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Martin Lowy  

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  • There's Something Wrong With The World Today And It's 1995 [View article]
    That may be, But if the Fed does not put risk-based capital requirements outside FIN 46, the banks would not guarantee the ABCP and SIV liabilities (capital charge too high). Without the bank guarantees (called liquidity backstops or whatever), the market would not have bought the short-term securities (they would have seemed too risky, and they were). Maybe the risks would have been taken using some other mechanism. But with the leeway given by the regulators, German and American--were on the hook when the SIVs and other SPVs imploded, and it was the banks, not the investors, who had to create the liquidity and be subject to losses on the underlying assets.
    Jun 29, 2015. 09:59 AM | Likes Like |Link to Comment
  • Anecdotes On Eurodollar 'Money Supply'; Part 2 [View article]
    Mr. Snider, I do try to understand what you are saying (I think it may be quite important), but I still am having difficulty.

    Would it be constructive to suggest that you are saying that "capital", broadly understood, is the real "money"? I would rather not call it money because that seems confusing. But we could say it is the real determinant of the degree of leverage in the system. Capital in modern finance, however, is a chameleon. The math determines what it is in normal times. When abnormal times come, the math changes, and the supply of capital shrinks, which in turn requires that the risk profile of the B/S be shrunk.

    There also may be other kinds of capital, as you note. E.g., Nobel Prize winners on the payroll are a form of capital. You can get leverage/credit without mathematical capital if you are believed to have mathematical genius.

    But at bottom, the observation looks to me like saying that capital is key to the creation of risk. Capital and risk may be defined various ways. Most of them involve math, whether VaR or something else, but they are the limiting forces.

    Going forward, it appears that the world is becoming more demanding regarding capital. This is particularly true of banks subject to CCAR. Will risk migrate to somewhere else where capital gets less scrutiny?

    Is my description making sense to you?
    Jun 28, 2015. 10:21 AM | Likes Like |Link to Comment
  • There's Something Wrong With The World Today And It's 1995 [View article]
    This is very interesting. I have read it a couple of times. But there seem to me to be a few leaps. Perhaps they seem not like leaps to cognoscenti, but they look like leaps to me. One of them is the statement about risk management using VAR and Basel in 1995. My recollection is that in 1995 we still had Basel I. The big banks were starting to clamor for Basel II--and they won eventually, but not until 2001(?).

    I do see the argument for 1995 for various reasons. But an argument for 1999 also can be made. 1995-1999 was a period of high productivity gains and a high return to skills. (See Baudry, Green and Sand.) 1999 was the start of the euro.

    My charts of European bank dollar assets show a big upsurge beginning in 1999. My graph does not seem to want to copy into this space. Suffice it to say that they increased from about $1 trillion to $4 trillion by 2007. I assume that is what you mean by the Eurodollar economy. Yes, that inflow from Europe (basically a round trip, often via MMFs but also via those bastards called ABCP and SIVs) pumped up the housing boom. With that I agree.

    BTW I call ABCP and SIVs bastards because they were illegitimate offspring of the U.S. regulators nullifying FIN 46 for risk-based capital rules.

    The Fed did have to bail out the European banks with swap lines in 2007-2009. And the Transatlantic Banking Glut (as I have called it) seems to be over.

    What caused it? Essentially, i believe, European banks were said to be safe--that is, their governments stood behind them. That proved to be the case. So they were able to borrow globally. And, due to Basel II, they were able to buy high-rated debt with almost no capital cushion and, therefore, a practically infinite theoretical ROE despite thin spreads.

    Are we talking about the same things in different languages?
    Jun 27, 2015. 02:08 PM | 1 Like Like |Link to Comment
  • The SEC's Tick-Size Experiment: Impact On Small Caps And High-Frequency Trading [View article]
    Good article, thank you.
    Jun 19, 2015. 08:40 AM | 2 Likes Like |Link to Comment
  • The Bailouts Of 2007-2009 [View article]
    Interesting data, thank you.

    One point: Supporting Fannie and Freddie was not really voluntary. That is, although their bonds do not officially carry the full faith and credit of the U.S., the world treats them as if they do. Default on those bonds simply was not a thinkable result.
    Jun 15, 2015. 09:30 AM | Likes Like |Link to Comment
  • What Behavioral Finance Tells Us About The Greek Negotiations [View article]
    Readers, please read Cam's latest update. Brilliant, probably correct, and very sad.
    Jun 10, 2015. 09:37 AM | 2 Likes Like |Link to Comment
  • Bio-Reference Laboratories: A Conundrum Wrapped In An Enigma [View article]
    Please explain. I am willing to learn. I do see that he is 78 years old and that the Chief Technical Officer is 67 and they both seem to have good track records.
    Jun 8, 2015. 05:09 PM | Likes Like |Link to Comment
  • Bio-Reference Laboratories: A Conundrum Wrapped In An Enigma [View article]
    Depends on when you bought in 2012. If we take 33 as the sale price last week, you could have bought at 24 or at 32 in 2012. Like you, I have made money on BRLI, but in recent years, some people have not.
    Jun 8, 2015. 03:09 PM | Likes Like |Link to Comment
  • How Scary Is The Current Margin Debt Situation? [View article]
    The aggregate margin debt numbers may not tell us much. Suppose 75% of stocks are owned free and clear and 25% are mortgaged to the hilt. And suppose the 25% are among the higher-beta stocks that can be expected to lose more value in a downturn. If we had such data, then we could ask what kind of market event would trigger large amounts of margin calls. Unfortunately, I do not know where to get such data, but maybe some other reader knows.
    Jun 3, 2015. 04:30 PM | 2 Likes Like |Link to Comment
  • China's Cunning Plan To Revive Growth [View article]
    Thanks for a great piece!
    May 28, 2015. 08:47 AM | Likes Like |Link to Comment
  • Redefining Retail Banking [View article]
    Retail banking is indeed being redefined. But, for the most part, not by banks but by technology companies, large and small. Take a look, please at what my friends at Simple have done, for example. Their software transforms the retail banking experience. (Simple now is owned by a large Spanish bank, but it began as an idea pursued by a guy from Australia and a guy from india working in Oregon.) Apple Pay promises to change the payments system. So do virtual currencies.

    There are numerous other examples. The hardest nut to crack is how to lend profitably to lower-income consumers and business startups. Maybe my friends at Vouch are on the right track. Time will tell. But they are doing what banks are not doing: They are using social media-type methodologies to shore up naturally weak credit.

    Unfortunately, lending to small businesses is hazardous. They have little or no collateral (other than real estate, which proves to have less value than thought just when it is needed) and their cashflow often is erratic. To lend against inventory or receivables is time-consuming and expensive; therefore rates are high. For these reasons, crowd-funding, which tends to be less leveraged, may be a better financing vehicle than banks.

    (Yes, I was a consumer banker for a while a long time ago. And I try to keep up with developments.)
    May 21, 2015. 09:10 AM | Likes Like |Link to Comment
  • Yes, The Fed Does Directly Influence The Broad Money Supply Through QE [View article]
    Unfortunately, comparisons with the effects of monetary policy as recently as the late 1970s probably have little predictive utility in today's market conditions. One of the major differences is the current relative liquidity equivalence between a T-bill and a dollar bill. Repos were in their infancy in 1979. (Anyone remember the failure of Drysdale Securities in 1982? The FRBNY held seminars on how repos should work after that. Few in the financial community understood the concept well before that even though the Fed had been using it for some time in the conduct of monetary policy.) The concept of the money supply thus has become very elastic. IMO that factor makes Roche's point about exchanging assets more credible. To the extent that there is a change in the tenor of the government paper being exchanged (dollars for longer dated T-Bonds denominated in dollars), something besides an asset swap is going on. But as long as the bonds are U.S. government bonds, relatively little is changing even then. Bigger changes would occur if the Fed bought privately issued bonds. They have credit risk characteristics that are different from government bonds, plus the swap increases the outstanding sum of U.S. government debt (which includes both cash and interest-bearing securities).

    One also has to factor in the change in the proportion of U.S. credit held by banks--now something like 20%. At such a low percentage, the possibility that banks will not feed changes in reserves into the marketplace becomes real--as appears to have been the case in recent years.

    Thus IMO the ability of monetary policy to control the economy is significantly diminished.
    May 12, 2015. 08:33 AM | 1 Like Like |Link to Comment
  • Schäuble Warns Of 'Sudden' Greek Default [View article]
    Reminds me of "The Sun Also Rises" where this exchange takes place early in the book: Q. "How did you become bankrupt?" A. "Two ways, gradually, then suddenly."
    May 11, 2015. 09:10 AM | 3 Likes Like |Link to Comment
  • Yes, The Fed Does Directly Influence The Broad Money Supply Through QE [View article]
    Please add the practical equivalence of cash and a T-Bond in the modern economy. Not quite true at longer maturities, but nevertheless may explain the limited impact of such enormous volumes.
    May 7, 2015. 10:09 AM | Likes Like |Link to Comment
  • The Debt Supercycle Versus Secular Stagnation [View article]
    I question the last paragraph. Two grounds: (1) You say the building boom post-WWII was made necessary by the baby boom--largely true, though the expansion of the CA population also was a factor. But the building boom of 2002-2006 had no such impetus. Indeed, investor speculation was a precipitating cause. (Yes, the building boom started building in 1997 or so, but 2002-2006 were the years that created the problem.) (2) The building boom post-WWII was largely financed by financial repression in the form of Reg Q. If you look at the history, Reg Q limit on interest rates paid on savings deposits was imposed at the political behest of the large homebuilders and the CA S&Ls that financed them. Result was that S&Ls lost deposits when MMFs were authorized by the SEC in 1972. (it can be argued that the SEC caused the S&L debacle.)

    If you are interested in the the S&L history, please take a look at my book High Rollers. Even though it came out in 1991, it is largely correct even in hindsight.
    May 4, 2015. 10:47 AM | Likes Like |Link to Comment
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