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Archive for the ‘Bailout’ Category

Holder Refutes Obama with “Indictment” of TBTF

Posted by Larry Doyle on March 12th, 2013 8:25 AM |

In December 2011, President Obama was interviewed on 60 Minutes and had the following exchange with CBS’ Steve Kroft in regard to behaviors on Wall Street:

KROFT: One of the things that surprised me the most about this poll is that 42%, when asked who your policies favor the most, 42% said Wall Street. Only 35% said average Americans.

My suspicion is some of that may have to do with the fact that there’s not been any prosecutions, criminal prosecutions, of people on Wall Street.

And that the civil charges that have been brought have often resulted in what many people think have been slap on the wrists, fines. “Cost of doing business,” I think you called it in the Kansas speech. Are you disappointed by that? (more…)

Why Should The Banks Be Broken Up?

Posted by Larry Doyle on January 14th, 2013 9:54 AM |

As much as I detest the involvement of the government in what are supposed to be free markets, I can appreciate the need for Uncle Sam’s stepping in to save our banking system in late 2008.

Now going on five years hence, it is time that we move to save capitalism. How do we do this? We need to break up the banks. Why so? Here’s a handful of reasons why:  (more…)

Good News and Bad News: The Plot Thickens

Posted by Larry Doyle on April 13th, 2009 6:39 PM |

It seems as if Wall Street banks are releasing “surprisingly positive” earnings in stealth fashion these days. Goldman Sachs was expected to release 1st quarter 2009 earnings tomorrow. Well, Goldman just released that they “blew the doors off” the building in a very explosive and positive fashion. Bloomberg reports Goldman Sachs to Sell $5 Billion in Stock, Repay TARP:

The New York-based bank earned $1.81 billion, or $3.39 a share, in the first quarter as a surge in trading revenue outweighed asset writedowns. The results beat the $1.64 a share estimate of 16 analysts surveyed by Bloomberg.

The earnings were driven by a sizable increase in trading activity which reads as a major gain in market share. With Bear, Lehman, and Merrill all gone and Citi and BofA in the hospital, the crowd at Goldman is sowing while the sun shines. What does that mean? For those who want or need to “play,” Goldman is now one of the few shops truly open for biz. The price to “get in the game” just went up and Goldman’s franchise is clearly benefiting:

Goldman Sachs benefited as the gap between what banks pay to buy fixed-income securities and the price at which they sell, the so-called bid-ask spread, almost doubled to 19 basis points in six months, according to data compiled by Bloomberg.

Over and above the earnings, Goldman has sent a clear signal to Uncle Sam requesting him to leave the Goldman “casino.” With Goldman’s earnings power clearly defined, the firm has announced its intention to raise more equity capital and pay back the TARP money it received last Fall. It will make that equity raise after the release of the Bank Stress Tests at the end of the month. Uncle Sam’s intentions to oversee compensation, business practices, and the like is the antithesis of how Goldman operates. While the actual cost of the government TARP money is cheap, the unknown costs are enormous. Goldman has no interest in maintaining those risks.    (more…)

From The Archives: “Where’s The Money??”

Posted by Larry Doyle on April 10th, 2009 8:16 AM |

On a quiet Good Friday morning, brief reflection never hurts. In that spirit, I thought it may be worthwhile to go into the archives for our year-end piece 2008. This piece was originally published on December 29, 2008:

I thought about providing an outlook for 2009. I considered offering further opinions on Obama’s economic plans. Perhaps a review of the Bush economic program would be well received. Then yesterday, the lead editorial in my local newspaper asked “Where did the bailout money go?” I had my answer. In previous pieces I have touched upon why I thought there was a very good chance this money would not flow through the system. I hesitate to continue to refer back to my piece published on November 12th (The Wall St. Model is Broken…and Won’t Soon be Fixed), but for new readers I do firmly believe it is as good as anything I have read or seen in any publication in explaining how we find ourselves in our current position.

Please allow me to digress for a second. I will admit that I am not a movie buff, but I do enjoy films that focus on the success of underdogs, have a measure of financial intrigue, or perhaps a combination of the two. Not surprisingly, a few of my favorite movies are, Rocky, Jerry Maguire, and The Sting. (more…)

“Beholden to Failed Banksters”

Posted by Larry Doyle on April 9th, 2009 3:56 PM |

Any investor or manager with a degree of experience knows that the “first loss is the best loss.” What do I mean by that? Once the market detects a loss or a weakened position, the price for that asset will remain capped unless and until the asset is sold or liquidated. This price action occurs in every sector of every market.

Welcome to the world of global finance 2009. As banks, insurance companies, hedge funds, and other financial entities deal with losses, we see a lack of aggressive posture being taken on dealing with these losses. Why? Once moral hazard is violated with a single entity, every other entity will look to violate it as well.

Immediate losses are forestalled in hopes that they will be covered or disguised. However, every loss ultimately must be recognized. By whom  and how is the question.

At this juncture, more of the losses in our financial system are being directed toward the taxpayers. How? Via the wide array of government programs. What is the cost? A likely underperforming economy due to a lack of credit, and higher taxes to offset lower revenues.  (more…)

Games of Chance: TALF, PPIP, TARP, FDIC, FASB

Posted by Larry Doyle on April 7th, 2009 2:40 PM |

In thinking about the economy, markets, and our banking system, my memory brings me back to my early days in New York. While working my way along 8th Avenue back to my apartment in Hell’s Kitchen, I would happen upon numerous versions of the classic NYC “hustle.” The shell game (also 3 card monte) was rampant in NYC in the ’80s. Mayor Giuliani cleared out this game, along with a host of other street scenes. For those not familiar with this game, there was a constant need for new players with new money to keep the game alive.

Why do these games remind me of our current banking system? The similarities are scary. Let’s access the most recent piece from John Mauldin’s site to “view the games.”

Mauldin’s guest, John Hussman, comments on these various “games” (TALF, PPIP, TARP, FDIC, FASB), in which taxpayers bear the brunt of the risk in the government’s engagement with financial institutions. Hussman writes of the PPIP:

this is a recipe for the insolvency of the FDIC and an attempt to bail out bank bondholders using funds that have not even been allocated by Congress. The whole plan is a bureaucratic abuse of the FDIC’s balance sheet, which exists to protect ordinary depositors, not bank bondholders.


Things You May Have Missed

Posted by Larry Doyle on April 7th, 2009 10:08 AM |

The stream of data and market moving news is non-stop. I found these items of interest and look to share them with you as I believe they provide interesting insights and perspectives from around the world. I beg your indulgence if some of these items are not news to you, but if they are I hope they help you “navigate the economic landscape.”

1. Australia’s central bank cut its overnight lending rate to 3%, the lowest level in 49 years. While that rate is one of the highest rates in the developed world, it was widely expected to be left unchanged.  Australia has had one of the strongest economies in the world. This cut is an indication the Australian central bank believes their economy is slipping into a recession.

2. Japan’s exports are reported to be down 40% versus a year ago. Additionally, Japan’s industrial production is reported to be down 30+% during the same time period. These economic figures are significantly weaker than most other developed economies. As a frame of reference, most other developed economies’ industrial production is down 10-15%. Clearly, Japan is so dependent on exports and it is now paying the price of not having more fully diversified its economic foundation.

3. Gold is now trading near $880/oz. A month ago this precious metal was trading slightly above $1000/oz. Why is gold down recently? Coming out of the G-20, there are expectations that the IMF may sell some gold reserves to raise funds for low-income countries. I commented the other day that gold is not perfectly correlated with inflation due to changing fundamentals and technical variables in the gold market. This development with the IMF is a perfect case in point of my assertion. (more…)

A Fraud By Any Other Name

Posted by Larry Doyle on April 6th, 2009 4:30 PM |

A few loyal readers have graciously shared video clips of interviews with former banking regulator, William K. Black. These interviews address the fact that a tremendous amount of mortgage originations at the core of our current economic turmoil were fraudulently underwritten.  The borrowers were never qualified only then to fall upon hard times.  The loans were often NINJA (No income check, No job check or asset check) and the fraud was more often committed by the lender than the borrower.

Why and how did this happen? Let’s briefly revisit my writing from November 12th:

At the turn of the century, the Wall Street model was a pure “originate to distribute” model with little to no residual risk on behalf of the originators or underwriters. When there is no residual risk, those who “WIN” are the players that can purely process the most volume. Well, how does one get volume? Lower the credit standards, put fewer restrictions on borrowers, little to no covenants (NINA Loans … no income, no asset check). WOW!!! What were we thinking?? Well Wall St. felt, “let’s worry about it tomorrow or maybe not at all because we are making too much money today.”

That money SUPPOSEDLY being made left tremendous risks on the books of the banks. The pursuit of ever greater SUPPOSED profits incorporated the use of CDS (credit default swaps) as synthetic collateral for structured deals. These CDS allowed for an enormous increase in volume and SUPPOSED profits. Don’t forget, though, at the core of the process a large percentage of the underlying loans were fraudulently underwritten.  (more…)

Remaining on Guard…

Posted by Larry Doyle on April 4th, 2009 10:07 AM |

I much prefer a rallying stock market, but I am not a day trader trying to catch moves for quick flips. I look for changes in economic fundamentals (incorporating both private sector and public sector inputs), assess those changes with market technicals (overbought and oversold conditions), and position myself accordingly.

The big wild card in current analysis is the impact of public sector inputs. Many of the maneuvers utilized by the Treasury and Federal Reserve have never been used prior to this economic downturn. Are they working? To what extent? What are the unintended consequences? What is the time delay from implementing a program to measuring its impact on the economy? These questions are the topics of protracted discussions by economists, bankers, analysts, and money managers around the globe. I’d also like to address them here at Sense on Cents.

My market instincts tell me that programs injecting trillions of dollars across wide swaths of the market are not without costs. These costs in the form of “crowding out“, distorted competition, changed behaviors (AIG undercutting insurance rates), moral hazards, and inflation are very real. The challenge is assessing the risks of these long term costs versus the necessity of providing sufficient capital and liquidity backstops to support the economy.  (more…)

32 Bid/84 Ask

Posted by Larry Doyle on April 3rd, 2009 11:14 AM |

Will banks sell toxic assets? This question is being asked ad nauseum. Investors have indicated a willingness to purchase at the right price. That price has moved up somewhat given the assistance of government financing (read this as taxpayer financing) and government assumption of losses (read this as taxpayer assumption of losses). Bank executives have indicated a willingness to sell, “at the right price.” Ken Lewis, CEO of Bank of America, made that assertion again this morning. 

What’s the right price? Well, a Bloomberg survey of investors and banks provided indicated levels of interest as to what the right price for certain of these toxic assets might be. Investors are willing to pay 32 cents on the dollar. Banks are willing to sell at 84 cents on the dollar. In Wall street parlance, between those levels one can drive many Mack trucks!!

Aside from the disparity in perceived value, banks now are further incentivized not to sell given the reprieve they received just yesterday in the relaxation of the mark to market.  (more…)

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