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Home“I Want the Truth!”
Posted by Larry Doyle on April 15th, 2009 6:44 AM |
Recall how Hank Paulson compelled every major money center bank to accept government funds via the TARP last Fall. Paulson was concerned that if every institution did not participate in the TARP that the market would punish those institutions receiving funds.
The lack of delineation then and still now is creating stress for individual institutions and the market as a whole. Why? Markets thrive on two factors: capital and information. We have witnessed over the last year what a lack of capital in the form of credit has meant for the economy. We are also experiencing what a lack of information means.
Whether it is industrial and tech companies not providing guidance about their future earnings (GE, Intel just yesterday), banks utilizing relaxed mark-to-market accounting, or now banks being lumped together on Bank Stress Test results, the markets are sufferring as a result.
Are we seeing a version of the classic scene in a A Few Good Men? Who can ever forget this exchange?
Jessep: You want answers?
Kaffee (Tom Cruise): I think I’m entitled to them.
Jessep: You want answers?
Kaffee: I want the truth!
Jessep: You can’t handle the truth! Son, we live in a world that has walls. And those walls have to be guarded by men with guns. Who’s gonna do it? You? You, Lt. Weinberg? I have a greater responsibility than you can possibly fathom. You weep for Santiago and you curse the Marines. You have that luxury. You have the luxury of not knowing what I know: that Santiago’s death, while tragic, probably saved lives. And my existence, while grotesque and incomprehensible to you, saves lives…You don’t want the truth. Because deep down, in places you don’t talk about at parties, you want me on that wall. You need me on that wall.
We use words like honor, code, loyalty…we use these words as the backbone to a life spent defending something. You use ’em as a punchline. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very freedom I provide, then questions the manner in which I provide it! I’d rather you just said thank you and went on your way. Otherwise, I suggest you pick up a weapon and stand a post. Either way, I don’t give a damn what you think you’re entitled to!
Kaffee: Did you order the code red?
Jessep: (quietly) I did the job you sent me to do.
Kaffee: Did you order the code red?
Jessep: You’re goddamn right I did!!
Mum’s the Word
Posted by Larry Doyle on April 10th, 2009 12:40 PM |
The movie Goodfellas provides a wealth of material for comparative analysis of the markets. The “insider activity,” the “fooling around,” “the payoffs,” and “the gambling” all make for great drama on the screen. Truth be told, one does not have to look all that hard to find striking similarities to certain activities in the world of Wall Street, and for that matter, Washington.
One of my favorite scenes in the movie occurs after the boys make the big heist. Immediately, the word is put out to keep your mouths shut and no indications of newfound wealth.
Back to reality. In terms of “putting the fix” into the world of our major money center banks, isn’t the relaxation of the mark-to- market the “newfound wealth”? Isn’t the “keep your mouths shut” the equivalent of the Treasury telling the banks not to comment on results of the Bank Stress Test? Speaking of the Bank Stress Tests, Bloomberg reports:
The U.S. Federal Reserve has told Goldman Sachs Group Inc., Citigroup Inc. and other banks to keep mum on the results of “stress tests” that will gauge their ability to weather the recession, people familiar with the matter said.
The Fed wants to ensure that the report cards don’t leak during earnings conference calls scheduled for this month. Such a scenario might push stock prices lower for banks perceived as weak and interfere with the government’s plan to release the results in an orderly fashion later this month.
Clearly the Fed and Treasury are trying to keep their “boys” quiet and lay low while the real regulators of the market, that being honest investors, are walking the beat.
If any of the boys talk, then the leaders of the family won’t be able to coordinate the stories and hoodwink the public.
Whatever happened to, “as long as you tell the truth, you don’t have to worry about having a bad memory”?
It seems we are operating much more in the realm of, “well, I can tell you but . . . ”
The Goodfellas: Henry Hill, Jimmy Conway, Paul Cicero, and Tommy DeVito
Henry . . . Jimmy . . . Paulie . . . Tommy . . .
Please let me know who in our government and world of finance are most appropriate to play each of these individuals? Let’s have some fun.
“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…)
Bank Stress Tests: Major Sham??
Posted by Larry Doyle on April 8th, 2009 11:35 AM |
Why is it urban school dropout rates are 50%? Well, I am sure there would be as many reasons for that horrendous statistic as there are dropouts. The fact of the matter is, though, the state of urban education has promoted a phenomena known as “social promotion.” If students aren’t qualified to do the work, testing has been gamed, standards have been lowered, and corners have been cut. As a result, urban education at this stage is an unmitigated disaster. What does this have to do with the current state of our economy and the world of finance? I am glad you asked.
If banks, much like students, are not required to pass rigorous testing, then “social promotion” in finance will produce results not unlike those in education–underperformance and ultimately an inability to compete on the global stage.
Against that backdrop, I personally looked forward to the results of the Bank Stress Tests. Let’s finally get an honest assessment of the “students.” Let’s see how they have performed and let’s project to see how they will perform!!
As with any test, the results are only meaningful if the process and proctor have unquestioned integrity. The proctors for the Bank Stress Test are none other than Treasury Secretary Tim Geithner and Fed chair Ben Bernanke. Why is a testing authority of the magnitude of FDIC, led by Sheila Bair, not more involved in the process? Ms. Bair is the one individual in our country with the greatest level of interaction with and understanding of the student body, that being the banking industry as a whole and individual banks specifically. (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.
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…)
Big Brother
Posted by Larry Doyle on April 4th, 2009 8:45 PM |
Long term financial health and well being is predicated on fiscal discipline, core values, and strong management. These principles are necessary for major corporations and also individual family units. The market has a means of rewarding corporate units that practice these principles and punishing those that don’t. Enter into the world of finance 2009 when a number of financial units (Citi, AIG, Freddie, Fannie) are kept alive despite not practicing those principles.
Both shareholders and employees of these companies bear the risk of being connected to such institutions. It remains a challenge as to how to operate these institutions in the context of truly free and open markets. In light of these challenges, it is no surprise why other organizations would not want to have Uncle Sam as a partner. (more…)
Market Moving News
Posted by Larry Doyle on April 1st, 2009 10:02 AM |
End of quarter trading is often skewed with many fund managers buying winners and selling losers so as not to have to report those holdings in quarterly reports. Additionally, the market often finds reason to trade up on the last day of a quarter to “put a happy face” on a whining child.
The first day of the new quarter brings us a reversion to previous tough economic news. On the labor front, I commented yesterday in my March 2009 Market Review that a seeming stabilization in the labor market was a positive. That rug got pulled out from under investors this morning. ADP reports that jobless claims are rising from the 650k range to 742k. That 15% increase in projected unemployment is weighing on the market.
Additionally, investors should not view the relaxation of the mark-to-market accounting rule as a positive for the market. The WSJ reports this morning: (more…)
