Wednesday, September 26, 2012

Hail Mary Pass now a Golden snatch? Or 1 obvious + 2 not so obvious = 3 uncalled penalties and the risks of framing…

Many who watched the now infamous Monday Night Football interception which two on-the-spot refs ruled inapposite; one interception and the other touchdown; which because of NFL rules like all TD’s, was not subject to challenge hence review.  And prior to that missed a V obvious penalty by the Seattle receiver for interfering by shoving a Packer to the ground and out of his way just before the ball arrived – those were the two much heralded botched calls.

However, because media attention laser focused on the receiver’s catch or defender’s interception – many may have missed, make that most all missed the other two penalties. The first not so obvious penalty occurred when the QB was tackled after releasing the pass, and the second not so obvious penalty was on another potential receiver, Seattle’s #14 who was knocked down / overwhelmed by several Packers. #14 was standing to the left of the Packer’s MD Jennings; the player who caught the pass most everyone agrees first (and therefore intercepted) or at least before Seattle’s Golden Tate got his claws around the ball (and was therefore ruled a touchdown).

The debate over these refs will no doubt continue, and let us agree that all refs are prone to mistakes, because as many professional fans and commentators have pointed out, the “game is too fast” for them to make correct calls. And also because of on the sideline, S-L-O-W motion video replay in High Definition television, in the stadium and on millions of screens in homes around the country that in many cases are 50 inches or more.

The media immediately focused us on the catch or interception – but if the roughing the QB penalty was called (correctly) and the catch was (correctly) ruled an interception would there have been another play run? Would some time have been put back on the clock? After all the play as I recall was run with only 8 seconds left.

My point in writing about the issues of framing is to connect it to our “economy” and “financial markets” and I’m going to borrow a Bernanke-ism – economic naturalists. If investors and savers alike would stop for a moment and think about where we are and why we got here – well it just might be a good idea now – to go back and roll the videotape.

The Fed is now on chapter 3 of QE, and this iteration is open – ended; indeed although the Fed has not spoken of their program this way – I believe most would agree that this and the previous facilities are the so called BAZOOKA.

The need for the bazooka – was a very concise one page summed up by Kyle Bass in January 2010 – it’s page 13. Page 13 shows, if you do the arithmetic, that a very few, certain banks and former investment banks (CSE’s) were $16T+ in the hole, as of the end of 2007. The $16T of asset value, in large part appears a figment of these banks proprietary computer models.

Today, many Monday morning quarterbacks have appeared on TV to promote their new books of solutions to the financial crisis both here in the US and the Euroland – the most recent being (sorry to pick on you) Mr William Rhodes. Mr Rhodes, former chairman of Citibank, was introduced on a recent talk show as being connected to the most powerful and influential policy makers. During the course of the interview Rhodes dropped the name a prime minister who he expected to meet and ask questions – baloney comes to mind. Why? As well intended as Mr Rhodes may be – he and most all others, with few exceptions should have zero cred – where were they when the bubbles were created from 2003 to 2008? Were his fingers broken?

The lesson that bears repeating is yes, pay attention to the media and also pay attention to your instincts NOW for stuff that the media is not laser focusing YOUR attention on…otherwise known as framing; specifically models are not markets and markets are not models...

Thursday, August 2, 2012

Time is money, but not at Facebook

Time is on my side, my side...those are the lyrics in a song; it seems these lyrics were the sine qua non for the executives at Facebook. Said another way, Facebook seems to have rather linearly assumed that since users spent so much time, that magically that time would be distilled into money, not so easy.

A new glue, now we hear there is a micro - site called Facebook Stories, initial vignette is about memory, reconnecting to the past...

Perhaps Facebook execs, might look in their past, way, way back to the time they were little children. To those birthdays, Christmas, Hannukah's past...the new toys, we enjoyed for all of 24 hours; then asked for new ones. It's what I call the half life of the novelty - effect...others will call this something else; cool, until it's not cool; like when your parents, grandparents and little brothers, sisters, and nieces and nephews are on Facebook too, time to find a new place to hang a way Facebook has for many morphed into a utility.

Facebook also needs to be bold and upfront about their advert policy, no one appreciates ads, no matter how pre-selected they may be. A free membership version would include adverts, however a no - ad version of membership for a small annual fee - individual, family and corporate plans come to mind. Most members I'm sure (since they use, share and like Facebook every day) would be amenable to a small fee $11.95 per year, $19.95 for two, $39.95 for life. Later, tiered memberships with higher fees as new features, games, connections, premium contents are added could be rolled out. The idea that members can send or even influence "ads" to others is to many I believe, a net negative; unless those ads are very seldom and v carefully curated.

Facebook needs to admit that people use the service to share and play together satisfying certain critical human needs.

Adding up the negatives posed by the half life of the novelty, the ad turn offs, the trickle of abandoners against the initial great things about the service are formidable, but not impossible challenges.

Of course, there are plenty of myriad, and original ways to unlock the value of 900 million users, but not on the course we see charted thus far; it begins like any other business, by anticipating and providing good value, then rinse and repeat...

Thursday, July 26, 2012

Libor's Deep Throat cries boo who? ~2008

The unfolding Libor rate setting scandal sets up a logic test.

The NY Fed (somehow) became aware of issues framed in today's Senate Banking Subcommittee exchange.
Senator Vitter (LA) ~ "Since you knew Libor was being manipulated why did the Treasury and Fed (continue to) rely upon it ~2008?". The witness ~ " was under reported, uh, misreported...but we didn't know if we were being hurt by it..."

Framing what, when and who knew matters, but unless and until we find out who complained to the NY Fed ~2008 it's not the whole picture and you want to know the whole picture. In other words - Who started the whole thing?

The LIBOR logic test, says the complainers (to the NY Fed) would not be any of the Libor panel banks, but others adversely effected. Wall St logic dictates "why complain unless it's hurting us or..."

So that leaves certain entities which may have had a dog in the hunt, perhaps the nascent BHC's (Bank Holding Companies), perhaps the world's largest CDO CDS seller at the time, perhaps the world's light bulb maker, and intriguingly why was one of the panel banks paid almost $250 million more IN cash by the CDS seller, than requested on Sept. 16, 2008.

But, there's always a but, by definition, the circumspect NY Fed could (or should) only field complaints or market rumors from those it supervised at the time - si? That could shrink the number of potential (legal?) complainers - si?

Who were the Libor Deep Thoats in ~2008 or before? And for that matter, does this go all the way back to Prime - rate setting? Why did Libor replace prime, and become the benchmark for nearly all world's derivatives? It's not new news that Libor was a survey - based, rather than market-based rate forever.

Tuesday, May 22, 2012

Facebook IPO compared to tagline - "a more open, TRANSPARENT and connected world?"

Last Friday, 5/18 will I believe become known as "Facebook Friday" for several reasons. Today, The Daily Beast reports that certain underwriters may have lowered their revenue projections prior to the IPO AND may have informed some investors; but not all investors. I was jammed up last week and could not get the fact out of my mind that while on the road show that there would be private one-on-ones for certain investors. The general road shows surface questions, many questions over and over; there is no doubt that these questions (I wasn't there) were laser focused on revenues; whether new models compared to pre-IPO or ARPU (average revenue per user). The private one-on-ones cast extreme scrutiny on revenue numbers and assumptions - past present and future. NO DOUBT: When underwriters, no doubt listening, perhaps bristling and responding to potential investor's questions, probes and scrutiny - likely, as is often the case when more than two people look at the same set of numbers, raised some hard-to-dispose-of aka troubling issues causing them (apparently) to adjust projections DOWN; but they decided not to disseminate that to ALL investors. What are the future prospects? Some may ask with approximately 800 million users how many more would sign up in the future? And given the anti-climactic IPO fallout how many will remain active, revenue paying users? Facebook's tagline ironically is, I believe, to promote a more open, transparent and connected world. Really? There can't be a more prominent example, assuming the Daily Beast is accurate of informaion assymetry; unequal, untimely and incomplete information - perhaps knowing, willful and intentional and approaching recission of all those IPO allocations - si?

Wednesday, March 21, 2012

Leverage a/k/a assets owned (by certain banks) but not paid for...a $16T case of leverage

McLean, in today's Reuters, takes up the issue of whether the infamous, few have ever heard of 2004 SEC CSE program's voluntary-adoption-of-models'-leverage was the cause of the financial crisis? McLean says no, because, it was the same elevated (30 to 1 plus) level as in 1998; as for example in Professor Andrew Lo's recent paper; hence they say it did not cause or explain the 2008 financial crisis.

(CSE stands for Consolidated Supervised Entity program. Five investment banks applied to become CSE's, all five ceased to exist as CSE's by September 26, 2008 including Bear, Goldman, Lehman, Merrill, Morgan Stanley.)

However, McLean and others fail, in my view, to appreciate the alternative definition of leverage: Assets owned (controlled) but not paid for.
Example from the borrowers point of view: One guy says to his friend "I own my house and it's worth $600,000" Does the guy say that he owes $550,000? Usually not.

Banks'(and CSE's) leverage was flawed in several ways: they didn't make clear that their assets' values; hence net capital were based on models, remarkably they didn't somehow appreciate that what Gorton labeled informationally-insensitive assets would become hyper sensitive, they didn't make clear the amount of assets concealed or masked off balance sheet and they sure as you know what did not inform any individual mortgage borrowers of the above. The UCC Article 9, by the way, reminds us that mortgages evidence a "consensual interest".

As of the end of 2007, the sheer dollar amount of unpaid for “assets” (or off balance sheet, off shore exposures to assets) was $16T – correct $16T.
(For comparison purposes, I invite and welcome any so inclined to supply the dollar amount for 1998 assets owned but not paid for.)
That works out to over 97% of the “assets” on (off and or off shore) the books were NOT paid for at the end of 2007.
Banks and CSE’s assets of choice in the 2000’s were MBS and CDO’s often “enhanced” by CDS, credit default swaps.

The Fed (and its sundry support programs were undertaken in emergency, exigent circumstances).
Bloomberg estimated that such support approached $8T. The Fed did not purchase liabilities, they bought “assets”.
Why did the Fed have to buy anything? Because for years, not months, there was NO market, arms-length trading of those “assets”; had there been more trading; market participants would have been aware that $16T of MBS and or CDO's were flooding the market. More supply, especially a veritable flood of anything depresses its value.
The presence of increased leverage is a flag that banks were not TRADING – they were holding – speculating. Further it was a clear, unmistakable, flashing red, neon light they STOPPED intermediating; that’s the point. In medical terms, when banks stopped intermediating it was like the US financial system had 3 arteries 95% blocked; blood flow shrunk to a trickle but the patient had not yet had a heart attack. It was not a question of whether or not the financial system would have one, it was when and how severe it would be.

The tagline many will recall the fact upon which many swore by: for decades US house prices had NEVER gone down year over year. Remember that one?
However, behind that fact was this:
For decades borrowers were required to put down 20% that’s 4 times leverage on the underlying collateral (asset), the house.
For decades borrowers had to fully document all information on the loan application; gifts were prohibited.
Loan applications had to be reviewed by an underwriter and approved.
In the 2000’s we know that few borrowers were rejected for loans; FDIC OIG in 2006 report pointed to widespread violations and repeat violations of TILA and RESPA in 2004 and 2005.

Inherent in every MBS and CDO are thousands of individuals’ mortgages.
What was the underlying collateral in the 2000’s?
Houses on Main St. were the underlying collateral in the 2000’s.
Houses are themselves leveraged AT the point of origination.

Mixing drugs and alcohol can be lethal. Mixing bank balance sheet leverage, hiding leverage off balance sheet, borrower leverage, thong-like underwriting and using models upon derivatives (and second derivatives) to imply value and determine net capital is guaranteed systemic cancer, when-not-if global, not just US financial napalm.

Back to McLean, debunking CSE leverage is ascribed to several economists who cite leverage of approximately 30 to 1 in 2008 was about the same as in 1998. So they conclude that since leverage was the same then it didn’t explain or cause the crisis. However, no it wasn’t and it’s not anywhere near an analogue and here’s why:

1. First, 2008 was not 2007; leverage as of September 2008 would have been MUCH more pronounced, that means north of 30 or 40 to 1.

2. According to Warren Buffett’s Bloomberg interview in June 2009 30 or 40 to 1 was just what was reported at the end of the quarter, intra-quarter was, I recall the sage saying, was “much more crazy or worse” or words to that effect.

3. Accurate marks of collateral (50 cents on the dollar) in 2008 indicate effective leverage of 60 to 1 or more.

4. Leverage of 60 to 1 means if the underlying collateral declines by just 1.6% the institution, correct the institution, is insolvent.

5. Real, arms length trade, marks of 50 cents on the dollar were common, and mean that a 50% decline in value occurred, CDS aside.

6. Example, in May 2007 Goldman informed a Bear Stearns unit that their MBS were worth 50 to 60 cents on the dollar; correct May 2007.

7. Collateral in 1998 was not concentrated in MBS or CDO, leverage in 2008 was laser concentrated in MBS and or CDOs.

8. Leverage in 2008 was concealed and or hidden, off balance sheet, and or off shore. Leverage in 1998 was NOT concealed and or hidden; leverage in 1998 was likely temporarily goosed upwards due to the Fed-mandated (and supported) industry rescue of LTCM. The Lo graph clearly shows that 1998 leverage retreated south until it began to rise again after the CSE program became effective in August 2004.

9. CSE’s and certain banks’ number of on and off balance sheet and or off shore entities in the 2000's was in the hundreds, one, as I recall, had over 2,200;

10. The CSE program allowed proprietary models to imply asset values, risk and net capital.

11. The decision to apply for CSE status and use of this alternative method was voluntary; that meant the SEC did not impose the alternative (model) method ON the CSE’s; they decided to use it on their own.

12. Models were not in use to determine net capital in 1998; markets and or arm’s length trades were. In fact, a future CSE, Merrill Lynch had this to say about models in their 1998 annual report (as Roger Lowenstein wrote in his When Genuis Failed tome on LTCM, page 235):
"Merrill Lynch uses mathematical risk models to help estimate its exposure to market risk"...and "may provide a greater sense of security than warranted; therefore, reliance on these models should be limited".

13. The 2000’s we (and most of the rest of the world) had several bubbles as a result of leverage – the house price bubble, the house overbuilding bubble, the consumer spending bubble and the stock market bubble (the Dow peaked at ~14,700 in October 2007).

14. Brooksley Born, in the late 1990’s, pointed out derivates’ dangers but was disregarded – derivatives exploded in the 2000’s NOT in 1998.

15. Last, and I’m surprised economists' oversight of this: “the leverage ratio” is one of many financial ratios, called common size measurements and while generally explanatory do not account for drastic changes in either the numerator or denominator. Example: Roger Maris' single baseball season 61 home run record, eclipsed Babe Ruth’s 60 was marked with an asterisk * for decades. Why? The number of games in the season increased to 162 from 150 games.

16. The dollar amount of MBS created from 1996 to 2000 was $4T, from 2001 to 2008 was $16T.

17. And when it comes to assigning responsibility
a. No borrower approved their own loan application;
b. No borrower consented to their mortgage morphing into an MBS or CDO or something else;
c. No borrower knew at or before they signed their mortgage, to ask their lender (or loan securitizer) what leverage was or what their leverage ratio was;
d. No bank was forced by a borrower to turn their mortgage into an MBS or CDO;
e. No bank was forced to leverage an MBS or CDO;
f. No bank was forced to use models to imply value upon any MBS or CDO;
g. And no bank was forced to conceal, mask or hide leverage off balance sheet;
h. And no bank informed any borrower that the combination of the above meant that their house was effectively leveraged up to 3,000 to 1 or more.
i. And that my friends is the story of leverage in the CSE (2004 to 2008) era, not 1998 as some would lead you to believe.
j. By the way, it took the Fed until 2009/10 to figure out and draw up the schematic of the 3 banking systems we had and still have - the Traditional, Cash Shadow and Synthetic Shadow, yet the diagram (scarcely readable, and only with a magnifying glass in 2 foot by 3 foot format); explains the Traditional banking system, easily and clearly in 3 inches, the two Shadow banking systems take up 23 of 26 inches of space, nor does it capture the essential and indispensable $16T "leverage";
k. And there’s more to come.

Any and all comments, questions, reactions or corrections are welcome and appreciated.

Friday, January 27, 2012

Shhhhhhhh....please be quiet, I'm trying to play capitalism...

This piece is an invitation for anyone else to document, contribute or just write about their own personal experiences as to how the financial crisis has interrupted, disrupted their lives, others, and or business or any other pursuits.

So - Shhhhh…I’m trying to play capitalism, has had huge effect on me. Every day it seems there is new information. Mind you not just incremental daily creep of news BUT often seismic news. Just this past week the NY AG, who had initiated investigation into any and all mortgage banking practices, was named to head a new federal investigation. So, although I didn't have to, I begin to read, research into what happened to cause this, why, who was involved and what other agendas may be at play in contrast to a plain old vanilla investigation the Empire State AG has enough wits to launch LAST year.

How long did that interruption take me to do? Probably an hour or more; it's not just the elapse of time; it's the interruption and sapping of the precious daily amount of creative energy I have away from other pursuits.

See my point is, with all the interruptions of news, (and I'm not even counting the social media disruptions) NORMAL capitalism, defined perhaps with an extra spoonful of nostalgia, free markets don't happen. News and information drive markets. Free markets, at least those we deserve, are for example, like the familiar parties of guys and girls, girls compete with each other and guys compete with each other to get their choice preference in rank order and guys we know there ain't closing time; by the way the girls already know that we know this and are LONG gone before it even comes close to that point.

However, getting back to the party for capitalism, there is a new, brutish and uninvited guest - the Fed. In addition he's a financial drug dealer, having arrived dressed not in a toga, but a white doctors coat and has a matching beard.

The capitalism party, has always been played by the same open, understood and agreed upon in advance rules of Darwinian competition and winners and losers; only to be played at the next week's party. Except, for the past few years the brute has shown up and in fact held press conferences so as to tell us one more time that he's a student of TGD (right - we heard it the very first time) after the party so as to improve his image.

Pretty soon, those who had been attending the Party for Capitalism decided to stay home, not even go out, just wasn't fun for anymore; because they've been hearing there's now even more weird people showing up at the party with the financial drugs.

Wednesday, January 18, 2012

Volcker Rule, Proprietary Trading and...

concerns expressed by some, mostly those whose bonuses, options and or compensation depend(ed) on it or their political sock puppets, over the free flow of capital.

Let's be clear - proprietary trading is a misnomer. How's that?
In the past, trading did NOT take place, HOLDING did and valuing prop positions with home grown computer models for proprietary profit. In fact, at the end of 2007, summing up such holdings came to a breezy $16T; correct $16T of assets owned (NOT traded, perhaps never) but NOT paid for. Hiding of marks seem to have taken place too - when certain people take the time to READ a 518 pp FCIC document.

Since the sponsors of proprietary trading have been called out for what they are, the next rallying point "free FLOW of capital" also fails.

The 2007/8 financial crisis is THE case study that prop trading INHIBITED, indeed was the polar opposite of the free flow of capital. How or why else would the Fed, lender of last resort, have to take action, under extreme, exigent circumstances and step up and rescue, with $1.2T in CASH in exchange for certain prop trading securities, if assuming arguendo prop trading had any positive effect on the free flow of capital? I'm not even going to list the trillions of dollars of amelioration (attempts) on behalf of the erstwhile prop trader aficionados - please spare me.

The champions of prop trading, do not even have support in the "end justifies the means" and are EVEN MORE preposterous, disgusting, revolting, and abhorrent as saying (with apologies in advance, if I offend any victims) "A few guys, got drunk and just gang raped your sister but it's ok, because society benefits from an increasing birth rate, and a growing, younger population, not worrying about the fact that the victim contracted AIDS as a result of the brutal attack."

YES - that's it - certain prop trading units on Wall St gave Main St and the rest of the US and world real economies AIDS from private, exclusive financial sex orgies going on ALL NIGHT LONG.

If, the bonus cry babies, false flag waving, money sucking vampires and their considerable, ill-informed, lobbying corp d'esprit inside the beltway WANT to fix the problem then all that's required is a few simple, doable things:

Disclose EVERY trade on an independent exchange or platform
Clear EVERY trade on an independent clearing agent
Every trade would include any security including any and all private placements of any stripe or regulation, future, option, currency, derivative, credit default swap contract, or any other new financial interest or contract on (or derivative of) any of the above
Hedge funds, need to disclose, just like their 1940 Act competitors, holdings (long, short, repo, swap, etc.) twice per annum.

On that basis, let the largest, most sophisticated financial institutions TRADE (that's an action verb) all they want as long as it's arms-length and market - based; THEN AND ONLY THEN THE MARKET WILL SEE CAPITAL TRULY and EFFICIENTLY FLOW.

The SEC terminated the CSE (Consolidated Supervised Entity program) on September 26, 2008 for a reason - EVERY SINGLE CSE FAILED, MERGED OR CEASED OR APPLIED TO BECOME LUCKY DISCOUNT WINDOW BORROWERS AS BHC'S ON SEPTEMBER 21, 2008- including:
Bear Stearns,
Lehman Bros.,
Goldman Sachs,
Merrill Lynch,
Morgan Stanley.

Period, full stop.