Fund Insider

Too Big to Fail - Even Greenspan Is Speaking Out

Jeez, leave Greenspan alone. No economist has all the answers.
We all enjoyed the huge market run up, in the values of our stocks and homes, which would not have happened without his low regulation, free market policies. Huge run ups have always been followed by huge declines. Reduced regulation is always followed by over-regulation. Human DNA requires that we ride a roller coaster, never happy unless we are on the way up, but coasters get all their energy from the free fall ! If you don't like the roller coaster ride, put your money under the mattress in your rented home.

PS I worked mostly for small financial services firms, but had a 2 year stint with Citibank before it became Citigroup. Citi had many resources that other smaller firms didn't have and was able to achieve many great things unthinkable by smaller firms. That said, small firms have an agility that can never be matched by large firms. The free market needs both companies that can move mountains and small firms that can quickly get around the mountains and move the economy forward. There is no inherent good or evil in bigness and size of businesses should NOT be regulated in any way. Many firms grow too big, and if the government doesn't step in the free market does so anyway. Most large firms buy and sell subsidiaries as they continually evaluate what fits in with their strategy. If they allow themselves to grow
fat and lazy, let them go bankrupt and the pieces will be sold off
as they should have been to start with.

Gov involvement in "too big" should only be limited to cases where a firm uses illegal monopolistic tactics so as to eliminate any fair competition from those smaller but valuable competitors that breed innovation and options for customers. Anti-trust should be the only reason govt breaks up a large firm, not some perception that we have too much risk, ridiculous. Had the US let evolution take it's course in the 1970s, Chrysler would be long gone and GM would probably be far healthier today due to lack of competition from it's own government, not elimination of competition. They still had to contend with Ford and many others, I just don't advocate unfair competition from the government for non-utility type services, any more than we should allow unfair competition from a monopoly.
After all, the US gov is the ultimate monopoly and should ban itself from bailing out/buying firms just on the basis of it's own anti-trust laws !

The Dow: Ominous Parallels to the 1929-1930 Era

Thousands of PhD economists can't predict direction of markets despite their in-depth study of history and current data. What makes anyone posting here think any of us can get it right ?

Can We Insure Against Systemic Risk?

All insurance is designed to protect against what is called idiosyncratic risk but can also suffer from system risks.

Take for instance your home owners insurance. The property insurers can easily withstand a single claim on a single home, but a hurricane can potetnially wipe out an insurer if enough damage is done, that's systemic risk. They used to price a policy considering the potential that YOUR home will be damaged, but they got smarter and started charging higher premiums if your home was in an flood zone, coastal area etc. Problem is, in financial insurance the persons at AIG needed to be able to identify such hot spots and charge appropriately. They didn't know, nobody knew how easily then entire real estate market could collapse. The closest we have come to this in decades was the S&L collapses of the early 90s when mainly real estate in Texas was affected. Once could price a policy differently for mortages concentrated geographically than one distributed, based on that bit of history, but when the entire country goes down the tube, yes, systemic risk impacts us all.

Let's hope there is no plague. Whomever is left living will criticize life insurers for not forseeing the potential that a very large % of policy holders would die in a short span of time ! If they considered that potential, you couldn't affort life insurance. In the end, our society is always backed by the govt, or not and then you end up with the great depression under Hoover.

Can We Insure Against Systemic Risk?

Acccording to Michael Lews (a prolific writer on Wall Street greed)
AIG went against industry practice and refused to post collateral to dealers when they first started trading CDS (selling insurance).
It is this lack of collateral obligation that allowed them to run amok writing unlimited amounts of insurance, they didn't need any collateral at hand to fund them. At some point they had to do it, but could only do so with govt help to fund the collateral payments to Goldman, etc.

Interesting read
www.vanityfair.com/pol...

On Jul 15 01:26 PM Gtarras wrote:

> Here are two major points nobody mentions:
>
> 1. AIG was brought down not by the REAL losses on these tranches,
> but by mark-to-market SWINGS. It was offering to post collateral
> through a mechanism called CSA, if prices went too far against the
> protection buyer. Other players like AIG (monolines), did not offer
> these margin posting service.
>
> 2. It is still not clear whether the real losses that AIG will suffer
> will be enough to wipe out its capital. For example, MBIA seems to
> be ok in this regard.
>
> The CSA offer from AIG was a suicide. Their exposures were close
> to $1 billion in each deal, with VERY ILLIQUID deals 5-8 years in
> maturity. With this type of setting, if a price on your tranche jumps
> from 10 bps to 100 bps, you get slaughtered. (they clearly thought
> it would not happen.)
>
> For example, if you sell 5y protection, $10 mill exposure on a liquid
> name and things go against you, i doubt you'd suffer that much.<br/>
>
> Thats the reason its critical that this systemic risk issue is brought
> up. NOBODY is big enough to withstand this type of hit (except the
> govt). Of course, there was a reason the banks wanted to unload these
> tranches- to free up capital. Easy fix would be to make changes in
> Basel to view these types of exposures as "capital light".

Tax Dollars at Work: Goldman Sachs to Pay Record Bonuses

Enough bashing the banks. If they do poorly, people complain.
If they do well, people complain. What should they do, just close the doors ? They are no Angels at GS but they are doing what they are supposed to do, make a profilt. They avoided heavy investment in sub prime and that's why they are still here to take advantage of the current voids in the marketplace. They are smart, and others are jealous of them. Would you prefer if they go under and there are more mass layoffs and another 40% stockmarket slide ?

Goldman Sachs' AIG Collateral Demands Behind Company's Implosion

Heaven, Hel, you are 100% correct. Anyone who doesn't
collect collateral to which they are entitled under derivative trading is negligent in their duties.

Goldman Sachs didn't get to where they are by being "good guys"
but that doesn't mean they shouldn't enforce contracts they signed.
In this case, these are commonplace type of contracts, nothing invented by Goldman.

The Bonus Calculus

Would the CEO of most banks have survived sub par profits during the go go years, to be vindicated later when the coming crash has minimal impact on his firm ? Would you give a bonus to a CEO who has sub par performance because he is reducing risk during a bubble, which may or may not payoff during a crash nobody believed was coming but him, as in 2008 ? Would you strip him of his bonus in 2005 for being conservative then ? The single minded
focus on short term profitability is what got us in this mess, and by
saying you can't reward people in bad times is ridiculous. Nobody would have any incentive to act conservatively.

Most other staff have some lower level of responsibility.
A division head, the results of his division, a peon for his own narrow tasks. Still it's a microcosm of the same issue. If your boss gives you a project, you rush through it to make a deadline, do you get a huge bonus, only to have the firm later see the downside risks you didn't consider? Can they take the bonus back ? You have to set clear goals for people and reward them when achieved.
If those short term goals reduce short term profitability, you still need to reward it.

Finally, what about market forces ? During good times, over my 20+ year wall street career, I was often offered far more to leave than stay where I was, which is just ridiculous. You are always more valuable to your current employer who has invested in you.
They should make it worth your while to stay. Right now market forces do not dictate large bonuses, but there are many times when they do. Frankly if another industry offered me employment at far lower compensation, why should I consider it ? I am mentally stimulated by working on wall street, meet interesting people, and I am paid more, so what's wrong with that ? The second the pay is gone, I'd CONSIDER other options.

The fact is, that people whom have upside potential will be more vested in what they do. Lawyers who think they can be a partner work harder than gov workers who know they can never get a piece of the action (other than via bribery). Wall Street has this right more than wrong, and the whole debate is just silly. The Senators and Congressman that all take bribes, oh I mean corporate campaign contributions, should be the last ones to criticize bonuses in private industry. Bail out a financial firm, and lose all the employees, you have nothing left to bail out.

Misunderstanding the Great Recession

Regarding "It took about 6 years to clear.", the world moved
and adapted much more slowly back then(1873.). I'd say 6 years by the standards of the time was quick. It that guide is useful, we are near
the end of this downturn !


On Jan 26 12:06 PM John McLeod wrote:

> It is clear now that the present crisis was caused by hedonic shock
> resulting from a disruptive cornucopia. That is, East Asia sented
> sending Europe and North America massive amounts of cheap cars and
> manufactured goods, clothes, etc. I think it was pre-Xmas 2006 when
> LA &amp; Long Beach were backed up 6-weeks deep in Bratz dolls and
> radio controlled cars. This destroyed the competing domestic suppliers,
> but caused consumers to (temporarily) feel about twice as wealthy
> and confident. Thus banks-gone-wild, the re-fi boom and so on.<br/>
>
> As Professor Scott Nelson of William &amp; Mary recently pointed
> out in the Chronicle of Higher Education, of all places, exactly
> the same thing happened in the run-up to the Crisis of 1873. Then
> it was American grains and manufactured goods flooding Western Europe.
> First the economies of their traditional bread basket (Russia &amp;
> Ukraine) collapsed, while at the same time financial innovation and
> hedonic shock caused exuberant consumerism and a monumental building
> boom (that's where all those touristy piles in Vienna, Berlin, Paris
> and so on came from). It took about 6 years to clear.

Misunderstanding the Great Recession

The post states : "Profits naturally follow innovation and well conceived / executed work plans."

Couldn't be further from the truth. Long ago consumers lost interest in "well conceived" and started buying "well priced" product, hence the success of Walmart and demise of our great innovation and manufacturing engine. When you innovate, and then consumers buy poor quality knockoffs from overseas, it should be no surprise that US firms will offshore and/or reduce quality. Consumers accept lower quality in exchange for lower prices. This causes huge amounts of waste, both financial, and environmental. Is a product really "cheap" if it fails soon after purchase ?

Profits SHOULD follow innovation and well conceived plans,
but this is not what the people are willing to pay for. Let's stop
blaming politicians for everything, and start looking at our poor
consumption decisions.