Sense on Cents

Let’s Give Barack Some Sense on Cents

Posted by Larry Doyle on June 16th, 2009 9:16 AM |

In true Washington fashion, Obama’s proposed regulatory reforms have been “leaked” to the market. Let’s review, analyze, and critique. The Wall Street Journal provides a very helpful overview of these reforms via Blueprint to Avoid Market Meltdowns:

President Barack Obama spent the first five months of his presidency trying to make sure the worst financial shock in 70 years didn’t push the U.S. economy into a depression. He will spend the next five months or so trying to redo the rules of finance so we don’t go through this again.

Enough of the Obama plan has leaked to see how Treasury Secretary Timothy Geithner and chief White House economist Lawrence Summers propose to protect the economy from the vulnerabilities now so painfully evident: Plug the gaps; don’t redo the organization chart. Rely heavily on the sagacity of the Federal Reserve; the alternatives are inferior. Craft a plan that has a chance of getting through Congress.

Will there be real “change” involved in Obama’s plans or a mere reshuffling of the deck chairs along with a healthy dose of Monday morning quarterbacking? Will the Wall Street-Washington cabal be exposed or solidified? Let’s navigate the landscape of Obama’s proposed reforms using the WSJ’s blueprint:

Problem: Several financial firms were so big and intertwined that their failure threatened the entire system, and they weren’t all banks.

Solution: Pump up the Fed’s role in overseeing all big “financial holding companies,” giving it explicit authority to match its responsibility. Tell it to protect the system, not only the sturdiness of the banking units of these firms. Brace for controversy: Some in Congress already think the Fed is too powerful.

So propose a “council” of regulators to share some duties, but make the Fed the heavy. (Retain the Fed’s ability to lend to anyone in a crisis, as it did to Bear Stearns and American International Group, but require it to get the formal OK of the Treasury secretary.)

Sense on ¢ents: the Fed is already charged with these responsibilities within the banking industry. I highlighted these points the other day in my post “The All Powerful Federal Reserve”:

What are the Federal Reserve’s responsibilities?

-supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers

-maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

The Fed failed to perform. Why give it more power? Obama is specifically addressing the risks within the insurance industry in designating the Fed as the authority in overseeing the entire economic system.

I believe our risks are increasing dramatically via this move. Why? Not enough checks and balances. Not enough eyes and ears and “teeth” to monitor and promote accountability. Merely because the Fed is “all powerful” does not mean that it is “all knowing,” “all capable,” and “all encompassing.” Read the rest »

Comments (0)

Mere Pawns in Financial Chess Match

Posted by Larry Doyle on June 15th, 2009 6:51 PM |

The equity markets were down approximately 2% today without any overwhelming economic news. The news we did receive was decidedly mixed.

On the bearish side of the ledger, a measure of manufacturing activity in New York declined and confidence amongst homebuilders also declined. On the bullish side, the IMF announced that it is raising its 2009 forecast for economic activity in the United States. Taken together, those statistics would not typically generate a 2% downward move. So what happened?

Please recall from my posts “Greater Fool Theory“ and “What’s Driving the Market” that I believe the market is being driven by technical analysis and flows to a much greater extent than fundamental strength. Did we have any meaningful developments during the day or over the weekend to impact the technical support for our markets? I’m glad you asked. As Bloomberg reports, U.S., Global Stocks Drop as MSCI Falls Most in 2 Months:

Europe’s Dow Jones Stoxx 600 Index lost 2.5 percent after Group of Eight finance ministers, who met in Italy over the weekend, began drawing up contingency plans for rolling back budget deficits and bank bailouts as the economy shows signs of recovery and investors start worrying about inflation.

Recall that technical support is predicated strictly on new flows of cash entering the market to provide support and push prices to higher levels. There is no real fundamental analysis that supports these flows. While some economists may believe there are hints of global economic recovery, those debates are ongoing. The fact is, much like in a “shell game,” when a dealer (like a government) gives a hint that he plans on pulling some chips off the table, other players will do the same.

That line of reasoning developed at the G-8 conference and carried over into the market. Why did the G-8 express concerns about deficits and bailouts and inflation? Very simply, when interest rates move higher by 1% over the course of 6-8 weeks, they are sending a strong signal that there is a problem brewing. Even Dallas Fed governor Richard Fisher acknowledges that the Fed can only do so much to support the massive deficit spending and fiscal deficits. Bloomberg reports, Fisher Says Fed Can’t Offset Treasury-Borrowing Flood:

The Federal Reserve isn’t capable of offsetting the “flood” of U.S. Treasury borrowing with its bond-purchase program, which is helping to revive credit markets, Dallas district-bank President Richard Fisher said.

“The program has had its impact,” Fisher said today in an interview with Bloomberg Television. “At the same time, you cannot counter this enormous flood” of borrowing “coming from the United States Treasury.”

The Fed’s efforts to stimulate the economy are complicated by rising Treasury yields, which push up the cost of mortgages even after policy makers have lowered short-term interest rates near zero.

On the one hand, G-8 ministers are indicating the need to pull in their fiscal reins. On the other hand, Fed governor Fisher is indicating the Fed can’t support Treasury borrowing singlehandedly.

Do you get the sense we are all mere pawns in this massive game of financial chess going on around us?

Comments (1)

A Real Regulatory Review: Sense on Cents Interview with Bill Singer

Posted by Larry Doyle on June 15th, 2009 1:35 PM |

I feel so strongly about my interview last evening with Bill Singer, the preeminent veteran Wall Street regulatory lawyer and market reform advocate, that I am providing a transcript of highlights. My transcription is not totally word for word, so at the end of this post I will provide a BlogTalkRadio audio player so that you can playback the complete interview.

As time allows, I sincerely hope you read the entirety of this transcript and will listen to the complete interview. In my opinion, the issues addressed are that important. You will not be disappointed.

Given Bill’s extensive experience and relationships, he is uniquely positioned to comment on these timely and cutting edge issues. And now, on to the transcript . . .

Sense on Cents: Bill, we have just gone through a tsunami of epic proportions. Our financial industry brought our nation to its knees. We now get the sense that the regulatory oversight of our financial industry may not truly change. What are your feelings about that?

Bill Singer: I think you are right on point. My greatest fear is at the end of the day, we all go back to square one. It’s like asking for a mulligan in golf. People’s lives have been shattered and businesses destroyed. If you listen to the ‘garbage’ coming out of Washington, it’s as if the solutions are the same old things. We’ll set up panels, write papers, but what will really change? I don’t know what planet these people are living on, but last I looked, we haven’t gotten out of this crisis. We owe the next generation a much better regulatory system and a much fairer market. You just get this overwhelming sense that the ‘fix is in.’

Wall Street is wiping their brow and sweat and saying “whew, that was a close one.” It’s as if Wall street is telling Washington, “You’re still with us, aren’t you? We’re still paying for your campaigns.” I’m just afraid that nothing will really change other than some cosmetic changes.

Sense on Cents: I hope some real statesmen step up to address these issues. Since I’ve been writing, I believe we always get into the sufficiency of regulations. Which regulations need to be improved and which should be wiped away. I strongly believe, first and foremost, any industry has to have transparency and integrity in its process. As you just mentioned, it seems as if the ‘fix is in.’

Bill Singer: Larry, I’ve been reading your columns for quite some time now. This is not the time for anybody to be blowing smoke up anybody’s “you know what.” We have a career cast of politicians and regulators who by and large have never really worked for a living and who don’t really have a sense of what the ‘everyday Joe’ goes through. What we need right now is new ideas, new blood. You can’t break into the system. If you have been one of the individuals who has been warning about the major issues for years, you’d think that you would be invited in to ask to contribute ideas to fix them. That never happens. Those folks who regulate us are a very closed society. We have a system in our country that feeds cronyism and there is no way out of it.

I have reached out repeatedly over the years to regulatory bodies and as a 30 year veteran, and a former regulator, if I can’t even get an interview (and I’m not saying I would even want the job; they probably couldn’t afford me), that tells me how corrupt the system is.

When the public reads about Harry Markopolos and Gary Aguirre who have tried to expose issues and they aren’t embraced, that speaks volumes. Regulation has been “in bed” with Wall Street for very long. We need a vibrant and intelligent regulatory system to protect the public against fraud and the industry against its own folly. Read the rest »

Comments (8)

FROM THE ARCHIVES . . .
Future Financial Regulation: Not a Question of Sufficiency, but of Transparency and Integrity

Posted by Larry Doyle on June 15th, 2009 5:30 AM |

I hope people far and wide will listen to the interview I had with Bill Singer on last evening’s NQR’s Sense on Cents with Larry Doyle. Bill is the preeminent veteran Wall Street regulatory lawyer and market reform advocate. He pulled no punches in our conversation. My chat with Bill compels me to republish my posting from mid-May on the future of financial regulation.

Editor’s Note – this piece was originally posted on May 18, 2009:

Will our future regulatory structure of the financial industry allow capitalism to thrive? Will the political wizards in Washington prioritize personal agendas and expediency over unquestioned transparency and integrity? I believe we are at a critical regulatory crossroads not seen since financial regulations implemented in the Securities Act of 1933.

Do the powers that be both in Washington and Wall Street understand the magnitude of responsibilities and obligations involved in this process? Initial returns are decidedly mixed. The debate by those intimately involved in the regulatory oversight is typically framed as a question of sufficiency. That is, does the industry have enough regulation or not?

The media often frame the debate in political terms between laissez-faire proponents and those favoring increased government intervention. Both camps are missing the bigger picture, because both camps are feeding from the same trough. Allow me to expound.

The critical regulatory question facing our markets is not of sufficiency but is one of transparency. Regrettably, both ends of the regulatory spectrum do not want to address this glaring shortcoming because it exposes the very nature of the incestuous relationship between Wall Street and Washington.

The mainstream media, to a large extent, is dependent on both Wall Street and Washington for their financial well being so they do not press or pursue the need for total regulatory transparency. Fortunately, Sense on Cents and other leading financial websites are not under this restriction.

Let’s dig deeper and review where regulatory developments stand currently. As the Financial Times reports, U.S. Poised For Finance Regulation Shake-Up:

Congress will next month start the biggest regulatory overhaul of the US financial system in decades, bringing into the open a frantic lobbying effort between banks, regulators and policymakers on what it contains and who pays for it.

The House financial services committee, chaired by Democrat Barney Frank, will hold hearings early in June into reforms outlined by Timothy Geithner, Treasury secretary, say people familiar with the timetable.

Regrettably, before the debate even begins the premise of sufficiency versus transparency is accepted without question. Well, Sense on Cents is questioning the lack of transparency and resulting integrity of the process, which by its very nature strongly influences the outcome. Allow me to be more specific. Much as the Parliament in the U.K. is being rocked by a current scandal over expenses submitted by legislators, I strongly exhort those who truly care about capitalism, free market principles, and our democracy to address the very nature of the relationship betwen the banks, regulators, and policymakers. Read the rest »

Comments (0)

Sheila “Bair”s Her Mind

Posted by Larry Doyle on June 14th, 2009 12:43 PM |

Sheila Bair, Head of FDIC

I have always held Sheila Bair in high regard. Why? I believe she has no agenda other than what is best for our country. I find her to be tough, but fair. I think she prioritizes integrity, transparency, and reputation–all of which we badly need, but are in short supply.

Ms. Bair is currently engaged in an active debate about potential management changes at Citigroup. She is no shrinking violet in taking on any and all Wall Street heavyweights. I commend her for that. Additionally, she is giving “no quarter” in defending her positions on financial regulatory reform.

Ms. Bair recently spoke with Forbes, Bair Cautions Banking Crisis Is Not Over. Ms. Bair does not pull any punches or play the pandering games regularly seen in Washington and on Wall Street. As such, I think it is prudent for all of us to listen closely to what she has to say. Forbes reports:

Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said Friday that while the crisis that swept through the financial world last year has subsided somewhat, it was far from over and there would be “many more bank failures” ahead.

“I think there’s still some challenges, I think we need to be realistic. There are still some troubled assets on the books and we still have an economy that’s under significant stress.”

How many other government officials are equally as blunt? How many regulators will openly address the fact that the toxic assets are still very much an issue and that the economy is under ‘significant stress’? Our country is screaming for some good old-fashioned truth combined with straight talk. Ms. Bair provides it. Let’s go back for some more. What does Sheila Bair think about the economy? Green shoots? Turning the corner? Bair provides sobering commentary: Read the rest »

Comments (1)

NoQuarter Radio’s Sense on Cents with Larry Doyle

Posted by Larry Doyle on June 13th, 2009 6:56 PM |

UPDATE: The show has concluded, but you can listen to a recording in its entirety by clicking the Play button on the audio player below. Once the playback has started, you can fast forward or rewind to any portion of the show by clicking at any point along the play bar.

***************************

Please join me this Sunday evening June 14th from 8-9 p.m. ET for NoQuarter Radio’s Sense on Cents with Larry Doyle. The markets gyrated this week but ultimately ended up close to unchanged across the board. That said, our economic landscape continues to provide numerous twists and turns. Let’s navigate.

The wizards in Washington are working feverishly on an overhaul of the regulatory framework of the financial industry. Or are they? Will real changes be implemented or is it mere pandering? Sense on Cents is thrilled to host the preeminent veteran Wall Street regulatory lawyer and market reform advocate Bill Singer this Sunday evening.

Bill’s career is nothing short of extraordinary. He is engaged far and wide for his legal expertise and advocacy on a wide array of regulatory issues. At this point in our financial and economic turmoil, nobody is better positioned to address the intersection of Wall Street and Washington than Bill Singer.

More specifically, Bill operates within the following realms:

shareholder in the Securities Practice Group of the law firm Stark & Stark
Publisher of http://brokeandbroker.com
Publisher of http://RRBDLaw.com
Columnist and Member of Forbes.com’s Intelligent Investing Panel

Bill and I will engage in a no-holds-barred conversation about the recent meltdown of our financial system:

What role did inept regulation and incompetent regulators play in allowing the tragedy to unfold and proceed?
Should the present regulatory system be salvaged, or demolished and replaced with a new scheme?
A major part of the regulation of Wall Street is done by a so-called self-regulator whose rules and Board members are voted on only by its member firms — is this still a good idea?
Why don’t powerful industry interests want the job of stockbroker to be “professionalized” along the lines of medical doctors, lawyers, and CPAs?

These are truly historic times in the global economy. Let’s “navigate the economic landscape” without the pandering or nonsense found elsewhere!

With Bill Singer on this Sunday evening, you can rest assured we will leave no stone unturned in navigating all the angles on this part of our economic landscape.

Please spread the word amongst friends and colleagues not to miss the show this Sunday evening on NQR’s Sense on Cents with Larry Doyle.

Comments (0)

Greater Fool Theory: STRONGLY RECOMMENDED READING

Posted by Larry Doyle on June 13th, 2009 8:14 AM |

Investing is often much more an art than a science. What moves markets both up and down often will defy any logical line of reasoning. That fact can and will frustrate many money managers.

While I traded on Wall Street, I was fortunate to experience many different types of markets and the driving forces behind them. Ultimately I learned that over the very long haul, fundamental analysis will carry the day. That said, for protracted periods the mere flow of funds and market psychology embedded in technical analysis can be powerful if not overwhelming.

I addressed this line of reasoning the other day in writing What’s Driving the Market. I find it particularly uncanny that the lead article in today’s Wall Street Journal, Stocks in the Black on Gusher of Cash, navigates this same line of reasoning.

I wholeheartedly agree with the analysis put forth by the WSJ. I want to juxtapose my writing with that of the WSJ to highlight a theory which readers will likely never see or hear from individuals involved in the financial industry. Coming from a family of lawyers, allow me to “make my case.”

In my piece on Thursday, I wrote:

From my perspective, the Fed and Treasury have created nothing short of a flood of liquidity throughout our financial system and economy. While the economic activity is anything but robust, this money is in the system. Banks are not aggressively looking to lend and will not cut interest rates or credit standards. The shadow banking system (securitization process) remains stagnant.

Thus, where does the money/liquidity go? Much like pools of water after a torrential rainstorm, the pools of liquidity in our system are looking to penetrate any available crack and crevice.

The WSJ writes this morning:

governments around the world are pumping money into the economy at a frenetic pace. Because businesses can’t put trillions of new dollars to work in such a short time, the money is finding its way into financial markets. Some investors have begun speaking of a “bailout bubble” being created in certain markets, and about a “melt-up” in demand fueled by the growing supply of money.

“All that money that was printed had to go somewhere,” says Joachim Fels, co-head of global economics at Morgan Stanley.

As anybody involved in finance can appreciate, “follow the money” holds not only for criminal investigations but also for investment purposes. Let’s continue “down the river.” Read the rest »

Comments (4)

The All Powerful Federal Reserve: Part II

Posted by Larry Doyle on June 12th, 2009 12:19 PM |

Is the All Powerful Federal Reserve omniscient, omnipotent, and omnipresent? Any institution that purports to be transparent but ultimately clouds itself in a shroud of “financial intrigue” deserves serious questioning. Congressional efforts on this front regularly fall woefully short. With a few exceptions, serious media analysis of the Fed is also deficient. Fortunately, the Wall Street Journal provides a reasonable overview of recent Fed maneuvers, Fed to Keep Lid on Bond Buys. Let’s navigate the inner workings of the Fed and play devil’s advocate in the process.

The WSJ highlights:

Fed officials have become more confident recently that they have stabilized the economy and set the stage for recovery. But divisions are brewing within the Fed over whether it should do more to speed the healing, pause, or start pulling back to avoid an outbreak of inflation.

Those crosscurrents are likely to inhibit bold new strokes by the Fed at its next meeting, in contrast to earlier in the year, when a bleak outlook spurred aggressive action.

At long last, a hint of sanity on the inflation front emanates from within the hallowed halls of the kingdom of the Federal Reserve.

Please recall that when the Fed announced its increased level of aggressive quantitative easing, the 10 yr Treasury rallied 50 basis points from a 3.1% to a 2.6% in one day. That sort of move is unprecedented. The 10yr, even with the Fed’s support, has since retraced 1.2% in the last three months. Where would the 10yr Treasury be without Fed support? 4%, 4.25%, 4.5%? Who could estimate for sure? Read the rest »

Comments (5)

The All Powerful Federal Reserve

Posted by Larry Doyle on June 12th, 2009 8:10 AM |

What would our founding fathers think about the omnipotence of the Federal Reserve?

Is there any doubt that the true greatness of our Constitution is found in the balance of power amongst the executive, legislative, and judicial branches. Where in that mix is the power centered in the financial branch? Who controls the financial branch? Welcome to the kingdom of the Federal Reserve.

To whom does the Fed answer? How transparent is the Fed? Can the Fed be too powerful? Is the Fed “too big to fail?” How skilled is the Fed? Is it infallible? Does the Fed get involved in our political process? So many questions. Such limited clarity.

As our Brave New World of the Uncle Sam Economy evolves, the Fed has never been more influential in our economic and political process. Is the Fed too powerful? Let’s navigate the landscape of the Fed and see what we learn.

Rather than my regurgitating answers to frequently asked questions of the Fed, please allow me to link to the Fed’s own site for these “frequently asked questions.”

Let’s dig deeper. I want to specifically address, two specific aspects which fall under, What are the Federal Reserve’s responsibilities?

-supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers

-maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

Looking back over the course of the last ten years, how could any self-respecting central banker, politician, financial executive, market analyst, or financial blogger give the Fed anything other than a failing grade in these realms. Does that failing grade deserve to be assigned more to former Fed chair Alan Greenspan than Ben Bernanke? Perhaps, but the Fed as a whole failed miserably on these critically important initiatives.

As we move forward on our economic landscape, how will our “political leaders” within the executive and legislative branches address the allocation of responsibilities within the financial system? Read the rest »

Comments (8)

What’s Driving the Market?

Posted by Larry Doyle on June 11th, 2009 4:48 PM |

Is the economy providing subtle but solid signs of health to lead our equity markets to further gains? Do investors see signs amidst market flows compelling them to put money to work despite mixed economic signals? Is there a combination of both reasons driving the market? Let’s dig deeper and navigate.

The DJIA and S&P 500 have rallied 30+% from the March lows. Credit spreads within the bond market have also performed tremendously well from that time period. On a year to date basis, the DJIA and S&P 500 are now unchanged to slightly positive.

Were the markets being overly pessimistic in March? Were they too fearful of the great unknown? Are they overly optimistic at this point? I believe the markets are being driven much more by a bullish technical correction based upon an increased liquidity cushion than any sort of real fundamental economic factors.

From my perspective, the Fed and Treasury have created nothing short of a flood of liquidity throughout our financial system and economy. While the economic activity is anything but robust, this money is in the system. Banks are not aggressively looking to lend and will not cut interest rates or credit standards. The shadow banking system (securitization process) remains stagnant.

Thus, where does the money/liquidity go? Much like pools of water after a torrential rainstorm, the pools of liquidity in our system are looking to penetrate any available crack and crevice.

The Fed and banking system are very subtly, but effectively, compelling people to put their money to work in the market. How so? By leaving the Fed Funds rate, and other very short term rates, at such extremely low levels and professing they will stay at those low levels for the foreseeable future.

Thus, much like that pool of water looking for a crack in a foundation and finding it, the pool of liquidity in our economy is being pushed into the market rather than remaining stagnant in CDs, money markets and the like.

Does the market represent good value at current levels? Not by any reasonable measures. But this market is not about value or fundamentals at this juncture. This market is purely a technically driven market in which the pool of liquidity is chasing stocks higher.

What sectors are leading the market? The oil, gas, energy, and other assorted commodities for one. Financials, primarily the large money center banks, for another. What’s driving these sectors?

The former group is pricing in expectant inflation sooner than otherwise predicted, as the WSJ reports, Oil Rises On Inflation Trade. China is aggressively purchasing a wide swath of commodities in large volume. The financials are benefitting from an extremely cheap source of funding, that is, deposits and Fed Funds of 0-1%.

What remains the greatest risk to this flood of liquidity pouring into the equity markets? The technical flows so far outpace any sort of reasonable fundamental analysis increasing the risk that an equity bubble develops. What would cause that bubble to pop? Higher interest rates. What would cause rates to increase even further? Inflation and ongoing enormous fiscal deficits.

Rising equity markets may provide a degree of comfort at this juncture. I think it is critically important, though, to understand what is driving the market and what is further down the road on our economic landscape.

Comments (3)

« Newer Posts — Older Posts »