Obama's TARP 2 Signals an End to Mark to Market [View article]
I should add that Sweden averted a credit crisis in 1992 by insisting that banks write-off all bad loans prior to seeking government assistance extended with warrants. Japan now acknowledges it should have followed the Swedish model.
Grading the Bailout: Paulson's Report Card [View article]
The funds were not approved so Paulson could run a mutual fund. There are slightly larger problems.
If we learned anything from the Japanese experience, it is the need for government to assist in providing transparency through complete accounting, removing toxic assets from bank balance sheets, providing adequate liquidity and making guarantees where appropriate.
In my mind Paulson should have tackled both liquidity injections and purchase of toxic or troubled assets simultaneously. And he should have (1) been more forthcoming about abandoning the purchase of troubled assets and (2) tied more strings to liquidity injected through purchase of preferred shares.
Obama's TARP 2 Signals an End to Mark to Market [View article]
Whether we like it or not therer are similarities between what we are experiencing and what the Japanese experienced. In a keynote speech by Dr. Takafumi Sato, who played a role in the Japanese experience of the 90's, the very first thing he mentions is disclosure.
The first useful lesson is that prompt and accurate recognition of losses is essential. In the early 1990s, Japan did not have in place effective frameworks for disclosure and provisioning with respect to non-performing loans. This gave financial firms incentives to postpone the disposal of their non-performing loans, and the country plunged into a negative spiral of credit crunch and deterioration of the real economy. Based on this bitter experience, Japan improved disclosure requirements, clarified the rules on write-downs and provisioning, put in place a prompt corrective action scheme, and established an early warning system that enables the supervisors to conduct intense monitoring of banks before they become undercapitalized. In order for supervisors to act promptly, it is effective to have a regulatory framework in which they can make judgment in an objective manner.
From this standpoint, prompt disclosure by U.S. financial firms of the losses on financial instruments is encouraging. Challenges do remain, however, including the methodologies for valuation of financial instruments in cases where their market liquidity dries up, and the lack of data on exposure to complex financial products that are comparable across financial firms
The Beginning of a New Bull Market? [View article]
Two points.
Market bottoms are reached through a process in which the first low is tested in some manner...........usual... two times. The lowest of the lows is usually reached on light volume, not the type of volume we saw on on November 20. Markets tend to bottom through exhaustion, not panic.
The market is forward looking but what is it looking forward to? Economists and others are now beginning to believe that the economy and corpoate earnings may deteriorate through 2009 and turn around sometime in early 2010.
Using six months as a lead time, this places the earliest recovery in the third quarter. I am trying trying to make a point more than I am a forecast.
Analyst Earnings Revisions Still Extremely Negative [View article]
Very interesting information.
As to your question, I don't think anyone can answer with any measure of certainty because of the great uncertainty built into the economy.
Two or three weeks ago, consensus thinking was that the economy was going to turn around early in the second half. Now it looks like there is growing appreciation for the likely depth and protraction of the current recession and that the stimulus plan will not perform miracles. We are also seeing hints that party politics will both compromise and delay implementation the plan.
Resultantly, mainstream economists are revising their forecasts and moving closer to Roubini, Schilling and Felstein. The latter see a turnaround in the economy in early 2010 which also suggest that is when corporate earnings would improve. Earnings estimates for the SP500 have not caught up with this thinking and, in my opinion, have further to fall.
Savings, Consumption and the Economy: 'Lord, Make Us Thrifty, But Not Yet' [View article]
The present course cannot be sustained and the consumer must retrench.
Initially, savings will be use to retire credit card and equity debt.
Longer-term, we can hope that the increased savings will provide consumers a cushion, a means of retirement and additional funds for investment within the US.
A structural change in our economy is both required and needed.
Bailout Accountability: Something's Rotten in the Treasury's Kingdom [View article]
This was discussed today in a similar post on SeekingAlpha.
It's painfully clear that more time and thought should have been invested in TARP before its approval and funding.
Treasury's original TARP goal included avoiding widespread, systemic failure. Something about protecting taxpayers and forestalling further foreclosures was added subsequently. While implied, there was nothing specifically mentioned about extending credit or making more loans available.
These goals were to be realized through direct purchase of troubled assets........somethin... early critics said would be difficult because of the time it would take to price the assets under consideration. And after securing approval to purchase troubled assets, Paulson switched gears and started buying preferred stock, attaching few strings along the way.
Characteristically, we are now examining what has taken place and are asking whether the public good has been served and where the money went. Sadly, we got pretty much what we bargained for.
We did not demand much in the way of accountability in use of the funds..........and, as the author points out, we are not getting much. In a similar vein, we did not specify that the TARP funds should be used as reserves for expansion of credit. And sure enough, no new loans.
These are getting to be expensive lessons and I hope something is learned in the process.
What If the Economic Model Is Wrong? [View article]
All of the models, to varying degrees, have weaknesses, particularly with respect to institutional behavior and distribution of risk. Physics does a better job with critical state and failure theory.
With that little bit out of the way, it's safe to say you do not need a model to grasp that an economy built upon a mountain of debt and attending asset bubbles is certain to give way.
The author touches upon the key issues with respect to evaluating TARP: lack of clearly defined goals or implete goals.
Without clearly defined and agreed upon goals, it's almost impossible to evaluate Treasury performance. Similarly, we can fairly ask what the banks have done with their respective liquidity injections.........but lacking a strategic framework we cannot assess how well they have handled the funds.
I know time was of the essence but the questions hanging over Treasury's development and execution of TARP, suggest that more time and thought should have been invested in TARP prior to its funding.
Its mission should have been clearly understood and more strings should have been attached to prevent diversion of funds to activities not anticipated by the plan e.g. executive compensation.
The Obama Stimulus Plan and the Dollar: Is There a Connection? [View article]
We do have to be concerned about the dollar but don't forget the rest of the world is reflating in parallel.
The Bank of England is at the lowest rate since its inception over 300 years ago. ECB President Trichet has said liquidiity injections would continue until markets return to normal.
Want to Reform Wall St.? Bring Back Partnership Investment Banks [View article]
Like most of you, I like the author's thinking but since most of the broker dealers are already publicly held companies.......we must deal with the situation as it is.
First, limit leverage to something like 15 to 1. Commercial banks are limited to around 10:1, while some investment banks were over 30:1 last year.
Next, and where money management is involved, base compensation for the firm, whether a partnership or LLC, on a small percentage which would applied to the assets under management. These revenues would be used to pay typical overhead costs, including small base salaries.
Incentive compensation, though, would be some percentage of earned profits, typically around 20% in the hedge fund space. But, put in place high water marks which come into play when there have been losses and which require that investment managers recover prior losses before any incentive compensation is paid.
Thus, should the fund lose $10 million in any given year, the fund manager would have to recover that amount before becoming eligible for incentive-based compensation.
Cooper goes so far as to conclude that “If blame (for the current financial crisis) must be laid anywhere it must be placed at the collective feet of the academic community for having chosen to continue promoting their flawed theories of efficient, self-regulating markets, in the face of overwhelming contradictory evidence.” QED.
Academics develop and provide frameworks for understanding market behavior, but are not the dominant participants. Efficient market theory is based upon transparency and reliable information........whi... then leads to price discovery.
Taking Congress and HUD out of the mix, had the ratings agencies properly graded the toxic, sub-prime products being packaged as CDO's, they would have been priced much differently and the market would demanded a higher yield to compensate for the higher risk. In turn, this would have made sub-prime loans more expensive.....and fewer would have been issued.
Some where expecting December job losses to be 525,000.
Even though losses of 524,000 were reported, the report was worse than expected as payrolls in October and November revised lower by a total of 154,000 jobs. November's loss was revised to 584,000, the highest in 24 years.
Meanwhile over in survey land, the number of unemployed persons increased by 632,000 to 11.1 million and the unemployment rate rose to 7.2 percent.
There are games, of sorts, being played much of the data. The BLS calculates the worforce to 154 million people but excludes 1.9 million people who are "marginally attached" to the workforce.
If you throw these people ino the mix, the unemployment rate would increase to 8.3%(13/155.9) . Others estimate the real rate of unemployment to be higher.
Don't be too hopeful about us knowing what is going on.
Ryan Avent says that he thinks the "plausible range of economic outcomes is, at the moment, quite wide indeed", and wonders whether "the size of this conceivable range is actually reflective of potential outcomes, rather than simple ignorance":
Other than quantitative easing, which cannot be calibrated to specific outcomes, nothing else is in place; only the broad outlines of the stimulus package have been released. So, I would think the range of possible outcomes to be extremely broad.
Obama's TARP 2 Signals an End to Mark to Market [View article]
Grading the Bailout: Paulson's Report Card [View article]
If we learned anything from the Japanese experience, it is the need for government to assist in providing transparency through complete accounting, removing toxic assets from bank balance sheets, providing adequate liquidity and making guarantees where appropriate.
In my mind Paulson should have tackled both liquidity injections and purchase of toxic or troubled assets simultaneously. And he should have (1) been more forthcoming about abandoning the purchase of troubled assets and (2) tied more strings to liquidity injected through purchase of preferred shares.
Obama's TARP 2 Signals an End to Mark to Market [View article]
The first useful lesson is that prompt and accurate recognition of losses is essential. In the early 1990s, Japan did not have in place effective frameworks for disclosure and provisioning with respect to non-performing loans. This gave financial firms incentives to postpone the disposal of their non-performing loans, and the country plunged into a negative spiral of credit crunch and deterioration of the real economy. Based on this bitter experience, Japan improved disclosure requirements, clarified the rules on write-downs and provisioning, put in place a prompt corrective action scheme, and established an early warning system that enables the supervisors to conduct intense monitoring of banks before they become undercapitalized. In order for supervisors to act promptly, it is effective to have a regulatory framework in which they can make judgment in an objective manner.
From this standpoint, prompt disclosure by U.S. financial firms of the losses on financial instruments is encouraging. Challenges do remain, however, including the methodologies for valuation of financial instruments in cases where their market liquidity dries up, and the lack of data on exposure to complex financial products that are comparable across financial firms
The Beginning of a New Bull Market? [View article]
Market bottoms are reached through a process in which the first low is tested in some manner...........usual... two times. The lowest of the lows is usually reached on light volume, not the type of volume we saw on on November 20. Markets tend to bottom through exhaustion, not panic.
The market is forward looking but what is it looking forward to? Economists and others are now beginning to believe that the economy and corpoate earnings may deteriorate through 2009 and turn around sometime in early 2010.
Using six months as a lead time, this places the earliest recovery in the third quarter. I am trying trying to make a point more than I am a forecast.
Analyst Earnings Revisions Still Extremely Negative [View article]
As to your question, I don't think anyone can answer with any measure of certainty because of the great uncertainty built into the economy.
Two or three weeks ago, consensus thinking was that the economy was going to turn around early in the second half. Now it looks like there is growing appreciation for the likely depth and protraction of the current recession and that the stimulus plan will not perform miracles. We are also seeing hints that party politics will both compromise and delay implementation the plan.
Resultantly, mainstream economists are revising their forecasts and moving closer to Roubini, Schilling and Felstein. The latter see a turnaround in the economy in early 2010 which also suggest that is when corporate earnings would improve. Earnings estimates for the SP500 have not caught up with this thinking and, in my opinion, have further to fall.
Savings, Consumption and the Economy: 'Lord, Make Us Thrifty, But Not Yet' [View article]
Initially, savings will be use to retire credit card and equity debt.
Longer-term, we can hope that the increased savings will provide consumers a cushion, a means of retirement and additional funds for investment within the US.
A structural change in our economy is both required and needed.
Bailout Accountability: Something's Rotten in the Treasury's Kingdom [View article]
It's painfully clear that more time and thought should have been invested in TARP before its approval and funding.
Treasury's original TARP goal included avoiding widespread, systemic failure. Something about protecting taxpayers and forestalling further foreclosures was added subsequently. While implied, there was nothing specifically mentioned about extending credit or making more loans available.
These goals were to be realized through direct purchase of troubled assets........somethin... early critics said would be difficult because of the time it would take to price the assets under consideration. And after securing approval to purchase troubled assets, Paulson switched gears and started buying preferred stock, attaching few strings along the way.
Characteristically, we are now examining what has taken place and are asking whether the public good has been served and where the money went. Sadly, we got pretty much what we bargained for.
We did not demand much in the way of accountability in use of the funds..........and, as the author points out, we are not getting much. In a similar vein, we did not specify that the TARP funds should be used as reserves for expansion of credit. And sure enough, no new loans.
These are getting to be expensive lessons and I hope something is learned in the process.
What If the Economic Model Is Wrong? [View article]
With that little bit out of the way, it's safe to say you do not need a model to grasp that an economy built upon a mountain of debt and attending asset bubbles is certain to give way.
TARP: Time for Accountability [View article]
Without clearly defined and agreed upon goals, it's almost impossible to evaluate Treasury performance. Similarly, we can fairly ask what the banks have done with their respective liquidity injections.........but lacking a strategic framework we cannot assess how well they have handled the funds.
I know time was of the essence but the questions hanging over Treasury's development and execution of TARP, suggest that more time and thought should have been invested in TARP prior to its funding.
Its mission should have been clearly understood and more strings should have been attached to prevent diversion of funds to activities not anticipated by the plan e.g. executive compensation.
Markets Are Perched on a Precipice [View article]
The Obama Stimulus Plan and the Dollar: Is There a Connection? [View article]
The Bank of England is at the lowest rate since its inception over 300 years ago. ECB President Trichet has said liquidiity injections would continue until markets return to normal.
None of the currencies look safe.
Want to Reform Wall St.? Bring Back Partnership Investment Banks [View article]
First, limit leverage to something like 15 to 1. Commercial banks are limited to around 10:1, while some investment banks were over 30:1 last year.
Next, and where money management is involved, base compensation for the firm, whether a partnership or LLC, on a small percentage which would applied to the assets under management. These revenues would be used to pay typical overhead costs, including small base salaries.
Incentive compensation, though, would be some percentage of earned profits, typically around 20% in the hedge fund space. But, put in place high water marks which come into play when there have been losses and which require that investment managers recover prior losses before any incentive compensation is paid.
Thus, should the fund lose $10 million in any given year, the fund manager would have to recover that amount before becoming eligible for incentive-based compensation.
The Origin of Financial Crises [View article]
Academics develop and provide frameworks for understanding market behavior, but are not the dominant participants. Efficient market theory is based upon transparency and reliable information........whi... then leads to price discovery.
Taking Congress and HUD out of the mix, had the ratings agencies properly graded the toxic, sub-prime products being packaged as CDO's, they would have been priced much differently and the market would demanded a higher yield to compensate for the higher risk. In turn, this would have made sub-prime loans more expensive.....and fewer would have been issued.
Jobs Report: A Sliver of Optimism [View article]
Even though losses of 524,000 were reported, the report was worse than expected as payrolls in October and November revised lower by a total of 154,000 jobs. November's loss was revised to 584,000, the highest in 24 years.
Meanwhile over in survey land, the number of unemployed persons increased by 632,000 to 11.1 million and the unemployment rate rose to 7.2 percent.
There are games, of sorts, being played much of the data. The BLS calculates the worforce to 154 million people but excludes 1.9 million people who are "marginally attached" to the workforce.
If you throw these people ino the mix, the unemployment rate would increase to 8.3%(13/155.9) . Others estimate the real rate of unemployment to be higher.
Don't be too hopeful about us knowing what is going on.
Can We Really Guide the Economy? [View article]
Other than quantitative easing, which cannot be calibrated to specific outcomes, nothing else is in place; only the broad outlines of the stimulus package have been released. So, I would think the range of possible outcomes to be extremely broad.