I came across an interesting article about Jim Rogers (who co-founded the Quantum Hedge Fund with George Soros), who says he’s shorting U.S. I-Banks due to a combination of money losing investments, high operational costs and toxic balance sheets.
Jim Rogers, co-founder of the Quantum Hedge Fund with billionaire George Soros, boosted his bets against U.S. securities firms because of their salary "excesses'' and money-losing investments.
Rogers said he increased his year-old short positions in the past six weeks in U.S. investment banks, using exchange-traded funds and bets against individual companies he declined to name. Stocks in the industry, which pays too much in bonuses, may fall as much as 70 percent in a bear market, he said.
"You see 29-year-olds on Wall Street making $10 million to $20 million a year, and they think it's normal,'' Rogers, 65, said in an interview in London today. "There have been lots of excesses,'' said Rogers, chairman of Beeland Interests Inc.
"Who knows how bad the balance sheets are,'' Rogers said. "They took on gigantic amounts of bad paper."
"The slump in the U.S. housing market still has a long way to go'' before recovering, he said. Market excesses don't clear themselves out in just four or five months; they take years.''
Rogers is best known for being a commodities bull since 1999, before the market started to rally in 2001. His Rogers International Commodity Index has more than quadrupled since its start in 1998, while the Dow Jones Industrial Index gained 56 percent.
"History shows that the bull market in commodities will last a long time,'' Rogers said last year. He predicted in 2005 that commodities will rally at least until 2014 and perhaps until 2022.
While I think that Jim can lean towards hyperbole at times, it’s hard to argue against his track record and he makes some excellent points about the brokers. With respect to the bad debt issue, the thing that stands out in my mind is: “Can we even take the earnings reports of the past 6-8 quarters seriously?” The brokers (and retail banks for that matter) were overvaluing mortgage and other debt securities by mark to model methods, based on the anticipated performance of the underlying loans. As the mortgage crisis continues to worsen and the market realizes how risky and toxic certain securitized loans are, it’s quite obvious that many of those securities were overvalued from the start.
Meaning: included in the earnings statements of past quarters are paper gains from overvalued securities, which the banks won’t be able to realize and/or were gains that just didn’t truly exist in the first place. The financial sector’s Q3 write downs helped to clean up some of the “faux” paper gains on their balance sheets, but I doubt they removed all of them. Let’s not forget Goldman’s $2.62 billion paper gain in Q3. If the financial sector wants to come clean, it should quantify and reveal the remaining “suspect” paper gains on their balance sheets.
On the topic of housing it comes down to one fundamental fact: the housing market was simply overinflated due a combination of factors related to market psychology, cheap money, bad decision making, lax lending standards, etc. In other words, housing isn’t in a downturn per se (as that usually indicates a drop from fair value); instead the housing market is correcting itself due to being overinflated. Since housing prices were overinflated over the course of roughly 5-6 years (depending on the region), it stands to reason that it’s going to take a long-time for the housing market to correct itself.
Analysts, executives, pundits, et al, need to stop talking about “housing recoveries”, as they’re effectively wishing for prices to go back to being overinflated, which will (of course) only lead to another set of housing and mortgage related problems down the road.
Bloomberg: “Rogers Bets Against U.S. Investment Banks, Housing” -- Saijel Kishan and David Clarke, October 31, 2007
Disclosure: at the time of publishing the Author didn’t own a position in any of the firms mentioned in this or the referenced article.