Compared to U.S. Bailout, Euro Bailout Is Nothing [View article]
Don't think for a second that the EU is done; they are simply using a top down approach to financial rescue by first bailing out insolvent states. As they drill down further and peel back the onion, they will start bailing out individual banks and businesses. Yesterday, the FT reported that European banks are far behind their US counterparts in writing down impaired loans and they could be looking at a $trillion or more of writedowns. It's too early to call the winner of the bailout race.
Lehman Head Warns of More Big Bank Failures [View article]
So, here is the man overseeing the largest bankruptcy in history telling us that, more than one year on, US regulators haven’t even asked for his professional opinion as to what went wrong and how we can stop a repeat. That’s pretty damning. It certainly speaks to the inability of regulation alone to prevent another crisis. ______________________...
This speaks to the highly politicized nature of the problem and the combined unwillingness and inability of congress and the administration to bring about meaningful reform. Moreover, we all know that the stress tests were theater at best dooming us to repeat the Japanese experience as banks hoard capital to cover continued losses. Basel III guidelines have not been released, the house bill is remarkably useless and the Dodd bill faces a tough fight, all suggesting a lost opportunity and a paralyzing repetition of the recent crisis in 07.
I agree with much of what the author submits but if nothing else the Volcker rule would remove the insanity of offering these grotesque financial behemoths FDIC insurance and access to the Fed window while, simultaneously, allowing them to gamble and play in global casinos.
We have the regulatory authority to contain and manage systemic risk: stringent underwrting standards. If the loans underlying MBS or CDO's are sound, then you can slice, dice and securtize as much as you want and expect to be repaid. There are a number of reforms I would like to see but one of the most important is limiting CDS to those that actually hold debt being hedged.
While I prefer some of the more extreme measures, maybe Treasury could have engaged in some long-term planning(several forward looking weeks) by making CAP (TARP) monies available simultaneously with a hastened version of the soap opera viewed on CNBC as the stress test. Instead,we gave them the money only wind up negotiating with the oligarchs after we had given away the store. As to the underlying financial soundness of the program it is not profoundly shocking the most credit worthy institutions with the best business models were the first to repay CAP monies. Before we break out the bottles, lets see what happens with GM, Chrysler, AIG, the agencies and other black holes.
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.
Government's Best Move in 2008? Letting Lehman Fail [View article]
A very interesting article that challenges our thinking; I think it will be debated for some time with little consensus.
My first thought, is that the current situation is a result of government failure to bring regulation to an increasingly complex financial services industry. Markets can only be efficient when there is transparency and the opaque industry of synthetic financial products, including credit default swaps, is anything but transparent. Thus, there are pricing issues and fear of counter party risk.
Had government performed its function of providing the infrasturcture needed for markets to operate efficently, it is unlikely that it would have had to place the GSE's under receivership and taken other steps mentioned in the article. Intervention was required because there was lack of anticipation.
The decision to allow Lehman fail is covered well in the article but was followed by unintended consequences. Fears immediately consolidated over the viability of AIG, Goldman and Morgan. And the government did not forsee the depreciation of Lehman's bonds leading to a run on money market deposits.
The take away is that the government's function should be to assist private enterprise by providing a regulatory environment that offers transparency and promotes efficiency. Direct intervention is a moral hazard and leads to unintended consequences.
Compared to U.S. Bailout, Euro Bailout Is Nothing [View article]
Lehman Head Warns of More Big Bank Failures [View article]
______________________...
This speaks to the highly politicized nature of the problem and the combined unwillingness and inability of congress and the administration to bring about meaningful reform. Moreover, we all know that the stress tests were theater at best dooming us to repeat the Japanese experience as banks hoard capital to cover continued losses. Basel III guidelines have not been released, the house bill is remarkably useless and the Dodd bill faces a tough fight, all suggesting a lost opportunity and a paralyzing repetition of the recent crisis in 07.
More Thoughts on the Volcker Rule [View article]
We have the regulatory authority to contain and manage systemic risk: stringent underwrting standards. If the loans underlying MBS or CDO's are sound, then you can slice, dice and securtize as much as you want and expect to be repaid. There are a number of reforms I would like to see but one of the most important is limiting CDS to those that actually hold debt being hedged.
Bailouts: Revisionist History [View article]
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.
Government's Best Move in 2008? Letting Lehman Fail [View article]
My first thought, is that the current situation is a result of government failure to bring regulation to an increasingly complex financial services industry. Markets can only be efficient when there is transparency and the opaque industry of synthetic financial products, including credit default swaps, is anything but transparent. Thus, there are pricing issues and fear of counter party risk.
Had government performed its function of providing the infrasturcture needed for markets to operate efficently, it is unlikely that it would have had to place the GSE's under receivership and taken other steps mentioned in the article. Intervention was required because there was lack of anticipation.
The decision to allow Lehman fail is covered well in the article but was followed by unintended consequences. Fears immediately consolidated over the viability of AIG, Goldman and Morgan. And the government did not forsee the depreciation of Lehman's bonds leading to a run on money market deposits.
The take away is that the government's function should be to assist private enterprise by providing a regulatory environment that offers transparency and promotes efficiency. Direct intervention is a moral hazard and leads to unintended consequences.