Friday, May 29, 2009

As Transparent as a Cesspool

This Huffington Post piece, "Accountants, Washington Helping Banks Fluff Profits," illustrates why it's so frustrating to watch this financial crisis play out, day after day.

We need greater transparency in the financial system. Nobody -- right, left, center, right of center, left of center, center of right of left of center -- contests that. Nobody has said, "What we need in America are more off-balance-sheet vehicles, derivatives traded in back alleys, murky accounting rules, hard-to-understand securitizations."

If we need more light, we do we keep embracing the darkness? I don't get it.

And if you don't like "mark-to-market rules" (accounting standards that value an asset on a company's books according to what it's worth at that moment, freely traded), then what do you like? Mark-to-whatever-you-feel-like-it rules (these by the way, in their more reputable guise, are known as "mark to model")?

If you're an accountant, the nice thing about a financial asset should be that it's not a friggin' puppy. It doesn't have sentimental value. That CMBS in the back room isn't worth $5 million to me but $10 million to you because you like its big brown eyes and curly cashmere-soft coat.

At day's end (so to speak), it pays out X dollars, and that's what matters. That's how the market prices it. If you claim it's worth $10 million, but Joe Investor will give you only $5 million, but it IS really worth $10 million (assuming reasonable rates of return), guess what? Fred Investor will step in and give you $9.7 million say, recognizing a good deal when he can get one.

But if you can't get anything near $10 million, for God's sake, don't turn purple and start throwing your paperweights around the office, swearing about those "damn accounting rules." I know in America it's always in fashion to blame someone else, not yourself. But in this case, you really need to man up. If you're holding a stinkbomb, deal with it honestly, instead of trying to bend every accounting rule in sight.

Thursday, May 28, 2009

PPIP Deathwatch, May 28 Installment

More evidence, this in the Wall Street Journal, that Geithner's plan to purchase toxic assets from the major banks is hitting the skids: Plan to Buy Banks' Bad Loans Founders.

To be fair, this is only one piece of the public-private partnership effort to buy bank assets through a competitive bidding process. PPIP provides a mechanism for banks to dispose of both (1) loans (the article above) and (2) securities. The Treasury, in charge of the securities auctions, assures us that it's still going full-steam ahead.

Honestly though, I doubt the Treasury's earnest intentions will matter much. The banks will pull out the sharp knives, when Geithner isn't looking, and skewer him. They don't want to sell their impaired loans, their impaired securities, their impaired nothin'. The banks don't want to sell any of this crap at anything near a market price because, to maintain the fiction of solvency, they have to keep pretending it's worth more than its real value.

And what the banks want in this crisis, the banks get. The Obama Team feels most comfortable bullying Detroit and pandering to Wall Street.

Wednesday, May 27, 2009

Mr. Greenspan, Surely You Jest

Jaw dropper of the morning ... did anyone else see this quote below? It was in a Washington Post article on Brooksley Born, the smart lady who was ostracized by Washington's high-powered financial regulators after she (presciently) warned that unregulated derivatives could lead to a huge financial mess:

Greenspan had an unusual take on market fraud, Born recounted: "He explained there wasn't a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him."

Wow. I am just flabbergasted, bumbleboozled, speechless beyond the reach of the confines of the English language. I have one comment: Is Alan Greenspan seriously this stupid? I know he's an unrepentant Ayn Rand acolyte, but ... but ... oh my God.

This reminds me of that line about chimpanzees: sure they may look like cute pets; just remember you're getting an ape who can bend steel but who has the intelligence of a five-year-old. Or in Greenspan's case: sure he may look like a cute Federal Reserve chairman (in the right light); just remember you're getting an ape who can cause markets to tumble with the snap of his fingers but who has the wisdom of a four-year-old.

Monday, May 25, 2009

How the Mighty Have Fallen

Alan Greenspan, Master of Snark? The former chairman of the Federal Reserve, whose most trivial utterances were once closely parsed for larger meaning ("Greenspan said some of the cherry trees on his drive to work seemed to be blooming later than usual this year? ... Sell Treasuries! Sell! Sell! Sell!"), appears to have been reduced to ankle-sniping. Richard Posner said he received an e-mail from the Once Great One, complaining about Posner's "rather thin analysis of the source of the current financial crisis."

Follow the link above to read the whole thing. If you want to save yourself some time, here's the version in a nutshell's nutshell:

Greenspan: My monetary policy not to blame for housing bubble; Fed sets only short-term rates which we did raise; trouble is long-term rates on mortgages stayed low and pumped the bubble because the damn Asians were saving too much. Posner: short-term rates do influence long term, the Asians be damned; in any event many homeowners weren't taking out fixed-rate mortgages anyway but rather ARMs, which do track short-term rates, so there.

If I were a ringside judge, I'd give the bout to Posner. Maybe not an outright knockout -- Greenspan lands a light punch to the chin. But that's not the larger point. What I wanted to underscore was what a weird place we've come to in this financial crisis. In the good old days, a surly Greenspan wouldn't have been e-mailing his critics. He towered above all that. He was, well, you know, ALAN FREAKIN' GREENSPAN. He didn't send e-mails to Atlantic magazine writers who run blogs by names such as "The Daily Dish."

Of course now that Greenspan has shown that he's not above chasing heckling fans into the stands, I want to throw down the gauntlet too. That's right, I too want to mix it up with Greenspan. So let's get it on, big guy!

Yep, "Mr." "Greenspan", I too think you SCREWED UP, BIG TIME. Enough namby pamby excuses. Blame the Asians huh? Oh right, the Asians prevented you from regulating the mortgage companies that ran amok. And was that an Asian standing offstage, training a gun on you, warning you to make soothing statements about the housing market or Andrea Mitchell would be dog meat by dawn? Let's see, you warned us about a housing bubble, about, uh, ZERO times?

Okay Greenspan, let's have your best shot. I've cleared out my comment section just for you. Finance Guy awaits your reply. I say what Posner said, only double! Plus I say what I said too! Come on, ya big lug. Take a swing.

Tuesday, May 19, 2009

Krugman Does China

Couldn't resist letting Paul Krugman's China trip slip by without comment, especially since I just moved out of Hong Kong after three years. I found this article by China Stakes (Krugman in China: Stimulating, Controversial, and Expensive) to be amusing.

It appears the Chinese were initially delighted to have Krugman on the Sino-lecture circuit for several reasons. First, he is seen as an economic prophet (and what price can you put on one of those -- oops, looks like $200,000 an appearance, according to the article, making this probably a million-dollar jaunt for PK). He also won the Nobel Prize recently and has been a harsh critic of the U.S. response to the financial crisis.

Everything seemed to be in the cards for a lovely week of high-powered talks and shmooze-fests. You can almost see the dark-suited Chinese officials sitting in the front row and nodding with vigor as Krugman lambastes the Obama team's tepid response to the banking mess. "Why, oh why, are they so frightened of nationalization?" Krugman thunders as an audible murmur of sympathy rises from the audience.

But of course, the trouble with mavericks and independent thinkers is they don't heel and sit up and roll over on command. The article made Krugman sound a bit prickly as he challenged China to take responsibility for the impact of its own huge and persistent trade surpluses. He spoke frankly about the root cause of the surpluses, the country's currency regime.

That part greatly interested me. In Hong Kong, studying China's exchange rate policy became one of my pet projects. I became convinced it was the keyhole to understanding the country's larger economy.

This is what Krugman had to say on the subject, according to the article:
Krugman also hinted that China's massive trade surplus is the result of manipulating its currency's exchange rate. He said: “The U.S. Congress will review China's currency each year, and the Treasury will report whether some countries are manipulating currency or not. The answer each time is that China doesn't manipulate, but everybody knows this is not an honest assessment, it's a decision made to avoid conflicts.”

Does China manipulate the rate at which the renminbi (or yuan) trades against the currencies of other nations? Absolutely. I know China fumes and stamps its feet whenever the U.S. hints at this, but that's all theater.

Don't be fooled by that move back in the summer of 2005. Remember? China switched to an exchange rate that floated against a basket of currencies, within a narrow band (that itself is periodically adjusted). It sounds like they freed up their currency somewhat.

Not really. Theater, all theater.

The Chinese made the change, cleverly, to outfox their opponents in the U.S. who complained about the country's fixed rate policy that undervalued the yuan. The Chinese stood accused of dumping low-cost goods and stoking their economy through exports. Beijing answered with a "managed currency" that would "float." Of course it floats in the same way that a dog on a four-inch leash runs.

Actually it's even worse. The semblance of a sort of-floating currency gives the Chinese cover to monkey around with the exchange rate as they wish. While living in Hong Kong, I noticed sometimes it moves opposite the way news would indicate, as the Chinese tweak it down or up to try to discourage currency speculators.

The best evidence that the "basket of currencies peg" is a fiction appears in Jonathan Anderson's wonderful look at the currency, "The RMB Handbook." A graph shows the RMB, after the peg, making a slow but steady increase against the dollar for the next year or so. Anderson, a UBS economist, found that the slow, linear creep of the RMB versus the dollar couldn't be mathematically explained, no matter how creatively you composed that basket of currencies. It was too precise, lacking normal volatility. It was ...

Manipulated (my language, not his). Totally. Indeed you can reasonably draw no other conclusion (note: for semantic reasons, you may prefer the word "managed" to "manipulated" -- I know that James Fallows of the Atlantic, an excellent observer of the China scene, doesn't like the emotional freight carried by "manipulated.")

I'd be the first to say, "Of course China manipulates its currency." But I'd argue that's usually a good thing. Essentially they're selling us stuff for 20, 30 percent off (or however much the currency is undervalued). If Macy's has a clearance sale, do you go outside the store and picket in protest? Hell no. You limber up your wallet and get a parking spot early. Of course the trouble is there's a dark side to this, as we're seeing now. Our unrestrained consumerism in the U.S. coupled with bad policy led to huge trade imbalances that cause global stress.

If I'm scoring this, I place most of the blame with the United States for not recognizing the implications of the undervalued currency and not reacting accordingly. Even if someone offers you all the half-price donuts you want, you don't have to eat yourself into a stupor. But China, as Krugman observes, doesn't escape scot free. They were complicit. They need to make changes too.

Wednesday, May 13, 2009

Finance Blogs: What I Read

I looked over my last couple of blog entries and found them, er, somewhat lacking (ahem: boring), so I thought I'd mix things up a little today. My pet project of late of course is tracking PPIP (as readers can tell, I've solidly thrown my weight behind the "it will fail because the banks won't play" theme, a la Roger Ehrenberg). A quick observation here: the ever-cantankerous banks, mewling and whining about the onerous provisions of TARP as they feast at the Fed's trough of cheap funds, seem to be bearing out my prediction. Their attempted smackdown of their regulator during the "stress tests," arguing downwards the amount of capital they had to raise, showed them to be typically uncowed in the face of Washington power. These refractory banks won't be nudged into participating in the Geithner plan. So stay tuned for "Whatever happened to PPIP?" stories. I expect them in, let's say, early June when it becomes clear that nothing is moving forward on the Geithner plan.

But meanwhile ... time for something completely different. Below are the blogs I'm reading now with quick comments about each. My reading is predictably skewed toward the financial crisis, which I think is a once-in-a-lifetime event that we are not ("green shoot" talk notwithstanding) out of at all, but rather as with a roller coaster, we have simply hit one of those short uphill rises before another plunge.

So here's my rundown, in order of preference:

Naked capitalism: Take my food. Water. Roof. But not this blog. Yves Smith is smart and spunky and WON'T be getting invited to the White House as an Obama critic (as Krugman was) because she punches so hard. This blog has meaty, insightful, well-reasoned commentary. Must read.

Zero Hedge: Technical, wonky, but thrilling ... reading it, sometimes you feel like the fly on the wall of a Wall Street trading room. This blog breaks news. Occasionally makes mistakes. But shy it is not (and the authors are so prolific that a grazer can always find something to chew on, amid the scads of technical analysis).

Rortybomb: I really like Mike's style (disclosure: he did compliment my blog once, but that in no way influenced me here because he's just REALLY good). He delightfully mixes wide-ranging subjects (comic books, baseball cards and a whole ton of other stuff) to draw analogies and make financial topics simpler to understand. His posting is a little spotty, but hey: he's probably got a job (or a girlfriend, or a life), so go easy on him.

The Conscience of a Liberal: I like Krugman's writing a lot. He's often devastatingly simple when he argues points: he's like a knuckleballer who throws only 65 miles an hour but the opposing batters all miss the pitch, baffled. I'd rank him higher except his blogging has gotten a bit more lightweight and infrequent and subject to more "warmed-over" pet peeves as opposed to original thinking.

Economist's View: I generally agree with Mark Thoma's thinking and he's on top of the issues of the day. He tends to quote chunks of columns or articles without comment (or with light comment) -- not my favorite blogging style. He also tends to lapse into econ-speak more than seems to be necessary (to be fair, his audience appears more to be academic economists like himself).

Calculated Risk: The go-to blog for the quick number round up: the latest figures on unemployment, retail sales, GDP, housing starts. Of course its forte is the housing market. The author tends to maintain a relatively neutral voice, with a few stinging asides that show where his contempt lies.

Greg Mankiw's Blog: I want to like this blog more than I do. Sure, pilosophically, I disagree with Greg more than with any of the others (he skews conservative, having worked for past Republican administrations). He is an undeniably smart guy though and an effective spokesman for the conservative viewpoint. But he has no comment section (double boo -- no triple boo) and sometimes feels a bit smug, as when he plugs the world's best economics textbook (three guesses who wrote that and the first two don't count).

Friday, May 8, 2009

Stress Test Math Makes Absolutely No Sense

I just can't get too excited about these stress test results. It's the mathematician in me.

Sure, it sounds great: the 19 largest banks need only $75 billion, total. They emerged from their Geithner shakedown cruise not in tip-top shape, but looking far better than anyone thought.

Sure, it sounds great, if you don't think too hard about the numbers.

It's simple really. New York University Professor Nouriel Roubini, one of the few economists who was eerily prescient about the magnitude of this crisis, forecasts $3.6 trillion of losses to come on U.S. loans and securities, more than half of that coming from banks and broker-dealers.

What do the stress test results imply about losses to come? The 19 banks that were examined control two-thirds of the banking system's assets. If you assume for simplicity that they hold two-thirds of the "losses to come" (though in truth they probably hold more, having dabbled in riskier assets more recklessly), that seems to imply the U.S. banking system will lose no more than $113 billion (since these banks total must raise no more than $75 billion).

And that makes absolutely no sense. Roubini's math (and not just his -- but the calculations of others as well, including the International Monetary Fund) suggests the U.S. banking system is looking at another trillion dollars or so of value evaporating off the books. If these stress-tested banks shoulder about $700 billion of that -- at least -- how does $75 billion in capital stuff that hole?

And who is dumb enough to provide that capital, knowing this?

We already know the answer to that last question. Look for more government aid, probably through the backdoor, to prop up the banks. This seems to be the Obama Team's strategy for 2009 for dealing with the financial crisis: try to minimize problems, paper over gaping holes, and silently slip the banks (through cheap funds, multiple lending facilities, bailouts galore) enough money to keep them tottering along.

Tuesday, May 5, 2009

The Dance of the Seven Veils

I'm back in the U.S. (to live), having traversed too many time zones in too short a period of time. The planes did feel like airborne virus cages, with the phlegmy cough in seat 14C recirculating a few dozen times, and I did appear to contract something but -- keep the CDC off my doorstep -- it appears not to be swine flu but rather a garden-variety head cold. In Tokyo (layover), there was an interesting scene of unknown conclusion: a phalanx of surgical mask-wearing health workers shot past a bunch of us deplaning passengers, followed by a hustling man carrying a videocamera. Where they were headed, and what they were doing, was unclear though ominous. So I'm back in the good ol' U.S. at last, which brings me to this first (short) entry, as I de-jetlag ...

The leakapalooza surrounding the Bank Stress Tests (why not capitalize? It feels like this has been with us for, oh, a few decades by now) has been interesting to observe. It is almost like watching a pilot (I'm in an aviation metaphor mood for obvious reasons) feather down a wide-body aircraft. With all the delays and all the leaks hinting at how the banks fared, all of which has been mulled and chewed over by bloggers and other media chattering heads at some length, you really REALLY get the sense that Geithner and crew don't want any bad surprises here.

Consider: (1) You can't exactly fail the test, as the government has made clear it will give inadequately capitalized institutions a chance to raise funds, or failing that, will supply money itself. (2) The leaks look very much packaged by the White House -- we haven't after all heard anything particularly damning about a given bank, but rather vagueness and broad hints of what's to come: e.g. "10 of 19 of the stress-tested companies need to raise capital." If these leaks hadn't been orchestrated by Team Obama, I'd expect to see more names and hard numbers. (3) The banks themselves are apparently actively negotiating what the final disclosure will say.

#3 is yet more evidence of the topsy-turvy state of what passes for U.S. capitalism, early 21st century. It has become obvious to even a casual observer that the financial institutions run the government and not the other way around. Imagine if you're a code inspector and you visit Tom's Lobster Shack and his electrical wiring is a jury-rigged abomination. You tell Tom, "Hey, I'm going to write this up; it's all wrong," and Tom says, "Wait a minute, let's negotiate this, it's not as bad as it looks -- the reason the dog got electrocuted was because his tail was wet, not because that's a bare wire." How often do you think this happens? Maybe, like, never? But the banks have made it clear in this crisis they don't bow and scrape to nobody, pal. Regulator, shmegulator.

What I'm interested in watching is how the stress test results affect PPIP, Geithner's planned public-private partnership to buy dodgy legacy securities and loans. Once again, I think the program is virtually dead -- I read an interesting NYT piece on the plane about how the big banks are giving Washington the cold shoulder, and several have made clear they are NOT interested in being part of PPIP, in any way, shape or fashion. The program is dead because the big banks want to earn their way out of this crisis, as is becoming clear from the Potemkin first-quarter profits they posted and changes in fair-value accounting that remove the teeth from mark-to-market rules, thus allowing them to postpone declaring losses on impaired assets.

I see Roger Ehrenberg is also a pessimist about the Geithner plan. He thinks PPIP is DOA too. The only saving grace for Geithner's proposal would be if he finds a way to muscle the banks into participating, whether they like it or not. If he was smart, he'd use the stress tests to do that and outfox his recalcitrant opponents. But in this crisis, the government has shown no instincts for cunning, only for rolling over.