Quoting the Crisis

04/12/2009

“ Increased demand for their products was noted by makers of food products, apparel, furniture, chemicals, and electrical equipment. Declining demand was noted by makers of lumber and wood products, metal and metals products, and industrial materials. „

FRB: Beige Book—Philadelphia—December 2, 2009 (via nonolet)

Quote posted at 20:22

“ The smart people of the world are no longer using their knowledge to improve the human condition. Now they spend their days trying to figure out how to more efficiently move money in circles while skimming some off the top as it slides through their hands. „

Jerry Pournelle, in a TWIT podcast quoted in The Bob - The Money is Moving in Circles

Quote posted at 18:22

“ One of the ongoing complexities of security analysis is that you can never satisfactorily determine where you are in a cycle. How long might a bull or bear market last? Had you avoided the upward frenzy of 1929 and miss the great crash only to jump into the market in early 1930, the pain you would have felt by 1933 would hardly have been different from the agony of those who invested at the 1929 peak. We will not be certain until much later whether the so-called bargains of January, 2008 were truly undervalued or merely dangerous temptations to value-starved investors. „

Distressed Debt Investing: Wisdom from Seth Klarman - Part 6 (via nonolet)

Of course, it used to be easier to invest when you could simply make a value judgement instead of wondering when a massive, leveraged investor like GS or Paulson or Galleon was coming along to be a “contrarian” and crush sound investing with pure “I’m bigger than you” speculative power or insider shit.  Nowadays it’s not enough to just price a security to risk, you have to price in the participation of leviathans.

(via unsolicitedanalysis) (via nonolet)

Quote posted at 16:21

“ THIS is the kind of snooping you’d expect in China, not a modern western democracy. It raises huge questions over privacy invasion and freedom of expression. „

Andrew Heaney, a senior executive at TalkTalk, one of the UK’s largest internet service providers, quoted by Paul Marks in Net piracy: The people vs the entertainment industry - tech - 03 December 2009 - New Scientist

Quote posted at 09:02

03/12/2009

“ With hindsight, the capital assigned to certain categories of high-risk and off balance sheet transactions by Basel rules was far too low. Those mis-calibrations were then arbitraged by the banks in ways which included inflated trading books and an over-expansion into high-risk loans and securitised assets. „

Andrew G Haldane, Executive Director, Financial Stability, Bank of England, and Piergiorgio Alessandri in Banking on the State (PDF)

Quote posted at 22:50

“ Whatever place the ‘credit crunch’ eventually finds in economic history, one certain victim of the crisis has been free market economics. It is impossible any more to hold that economies will prosper only if markets are freed from political bondage. Attacks on the economists by politicians and journalists have become commonplace. Even the Queen of England asked publicly why none of them saw it all coming. The ideological hegemony of mainstream economics, especially since the 1980s, has been holed below the water. This is not to say that the free marketers have been silenced, but public acceptance of the notion that the economy is social, institutional and in need of political guidance is now commonplace. And Karl Marx, after being sidelined for decades, is once again a best-seller in Germany. All of this suggests to me that the crash has opened up a new terrain for thinking about anthropology, economics and history. „

Professor Keith Hart, in Angry Bear: Cross-post: A human economy for the twenty-first century

Quote posted at 20:50

“ 

Out-of-the-money options: The payoffs to high-risk lending can be replicated using an alternative strategy of writing deep out-of-the-money options. This can be achieved, for example, by selling protection in the CDS market. The writer of that protection receives an insurance premium and thus a steady source of income ingood states of the world. Because of that, this strategy appears to generate “alpha” – excess returns – during the good times.

In fact, this strategy is a wolf wrapped in sheep’s clothing; it is beta dressed up as alpha. In the event of a bad state of the world – default by the reference entity in a CDS context – the writers of the insurance suffer a significantly negative payoff, eliminating the apparent alpha earned in good states (Figure 3). This was, in effect, the AIG strategy. AIG is believed to have written around $1.0 trillion of CDS protection. This strategy delivered large apparent “alpha” returns during the disco years. But when the music ceased and true beta was revealed, AIG required state support of around $180bn.

 „

Andrew G Haldane, Executive Director, Financial Stability, Bank of England, and Piergiorgio Alessandri in Banking on the State (PDF)

Quote posted at 18:48

“ I should have assumed that Wall Street’s tendency toward reckless myopia – ingrained over the past decade – would return at the first sign of even temporary stability. The eagerness of investors to chase prevailing trends, and their unwillingness to concern themselves with predictable longer-term risks, drove a successive series of speculative advances and crashes during the past decade – the dot-com bubble, the tech bubble, the mortgage bubble, the private-equity bubble, and the commodities bubble. And here we are again. „

John Hussman on Reckless Myopia

Quote posted at 16:48

“ 

By the start of this century, bank balance sheets were more than five times annual UK GDP. In the space of a generation, the insurable interests of the state had risen tenfold.

By itself, this expansion of balance sheets need not imply that the state was bearing greater implicit risk. For example, banks could have self-insured by holding larger buffers of capital and liquidity. In practice, the opposite happened (Charts 2 and 3). Capital and liquidity ratios have fallen secularly in the UK and US for over a century.

Since the start of the 20th century, capital ratios have fallen by a factor of around five in the US and UK. Liquidity ratios have fallen by roughly the same amount in half that time. Taken together, these balance sheet trends indicate a pronounced rise in banking system risk and hence in potential demand for state insurance. They have also affected the returns required by bank shareholders.

As banks moved up the risk spectrum, the return required by shareholders has predictably increased. Between 1920 and 1970, the return on UK banks’ equity averaged below 10% per annum, with low volatility of around 2% per year (Chart 4). This was roughly in line with risks and returns in the non-financial economy.

The 1970s signalled a sea-change. Since then returns on UK banks’ equity have averaged over 20%. Immediately prior to the crisis, returns were close to 30%. The natural bedfellow to higher return is higher risk. And so it was, with the volatility of UK banks’ returns having trebled over the past forty years.
4

 „

Andrew G Haldane, Executive Director, Financial Stability, Bank of England, and Piergiorgio Alessandri in Banking on the State (PDF)

Quote posted at 14:46

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The cash in the general operating account exceeded $6 billion by the time Bok and El-Erian left. Problems were starting to surface in housing and the credit markets in 2007. But still the cash policy went unchanged. It wasn’t until early 2008 that a chorus of concern was rising from members of the financial staff, professors on advisory committees, and the board. They decided to start pulling some of the cash out of the endowment - in $250 million chunks - quarterly, according to Harvard officials briefed on the plan. But it was too late. They got one slug of money out in March 2008, and then the markets seized up.

The very thing that the former endowment chiefs had worried about and warned of for so long then came to pass. Amid plunging global markets, Harvard would lose not only 27 percent of its $37 billion endowment in 2008, but $1.8 billion of the general operating cash - or 27 percent of some $6 billion invested. Harvard also would pay $500 million to get out of the interest-rate swaps Summers had entered into, which imploded when rates fell instead of rising. The university would have to issue $1.5 billion in bonds to shore up its cash position, on top of another $1 billion debt sale. And there were layoffs, pay freezes, and deep, university-wide budget cuts.

 „

Beth Healy in Harvard ignored warnings about investments - The Boston Globe

Quote posted at 12:46

“ Has it really come to this? Imagine what emotions must be billowing through the halls of Goldman Sachs to provoke the firm into an apology. Talk that Goldman bankers might have armed themselves in self-defense would sound ludicrous, were it not so apt a metaphor for the way that the most successful people on Wall Street have become a target for public rage. „

Arming Goldman With Pistols Against Public: Alice Schroeder - Bloomberg.com

Quote posted at 10:35

02/12/2009

“ The Chinese and American economies are mirror images of each other. The American economy revolves around the consumer. Low prices trump all, and enhancing consumer welfare is the ultimate goal. In China, by contrast, the producer is sovereign: investment trumps all, and building is what matters most. Just consider the stimulus plans the two countries enacted earlier this year: In the U.S., most of the stimulus took the form of giving money to individuals via tax cuts and repairing the social safety net by sending aid to the states. China poured almost all its stimulus into infrastructure and construction. „

Why the Chinese don’t spend : The New Yorker (via nonolet)

Quote posted at 23:12

» Anatomy of a Government-Abetted Fraud: Why Indymac/OneWest Always Forecloses

crazynutjob:

That is a sweet deal. The loss-share agreement OneWest entered into with the FDIC pays out better on foreclosures than for mods. Left Hand, I’d like to introduce you to Right Hand. You two should probably coordinate a little better.

Link posted at 21:09

“ This did not get enough press, but in early November [2008] Chinese banks (top tier banks like Bank of China and Industrial and Commercial Bank of China) refused to fork over billions in collateral on dollar/yen FX trades which were out of the money after the yen’s October appreciation. The headlines should have read (but didn’t): “Chinese Banks say: STUFF IT.” The Chinese banks won a game of drag race “chicken” with foreign banks. Most credit support annex agreements would say that closing out these trades would be an event of default, and then the cross default on all the trades would kick in with the same counterparty. But the credit of the Chinese banks was better than many of their counterparties, and they renegotiated contracts with the Chinese banks. What inspired Chinese banks to play and win this game of brinkmanship? The motive may be entirely unrelated to the bath that highly-placed “retail client” Chinese have taken with investments in mini-bombs, er, I mean mini-bonds, sold to them with “AAA” ratings by U.S. investment banks. The latter is just icing on the rice cake. „

Janet Takavoli in The Bailout Mess: Attempt to Abandon Mark-to-Market Accounting

Quote posted at 19:08

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Goldman questioned PriceWaterhouse, Goldman’s and AIG’s common auditor, about prices. Goldman wanted lower prices, which meant that AIG would have to produce more collateral. When AIG was downgraded in September 2008, AIG was required to put up an aggregate amount of $14.5 billion in additional collateral to equal the full difference between original prices and market prices. But “market prices” in this illiquid market were influenced by Goldman Sachs.
Goldman was right to question the prices, make calls for collateral, and protect itself.

Goldman’s activity was not the same as that of an arsonist buying fire insurance, but its trading activities with AIG and others were accelerants of AIG’s problems.

 „

Janet Takavoli in Goldman’s Undisclosed Role in AIG’s Distress

Quote posted at 17:07

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