Financial topics

[mannfm11]

John, I came here to comment on the April 14 post on the CDO testimony. I think the first time I read that I misread it, thinking you wrote that they combined that top 7% with some of the bottom stuff. In the first place, it was and is all toxic waste. When a PMI company insures a 95% loan, they get 1% and maybe even more now on the entire loan. Then they get a .35% renewal every year. That is a prime loan underwritten to FNMA standards. It is clear they aren't planning on paying out more than 1% the first year and .35% every year afterwards, so you could say they own the top 1% and it is all pretty much guaranteed to be a loss.

The biggest factor in buying a home is the downpayment. It is clear that migrant workers that made $14,000 and bought $400,000 homes in California didn't have $20,000 to put down and if they did, that was still a 95% loan. Being that person couldn't get a 95% FNMA loan, the risk is clearly higher. All the subprime I ever saw had 2 points on it plus what the broker could get. That means the outfit putting this crap together go the 2% for nothing, at least that is what I am reading into this. So, when they packaged this stuff, 28% of the pie was pure profit. That is the first point.

The next point is that the risk of loss goes up exponentially with risk taken on. This means that with just a little more risk, the loss would go from the roughly 1% I mentioned above to maybe 3%, meaning we are beyond the 2% they got up already. Being the whole market was driven by the availability of false capital, the risk for greater loss was already present. The default risk on a 95% conforming loan in an inflated market is greater than the insurance and homes are worth roughly 70% of value to a lender. A 20% default rate would wipe out the entire tranche. Most losses from bond defaults are 75%.

My point is that not only could the stuff not be made into investment grade loans, but that the stuff to begin with was most likely C quality at best and maybe D. The securities themselves were B, C and D paper as is the term in the mortgage business for subprime paper and the losses associated with the top portion of this paper would be absolute. There is no mathematical model that could show it in any other light. I think D is the lowest of junk ratings and there no way the top portion of a pile of D paper, no matter how it was stirred could ever be securitized into anything near A paper. The top 5% or so was literally worthless.

[reviresco]

“…We are not a fiduciary”

Lloyd Blankfein CEO, Chairman Goldman Sachs
January 2010

Consider that quaint word:

Fiduciary

That word worked well and proudly in the old paradigm of financial entities politely dipping their commission cup in the quiet asset pools of yesteryear, but the word isn’t at all helpful in today’s model of selling, bundling, reselling, carving out, rebundling, and so on to the Nth degree.

You see, “Fiduciary” is a very inconvenient position to be in when profit goals are only attainable by using the “Velocity of Money” concept. For money to have velocity, you have to create as much of a transactional torrent as you can and funnel it through your firms conduits and thus into your own commission/bonus structure. You simply can’t make a laudable profit if the money you control (or can get control of) isn’t continuously moving. And please, get off your high horse about whether or not it’s in the best interests of anyone outside the firm. Because after all, they are not a fiduciary.

Except:
What are you when you are a bank holding company in charge of loans, and deposits, and trusts, and other such instruments as Goldman Sachs is?


During the course of my career, I have been involved in the Savings and Loan industry, the Banking industry, the Insurance industry, and the Broker/Dealer industry.

The mission of all the above industries before the repeal of Glass-Steagall was the gathering of assets and their subsequent prudential deployment.

Except for Broker/Dealers, who raison d’être is to move money. Period.

I was in Savings and Loan during the mid 1980’s, before the formation of the Resolution Trust Corporation. The prevailing attitude at that time of crisis was basically “what the hell just happened?” as we tried mightily to garner new accounts, keep old ones, make new loans, and placate customers who were upset that we could only offer 6 or 7% rollover rates on CD’s which had been paying 15 and 16%.

Banking and Insurance came after that, and the main concerns in both industries were the pending repeal of Glass-Steagall. The Insurance companies in particular were deeply troubled about a conceived lack of understanding by the banks of the promises and duties owed to the policyholders and beneficiaries, and the mindset necessary to manage a societal safety net like insurance. They were very concerned about a cavalier banking industry in general and hotshots in the broker/dealer industry in particular.

The traditional Bankers themselves were less upset about Glass-Steagall disappearing. Gathering assets and having them available to invest in vehicles other than the traditional bank offerings seemed exciting and not altogether different than what they had been doing before. They just would be able to increase the yields for their clients with different products. And of course they might make a little more for themselves.

The Broker/Dealers just laughed off the concerns of the boring, stick in the mud insurance people. They were looking at thousands of billions of dollars getting stale as reserves that could be much more profitably utilized than as a back up for the multigenerational promises of the Insurance companies.

After a stint in the Broker/Dealer world that left me disenchanted with the necessity of moving client’s money out of (ostensibly) perfectly good investments into other (ostensibly) perfectly good investments if I hoped to make a living, I left and went back to the boring old Insurance industry, where multigenerational and societal fiduciary obligations were still honored.

Until I attended a sales meeting where the topic unfortunately was:

“The Velocity of Money” and how the concept should be applied in insurance practices.
So I left the financial world, where everybody has to move the same money around.
Unendingly.

I nostalgically think back to when our society’s financial foundations were not wobbly.

To get back there perhaps we should:

Honor the work and conclusions of our grandfathers and great-grandfathers by reinstating a lightly revised and updated Glass-Steagall.

Honor the work and conclusions of our great-grandfathers and their fathers by reinstating the original framework of the Federal Reserve, by re-empowering the 12 Federal Reserve Bank Regions to autonomously manage the dollar and its value within their own regions based on its own needs, rather than as nationwide monetary decisions.

[gerald]

This is from a supposed stack of just released Goldman Sacks emails during 2006-2007
posted on "Zerohedge" a financial site ------

"What is interesting in the email discovery is that there was another woman in the life of "kind and altruistic" Fab Fab: then Columbia University Post Doc Fatiha Bouhktouche."

In an email Fabrice sent out on January 29, less than a week after the critical January 23 email sent to Marine (see above), he writes:

Yep, work is still as laborious, it's bizarre I have the sensation of coming each day to work and re-living the same agony - a little like a bad dream that repeats itself... In sum, I'm trading a product which a month ago was worth $ 100 and which today is only worth $ 93 and which on average is losing 25 Cents a day...That doesn't seem like a lot but when you take into account that we buy and sell these things that have nominal amounts that are worth billions, well it adds up to a lot of money.

When I think that I had some input into the creation of this product (which by the way is a product of pure intellectual masturbation, the type of thing which you invent telling yourself: "Well, what if we created a "thing", which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?") it sickens the heart to see it shot down in mid-flight... it's a little like Frankenstein turning against his own inventor Anyway I don't want to bore you with my stories, I'm going to look in the yellow pages for the phone number of the ABX market and I'll send it to you, because I believe that a soft and sensual feminine intervention is necessary for Fab's survival

Kisses

http://www.zerohedge.com/article/was-fa ... al-masturb

Is this an example of a Generation "x", if the above is true, a lot of people could get real angry, and I don't think words are going to cut it.

[Tom Acre]

“…We are not a fiduciary”

Lloyd Blankfein CEO, Chairman Goldman Sachs
January 2010

...
Except:
What are you when you are a bank holding company in charge of loans, and deposits, and trusts, and other such instruments as Goldman Sachs is?


During the course of my career, I have been involved in the Savings and Loan industry, the Banking industry, the Insurance industry, and the Broker/Dealer industry.

The mission of all the above industries before the repeal of Glass-Steagall was the gathering of assets and their subsequent prudential deployment.

Except for Broker/Dealers, who raison d’être is to move money. Period.

...
After a stint in the Broker/Dealer world that left me disenchanted with the necessity of moving client’s money out of (ostensibly) perfectly good investments into other (ostensibly) perfectly good investments if I hoped to make a living, I left and went back to the boring old Insurance industry, where multigenerational and societal fiduciary obligations were still honored.

Until I attended a sales meeting where the topic unfortunately was:

“The Velocity of Money” and how the concept should be applied in insurance practices.
So I left the financial world, where everybody has to move the same money around.
Unendingly.

I nostalgically think back to when our society’s financial foundations were not wobbly.

To get back there perhaps we should:

Honor the work and conclusions of our grandfathers and great-grandfathers by reinstating a lightly revised and updated Glass-Steagall.

Honor the work and conclusions of our great-grandfathers and their fathers by reinstating the original framework of the Federal Reserve, ...

I hear you brother. The "financial services industries" changed the rules, changed their plans and got rid of anyone honest enough to object to the insanity in any way. Now enormous amounts of accumulated wealth are in the hands of a few people like the "Fabulous Fab". I think that the repeal of the of Glass-Steagall will go down as THE pivotal moment that led to the disaster we're facing. And the bill that repealed it passed by around 90% in 1999 and was quickly signed into law by Clinton. Hows that for a generational change, generational marker?

[Higgenbotham]

This I have to disagree with. When he speaks, think to yourself, "If I were in his position, and my goals were his, what would I say if the exact opposite were true." This is how I came to the belief that the man really is a genius, and truly knows far more about the real situation than any of the pundits. I might amend your statement to read: "I think what Bernanke 'says' is dead wrong."

I'm not so much referring to what he's saying in isolation as to what he's said and done in conjunction. So, for example, we can listen to a speech and say, well, he's either a liar or he's delusional but we can't tell which. But when we look at what he said he would do in conjunction with what he actually did and continues to do, then it appears to me that Bernanke can't possibly know what he's doing. I don't want to get too bogged down in that, but if you want to continue with specific examples it would be OK.

I wouldn't say that there is a 'lack' of liquidity: http://research.stlouisfed.org/fred2/se ... BR?cid=123.
There is, however, a 'fear' of a lack of liquidity based on those losses, and interest rates are too low to provide incentive to lend.
In my understanding, this is really interesting because we're creating an economic bomb that will explode once critical mass is reached. For now, the large excess reserves hold interest rates down, which inhibits lending, which inhibits inflation, which holds asset prices down, which creates losses, which makes the banks respond by holding even more excess reserves. (Japan has been operating like this for 20 years, so I could be wrong about the next part.) It will appear that quantitative easing is only making the situation worse, but once the excess reserves get large enough so that the largest bank can inflate their own balance sheet out of losses, they will release the money. (The rest is pure fantasy) As the other banks follow, there will be madness as investors chase rising asset prices with low call rate money. Treasuries will fall precipitously as dollars flood into risky worldwide markets and the fed will be politically forced to buy them up, throwing even more fuel into the fire in a vicious cycle. Gas, and housing will rise while salaries stay flat and we lose jobs even faster in the great restructuring as Krugman realizes that inflation doesn't create jobs. Working Americans realize that they are better off on the government dole and call for greater entitlement spending. GDP drops as inflation rises. China hastens their inflation to keep pace and maintain dependency. Economists are stunned; Marxists are not. America divides into two factions: Chimerica, and the rebels supported by their former enemies, the oil-rich states of the Middle East and Russia. World war ensues, and eventually an armistice is called and the US is broken up into 4 sovereign states by treaty. (I have to indulge this sort of flapdoodle every once in a while)

The fact that the system was/is operating at a loss is (my guess anyway) what caused the lack of liquidity to surface back near the end of 2008. And fraud would be part of the equation too. Fraud also generates and hides losses. The situation that turned up near the end of 2008 is really what I'm referring to, not the current state of affairs. After that, the Fed/government flooded the center of the system with liquidity as you've shown and now there's a little sloshing out to the edges. Even some small businesses are getting a few extra orders because a big corporation or university got some stimulus money. But the way I see it is the losses haven't been addressed and the rate of loss is likely increasing, which will begin to eat up the excess liquidity and we'll eventually be right back at the Fall of 2008 (except the government will be at the debt saturation point).

I think the rest of what you're saying is possible but far more likely in my opinion is that the Fed has shored up the center of the system at the expense of the periphery and there is no way of handing money to every small entity that is on the verge of bankruptcy. Probably before the center can begin to inflate its way out, the periphery will begin to collapse and that will spread like dominoes to something that is too big to fail in the sense that panic will ensue once the failure becomes evident. As we've seen, Greece wasn't quite big enough to set that off, but it was close. Or it could be something else like an assassination or a terrorist attack, etc., and that would likely happen because there's been a hell of a lot of discontent generated by the unequal distribution of money. I see too many things that can go wrong in an environment like this before inflation can begin to take hold again. Of course, as I've posted, there are people like John Paulson who are controlling lots of money and who theoretically should know better than me who are now betting the other way. The interesting thing about that in my view is what happens now that most everyone is leaning in that direction if/when they find out that they are wrong.

[Higgenbotham]

The above post reminded me of one really funny story I read about Bernanke's incompetence. I'll relate it as best I can remember but it is all accessible. Throughout the first half of 2007, Bernanke was stating that "subprime is contained." Granted, he might believe that or not believe it but it's what comes next that is so hilarious. Around mid July 2007, subprime actually started to collapse and spread. By mid August there was a real problem. So what did Bernanke do? He flew out to Newport Beach, CA to talk to some hedge fund managers to get a grip on the situation and understand why there was a problem. They told him point blank that if something wasn't done by the next morning that the stock market could be down 2000 points (or something like that). I can't remember all the details but the gist of it was that Bernanke had to get clued in by some hedge fund managers that there really was a serious problem. It's been 3 years, but I remember reading that and laughing so hard I just about fell off my chair.

What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.

http://money.cnn.com/2007/11/27/news/ne ... /index.htm

There's a lot more out there on this, but this is the first reference I came up with.

[JLak]

... Bernanke had to get clued in by some hedge fund managers that there really was a serious problem.

Okay, now I'm legitimately scared, and somewhat amazed that we've made it thus far.

[Higgenbotham]

... Bernanke had to get clued in by some hedge fund managers that there really was a serious problem.

Okay, now I'm legitimately scared, and somewhat amazed that we've made it thus far.

A bit more from the same time period:

I and other PIMCO professionals were attempting to describe to high-ranking Treasury and Fed officials the near-frozen commercial-paper markets and the draining confidence of bond and stock investors worldwide. It was Thursday, August 16. Stocks had closed down 210 points and were expected to open hundreds of points lower on Friday.

The modern financial complex has morphed into something unrecognizable to many astute market veterans and academics. Bernanke’s fellow governors and Hank Paulson’s staff at the Treasury spread their roots during an era in which traditional banking activity – lending out deposits backed by a certain level of reserves – was the accepted vehicle for liquidity creation.

But if Paulson cannot prevent expected declines of 10-15% in national home prices over the next several years, it is problematic as to whether Bernanke can substantially cushion them either. First of all, the aforementioned lack of “appreciation” of a modern-day shadow banking system has put the Fed far behind the 8-ball in its reflexive duty to lower interest rates in an anticipatory fashion. Mortgage credit has been contracting on the ground level for all of 2007 with individual, small, and then national mortgage brokers and originators closing their doors. Legal threats and regulatory pressures have compounded the credit implosion. As a result, home prices, as shown in Chart 1, have been declining for nearly 12 months and only now is the Fed responding to an unfolding crisis.

http://www.pimco.com/LeftNav/Featured+M ... r+2007.htm

Once Bernanke finally got around to shopping around for answers, the media caught wind of it and Bloomberg, I believe, requested a copy of his appointment book under the Freedom of Information Act for this time period. As I recall, he stonewalled for several months before finally turning it over. My recollection on this particular episode may not be entirely accurate (in fact, now that I think of it, it was Geithner's appointment book they may have been after) but this story seems to give a good summary of what was going on during that time period regarding the revolving door of meetings in a belated attempt to get Bernanke up to speed:

http://www.bloomberg.com/apps/news?pid= ... 21h4HAD6Ag

The next part of this unfortunate display of incompetence was Bernanke then panicked and abruptly slammed interest rates down, probably overshooting, although that is a matter of opinion and can't be proven. It's also a matter of opinion as to whether that potential overshoot was at least partially responsible for oil prices shooting up to $147 per barrel the next Summer and collapsing the economy. My opinion is yes, that had a lot to do with it, but that can't be proven either.

[freddyv]

http://money.cnn.com/2007/11/27/news/ne ... /index.htm

To understand where future losses may lie, it makes sense to ask which investments did especially well during the shadow's formation. Home prices have been the obvious first hit -- down 5% nationwide already, with perhaps another 10% to go over the next several years.

Note that even Bill Gross, one of the few sensible financial people who appears on your TV, was way off on how bad things could get.

BTW, John, I love the daily blog and have made it one of my daily must-reads along with Mish's blog at http://globaleconomicanalysis.blogspot.com/

Fred
http://www.acclaiminvesting.com/

[richard5za]

Goldman Sachs

My impression watching the grilling of Goldman Sachs executives on Bloomberg yesterday is that they were mostly unwilling to answer the questions in an honest way. There was nothing direct and open, or so it appeared.

What I'm not clear upon is whether USA legislation exists that requires directors, board members, trustees, or 'officers of the company' to exercise fiduciary responsibilities in any way. Is this a clear cut case of trangressing the law, or is it very vague? Or are civil claims a genuine possibility?

I have added a note upon my own understanding of fiduciary responsibility, based upon our laws here, but no doubt it means different things in different parts of the world:

A fiduciary responsibility embrances both the capacity and the will to carry out something, or to make a success of something, or not to do something, entrusted to the Officers of the Company/Trustees/Directors by another party. In law there are generally a number of fiduciary specifics, e.g. financial laws, but outside of the law there could civil claims upon a party who breached their fiduciary responsibility. In certain circumstances fiduciary responsibility may be a case of doing something in accoradnce with the original and entrusted intentions, or be as simple as expected and entrusted behaviour e.g. not hiding a contingent liability. The importance of the will required to succeed at or carry out entrustments is sometimes over looked.

Richard