Free Republic

Size doesn’t matter, says white paper on systemic risk Author: Mark Pengelly Source: Risk magazine | 26 Feb 2010 The idea of imposing a levy on large financial firms is a “flawed policy”, with economic costs outweighing any potential benefits, according to a recent white paper prepared by Washington, DC-based Nera Economic Consulting.! Such a process is not only subject to gaming by firms, but is conceptually flawed The white paper, which was prepared for the Property Casualty Insurers Association of America, is being distributed to members of the Senate Committee on Banking, Housing and Urban Affairs this week. Democrats...

Debts threaten to engulf Kuwait's investment industry, bankers warn By Robin Wigglesworth in Kuwait Published: February 22 2010 02:00 | Last updated: February 22 2010 02:00 Most of Kuwait's multibillion- dollar investment company industry could be wiped out by debt repayments on the finance houses' leveraged investments made before the recession, senior international and local bankers have warned. Spurred by cheap credit, abundant liquidity and few other opportunities in the government-dominated economy, Kuwaitis have set up scores of investment houses to bet on international and regional real estate, private equity and stocks. At its peak, the industry had assets of...

  Too interconnected to fail = too big to fail: What is in a leverage ratio? Daniel Gros 26 January 2010 Did allowing financial institutions to become “too big” play a role in the financial crisis? This column argues that being “too interconnected” is also a factor, and that US accounting standards should recognise gross derivatives exposure on the balance sheet to make this interconnectedness, and the resulting exposure, clear. By now there is general agreement that a financial institution can not only be “too big”, but also “too interconnected” to fail. But how do we measure what it is...

NEW YORK (Reuters) - As lenders continue to curtail access to mortgages, credit cards and other types of loans, one area of the credit market is rapidly expanding: student loans. Unprecedented growth in student loans over the past two years is raising questions about whether a generation will be saddled with debt before it has even entered the workforce, according to data that the Equifax Inc credit bureau provided exclusively to Reuters. The number of U.S. student loan accounts has risen 29 percent to 69 million over two years, according to Equifax, while balances have jumped by $105 billion to...

Vietnam orders gold-trading floors shut by end-March HANOI: Vietnam, where many people see gold as a safe haven against economic uncertainty, has ordered public gold-trading floors shut by March 31 because they rest on a “fragile foundation”. The order affects about 20 gold-trading houses operated by banks and other firms, which have been running for more than two years, the state-run Vietnam News reported. Retailing of gold jewellery will still be allowed, it said. The gold-trading floors have offered heavily-leveraged trading in which investors pay a security deposit of only seven percent of the net asset value of their trades...

Hold the Champagne on China’s Economy By Michael Auslin Thursday, October 22, 2009 Filed under: World Watch, Boardroom, Economic Policy Those who witnessed Japan's spectacular rise and fall in the 1980s should get a familiar feeling watching China these days. This month in Hong Kong, a single bottle of wine sold at auction for $93,000 to a Chinese buyer. No matter how good the vintage, that's not something to pop a cork over and celebrate. Those who witnessed Japan's spectacular rise and fall in the 1980s should be getting a familiar feeling watching China these days. In the eyes of...

With all this blather about “green shoots” and economic “recovery” and new “bull market,” I thought I’d inject a little reality into the collective financial dialogue. The following are ALL true, all valid, and all horrifying… Enjoy.

Nassim Taleb is an unlikely choice to play the Jimmy Stewart role in a 21st-century remake of the Depression-era classic Mr. Smith Goes to Washington [1]. But the tale of a naive do-gooder who tries to remind a corrupt political class of its obligations was re-enacted this week when Taleb attended the Wall Street Journal's Future of Finance conference in Washington, D.C. A French- and Arabic-speaking former options trader with a taste for obscure Greek philosophers and the ambition to be seen as a literary figure, Taleb has grown famous for his book The Black Swan [2], which has sold...

A reporter contacted me recently with the following question: "I am a reporter, and I am doing a story on Bernard Madoff's life after pleading guilty. As part of this, I was wondering if you could comment on what significance he will have in the history of this period. Will he represent more than a scamster who stole a lot of money from a lot of people? As Bernie Ebbers and Ken Lay came to embody corporate greed and deceit, what will Madoff symbolize?" Americans lived in a "Made-off" and Ponzi bubble economy for a decade or even longer. Madoff...

World's economies tumbling like dominoes /snip By Bill Fleckenstein MSN Money Lately, I have been struck by how bleak and black the newspapers have been in their coverage of the economy. Not that I've been surprised, but one can never know when events in the economy will coalesce into the news that causes the masses to realize how difficult the environment is. In reading the papers, it was obvious to me that it's becoming clear to everyone that "the next time down" is well under way, though the average person wouldn't call it that. 1980-82 versus now I was trying...

Bank Leverage Stats, 12/31/08 February 17, 2009 – 12:45 am The table below is an update from this post published a couple months ago (the prior post also explains this leverage calculation in detail…and why it matters). Click on the image to enlarge. As you can see, Morgan Stanley and Goldman have cut their leverage significantly. Citi is in worse shape. BofA and Chase are treading water. GE is the scary one. I mean, is Timmy Geithner going to stress test them too? I’m pulling balance sheet data from their quarterly earnings release, which doesn’t offer any detail on shareholders’...

Extreme Leverage In Reverse Portends Global Systemic Crash Inquiring minds are investigating a visual comparison of banks' market caps valuation as of January 20, 2009 vs. the second quarter of 2007. Bank Market Cap Comparison Note: I had posted a draft version of the chart that follows.Here is the corrected copy with thanks to Financial Times Alphaville. click on chart for sharper imagechart courtesy of JP Morgan and Bloomberg. Extreme Leverage In Reverse The chart is an illustration of extreme leverage in reverse. Bear in mind that fallout from Alt-A, prime home equity, credit cards, small business, and commercial real...

The United States lived in Lever-Lever Land too long. Like Peter Pan, the country has refused to grow up. The object of the stimulus plans offered by the present and the next US administrations is to return to Lever-Lever Land, that is, to debt-financed consumption. It won't work. Leverage is for the young, who borrow to build homes and start businesses. The financial crisis forces Americans to act their age, that is, to save rather than borrow and spend. For a world economy geared to servicing the once-insatiable maw of American consumption, that is very bad news for 2009. Recovery...

Madoff meets Lehman Posted by: Matthew Goldstein on December 19 It’s not a lot of money compared to the estimated $3 billion that a fund managed by The Tremont Group has lost in the Bernard Madoff scandal. But the same Tremont fund also claims it lost $25 million when Lehman Brothers went bust in September. In October, Tremont’s Rye Select Broad Market fund filed a lawsuit alleging that it was owed some $25 million on a derivatives contract that permitted it to borrow money from a Lehman subsidiary. The derivative contract enabled the Rye fund to leverage its investment in...

Leverage Is an 8 Letter Word November 21, 2008 By John Mauldin Leverage is an eight-letter word, which the markets now regard as twice as bad as the two four-letter words debt and pain (or fill in your own four-letter words). This week I try to give some insight into what is happening in the credit markets, some of it below the radar screen of most analysts. We will look at the potential for deflation and the Fed’s response. There is a lot to cover, so let’s jump right in. If Loans Are So Cheap, Why Don’t They Sell? I...

The unwinding of the investment vehicles that drove the credit boom is roiling the once-staid corporate leveraged loan market, and the pain may not be over yet. For years the US loan market was a clubby world dominated by banks, insurance companies and a few mutual funds. In the early part of the decade steady returns, low defaults and high recovery in bankruptcy attracted new buyers that used leverage to boost returns. Now these vehicles are unravelling in a wave of selling that is causing and feeding on volatility in the asset class. “We expect market volatility around loans to...

Time for the Darwinian flush Highlights from the latest Hayman Advisors letter to clients (i.e. the text in full): October 14, 2008 ‘The ultimate result of shielding man from the effects of folly is to people the world with fools.’ Herbert Spencer What’s Next? It is the “what’s next” that scares us the most. There is no doubt that many books will be written chronicling the times we are living through today. When we wrote to you in July 2007, we really meant “feet first”! The common denominator of everything that has gone wrong so far has been reckless amounts...

Last week saw the demise of the shadow banking system that has been created over the past 20 years. Because of a greater regulation of banks, most financial intermediation in the past two decades has grown within this shadow system whose members are broker-dealers, hedge funds, private equity groups, structured investment vehicles and conduits, money market funds and non-bank mortgage lenders. Like banks, most members of this system borrow very short-term and in liquid ways, are more highly leveraged than banks (the exception being money market funds) and lend and invest into more illiquid and long-term instruments. Like banks, they...

Default Swaps May Be Next In Credit Crisis Ultimate Moral Hazard Looms in the Markets By JULIE SATOW, Staff Reporter of the Sun | September 22, 2008 The biggest Wall Street story most Americans haven't yet heard of is the $62 trillion unregulated credit default swaps market. Here is one scenario: A hedge fund buys insurance in case a company defaults on its bonds — a so-called credit default swap — when the hedge fund doesn't necessarily own the bonds. Then it immediately shorts the stock, driving down the company's share price, leading to a downgrade, and eventually triggering a...

Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers 'They constructed a mechanism that simply didn't work' By JULIE SATOW, Staff Reporter of the Sun | September 18, 2008 http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/ The Securities and Exchange Commission can blame itself for the current crisis. That is the allegation being made by a former SEC official, Lee Pickard, who says a rule change in 2004 led to the failure of Lehman Brothers, Bear Stearns, and Merrill Lynch. The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed...