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HomeHow Long Can You Tread Water?
Posted by Larry Doyle on March 26th, 2009 11:10 AM |
The other day, I provided a cursory overview of the details embedded in the recently proposed Public-Private Investment Partnership, Will Banks Truly Sell these Toxic Assets?
The main point I tried to highlight in that piece was the need for true price discovery for these toxic assets. A loyal reader provided tremendous insight in highlighting that the PPIP needs to assure that sellers are truly at arm’s length from buyers to insure that the price discovery process is real and fair.
There are potential concerns with this price discovery process highlighted in my piece Send in the Clown. Are the bank portfolios, located within the largest banks needing to sell toxic assets, attempting to prop the market higher? (more…)
Roubini and Birinyi on the Market
Posted by Larry Doyle on March 26th, 2009 8:42 AM |
I always keep a close ear for the market insights of any of our Economic All-Stars. Highly proclaimed NYU professor and economist Nouriel Roubini is decidedly bearish on the state of financial companies, the economy, and the markets. Bloomberg reports, Roubini Says Stocks Will Drop as Banks Go Belly Up.
Laszlo Birinyi is more tempered in his assessment but believes the market has come too far, too fast and is subject to some pullbacks. Please remember that we saw a market bottom in the S&P 500 at the 666 level (pretty scary, eh) on Friday March 6. We have moved up 22% in a very short time frame. Birinyi further offers that this market is less geared for long term investors and more for short term traders focused on picking individual stocks.
LD
Send in the Clown
Posted by Larry Doyle on March 26th, 2009 5:15 AM |
In the process of a business transaction, have you ever encountered the sudden appearance of another interested buyer? Where does this other mysterious buyer suddenly come from? How is it that the new buyer appears at the most inopportune time? If you thought you were the primary buyer, do you feel as if your bid is being shopped? In business, this appearance of a supposed late buyer is known as “send in the clown!”
This part of the circus act is played out on Wall Street all the time. As we enter into the largest liquidation sale in the history of Wall Street, the big fellow with the red nose, floppy feet, baggy pants, and squeaky voice has just shown up, in the form of Citigroup and Bank of America’s bank portfolios. (more…)
Billions in Municipal Losses Later…Sorry
Posted by Larry Doyle on March 25th, 2009 8:03 PM |
The municipal bond sector has always been conducive to a “pay to play” mentality. Picture a municipal executive, compensated in a high 5 figure range, making a decision on a multi-million dollar bond transaction in which Wall Street underwriters were generating millions in fees. If that scenario is not ripe for abuse, I don’t know what is. The “pay to play” game has been going on for years in municipal finance.
Well, with the launch and growth in municipal derivatives, it appears that the “games” likely continued. Wall Street firms certainly booked huge profits. Municipal executives very likely received under the table payments. Taxpayers got screwed. (more…)
Did Wall Street Flip Off Treasury Today?
Posted by Larry Doyle on March 25th, 2009 4:55 PM |
The U.S. government was heavily involved in the bond market today. How did they do? They bought high and sold low. What happened?
The Fed announced last week that they would engage in buying hundreds of billions of government and mortgage securities in an attempt to move interest rates lower and spark consumer and corporate borrowing. Today, the Fed made their initial purchase under this program at mid-morning. Thanks to MB, I learned that Wall Street offered the Fed three times more bonds than it actually purchased. I gather that the Fed wanted to be extremely patient and diligent in their purchases. In any event, at mid-morning the Fed would have bought bonds near the market highs of the day.
Later in the day, Treasury issued multiple billions in 5yr notes. How did they do with this sale? Not very well. Wall Street backed up their bids an almost unheard of 5 basis points (.05%) to fully underwrite these bonds. What happened? (more…)
Will TARP Screw ARPS Even Tighter?
Posted by Larry Doyle on March 25th, 2009 1:37 PM |
I have written extensively how Wall Street perpetrated a multi-billion dollar scam in the name of Auction Rate Preferred Securities (ARPS). For our newer readers, ARPS are securities funded by longer maturity underlying loans or preferred shares but marketed as short term cash or money market surrogates. How would that work? Wall Street ran very regular (weekly, monthly) auctions to provide liquidity for ARPS holders. The scam worked well until the overall market hit the skids and the Wall Street dealers backed away from providing liquidity to these supposed short term cash/money market instruments.
In the process of reviewing the underlying loans backing these deals, investors became aware of the long term nature of that collateral and thus their investment. While there is overwhelming evidence supporting the gross mismarketing of these securities, the SEC and FINRA have dragged their feet in rectifying this situation. Why? Great question.
I have highlighted that FINRA actually owned $647 million of ARPS as of year end 2006. That news is shocking to whomever I inform. Did FINRA sell their bonds? If so, to whom? When? What price? Did they front run an imploding market?
Could taxpayers via the TARP (Troubled Asset Recovery Program) actually get stuck making investors whole for a scam perpetrated by Wall Street? This fraud gets more bizarre at every turn. Welcome to the world of finance 2009.
I thank PT for sharing with me a story that broke yesterday: (more…)
Dr. Edwin Vieira’s Amazing Crystal Ball, 2006
Posted by Larry Doyle on March 24th, 2009 9:52 PM |
I will admit that I am not a student of the Great Depression, but I have started reviewing that period. Obviously I, like every American, hope our economy stabilizes and we regain our footing and return to prosperity. While the pragmatic optimist in me believes that can happen, the trader and risk manager in me tells me to review the Depression, understand the dynamics, assess the risks of our current period, and prepare accordingly.
I hope and believe people who have been reading my work for a while appreciate that I am not an alarmist. Whether working on Wall Street as a trader and salesman or now writing for Sense on Cents, a measured, analytical approach has always generated the best results. In that vein, I discount speculators and salesmen who attempt to make a buck from heightened levels of anxiety. That said, the elevated levels of risk in our economy, markets, and global finance require an equally elevated sense of risk analysis and historical analysis.
Given some of the economic saber rattling emanating from China and the lessened fiscal support emanating from Europe, the threats of global protectionism are clearly growing. That scenario also occurred during the Depression. (more…)
Back to the Future
Posted by Larry Doyle on March 24th, 2009 4:02 PM |
Are we returning to the days of white picket fences, hot dogs, Mom, baseball, and apple pie? Perhaps some people never got away from those endeavors so there is no need to return. However, given forces within the banking industry far outside our control, perhaps we will be returning to the days of community and regional banking.
Our nation experienced the development of a handful of mega-banks given the economies of scale with that model. The leverage created by combining systems, cross-selling products, and outsourcing labor allowed these institutions to redeploy capital into higher risk securities and situations often housed in off-balance sheet vehicles. Pardon my cynicism, but that model does not put a lot of emphasis on customer or employee loyalty, despite what management at many of those institutions may say. That model promotes the concept of volume and efficiency over individual and relationship. Regrettably, that model never fully developed the risk management and risk managers to control those behemoths. (more…)
Treasury Seeks Unprecedented Power
Posted by Larry Doyle on March 24th, 2009 8:47 AM |
I have written at length about the problems within the banking, insurance, hedge fund, and consumer finance industries over the last 6 months. While the bulk of the media focus has been on the banking industry – and primarily the large money center banks – the erosion in asset values at these other financial companies has been accelerating.
This past Sunday evening on my weekly radio show, NQR’s Sense on Cents with Larry Doyle, I spoke extensively about the massive financial shortfall within the insurance industry. In addition, relatively early on I warned that the hedge fund industry had likely been severely mismarking many investments. From a piece I wrote on November 12, 2008:
Give it time, because hedge funds do not have to report to anybody as to what their positions are and where they have them marked. There is no doubt they have positions that are grossly mismarked and have many positions that are totally illiquid. For many investors in these funds, these are truly “roach motels.” Hedge funds will sell what is most liquid when they can to meet redemption requests. We should expect a significant number of hedge fund liquidations, consolidations, and out and out disasters.
The same can be said for a number of private equity shops. Consumer finance companies with large holdings of a variety of consumer assets are fighting for their lives as delinquencies and defaults on these assets ratchet higher. (more…)
