Friday, April 30, 2010

Chanos Calls for Investigation into AIG, Lehman

This video clip from CNBC's early morning Squawk Box show features James Chanos, President of Kynikos Associates and Bill Ackman of Pershing Square Capital Management LP. The two were interviewed April 27, 2010.

Quote from Chanos: “Until we find out what happened (with AIG and Lehman), we’re not going to be able to reform the system."

Saturday, April 24, 2010

Senator Levin Releases Goldman Sachs Emails

The Senate Permanent Subcommittee on Investigations, headed by Senator Carl Levin (D-Michigan), fresh from its grilling yesterday of executives from the credit rating agencies, has released several emails from Goldman Sachs on a Saturday, no less. Cannon fodder for the Wall Street firing squads on the Sunday talk shows, perhaps?

There is no "smoking email," as it were, but a lot of grist for the mills in the Obama Administration, Congress and their cheerleaders in the media to vilify Wall Street, with Goldman Sachs as the preferred target of the moment.

A July 25, 2007 email from chief financial officer David Viniar is already burning up the wires from the Associated Press in an article by Dan Strumpf titled "E-mails show Goldman boasting as meltdown unfolds."

See AP story here:

The mortgage-backed securities and mortgage collateralized debt obligation (CDO) markets were beginning to seriously tank in late July, ahead of a complete meltdown only a few weeks later.

One email Gary Cohn at Goldman Sachs forwards to CFO Viniar contains information describing the dramatic plunge in the value of mortgage-backed securities in an unindentifed deal. The email also noted a 95 percent wipe-out of the deal's residuals, the parts that are sometimes retained by companies that put together the deals because they are hard to sell.

In response to the collapse of these mortgage bonds, Viniar comments: "Tells you what might be happening to people who don't have the big short."

Reporting on another email on November 18, 2007, from Lloyd Blankfein, Goldman's chairman, AP reporter Strumpf sees the comments as boasting, giving more support to the article's theme of Wall Street gloating while America was burning.

Bankfein writes: "Of course we didn't dodge the mortgage mess. We lost money, then made more than we lost because of shorts. Also, it's not over, so who knows how it will turn out ultimately."

While Blankfein is happy about Goldman's experience so far, it seems a stretch to portray this as boasting.

Take a look at the context for the statement. The email is in response to an internal email notice about a positive story on how Goldman Sachs dodged the bullet in the mortgage meltdown being written by Jenny Anderson and Landon Thomas and slated for publication the next day in the New York Times.

Blankfein was pointing out that the conclusion of the article was not factually correct and, indeed, even with the protection of its big shorts, Goldman might still see big losses -- as they ultimately did.

The Blankfein email inadvertently exposes the shallowness of the reporting by the New York Times, whose reporters seem to rush to a premature conclusion about a company that previously had often enjoyed favorable coverage in their pages. It also reveals that the reporters had pretty much conveyed to Goldman ahead of publication just how they planned to portray the investment banking firm in their article.

The leaked emails are available online at this link:

The release of these emails, while entertaining, also serve as a reminder of the unattractive sanctimoniousness of Senator Levin and the other members of Congress who have had a field day grilling people who may or may not have contributed materially to the mortgage and financial market meltdowns.

Too bad there is no one to compel Congress to release its emails and statements made in private that showed how they wanted to "roll the dice" with lending standards for affordable housing at Fannie Mae and Freddie Mac, as Representative Barney Frank (D-Mass.) once gleefully said.

It would also be nice to see on prime-time TV people from Main Street grilling members of Congress about emails and statements that showed how cavalier they were about potential future losses from concerted and relentlesss efforts to pressures lenders to lend money to people who could not pay back the loans.

With a Congress complicit in the crisis doing the grilling, one almost feels sorry for the people on Wall Street who helped enginer and then compound the mortgage disaster that are paraded before us in a humiliating public display. But, not quite.

The least these harradans in Congress can do when they summon people to stand before them for grilling is be fair and even-handed.

If they were to show a degree of impartiality, it would be a shock and might improve the standing of Congress in the eyes of the American people. They won't, of course, because they do not appear to want to craft a bill that is thoughtful and measured and actually responds to the causes of the crisis. It's too much fun playing God with the lives of other people to actually get serious about the real issues.

Thursday, April 22, 2010

Wallison: Obama's Financial Reform Plan Aims To 'Control Yet Another Sector of the Economy'

In a new brief released today, Peter J. Wallison at the American Enterprise Institute states that the Obama Administration's financial regulation plan -- as represented in Senator Christopher Dodd's bill -- 'raises the question of whether its purpose is actually to address the causes of the financial crisis or -- like ObamaCare -- to put the government in control of yet another sector of the U.S. economy."

Wallison, who is the Arthur F. Burns Fellow in Financial Policy Studies at AEI, argues that the bill's provisions allowing for the Federal Reserve to regulate all large, nonbank financial institutions "would signal to the market that these institutions are too big to fail."

The proposed $50 billion rescue fund to be administered by the Federal Deposit Insurance Corporation (FDIC) enhances the too-big-to fail approach by assuring creditors "that they will be bailed out if one or more of these large institutions are in danger of failing," the brief states.

The bill, through these provisions, will favor large financial institutions over smaller competitors, and this, in turn, will lead to a restructuring of the financial markets and the U.S. economy, Wallison states.

These elements of the reform "make sense only if the administration is pursuing an ideological objective instead of striving to ensure a healht and competitive U.S. financial system in the future," Wallison writes.

Wallison, in the body of the brief, points out some of the flaws and consequences of the Obama administration's proposal:
  • It fails to address the government's role in the creation of a vast numbers of subprime and other nonprime loans that led to the crisis.
  • Instead of controlling large Wall Street firms, as claimed, the bill provides advantages to Wall Street financial institutions.
  • The legislation, if enacted, "would establish an unprecedented and unhealthy partnership betgween the government and the largest financial institutions."
  • As it did with Fannie Mae and Freddie Mac, the government will protect the largest firms from failure in return for the willingness of those firms to implement the policies of the government.
To read the entire brief, "Crisis and Ideology: The Administraiton's Financial Reform Legislation," click the link below:

Wednesday, April 21, 2010

The Story of the CDO Market Meltdown

A year ago, a paper written by a student at Harvard College -- Anna Katherine Barnett-Hart -- received a fair amount of media attention. The paper examines the collateral performance and credit rating of asset-backed security collateralized debt obligations, so-called ABS CDOs. The author's findings are not surprising, in light of what is already known about the mortgage meltdown, but they do provide a better delineation of the parameters of the CDO meltdown.

Given the intense interest in CDO deals following the Securities and Exchange Commission's charges of civil fraud against Goldman Sachs for a deal known as Abacus 2007 AC1, it is worth revisiting the findings in this research and analysis by a college senior seeking to graduate with honors.

The author looks at both broad data on CDO performance and the ratings of credit rating agencies, but she also closely examines 735 ABS CDO deals.

The author's main finding is that there was far too much in the way of low quality assets in CDOs -- and given the continued deterioration since the report, updated information would find the conditions of those assets even weaker.

Relying on data from Lehman Live, Barnett-Hart found that the share of floating-rate collateral (adjustable-rate mortgages or ARMs) in ABS CDO deals, which had been a small share of the deals, rose sharply to become a majority of collateral in 2003. Synthetic collateral began to take off in 2005 and rose to about a third of the deals in 2006 before declining slightly in 2007.

Barnett-Hart explored a number of hypotheses and measured them by looking at a range out outcomes, from defaults to CDO downgrades.

In terms of collateral, Barnett-Hart examined three effects over the period from 2002 to 2007 with the following outcomes:

The Housing Effect: Increasing exposure to residential mortgages, specifically subprime and Alt-A residential mortgage-backed securities (RMBS), is associated with worse CDO performance as measured by defaults.

The Vintage Effect: Increasing exposure to 2006 and 2007 vintage collateral, particularly assets with floating interest rates, is associated with worse CDO performance as measured by defaults.

The Complexity Effect: Increasing the amount of synthetic collateral, the amount of pre-securitized CDO collateral, and the overal number of collateral assets is associated with worse CDO performance as measured by defaults.

CDO Underwriters and Originators

The paper also ranks the biggest CDO orginator clients of the credit rating agencies. And its findings agree with much of the anecdotal evidence accumulated in a number of press reports and an increasing number of books on the meltdown.

Merrill Lynch, with $76.9 billion in rated deals, was at the top of the list for Moody's, followed in order by Citigroup, UBS, Wachovia, Calyon, Goldman Sachs, Deutsche Bank, Credit Suisse, RBS, Lehman Brothers, Bear Stearns, Bank of America, West LB, Dresdner Bank, Morgan Stanley, Barclays Capital, and JP Morgan.

After reviewing underwriters and originators, Barnett-Hart concluded the following:

The Underwriter Effect: Holding constant general CDO characteristics, CDO performance varies based on the underwriting bank.

The Size Effect: The performance of an underwriter's CDOs varies according to the size of their CDO business, with overly-aggressive or very inexperienced banks issuing worse CDOs, as measured by their ex-post defaults and rating downgrades.

The Originator Effect: Controlling for the type of mortgages issued, as measured by average FICO, the combined loan-to-value, and debt-to-income scores, the performance of a CDO depends on the specific entities that originated the assets that became collateral in the CDOs.

Underwriters as Originators

Barnett-Hart also looked at how much the credit quality of CDOs is affected when banks are both CDO underwriters and collateral originators.

Here, she found some interesting correlations.

The Assymetic Information Effect: CDO performance will be affected if it contains collateral originated by its underwiter, although the performance might improve or decline, depending on the important of reputation vs. adverse selection and moral hazard.

To read the entire paper, click this link:

Sunday, April 18, 2010

Bill Moyers Interviews Simon Johnson and James Kwak on Wall Street Abuses

How did Big Finance grow so powerful that its hijinks nearly brought down the global economy – and what hope is there for real reform with Washington politicians on Wall Street's payroll? Bill Moyers talks with authors Simon Johnson and James Kwak, two of the nation's most respected economic experts and authors of the new book 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.

To hear the segment, that ran Friday, April 16, click this link:

Friday, April 16, 2010

Did the Government Pay J P Morgan Chase 5 Basis Points to Borrow $271 Billion?

Buried in a financial supplement report to the first quarter 2010 SEC filing by J P Morgan Chase is a note that reports that J. P. Morgan chase was paid 5 basis points to borrow $271 billion in repos, which were part of the liquidity provided by the Fed to primary dealers (Wall Street firms) to strengthen financial markets.

A post by Edward Harrison on the blog Naked Capitalism argues that, in effect, the government (Federal Reserve) paid J P Morgan Chase to borrow money. Here is how he defends that charge against those who said that technically, the borrowing was not between J P Morgan Chase and the Fed, but between J P. Morgan Chase and its counterparties:

A commenter felt my reference to borrowing from the government was misleading. So, note that technically Repo counterparties are largely banks lending and borrowing excess reserves from one another. So, they are not really borrowing from the government. However, the Fed has set the Fed Funds rate at 0.00-0.25%. It controls the Fed Funds rate to within that range by making repurchase and reverse repo agreements that are collateralized loans to primary dealers of Treasury securities. The supply and demand dynamics in the repo market are largely controlled by the Fed in order to maintain the repo rate at the specified level set by the Fed.

So, while the repo market participants may be borrowing from each other, in essence they are borrowing from the Fed. The repo rate is set and controlled by the Federal Reserve. You could suspend all counterparty transactions in the market and have dealers just repo with the Fed and the net effect would be the same.
To read the entire post, click the link below: