Posted by Larry Doyle on September 30th, 2009 2:45 PM |
A $3.4 trillion loss may be perceived as good news when it was previously projected to be $4 trillion. That said, when losses of this magnitude are buried in a mix of financial chicanery and accounting charades, the impact is not lessened but only extended.
The loss to which I refer is the projected global writedowns on a wide array of toxic loans and assets as put forth by the International Monetary Fund. The IMF released the Global Financial Stability Report yesterday. While it is hard for the media not to cover any report that would project these types of losses, this story is not receiving the attention it deserves. What do we learn from this report?
>Global financial stability has improved, but risks remain elevated.
> Estimated global losses have improved to $3.4 trillion. However, further deterioration in banks’ loans is to come — over half of their writedowns are still to be recognized. (LD’s emphasis)
> Policymakers face considerable near-term challenges. These include ensuring sufficient credit growth to support economic recovery; devising appropriate exit strategies; and managing the risks arising from heavy public borrowing.
Other highlighted points include:
1. In regard to financial institutions, the IMF puts forth that bank earnings will NOT be sufficient to cover these writedowns and that banks will need to raise more capital. While securities prices of certain toxic assets have rebounded, the underlying loans on securities, as well as unsecuritized loans, continue to deteriorate. Against that backdrop, bank lending to consumers and businesses will remain under pressure.
2. Private sector credit growth continues to contract while public sector credit demands grow. This phenomena will only lead to further ‘crowding out.’
3. While Asian and Latin American economies appear to be regaining a sense of stability, the emerging economies of eastern Europe remain challenged.
4. Long term interest rates will be under pressure due to the enormous global fiscal deficits. The IMF projects that these long term rates will rise by anywhere from 10 to 60 basis points for every 1% rise in the deficit relative to GDP.
5. Policy changes remain significant. Issues of systemic risk, exit strategies, credit availability, and balance sheet pressures need to be addressed and managed.
6. The IMF provides a thoughtful and comprehensive review of all the challenges facing financial institutions and regulatory agencies in an attempt to restart the securitization of assets.
From origination to securitizing to rating to distributing, this once large corner of our economic landscape has widespread issues. I come away from reading this part of the IMF report with the feeling that the hurdles will be substantial and the time process protracted before any meaningful fully private securitization market regenerates.
7. The IMF gives strong marks to officials for stabilizing markets, but also cautions that the communication along with the actual unwinding of support mechanisms is critically important for long term stability.
What do I make of the IMF report? I repeat what I said the other day: we are running a marathon and, at best, we have only reached the 7-mile mark.
Miles to go….
Posted by Larry Doyle on September 30th, 2009 11:22 AM |
Wall Street has never been known to embrace humility. The rough and tumble world of ‘the street’ ultimately prizes profit over principle. Not that the titans on Wall Street would ever admit it, but make no mistake, Wall Street was and always will be about one thing…the bottom line. Nobody was more aggressive in pursuing those bottom line results than Morgan Stanley’s John Mack. His moniker “Mack the Knife” speaks volumes about his ruthless nature and aggressive cost-cutting to drive results.
Against that backdrop, I find it particularly interesting to see Mack present a fairly introspective interview with Bloomberg’s Judy Woodruff. All other assertions aside, Mack was recently unceremoniously pushed aside at Morgan Stanley. As I watched this short interview a few different times, I sensed a man entering a confessional as he tries to ‘come to Jesus.’
Mack initially provides insights on the following:
1. his view that the U.S. and European economies will have a long, slow recovery
2. his view that emerging economies will rebound in stronger fashion
3. the need for a systemic risk regulator on Wall Street
4. the need for one global financial regulatory system with one set of rules
5. the need for clawbacks in the Wall Street compensation process (clawback meaning the ability for the firm to pull back compensation from employees)
6. he admits that Wall Street needs to change. He tries to provide a mea culpa by offering an explanation that Wall Street firms tried to compete with private equity funds and hedge funds by developing those businesses internally. At this juncture in the interview, I felt that he was almost about to say, “Dear Lord, we lost our way and our moral compass. Please forgive us.”
Mack has been humbled both inside Morgan Stanley and across Wall Street. This Bloomberg interview exemplifies how “Whoever exalts himself shall be humbled; and whoever humbles himself shall be exalted.”
Posted by Larry Doyle on September 29th, 2009 2:33 PM |
10.01.09 UPDATE FROM LD: I wrote this commentary this past Tuesday afternoon. Mr. Lewis tendered his resignation last evening. In regard to my concluding remarks in this post, I only wish all my calls on the market were equally as prescient.
The intrigue embedded in the Bank of America takeover of Merrill Lynch is never ending. While the book and movie of this high stakes Wall Street thriller will be voluminous, the story most certainly has many chapters yet to be written. To this point, the following questions remain outstanding:
1. Why, at the time, did Bank of America pay such a premium for Merrill Lynch?
2. Did Bank of America know all the details surrounding the $3.5 billion in accelerated bonus payments made to Merrill employees in December 2008?
3. What did Merrill CEO John Thain share with Bank of America CEO Ken Lewis in regard to the growing losses at Merrill?
4. Did Ben Bernanke and Hank Paulson pressure Lewis to complete the merger against his will?
5. Did Ken Lewis consider invoking the MAC (material adverse condition) clause and negate the deal? Did Lewis consider invoking the MAC to negotiate a cheaper price?
6. Did Ken Lewis use the leverage embedded in the potential implementation of the MAC clause to generate significant government support?
Recall that a recent SEC fine of $33 million imposed by the SEC on Bank of America was thrown out by Judge Jed Rakoff as nothing more than a contrivance in which taxpayer funds were used to effectively repay other taxpayers, those being Bank of America shareholders.
Judge Rakoff will hear this case between the SEC and Bank of America in early February. Perhaps at that time answers to the questions asked above will be fully uncovered and released. Perhaps stories will leak beforehand to shed light on this drama. To that end, welcome to Sense on Cents.
I read a story to which I will link, but can not promise the link will not be broken at some future point. As such, I will provide a brief synopsis which provides riveting insights into Question 6.
Law.com reports today How Bank of America Used Merrill’s Losses to Bully the Government. In this report, the reporter offers that Corporate Counsel magazine has pored over hundreds of documents, e-mails, and transcripts pertaining to the Bank of America merger with Merrill Lynch.
In regard to the use of the MAC clause or renegotiating the deal, Law.com very clearly lays out how events unfolded last December:
The record shows that Bank of America decided not to disclose to shareholders its consideration of a MAC before the Dec. 5 vote. It also apparently decided not to use the MAC as leverage against Merrill to lower its price before the vote, even though the bank had agreed to pay a premium — $29 per share for Merrill stock that was selling at $17. It might have, but didn’t, use the MAC to force Merrill to drop its multibillion-dollar bonus pool.
Instead, the bank waited until after the shareholders approved the merger — but before the deal closed on Jan. 1 — and used the MAC to muscle the federal government and U.S. taxpayers into ponying up more bailout funds. At the time, the bank did not disclose the role of federal regulators in not invoking the MAC, and in promising the bank another $20 billion of taxpayer money in 2009 to complete the deal. (The bank had already received $25 billion in bailout funds in 2008.)
Some observers and politicians have accused federal banking officials of forcing Bank of America CEO Kenneth Lewis into completing the merger. But the documents suggest it was Lewis doing the bullying, relying on a highly vulnerable marketplace to win his way.
Wow. Did Ken Lewis overplay his hand? In light of this information, is there any doubt that Lewis is a short timer?
We will learn more in the days and weeks ahead as this drama plays out. You can’t make this stuff up . . .
Thoughts, comments, questions always appreciated.
Related Sense on Cents Commentary:
Did Big Ben Bernanke and Heavy Hank Paulson Break the Law in Buying Ken Lewis’ Silence (April 28, 2009)
Rep Edolphus Towns on Bernanke’s Testimony: ‘Something Rotten in the Cotton’ (June 26, 2009)
Posted by Larry Doyle on September 29th, 2009 12:30 PM |
Was it mere coincidence that JP Morgan’s co-head of investment banking Bill Winters recently voiced his disdain, genuine or not, for banker greed? I shared my assessment of Winters’ comments yesterday in writing, “JP Morgan’s Winters Identifies Problems, But Offers No Solutions.”
Why do I ask? Bill Winters was just shown the door at JP Morgan. Was Winters exacting a pound of flesh as he effectively went down the escalator? Bloomberg provides a measure of insight on these developments in writing, JP Morgan’s Staley to Run Investment Bank in Shake-Up:
JPMorgan Chase & Co. shook up the leadership of its investment bank, surprising analysts by announcing the immediate departure of co-chief executive officer William “Bill” Winters and naming asset-management chief Jes Staley to run the business.
Steve Black, who helped lead the investment bank with London-based Winters, will become executive chairman of the unit, the New York-based bank said today in a statement. Staley will be CEO of the business and Mary Callahan Erdoes, CEO of the private bank, will succeed Staley in running asset management.
These moves within the executive offices at JP Morgan are a classic example of what a friend and former colleague at Bear Stearns once told me about life within the upper-most echelon of Wall Street. He said, ‘the ledge is very narrow and the elbows are razor sharp.’
The simple fact is Winters was the outsider within that executive suite which he occupied with Steve Black. Is Steve Black a good guy? Does it matter? Steve Black has a longstanding relationship with Jamie Dimon from working with him back at Smith Barney in the early to mid-90s. Black, not unlike almost every chief executive on Wall Street, is a master at maneuvering on that ledge.
As for Mr. Winters, do not expect him to offer any statements critical of Black, Dimon, JP Morgan or any parts of JP Morgan’s franchise. Why? When any executive leaves a Wall Street firm, he is required to sign a release which handcuffs him from making any negative comments about the firm. Winters assuredly has significant JP Morgan stock and options outstanding. If he were to comment, he would jeopardize those holdings.
To that end, perhaps Bill Winters’ statement yesterday was his ‘Grove O’Rourke’ in the recently published Top Producer by Norb Vonnegut. What do I mean? Perhaps Winters’ interview in the London Evening Standard, JP Morgan’s London Head Slams ‘Greed’ of Bankers, was his conscience speaking and genuinely voicing his disdain for the greed that infects Wall Street and the City.
Related Sense on Cents Commentary:
JP Morgan’s Winters Identifies Problem, But Offers No Solution (September 28, 2009)
Posted by Larry Doyle on September 29th, 2009 9:34 AM |
I am increasingly impressed by Pimco CEO Mohamed El-Erian. Why? I believe El-Erian consistently provides a thoughtful and informed opinion and analysis of the global economic landscape. I witness his sagacity again this morning in reading his Financial Times commentary, Return of The Old Ways of Thinking Threatens Recovery:
We are at the point of maximum confusion in the multi-year transition of the global economy, markets and policymaking. We have left the global growth regime that was driven primarily by debt-financed consumption in the US, but we have not as yet reached a position of more balanced, albeit anaemic, growth. Those who lack a robust anchoring framework, be they investors or policymakers, risk being misled and backtracking to outdated ways of thinking.
I concur with El-Erian’s premise. As much as consumers, investors, bankers, and politicians may want to return to ‘business as usual,’ the fact is the global economy and the markets are a dramatically changed place. While market analysts and government policy wonks feed us a steady diet of ‘green shoots’ and ‘positive change in the rate of change,’ El-Erian properly frames the debate by focusing on the absolute levels expressed in economic and market data rather than merely the rate of change in those levels.
I made a less eloquent attempt at stating this premise this past July 29th in writing, “Economy and Markets: Improving, Declining, or Adapting?” I asserted:
While most economists and market analysts are looking at statistics and data to determine whether the economy and consumers are improving or rolling over, my take is different. I view the economy and consumers as adapting to the new dynamic at work in our country.
While those on Wall Street and their friends in the media would revel in short term developments and daily market swings, I view our market and global economy as akin to running a marathon. As such, I would place us at best at the 7 mile mark. El-Erian makes a similar assessment and states as much in writing:
Today’s lack of appropriate anchoring frameworks appears to be exacerbating short-termism. The issue goes well beyond the still-limited appreciation of the multi-year realignment of the global economy, which is gaining momentum. It also relates to tendencies well-documented by behavioural economists – such as framing the problem wrongly and refusing to question past approaches.
Given all this, we would be all well advised to follow the admonition of Mervyn King. Last month, the governor of the Bank of England stated bluntly: “It’s the level, stupid – it’s not the growth rates, it’s the levels that matter here.” Investors have not yet accepted his insight that the absolute levels of income, debt, wealth and unemployment, not just the rates of change, are what matters today. They need to, and soon.
What ‘heart rate monitors’ does El-Erian utilize to assess the overall health of our global economy? He offers the following:
>First, consumer indebtedness is still too high relative to income expectations and credit availability, particularly in the US and the UK.
>Second, some banks’ balance sheets are still too geared for the comfort of regulators or their own managers. This will inhibit them from lending to the real economy at a time when certain sectors (such as commercial real estate, but also residential housing) still require significant refinancing, and when consumers need time to work down their excessive debt loads.
>Third, unemployment has risen well beyond expectations, and is likely to prove unusually protracted.
>Finally, public debt has grown so rapidly as to spark concerns about future debt dynamics. This would inhibit the effectiveness of future stimulus measures, as well as complicating the formulation of exit strategies.
I encourage readers to take Mr. El-Erian’s assessment to focus on the absolute levels of economic and market data. In the process, please then incorporate that approach into the report on deflation I offered yesterday in writing, “Will Deflationary Forces Overwhelm Global Fiscal Stimulus?”
I commend Mohammed El-Erian for properly framing the debate. He is helping us all see the ‘forest for the trees’ as we navigate the economic landscape.
Posted by Larry Doyle on September 28th, 2009 3:12 PM |
While Uncle Sam and his international brethren are doing everything they can to reflate the global economy, will the deflationary forces deeply embedded in the deleveraging process carry the day and the future? In doing so, will these deflationary forces usher in an economic dynamic not seen since the 1930s?
The analysis and review by market savants, media mavens, and government pundits is ultimately mere noise relative to the denouement of the question proffered above. Jeff Gundlach, of Trust Company of the West, has spoken his mind and believes deflation will ultimately weigh upon our economy and markets. Today I share with you Deflation Rising: Making the Case for a Lasting Deflationary Environment recently produced by Black Swan Trading. High five to loyal Sense on Cents reader Ben for sharing this report.
The professionals at Black Swan produce a thoroughly superb and comprehensive review of this critically important topic. I strongly encourage you to put this post in your “Save” box for further review as we navigate the economic landscape. The report is launched as follows:
“If Americans ever allow banks to control the issue of their currency, first by inflation and then by deflation, the banks will deprive the people of all property until their children will wake up homeless”
Uncle Sam, whom we’ve dubbed the “stimulator of last resort”, is doing all it can to create some inflation. Inflation creation, through the debasement of money, is one thing governments have proven historically they do quite well.
Inflation bails out creditors because it allows them to repay debt more cheaply in the future, paying back the nominal value of debt with currency that loses a substantial amount of real value.
There is no bigger creditor than government.
But that said, at the moment it seems governments are losing the battle of inflation, to deflation, despite pumping money into the market around the clock.
This report makes the case for deflation. In it we examine the powerful deflationary headwinds that could lock the US and global economy into years of deflationary pressures that are reminiscent of the lost years in Japan when they became locked in a deflationary bear hug.
The report puts forth a wealth of compelling evidence for the deflationary case. The evidence covers the following topics, complete with numerous graphs and analytics:
1. Relationship between gold and the U.S. Dollar
2. Growth in money supply
3. Review of decline in the Consumer Price Index
4. Lack of Velocity of Money
5. Increase in bank reserves
6. Decline in outstanding consumer credit
7. Decline in nonfinancial corporate business credit
8. Discretionary spending reaches 50-year low >>>the writers posit that consumption will be much more dependent on income than credit
9. Decline in personal income
10. Structural headwinds in global economy including:
— U.S. economic policies
— likelihood of asset bubble in China
— dynamics in the oil and food markets
After an exhaustive, but not exhausting, 22-page review, the writers make a compelling case that the lessons of The Lost Decade in Japan will now very likely be played out here in the United States. What plagued Japan during that decade and to a great extent even today….deflation.
Additionally, the buildup of leverage within our economy took place over a 20 year time frame with a few significant hiccups. To think that our economy will be able to delever and recover within a year or two is beyond naive. I would project this delevering, adaptation, and recovery process will take at least five years if not longer.
Whether you place yourself in the deflationary camp, the hyperinflationary camp, or somewhere in between, do yourself the favor of reviewing this report. In the process, you will be more educated and qualified to navigate the global economic landscape.
Posted by Larry Doyle on September 26th, 2009 4:03 PM |
Sir R. Allen Stanford, the once proud and domineering master of the Stanford Financial kingdom, has not been having a lot of fun lately. How so?
Aside from the fact that he has been indicted for masterminding a multi-billion dollar Ponzi scheme centered on the Caribbean island of Antigua, his assets are totally frozen affording him no ability to retain legal counsel. As a result, he is being represented by a public defender. To add insult to injury, he sits in jail because the judge considers him a flight risk.
Life in jail is no bed of roses for Stanford, who was dubbed a knight in Antigua. What is life like in jail for Stanford? Put ‘em up!! Sounds like Stanford took a beating this week. Bloomberg reports, Stanford Gets Medical Treatment After ‘Altercation’ at Texas Jail:
R. Allen Stanford, awaiting trial on charges he swindled investors in a $7 billion scheme, was given medical treatment after getting into a fight with an inmate in a Texas jail, a U.S. marshal said.
“He got into an altercation with another inmate,” Alfredo Perez, a spokesman for the Houston office of the U.S. Marshals Service, said yesterday in a phone interview. “He’s being examined by medical staff and treated for his injuries,” which aren’t life-threatening, Perez said. Perez said the incident happened about 10 a.m. on Sept. 24.
Stanford, who has been in custody since being indicted in June, faces 21 felony charges for allegedly paying investors “improbable if not impossible” returns by taking funds from later investors in certificates of deposit at Antigua-based Stanford International Bank Ltd.
Stanford is obviously entitled to due process. Does he or anybody in jail deserve a beating by a fellow jailbird? No . . . but welcome to the real world, Sir.