CaptainJJack

Whitney Gets Bearish: Will She Be Right Again?

I have a question:
When was Meredith Whitney ever bullish?

Too Big to Fail Banks: A Simple Solution

Let me add my support to your ideas.

Glass Steagall should be reinstated.

Regulation should focus on leverage.

In general, leverage ratios should be set with a view, not of risk, which gets confused with market fluctuation, but the CONSEQUENCES of failure; i.e. not IF this deal goes bad, but what if this deal DOES go really bad?

The more that there is ANY implicit or explicit government support, the lower the leverage ratio.

So, any bank offering FDIC insurance should have very low leverage ratios. Any financial institution that has had any access to the Fed lending facilities should have low leverage ratios.

Goldman and Morgan Stanley have commercial banking subsidiaries.

They should be divested immediately. However, higher leverage ratios should be allowed, and the primary regulation should be that the I-Banks are required to mark to market daily.


On Nov 11 01:49 AM bob adamson wrote:

> Mr. Lindmark, there are two significant factors that your article
> does not fully address:
> 1. The US and UK are pre-eminent global investment banking centre
> and Australia and Canada are not, and
> 2. The role of risk in investment banking is different than in other
> banking roles.
> Arguably in the modern world the pre-eminent global investment banking
> centres are comprised of banks, hedged funds and other ‘near banks’
> and insurance bodies to back-stop investment banking. The focus of
> investment banking is properly on accepting and managing risk of
> a nature and extent that is very different than what is acceptable
> for the other, properly ‘boring, banking functions.
>
> Can’t a good case not therefore be made that the following needs
> to be done?
> 1. The first need is to decide to segregate ‘boring banking’ from
> investment banking by creating a modern version of Glass-Steagall.
>
> 2. A regulatory and governance framework analogous to those in Canada
> and Australia should be created for boring banks.
> 3. The US and UK (and other significant global investment centres)
> should in consultation devise a regulatory and governance framework
> for the banks, hedged funds and other ‘near banks’ dedicated to investment
> banking and for insurance bodies that back-stop investment banking.
> This framework needs to encompass the facts that (a) globalization
> and information technology have both increased the possibility that
> unforeseen risk will arise and the means for its better management,
> (b) it is often difficult and unnecessary to distinguish banks, hedged
> funds and other ‘near banks’ dedicated to investment banking from
> each other by role or function and therefore the new framework needs
> to cover them all, and (c) given the nature and extent of risk involved,
> the fact that a banks hedged fund or other near bank dedicated to
> investment banking or one of their insurers becomes insolvent can
> not be allowed to endanger the solvency or ongoing functioning of
> the system generally.
>
> It might be argued that the demarcation line between investment banking
> and boring banking isn’t as clear as the forgoing implies. This is
> true and it follows that the modern version of Glass-Steagall alluded
> to above should therefore forbid banks that assume specified classes
> of investment risk to engage in boring banking and require that they
> be registered within the investment banking regime described above.
>
>
> No doubt you and other commentators can improve on the forgoing suggestions
> but my basic point is that investment banking is unique and requires
> segregation and unique forms of regulation and governance.

Dinallo Has Common Sense Solutions on CDS and Regulatory Issues

The Credit Default Swap is not an insurance contract. There is no way to pool the risk.

It is a risk transfer product, just like a futures contract or an interest rate swap contract.

The issue is "contagion" , and it is why you do not see insurance contracts written on investment risk, generally. The environment that creates a problem for one creates the problem in many.

The correct way to regulate these is in an exchange, like other investment derivatives. They should be subject to the standard rules on market manipulation and clearing, in cash, everyday, at market.

There is no need for an insurable interest anymore than there is a need for an insurable interest in an interest rate swap or a grain futures contract.

Finally, I could not agree more that the repeal of Glass Steagall was the single biggest cause of this crisis. The Fed and the FDIC were formed in recognition that commercial banks were historically not regionally diversified, and often when a town or region went down, so did the banks.

However, the Fed requires that these banks hold much greater capital, with leverage at roughly 10 times, and the FDIC requires that the commercial banks fund the losses. Given the margins in this business, these banks achieve high ROEs even with the low leverage.

The Fed And FDIC were never designed to backstop an investment bank. The investment banks primary strategy is to borrow money and trade, and there is almost no way they can survive long term without 30+ leverage, the margins are far to thin.

As long as the one type of bank can own the other, we will see bad outcomes.

A Windy Credit Market Overview

I used to own Boeing, but I sold it when Mulally left, and I still own GE, although I recently sold at $14.15, after getting in at over $20 last year.

I made a lot of money on Boeing, but I lost on GE (obviously).

I followed the WTC dispute, and I expected this result. You would have to be brain dead not to see what the Europeans were doing, and if it continues, it will eventually kill Boeing.

But, Boeing is not going to do much to pursue this further. Their whole business is selling to countries that have protectionist policies (including the US), and they are not going not start stirring up a trade war.

The whole bet on Boeing right now is the 787, and if it were not so far behind, I would be interested in the stock. The key is NOT whether they will get it done, but rather how much will it end up costing them.

I've heard numbers in the $20 billion area, and if that is even remotely accurate, Boeing's profit prospects are poor even if they sell a ton of these planes.

GE, as you point out, is a play on GECC, and with the stock at almost 1.5 times book, there is at much downside as upside even if GECC works out.

Don't get me wrong, GE, especially ex GECC and Universal, is a GREAT company, and a pretty good long, long term bet.

But, I cannot get enthusiastic about the stock at prices above $14, even though Goldman and Morgan Stanley both seem to feel there is strong short term upside.

While I cannot take issue with their seeing a short term rise to $18 (Goldman), I cannot see any reason why it isn't equally likely to fall to $10 if new problems emerge in GECC's commercial portfolio, as seems a better than even chance.

High Frequency Trading: We Fear What We Do Not Understand

I appreciate this article, but there is one area that bothers me.

The underlying assumption is that markets are rational and that there is an equilibrium price, even in the short run. I you believe this, then all that program trading does is get you to the price you would have gotten to anyway, just faster.

But I do not believe this is true in the short run. The market "votes" in the short run and "weighs" in the long run.

In the short run, the stock may not stabilize around an equilibrium and I think it is possible to pound a stock, especially a financial stock that essentially trades on the amount of trust people have in the institution, into oblivion.

The issue is not so much front running as stock price manipulation by piling on

Obama's Donut Economics

You can add tax policy to the list of ineffective job creation ideas.

The tax cuts under Bush helped low wage workers buy more Chinese goods at WalMart and high wage workers buy more BMWs from Germany.

You factor out the purchases financed by home equity loans, and the US GDP did not grow at all under Bush lower taxes.

Obama's tax cuts are no better and are about as effective as the tax cuts last year. What people didn't save, they bought from China.

Geithner's Plan: A Look at the Options

I have a number of problems with this analysis.

First, it is not at all clear to me that the banking system, in total, is lending significantly less. They HAVE tightened lending standards, but I do not think ANY program to deal with their bad loans will change this much.

I have seen no data to support the idea that banks have significantly cut back on "good" loans. This is especially true at the 1800 smaller banks.

What HAS changed is the securitization market. Further, bond spreads are very high --- but this is not part of Geithner's new program.

Second, the banking system has been in worse shape than this. After the Latin American default in the early 1980s, ALL of the major banks would have been insolvent. The things that "saved" them was forbearance by the Fed, there were no mark to market rules, and the fact that their regular business was very profitable.

Third, banks are making boatloads of money on their regular business right now. I have seen estimates that the top four banks will make something on the order of $250 billion, operating pretax. This is compared to estimated losses of $250 billion to $500 billion.

Finally, you are suggesting that banks won't sell, but I believe that the whole purpose of the stress tests is to deal with this. If the bank does not pass, it will get more capital AND there will be a discussion about the carrying values of their assets.

I believe the banks will be forced to reflect the true value (write down) of at least their marketable assets, and if I am right, I expect they will be much more amenable to an attractive bid.

Who Will Profit from Mark to Market Changes?

I agree with falanke. Mark to market will not go away, but there will be clarification on how to value assets when there is no market.

I suspect this WILL provide a lot of relief, but it will be no panacea, and where an MBS has been traded, that price will be reflected in setting the value as I understand the way FASB is going.

The biggest mistake FASB made was moving the "market value" of the assets from a footnote to the balance sheet.

I believe this was in response to what I call "efficient market Nazis" who believed that the markets would ignore fluctuations in the asset values in setting the price of the firm (i.e.the stock price). Further, they believed (and still believe) anything other than today's market value for an asset is delusional.

While this may be great in theory, it ignores the reality that there are short to medium term trading strategies that take advantage of market mis-pricing through fear and greed, emotions that overrule efficient market rational thought, and if the firm is vulnerable enough, they can destroy the firm.

Although I do not follow the International Accounting Standards, a possible way out of this mess is to adopt a new set of recognized standards that had the benefit of seeing how our FASB mess unfolded.

Bank Preferreds: Betting at the Apocalypse Casino

I think your analysis is pretty accurate based on the action today with Cii. As I understand it, they are letting the preferred shareholders convert to common at $3.25, and the bank is going to continue the dividends on the trust preferred.

Given all of the institutional preferred shareholders, especially insurers, I think it would be suicidal for Treasury to insist on a suspension as part of the deal announced today.

However, you have to ask the next question: why did Treasury do this? There can only be one answer: they expect a lot more losses at Citi.

I still agree with you that the Trust Preferred Dividends should be safe through pretty much think and thin since Treasury has made it crystal clear that they will add as much support as needed to keep Citi afloat.

America's Banks: Are They Really Insolvent?

Even though there are a lot of comments here, I feel compelled to add my own solution:

I think the banks should be required to mark to market each quarter, BUT it should be in a footnote and not part of the actual balance sheet. This IS a distinction with a difference because the capital adequacy ratios and the ability to lend should be based on the balance sheet and not the footnote numbers.

The numbers that go on the balance sheet should reflect the ECONOMIC reality as the bank knows it at the end of each quarter, and that speaks to the question of WHEN and how much cash flow the bank is truly expecting from the asset.

If the bank expects that it will only receive 50% of the cashflow from the asset that it had been expecting to receive, it should market the asset down to 50% and put THAT amount on its balance sheet.

Yes, this IS mark to model, and yes, it is subject to manipulation, but that is why the true market value is in the footnote. The bank could play some games, here, but in the end, the analyst, and regulator, can see both numbers.

In other words, it should be based on the bank's expected cash flow.

I believe you will see that the "stress testing" outlined by Geithner is designed to effectively move from market to market to expected cash flow as the basis for evaluating the bank's creditworthiness and solidity.

I guess Geithner feels he cannot avoid mark to market balance sheets, so he is doing the next best thing to what I am suggesting.

Finally, I predict that Geithner will wait until the stress test is pretty far along before starting the auction market, but that needs to be set up to get the true market values to keep everybody honest, and it will.