is not infinite, and the current propping up of fundamentally insolvent entities has already shown signs of approaching the limits of possibility. Now, we may see the Federal Government forced to bail out one insolvent State after another.

The financialization of our economy has resulted in the illusion of wealth based in the most simple terms on ever-increasing debt and the profits of moving money around.

Unless we find new, genuine and sustainable ways of creating real wealth, we will spiral into default. There aren't a lot of other options!

Financial Stocks: Playing the Mark-to-Market Suspension

Salary is one thing; adjustable valuation options and unlimited restricted stock plans are untouched!!! The right hand taketh and the left hand giveth... in spades! The salary cap is just one more slight of hand.

Surely no one here is so naive to imagine that Geithner would really screw his old buddies??? The more things appear to change, the mare they stay the same!

The fine print of the 'CEO pay cap' makes for some fine reading, and I hope will spark some lively debate!

Barry Ritholtz has a link: www.ritholtz.com/blog/.../

or: seekingalpha.com/artic...

On Feb 16 12:53 PM RReagan wrote:

> I agree gtmcduffy - That way, congress wouldn't do really stupid
> things like limiting the pay of the top bank executives. In this
> country, people are most responsible for themselves and their families.
> Why work 50-60 hours and only get paid a fraction of what you are
> worth? Who would blame them if they all walked away and got higher
> paying jobs elsewhere. Maybe some of them were to blame for this
> financial mess, but the congress and others were to blame also.
> No talent left in the banks is another reason to short these stocks!

Financial Stocks: Playing the Mark-to-Market Suspension

Jolly_Rancher raises an interesting point (below)....

Mark-to-Market is in fact, very much an accounting issue: but is much more than that! You're right that it may or may not be a compensation issue... I apologize for the following long-winded reply.

E.G.; if my buddy across the street decides to dump his house tomorrow at what I consider to be an outright giveaway; say 50% below what the rest of my otherwise sane neighborhood consider to be reasonable price (as opposed to value), then the marketable price of MY house just fell in the toilet along with his! For now, this is simply an accounting problem, say, if I want an equity loan, or to go whole hog and refinance, or pull out a second mortgage (assuming I can find one!). Or, simply if I want to total up my pennies to see if that long-awaited retirement next year still makes a lick of sense in terms of my vaporized 401K+swan-diving home equity???

It will not become a compensation issue FOR ME unless I choose to copy my buddy's stupidity (or brilliant market foresight) and sell my house!

This is all rather academic, as my house does at least have some intrinsic and market valuation. Most importantly, the Mark-to-Market debate is not really about marketable assets. After all, if the 'assets' could be assigned a reasonable market price, we wouldn't be having this debate in the first place! Right?

Okay, now consider my cherished baseball card of Tommy Diddler that I bought back in his 1994 rookie year, who promptly hit 499 and went on to break all home run, RBI's and Grand Slam records 5 times over the next 10 years. In 2007 I had this mounted and framed card assessed by Moody's, Standard & Poors (a famous auction house famous for their accuracy) at a cool $5.5 mil, as there was a very limited run as Tommy was drafted 219th that year. I spent a week on a Johnnie Walker Blue Label high sawing through 2.5 inch Rib Eyes (yes, with Lobster tails & Scallops).

But.... my luck was holding, and on a Dismal Tuesday of 2008last the news hit. Good old Tommy was found to be an habitual user of steroids, cocaine, hashish, meth, and MaryJane, and was photographed in a disgusting variety of uncompromising positions with a bevy of middle-school cheerleaders; both male and female, along with the mascot; a non-consenting sheep.

My cherished card now has a value of what? A Price of what? Future value of what?

The debate about Mark-to-Market as it applies to banks that the long-suffering taxpayer is (or is not) about to bail out is simply this: many of their CDO's and other 'toxic assets' (an oxymoron if ever there was one) are now rated about as worthless as my stupid baseball card!

Is this an accounting issue? Yes. (I used the @#%*& thing as collateral for another loan for upgrades to my extreme Chopper Soft Tail, and it also covered my 401K loan which was for the basic bike in the first place. My wife thinks this was for a down payment to a landscaper for a goldfish pond, waterfall and a custom-designed exotic shrubbery garden in the back yard. My wife does all the accounting at month end. Is this an issue?)

A compensation issue? Yes. (Larry the loan-shark behind the 7-Eleven who made me the loan took the card as collateral. He then bundled my loan with several others, wrangled an AAA rating, and sold the whole she-bang to the Russian Mafia. Larry agrees with you, and is very convinced that this is a compensation issue. Do you want to talk to him for me? Please?)

On Feb 15 09:57 AM Jolly_Rancher wrote:

> An alternative? It's not an accounting issue. It's a compensation
> issue.

Financial Stocks: Playing the Mark-to-Market Suspension

Yes, I fully agree with your excellent assessment of the major problems with Mark-to-Market, and the difficulties in realistically applying some balance between short-term/long-term worth (as opposed to 'value', which is a different breed of duck)! The marketplace can only determine worth; and it can and often does ignore 'value', as hordes of us 'value investors' are unfortunately currently discovering to our chagrin!
But the question remains as to how best structure some form of worth/valuation vehicle that can be applied prior to default.
Is the devil simply in the details, or is such a vehicle a pipe dream?


On Feb 15 12:08 AM Jolly_Rancher wrote:

> Mark-to-market forces the banker to take a short term view of what
> is a long term asset. That is a mismatch. For example, Aflac's perpetual
> debentures are marked to market and causing the stock to plummet,
> but the debentures themselves mostly mature after 2015, many much
> farther out. The asset should be written off at the time of default.
> Default clauses trigger default. It is at that time that the debt
> is impaired. Anything short of this forces the banker to assay a
> prospective borrower with a the question "How is this entity's debt
> going to trade after I make the loan?" rather than what the banker
> should be asking "Can this entity pay principal and interest?"<br/>
>

Financial Stocks: Playing the Mark-to-Market Suspension

Jolly_Rancher, I agree with you that M-to-M is far from perfect, and even with it in place we still end up with fraud, corruption and scandal. And while we've seen many 'falling shoes', we really haven't seen much in the way of 'rolling heads'!

Yes, something better than Mark-to-Market would be welcome... But what???

On Feb 14 09:08 PM Jolly_Rancher wrote:

> Mark to market is ineffective. It does not change most bankers' behavior.
> They do the things they do to maximize income for themselves and
> they'll trash the world to squeeze a few million out of the system.
> So investors got market to market, now they're losing their shirts
> too, while the bankers got big bonuses. It would be best to suspend
> FASB 157 immediately and put in place something that actually changes
> banker behavior.

Financial Stocks: Playing the Mark-to-Market Suspension

# User 357161 & RReagan
!ustedes tienen los huevos grandes!
Although I no longer fly due to a medical condition, I still hold a valid pilot's license. We have an expression, 'There are old pilots, and there are bold pilots; but there are no old, bold pilots!'
As and old trader, I have shied away from shorts, but still play the short side with limited (low $) puts just to have some fun, or day-trade the ultra shorts. Have cashed in puts on BAC, JPM and C, and will wait for the the next rip higher and the probable dip before going to the well.

I wish you luck!

Financial Stocks: Playing the Mark-to-Market Suspension

This article begs for prediction, so here's mine!
Instinct (and little else) tells me that if the Mark-to-Market rule is suspended or made discretionary, then XLF will lead the markets in a breakout higher with the urgency of a duck shot in the fanny.

The pent up greed already in the markets, when combined with that eagerly waiting (salivating?) on the sidelines, should make for an exciting run up to the resistance levels at the January highs. There, all bets are off, and either a new spark-plug will emerge, or we'll 'pop & drop' back down with all the glide characteristics of a grand piano.

One thing is for sure; congested trading-range markets beg for huge moves one way or the other!

Nationalizing the U.S. Banking Sector: There's No Choice

The biggest (non-ideological) problem with your proposal lies in the grave difficulty in arriving at an even remotely accurate valuation of the assets involved, as current valuation will of course determine the degree of the taxpayers' pain! (assuming some of these assets have any real value whatsoever!)

Then, we will have to determine just when to return any surviving assets back into the private sector, and again, at what valuation.

As taxpayers, we stand to doubly screwed, and although we seem to be growing more and more used that situation, it is no more acceptable!

Nationalizing Bank Losses

Felix Salmon, John Lounsbury and others at SA deserve a hearty round of applause for working so hard to get a rational debate going on the nationalization issue! Much appreciated!

Thank you!!!!

Furthering the Discussion on Bank Nationalization

Tip 'o the hat, John, for working to promote rational debate of an issue that often seems to be overly testosterone-driven.

Like everything that has a season under heaven, so too, does nationalization. The devil is in the details, as always!

The asset pricing issue is huge, as some of the baddest and most toxic of the bad assets really have no value at all (as far as I can see), the pious protestations of the bankers notwithstanding.

My biggest concern about nationalization comes at the other end of the slippery slope; What is to be the 'Exit Strategy'?

In other words, what triggers will begin the return of the nationalized back to the private sector?

If the issue of when to quit as well as when to jump in is not is not dealt with upfront, then the long-suffering taxpayer runs the nasty risk of being royally... let's say... 'taken to the cleaners'... literally from both ends.