Monday, May 18, 2009

Genuflect or suffer...

This article is interesting only as a demonstration of a warped sense of reason.  It assumes the need for massive governmental enforcement, in addition to assuming away the laws of other sovereign nations.

This section was particularly egregious:

President Obama estimates that his proposals for ending tax haven abuses will raise $101 billion over a decade. The Senate Permanent Investigations subcommittee puts the annual tax loss at $100 billion; Treasury sets the figure at $123 billion. Collecting those lost billions could mean that Americans could pay no withholding tax from November 15 to December 31; it could pay for healthcare for about 20 million of the roughly 50 million Americans without health insurance.

Because we are civilized, we should make the Caymans invasion the last resort in an escalating series of steps designed to persuade the islands to stop undermining US national security. For starters, as I proposed in Tax Notes magazine, Congress should pass a law funding pursuit of every major tax cheat, just as we pursue every killer, rapist and drug dealer. Using offshore accounts to cheat the government out of $50,000 or more for two or more years should be made a felony per se. Then let's provide an escape hatch, which would spare prosecution of anyone who fesses up and fully pays taxes, penalties and interest. The same law should make public the name and details of every person or company that skips the opportunity to make things right.

Friday, May 15, 2009

The next in line...

Not much news here, Life Insurers are especially vulnerable with variable annuity policies promising guaranteed income with embedded death benefits.

(AP) — The Treasury Department has agreed to extend billions in bailout funds to six major life insurers, including Allstate Corp., following a months-long quest by some in the sector for government help in shoring up capital positions in the wake of major investment losses.

The Hartford Financial Services Group Inc. was the first to disclose Thursday that it had been notified by the Treasury Department that it was eligible for $3.4 billion from the Troubled Asset Relief Program, or TARP. Lincoln National Corp., which commonly goes by the name Lincoln Financial Group, said it has been initially approved for a $2.5 billion injection from TARP's Capital Purchase Program.

Allstate, Ameriprise Financial Inc., Principal Financial Group Inc. and Prudential Financial Inc. also are among insurers receiving preliminary investment approval, Treasury spokesman Andrew Williams confirmed. He declined to disclose the amount of investment each company will receive.

Thursday, May 14, 2009

Retaliatory strike...

...after the recent bloviation by the Chinese regarding U.S. Debt.  Hopefully this is merely a trial balloon.  This will have more commentators decrying the effects of protectionism, to say nothing of a "new era of proxy wars" using trade and exchange as the main implements.

Wednesday, May 13, 2009

Moody's donwgrading the U.S.?

...with predictable reactions from congressional members and think tanks who don't quite understand what it means for a country to issue debt in its own currency.

America’s triple A rating is at risk

By David Walker

Published: May 12 2009 20:06 | Last updated: May 12 2009 20:06

Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.

That warning from Moody’s focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.

Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of thePeople’s Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.

Saturday, May 09, 2009

Epic Gordian knots of farce...

...I am at a loss of words for this.  The G let let the banks run the stress tests based on their own assumptions.  If the results were negative, the Banks would have to raise capital to meet the approval of their regulatory overseers.   Of course, the results were negative to the tune of 74 Billion dollars.  

Now, they gain a 6 month period to wait and see if earnings outstrip "forecaststs".

Why not demand they raise additional capital, weighted an error term for the accuracy of the earnings forecasts?

I don't really need more evidence of regulatory capture, but it just keeps coming.

US banks claim line softened on $74bn

By Francesco Guerrera and Saskia Scholtes in New York and Krishna Guha in Washington

Published: May 8 2009 16:18 | Last updated: May 9 2009 04:06

US banks have been given government assurances they will be allowed to raise less than the $74.6bn in equity mandated by stress tests if earnings over the next six months outstrip regulators’ forecasts, bankers said.

The agreement, which was not mentioned when the government revealed the results on Thursday, means some banks may not have to raise as much equity through share issues and asset sales as the market is expecting. It could also increase the incentive for banks to book profits in the next two quarters.

The banks have 28 days to announce their capital-raising plans and until November 9 to implement them. Wells Fargo and other banks that will have to raise capital told the Financial Times that if operating profits were greater than the government’s stress-case forecast for the second and third quarter, they would receive credit for the difference. That, in turn, would reduce the need to raise fresh equity from other sources.

A Federal Reserve official said the 10 banks that need a combined $74.6bn in equity would be expected not to assume that their earnings would be higher than in the stress test when presenting their capital-raising plans. However, the official declined to comment on whether banks could take credit for such earnings as they materialised and adjust their capital-raising plans accordingly by November.

Thursday, May 07, 2009

More of the Same from the ECB

They are behaving like popular market news services...every day brings more statements and actions revealing different criteria and changing priorities.

Full article here, not that anyone would need to read yet more jaw-boning from Trichet.

FRANKFURT (AP) -- The European Central Bank cut interest rates a quarter point and said it would buy euro-denominated bonds as well as offer longer-term credit to banks as it moves to get more money flowing through the 16-nation euro zone economy.

ECB President Jean-Claude Trichet, in remarks to reporters after the bank lowered its benchmark interest rate to 1 percent on Thursday, unveiled the new measures to accompany already announced moves including increased credit amounts and broader collateral rules for banks that borrow from it.

Trichet said the central bank plans to purchase around euro60 billion ($80.2 billion) in euro-denominated covered bonds, which would grease the hard-hit banking system with more money in the midst of the world financial turmoil. He said details would come later.

The bank will also lengthen its short-term credits to banks through its refinancing operation to 12 months from the current six.

"We will display on the occasion of our next meeting all the technicalities that goes with this purchase of covered bonds -- which is highly technical," he told reporters.

Trichet said the bank could do still more, indicating that 1 percent may not be the lowest it could take interest rates.

"I will say, and it is something to be noted, that we have not decided today that the new level of our policy rates was the lowest level, that we could never cross whatever future circumstances could be," he said.

Covered bonds are securities backed by assets such as mortgages, but are considered safer than the asset-backed securities that have been at the center of much of the turmoil on world markets. Issuers must keep collateral on their books to back up the bonds, and creditors have more recourse in case of default, since they can seek repayment from both the collateral and the issuer itself.

Asked about other measures such as purchases of different kinds of securities -- which have already been undertaken by the Bank of England -- Trichet demurred. He said only that the bank had chosen covered bonds because they were one segment of the private securities market "that had been particularly touched" by the financial meltdown.

Tuesday, May 05, 2009


...for the cost of capital going forward are many.  Uncertainty in priority or the secured/unsecured status of bondholders is troubling.  With pricing of any risk instrument already being difficult, expediency of the process should not be given absolute priority.  Last but not least, all of this during a time when the Government wants to "encourage" lending.

May 5 (Bloomberg) -- Chrysler LLC dissident lenders must reveal their
identities by 10:00 a.m. tomorrow, a bankruptcy judge ruled, rejecting
claims that their safety was at risk.

Those named publicly include OppenheimerFunds Inc., Perella Weinberg
Capital Management LP’s Xerion hedge fund and Stairway Capital
Advisors. Perella withdrew its sale objection last week.

The lenders claim in their court filings that the U.S. government is
subverting federal bankruptcy law by forcing lenders to agree to a
reorganization that repays unsecured creditors ahead of some secured

The group, calling itself Chrysler’s non-TARP lenders, in reference to
aid other creditors got from the federal Troubled Assets Relief
Program, said the proposed auction would prevent a so-called “credit
bid” from its members.

Credit Bid

Under a credit bid, parties use debt to buy a company. The group also
seeks to block the proposed sale to an alliance led by Fiat, as well
as a request by the U.S. automaker for approval of a $4.5 billion
Treasury loan to finance the reorganization.

In a footnote, they cited a requirement that any competing bid include
10 percent of the purchase price in cash. That “appears designed
specifically,” to prevent non-TARP members from making a credit bid,
using the full amount of their secured claim, they said.

The group also objected to rules that would require all competing bids
be subject to the same terms as the proposed transaction with the
government and Fiat, which are financing the reorganization and
providing small-car technology, respectively.

Because bids need to be made in a week under the proposed timeline,
there isn’t enough time for parties to make due diligence required for
a competing bid, the holdouts said.

Secured Lenders

The group has pitted itself against secured lenders that agreed to the
Fiat deal, including JPMorgan, Citigroup Inc., Morgan Stanley and
Goldman Sachs Group Inc., saying those institutions had conflicts of
interest because they had accepted TARP funds, which included some
government controls.

As LIBOR spreads widen...

...Still many innings left to play in this game.  I am watching as many measures of credit supply and demand as possible at the moment, and remain skeptical of the "slowing 2nd derivative" (things are getting bad at a slower rate) arguments that fail to see other possibilities.

May 4 (Bloomberg) -- Most U.S. banks expect loan
delinquencies and losses to increase this year, a Federal
Reserve report showed today before this week’s release of stress
tests of the nation’s 19 largest lenders.
More than 70 percent of respondents on net said bad loans
will rise should the economy progress “in line with consensus
forecasts,” the Fed said in a quarterly survey of banks’ senior
loan officers. More firms made it tougher for consumers to get
home and credit-card loans in the past three months than in the
previous survey, while fewer tightened terms for businesses.
The report indicates that signs of stabilization in the
U.S. economy aren’t resulting in an easing in lending terms.
Banks are hoarding a record $1.1 trillion of cash even after the
Treasury and central bank made emergency capital injections and
set up special lending programs to ensure lenders extended
credit to households and businesses.
“The vast majority of domestic and foreign respondents
indicated that they expect deterioration in credit quality for
all types of business and household loans,” today’s Fed report

Assness stands ready...

...for a personalized tax rate.  Very clever and he is dead on regarding his criticism of Obama's couching bond holders exercise of claim rights as being upatriotic.

All Americans should read this.

Unafraid In Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLC

The President has just harshly castigated hedge fund managers for being
unwilling to take his administration’s bid for their Chrysler bonds. He called
them “speculators” who were “refusing to sacrifice like everyone else” and who
wanted “to hold out for the prospect of an unjustified taxpayer-funded

The responses of hedge fund managers have been, appropriately, outrage, but
generally have been anonymous for fear of going on the record against a
powerful President (an exception, though still in the form of a “group letter”,
was the superb note from “The Committee of Chrysler Non-TARP Lenders” some of
the points of which I echo here, and a relatively few firms, like Oppenheimer,
that have publicly defended themselves). Furthermore, one by one the managers
and banks are said to be caving to the President’s wishes out of justifiable

I run an approximately twenty billion dollar money management firm that offers
hedge funds as well as public mutual funds and unhedged traditional
investments. My company is not involved in the Chrysler situation, but I am
still aghast at the President's comments (of course these are my own views not
those of my company). Furthermore, for some reason I was not born with the
common sense to keep it to myself, though my title should more accurately be
called "Not Afraid Enough" as I am indeed fearful writing this...
It’s really a bad idea to speak out. Angering the President is a mistake and,
my views will annoy half my clients. I hope my clients will understand that I’m
entitled to my voice and to speak it loudly, just as they are in this great
country. I hope they will also like that I do not think I have the right to
intentionally “sacrifice” their money without their permission.

Here's a shock. When hedge funds, pension funds, mutual funds, and individuals,
including very sweet grandmothers, lend their money they expect to get it back.
However, they know, or should know, they take the risk of not being paid back.
But if such a bad event happens it usually does not result in a complete loss.
A firm in bankruptcy still has assets. It’s not always a pretty process.
Bankruptcy court is about figuring out how to most fairly divvy up the
remaining assets based on who is owed what and whose contracts come first. The
process already has built-in partial protections for employees and pensions,
and can set lenders' contracts aside in order to help the company survive, all
of which are the rules of the game lenders know before they lend. But, without
this recovery process nobody would lend to risky borrowers. Essentially,
lenders accept less than shareholders (means bonds return less than stocks) in
good times only because they get more than shareholders in bad times.

The above is how it works in America, or how it’s supposed to work. The
President and his team sought to avoid having Chrysler go through this process,
proposing their own plan for re-organizing the company and partially paying off
Chrysler’s creditors. Some bond holders thought this plan unfair. Specifically,
they thought it unfairly favored the United Auto Workers, and unfairly paid
bondholders less than they would get in bankruptcy court. So, they said no to
the plan and decided, as is their right, to take their chances in the
bankruptcy process. But, as his quotes above show, the President thought they
were being unpatriotic or worse.

Let’s be clear, it is the job and obligation of all investment managers,
including hedge fund managers, to get their clients the most return they can.
They are allowed to be charitable with their own money, and many are
spectacularly so, but if they give away their clients’ money to share in the
“sacrifice”, they are stealing. Clients of hedge funds include, among others,
pension funds of all kinds of workers, unionized and not. The managers have
a fiduciary obligation to look after their clients’ money as best they can, not
to support the President, nor to oppose him, nor otherwise advance their
personal political views. That’s how the system works. If you hired an
investment professional and he could preserve more of your money in a financial
disaster, but instead he decided to spend it on the UAW so you could “share in
the sacrifice”, you would not be happy.

Let’s quickly review a few side issues.

The President's attempted diktat takes money from bondholders and gives it
to a labor union that delivers money and votes for him. Why is he not calling
on his party to "sacrifice" some campaign contributions, and votes,
for the greater good? Shaking down lenders for the benefit of political donors
is recycled corruption and abuse of power.

Let’s also mention only in passing the irony of this same President begging
hedge funds to borrow more to purchase other troubled securities. That he
expects them to do so when he has already shown what happens if they ask for
their money to be repaid fairly would be amusing if not so dangerous. That
hedge funds might not participate in these programs because of fear of getting
sucked into some toxic demagoguery that ends in arbitrary punishment for trying
to work with the Treasury is distressing. Some useful programs, like those
designed to help finance consumer loans, won't work because of this
irresponsible hectoring.

Last but not least, the President screaming that the hedge funds are looking
for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a
hedge fund that has been bailed out. Find me a hedge fund, even a failed one,
that has asked for one. In fact, it was only because hedge funds have not taken
government funds that they could stand up to this bullying. The TARP recipients
had no choice but to go along. The hedge funds were singled out only because
they are unpopular, not because they behaved any differently from any other
ethical manager of other people's money. The President’s comments here are
backwards and libelous. Yet, somehow I don’t think the hedge funds will be
following ACORN’s lead and trucking in a bunch of paid professional protestors
soon. Hedge funds really need a community organizer.

This is America. We have a free enterprise system that has worked
spectacularly for us for two hundred plus years. When it fails it fixes itself.
Most importantly, it is not an owned lackey of the oval office to be scolded
for disobedience by the President.

I am ready for my “personalized” tax rate now.

Sunday, May 03, 2009

The Oracle gets it.

It is apropos that my alma mater is mentioned in the article, as I have wasted many, many hours of my life embroiled in arguments with fellow classmates regarding the Efficient Markets Hypothesis and Modern Portfolio theory.  My position always attempted to demonstrate the poverty of holding on to such positivistic positions given the obvious fact that information management is a central business model of investment banks and funds.

OMAHA, Neb. — A theme that keeps cropping up from Warren Buffett and Charlie Mungerat the Berskire Hathaway meeting is their complete disdain for modern portfolio theory and the use of higher-order mathematics in finance.

Mr. Buffett talked about efficient-market hypothesis. EMH is a key part of modern portfolio theory. Broadly the theory is about how math shows that investors should diversify because it reduces risk. EMH says you can’t beat the broader market because it’s always perfectly priced.

Here, a few select variations on the mathematics theme from the meeting:

Mr. Buffett: “There is so much that’s false and nutty in modern investing practice and modern investment banking, that if you just reduced the nonsense, that’s a goal you should reasonably hope for.”

Mr. Buffett said he was once asked by a student from the University of Chicago, a hub of modern portfolio theory, “What are we learning that’s most wrong?” To which Charlie Munger quipped, “How do you handle that in one session?”

Mr. Buffett on the efficient market hypothesis, the idea that all information is instantly priced into the market: “There’s this holy writ, the efficient market theory. How do you teach your students everything is priced properly? What do you do for the rest of the hour?”

Mr. Buffett on complex calculations used to value purchases: “If you need to use a computer or a calculator to make the calculation, you shouldn’t buy it.”

Mr. Buffett on the use of higher-order math in finance: “The more symbols they could work into their writing the more they were revered.”

Mr. Munger on the same theme: “Some of the worst business decisions I’ve ever seen are those with future projections and discounts back. It seems like the higher mathematics with more false precision should help you but it doesn’t. They teach that in business schools because, well, they’ve got to do something. ”

Mr. Buffett adds: “If you stand up in front of a business class and say a bird in the hand is worth two in the bush, you won’t get tenure…. Higher mathematics my be dangerous and lead you down pathways that are better left untrod.”

Mr. Buffett on the persistence of bad ideas in finance: “The famous physicist Max Planck was talking about the resistance of the human mind, even the bright human mind, to new ideas…. And he said science advances one funeral at a time, and I think there’s a lot of truth to that and it’s certainly been true in finance.”

Saturday, May 02, 2009


Still keeping some powder dry...and taking a huge realized loss.

May 2 (Bloomberg) -- Former American International Group Inc. Chief Executive Officer Maurice “Hank” Greenberg agreed to sell about 12.9 million of his shares in the insurer to an investment firm that he controls.

Starr International Co., the largest private shareholder of New York-based AIG, may buy Greenberg’s shares for at least $1.25 each and not more than a “mutually agreed upon” price, he said yesterday in a regulatory filing. Starr International may also buy about 47 million shares held by additional Greenberg-run firms and trusts, he said.

Greenberg, forced to retire in 2005 after almost four decades running AIG, has been locked in a legal battle with the insurer about stock held by Starr International. AIG has said that the shares were held for the benefit of its employees, while Greenberg has said that no agreement exists mandating that use of the assets.

Starr International, which had 205.9 million AIG shares as of March, according to Bloomberg data, was closely affiliated with AIG for three decades while it provided incentive pay for the insurer’s managers. After leaving AIG, Greenberg has run the firm as an investment vehicle, making bets on Chinese and Russian businesses.

Friday, May 01, 2009


Now how would she know this?  It pleases me that Bloomberg has included at least something regarding a track record prior to printing the latest "research" product from an analyst.

May 1 (Bloomberg) -- The Standard & Poor’s 500 Index may jump 20 percent to 1,050 over the next six to 12 months as investors buy stocks trading at low valuations, said Abby Joseph Cohen, Goldman Sachs Group Inc.’s senior investment strategist.

“You could see the market sustain at these levels,” Cohen, 57, said in a Bloomberg Radio interview. “We’re going to set a new trading range much higher than the trading range in February and March.”

Cohen was replaced as Goldman Sachs’s chief forecaster for the U.S. stock market a year ago. She had been the second-most bullish Wall Street strategist at the start of 2008, a year when the S&P 500 tumbled 38 percent to 903.25 for the steepest annual loss in seven decades. Cohen predicted in December 2007 that the index would end last year at 1,675. David Kostintook her job.

The S&P 500 closed at 872.81 yesterday, or 29 percent higher than the 12-year low reached in March. Kostin projects the index will finish this year at 940, which is also the median estimate among 11 strategists tracked by Bloomberg News. The measure closed between 676.53 and 869.89 in February and March.

Stocks have rallied since March 9 as companies from American Express Co. to Ford Motor Co. posted better-than- estimated earnings and investors speculated U.S. Treasury Secretary Timothy Geithner’s plan to finance the purchase of as much as $1 trillion in illiquid assets from banks will help end the global recession.


Cohen said the Federal Reserve’s delay in releasing stress tests on the biggest U.S. banks isn’t worrisome. Executives from the lenders are debating preliminary findings with examiners, according to government and industry officials. The results, originally scheduled for publication on May 4, won’t be revealed until May 7, according to people familiar with the matter.

“They’ve been having discussions with the banks about the appropriate next steps,” Cohen said. “If anything, the slight delay indicates the thoroughness” of the review.

This Politicization...

...of the stress tests "results" and the associated co-option of the entire process by the member banks themselves is bad comedy.  

WASHINGTON (AP) -- The Federal Reserve will release "stress tests" results for the biggest U.S. banks on Thursday, according to a government official.

Deliberations between banks and regulators about the tests' results pushed back the release date, which initially was expected to be earlier in the week.

In addition to an overall snapshot of the health of the 19 large banks being assessed, the Fed will provide detail about individual banks, according to the official, who spoke on condition of anonymity because of the sensitive nature of the matter.

The Fed will describe the resources banks would need to absorb losses on certain types of loans and investments under adverse economic conditions.

Last week, Fed officials said that all 19 banks that underwent stress tests will need to keep an extra buffer of capital reserves beyond what's now required, in case losses continue to mount. That would mean some banks will likely have to raise additional cash.

If they do, banks will have up to six months to raise the money from private companies, Federal Reserve Chairman Ben Bernanke has said. If they can't, then the government would provide assistance.

One option for help: allow the government to sharply increase its stakes in banks. That would be done by converting the government's stock in banks from preferred to common shares. It wouldn't require any additional taxpayer money, although it would increase their risks.

Another option: having the government make a fresh capital infusion in a bank using taxpayer money from the $700 billion financial bailout pot.

The tests were conducted to help regulators decide whether the banks have sufficient capital -- and the right mix of it -- to withstand any additional shocks to the economy over the next two years.