Tom Jacobs

The Five Most Effective Bailouts

Your inclusion of Fan and Fred really makes the Too Big To Fail case and thus, should be on your other list. They repeatedly abused the system through lobbying to take on more risk and generate higher remuneration for senior management, often through accounting deception and fraud. They went well beyond their mandate to increase liquidity in the primary mortgage market through providing insurance for successful securitization to buying secondary market securities with huge leverage. Thus they made themselves so big they would require a bailout when they got in trouble. Now, FHA is stepping in where they have backed out and is gaining on them for losses we will all have to make good on. I don't see how you can associate the bailout as a good thing. If AIG and Bear Stearns were bad because they ensured the gains of private individuals over fears of public consequences to their failure, how can you possibly find a different result for Fan and Fred?

Bloomberg vs. the Fed: Secrecy and Moral Hazard

1. The Fed remits its operating balance (profit) each year to the US Treasury. For every $ not remitted, taxes must be higher. By definition any funds spent by the Fed on anything that take away from this equation is money that must be made up by taxpayers.

2. As significant balances such as transaction accounts and amounts above the FDIC insurance limit are uninsured, traditional runs are still a problem. Just examine what led the FDIC to move on WAMU and Wachovia.

Time to Change GSEs' Deal with Treasury

It is like you stepped out of a time machine, completely ignoring Fannie and Fred's lengthy history of using lobbying to castrate any politician who dared suggest that their excessive risk taking and implicit government guarantees put tax payers at risk. Unbelievable.

Bernanke on Consumer Protection: No Fur Flew

Nice piece. Hard to read everything and your characterization is dramatically different from simply perusing the headlines. Love the Teddy.

$7.9 Billion Kazakhstan Bank Loss Shows Why CDS Must Be Regulated

This whole argument regarding the requirement that one show an exposure via bond or loan to justify a short position is misguided and more often than not an argument for the elimination of CDS in general. What about the fact that all the sellers of protection now have an interest in delaying bankruptcy, again without a traditional bond or loan position. You simply cannot have a market if the only justification for taking a short position is proving a pre-existing long position. Why not ban futures markets since most of the speculators who permit physical holders to hedge have no economic interest in taking delivery of the commodity in question?

A Better Corporate Credit Risk Model Still Not in Sight

Unfortunately, mathematical models and limited data are typically all we have save for those who are practicing loan officers. FICO scores work well for many problems. It is the assumptions around correlation between borrowers that are most at fault as well as the complexity in combining multiple instruments separating the ultimate lenders from the borrowers. While subprime may have gone too far and received far too much government backing, I still don't believe we want to go back to telling the lower middle class they can borrow at pawn shops or not at all.

While I won't dispute a number of the criticisms the author has provided for building a good model or the failure of most practitioners to understand, collect, clean and appropriately use their data with a given model, something needs to be done differently and anything open source is at least a step in the right direction. Some credit should be given for at least trying to change from the status quo.

U.S. Banks Putting 'Lipstick on a Pig'

Jeff,

I generally find your posts, this one included, credible and in the right direction, but I believe that the inflammatory language detracts from your analysis. There is nothing wrong with tact. You have strong arguments and the only perception I get from "crime syndicate" or "feces" is to question your judgment.

I have not observed Bloomberg to be a Wall Street mouthpiece at any point of the crisis. They took the lead on challenging the Fed's secrecy regarding its actions, not a step that a Wall Street mouthpiece would pursue when the Fed has repeatedly acted to protect Wall Street and the status quo.

Tom

Understanding Nassim Taleb

Well Felix, becoming Taleb's apologist now? The guy impresses with his arrogance and disdain for everyone. Yet he gets you to explain to us why his inability to talk detail that everyone can understand is really OK since it is not his thinking pattern. He milks the same theme, selling out of the money options is not riskless at either the individual trader level in Fooled by Randomness or at the business level in the Black Swan. Books aimed at and purchased in great volume by common people as opposed to academics. Janet Tavekoli does a service by calling into question his motivations given his failure to answer to the inconsistencies in selling the GQ profile and ignoring the very helpful "misstatements" made in the same article. Who are you serving by selling him to us???

Brazen Bank Tunneling and Inflation

Great post. The behavior is simply disgusting. All the "we wish to participate in the upside" comments, etc. But is the FDIC listening?

Fed Finds a Way to Use Stress Tests to Screw Bank Shareholders One More Time

You seem to write from a vacuum. These very banks negotiated to lower the bar on these supposed stress tests. Further, they have succeeded in watering down the "market values" at which they carry their assets. Finally, they generated their earnings in the first quarter from a combination of AIG using tax payer money to buy out various CDOs at par as opposed to anything like market value as well as some such as Citi booking gains buying back their own debt. Now you object to requiring that the banks not get to include their own internally generated profit projections. Again, I don't know where you are coming from...

The Backwards Credit Card Model

I think the author makes a good point. One can look at other questionable business models as well such as cell phones or cable - reward new customers but charge the highest rates to existing customers and charge fees for switching carriers, etc.

How CDS Spreads Affect Equity

You should probably differentiate between levels of seniority when you do your comparison. Two firms with CDS at the same level of seniority, etc. Further, the CDS spread is effectively Probability of Default * Loss in the event of default, so adjusting for loss in event of default, CDS is a proxy for default likelihood, etc. Thanks for the post.

JPMorgan, Amex Issue Non-FDIC Backed Debt

You are not comparing apples to apples here. A 120 bp spread for CDS needs to be added to the TED spread equivalent at term to compare to an issue over Treasury. On Friday per the H15 statistical release,

www.federalreserve.gov...

the difference was 46bp using CMT for 5 Year Treasury, lowering your balance sheet cost to about 110bp for the JP Morgan placement. Still a big number.

The Wild and Crazy World of Self-Referenced Credit

Hats off to the author. Great post, particularly in the current environment of demonizing all things CDS. Thanks for such a well written and carefully explained piece.

Tom

Writing Naked CDS: When Murder (and Betting on It) Is Legal

There are plenty of agents with no commodity exposure who either agree to deliver or accept delivery of commodities in futures contracts and they perform the role of enabling those with said exposure to hedge and no one wants to take them out to the woodshed. Tangentially, a number of academic studies showed that those tech stocks that could not be shorted due to technical and other factors experienced the largest degree of "bubble" in their shares during the late nineties boom in tech stocks. Thus, I would conclude that the idea that one has to demonstrate an economic exposure to hedge in order to short credit or that shorting both credit and equity is somehow evil is misguided, at best.

I also liked this line from the Barron's piece: "If the total cost of buying a bond and insuring it to par is less than par, it creates an arbitrage that ultimately destroys capital." How does this destroy capital? The arbitrage is to buy the bond and buy protection on the CDS which will drive up the bond price and the cost of insurance until par is reached and the arbitrage is gone.

Tom