Paul Krugman: The bottom line is that Goldman’s blowout quarter is good news for Goldman and the people who work there. It’s good news for financial superstars in general, whose paychecks are rapidly climbing back to precrisis levels. But it’s bad news for almost everyone else.
Abnormal Return: Many of Goldman’s supporters would like us to believe that Goldman is simply playing the game smarter than the rest of its competiton. However, that game is not being played on a level playing field. It is some sort of hybrid where politics intersects with finance.
To be realistic neither its shareholders nor the government is going to force Goldman to make any tough choices in the near future. Regulatory reform seems stalled at the moment, in part due to the need to explain this situation. So for now Goldman will get to have its cake and eat it too. For that, it will continue to be the poster child for much of what is wrong with the current system.
Reuters: Goldman Sachs’ second-quarter earnings release showed a continued increase in the amount of market risk held on the firm’s trading book. Its risk appetite has continued to expand at a time when extreme turbulence has forced others to scale back.
Total value-at-risk (VAR) averaged $344 million, on a gross basis before diversification effects, up from $303 million in the second quarter of 2008 and $226 million in the second quarter of 2007.
[There is] the question why Goldman felt comfortable allowing VAR to rise so much. One explanation is that the firm is comfortable it can rely on the Greenspan/Bernanke put, now enhanced by its access to the Fed’s discount window as a member of the Federal Reserve System, to limit downside risks in the event of a crisis.
In effect, the put allows the firm to ignore the worst “tail risks”. The firm can ramp up risk-taking confident in the knowledge it will be shielded from the very worst outcomes by the government.
(1) From the FT, an evaluation of the goals and strategy of last week's bank "stress test". I liked this quote:
The biggest question is how far this exercise will help restore the
economy. Commercial banks provide only a quarter of financial sector
credit in the US, down from close to 40 per cent in the mid-1990s (see
chart). Much of the rest came from various forms of securitisation.
Unless and until the latter markets reopen fully, private sector credit
is likely to be constrained. How far that constraint is binding depends
on how far highly leveraged borrowers are willing to borrow,
particularly when the collateral against which they borrow has lost
value. For this reason, it is the huge stimulus – the least
conservative parts of the economic package – that will deliver the
recovery. These are also the least upsetting to the interests of
powerful lobbies, particularly in finance.
Securitisation is not de facto dangerous. What we've learned in retrospect is that the default risks in the underlying loans were far greater than bankers projected. So theoretically, now that we have new data that much more accurately represent what default risks there are, we should now be able to price asset backed securities appropriately. This should also reduce the number of people willing to lend to the truly sub-prime, as these pools of loans should have a harder time finding buyers.
But if this is true, then securitisation should be on its way to becoming just another bread-and-butter, not so exciting business. Low margins, and specifically, requiring the issuers to retain a much larger chunk of the lowest tranches as a cushion for the upper tranches. Which will still mean a much less free flowing credit market than we've become accustomed to.
Which is, in my opinion, a good thing. But the message seems to continue to be contaminated with the idea that anything less than a return to the bacchanalian debt gorge of the past two decades is not good for America.
(2) A couple of articles about the influence of CDSs on the car industry, specifically, skewing the incentive of creditors to push for liquidation bankruptcy rather than a workout b/c they stand to gain more collecting on the default insurance. I have been out of the loop for a couple of weeks, but I thought this actually happened to Chrysler as well, and the resolution was basically the government coming in pretty heavy handed to push through the re-organization. I would also love to see some CDS contracts to know exactly what the terms are that trigger payout.
(3) And finally, the bruhaha on NPR's Planet Money. Again, I'm sooo last Tuesday on this, but I guess what happened is that Adam Davidson, the lead correspondent on Planet Money, interviewed Elizabeth Warren last week and got into a rather heated argument with her over whether she was using her new position as chair of the Congressional Oversight Panel (COP) overseeing the TARP program inappropriately by directing focus on the plight of the middle class in America rather than focusing on what Adam sees as the exclusive goal of the COP, namely, managing TARP towards the goal of stabilizing the financial system.
Here is the original podcast with the argument. Here is a subsequent podcast, where Adam Davidson, responding to listener outrage, and apologizes by explaining where the aggression (on his part) came from. Some listeners believed that Adam's interview of Professor Warren reeked of sexism, partly because, in contrast, he was completely deferential when he interviewed Timothy Geithner earlier in the year, despite the fact that Secretary Geithner did the standard government two-step evasion. Although the differences between the two interviews are stark, I think it is more a reflection of where Davidson's personal politics lie, and that he, like Geithner, are very much bought into the view that anything short of a complete rescue of the financial system, as it is, would be devastating to the US economy. The fact that Warren apparently does not share this view (and thus, has a parallel view that what needs to be saved is the American middle class) thus garnered some rather pointed questions from Davidson.
I've not yet listened, but the full interview with Elizabeth Warren has also been made available here.
As a lady also about to join the parade of cougars, I'd like to salute those fine West Coast divas of the web, Citymama (fellow Momocrat) and Bad Kitty, who have joined their wonder-twin-powers to create 40 Whatever.
It's not econ, it's not finance, but it's the finest snark around. Srsly, if I could actually lose some butt-fat every time I LMAO at their site, I would have a srsly nice badonkadonk. Go! Visit! Get your own button (cause I already got mine).
Havard Business: Looting 2.0 (Or Why AIG Must Fail) FT: Slaughtering sacred cows: it’s the turn of the unsecured creditors now Bloomberg: Naked Short Sales Hint Fraud in Bringing Down Lehman Reuters: Washington Mutual Sues FDIC for over $13 Billion Yahoo Finance: Administration wants to Buy Up Banks' Toxic Assets Thomas Friedman: Are We Home Alone? FT: Financial Sector Must Feel Pain Rolling Stone: The Big Takeover
Well, tomorrow, Obama will become President of the United States. I wish him great luck, because I feel that we've all placed a little too much faith on what he can/should/must do as President.
A few of the MOMocrats are going to be at various inauguration functions, so please check out our website at www.momocrats.typepad.com. You can also get direct tweets via twitter from @lawyermama or @queenofspain (though, according to the NYTimes today, the cell phone operators are telling potential message senders not to get their hope up w/r getting out timely messages).
And finally, in the spirit of being bitter because one has to be at work when it feels like everyone else in the world has the day off (and most notably, hubs and the kids -- though, don't feel for J, our nanny very graciously agreed to help out today), here are some Monday choice notes:
Sometimes it's lonely being all, the sky is falling, and sometimes I know it's just pieces of plaster. But this must read (and short, and easily understandable) profile of 8 economist/financiers/politicians (which include many many of my faves) and their calls on 2009 encapsulates many of my own beliefs. (HUGE H/T Boston Gal) Some Exerpts:
Things are going to be awful for everyday people. U.S. GDP growth is going to be negative through the end of 2009. And the recovery in 2010 and 2011, if there is one, is going to be so weak - with a growth rate of 1% to 1.5% - that it's going to feel like a recession. I see the unemployment rate peaking at around 9% by 2010. The value of homes has already fallen 25%. In my view, home prices are going to fall by another 15% before bottoming out in 2010.
For the next 12 months I would stay away from risky assets. I would stay away from the stock market. I would stay away from commodities. I would stay away from credit, both high-yield and high-grade. I would stay in cash or cashlike instruments such as short-term or longer-term government bonds. It's better to stay in things with low returns rather than to lose 50% of your wealth.
Sheila Bair (who is worth like 543,230 Paulsons. Hey Obama, where's Bair's job? Or is she so indespensible at FDIC now that you just can't spare her?)
We will dig out of this. And when we do, I hope for a back-to-basics society - where banks and other lending institutions promote real growth and long-term value for the economy, and where American families have rediscovered the peace of mind of financial security achieved through saving and investing wisely. We need to return to the culture of thrift that my mother and her generation learned the hard way through years of hardship and deprivation.
Virtually the only asset class I know where the fundamentals are not impaired - in fact, where they are actually improving - is commodities.
I have covered most of my short positions in U.S. stocks, and I'm now selling long-term U.S. government bonds short. That's the last bubble I can find in the U.S. I cannot imagine why anybody would give money to the U.S. government for 30 years for less than a 4% yield. I certainly wouldn't. There are going to be gigantic amounts of bonds coming to the market, and inflation will be coming back.
and finally, Meredith Whitney (whom I would prostrate myself in front of and kiss her toes. Gimme a job? ktksbye.)
What the federal government has done so far- with TARP, bailing out Citigroup, etc. - has stemmed the bleeding, but what it hasn't done is fundamentally alter the landscape. Yes, there's been a tremendous amount of capital thrown into the system, but my concern is that it's just going to plug the holes. It's not going to create new liquidity, which is what the system so desperately needs.