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GREED born of FEAR |
rffrydr
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 Posted: Sat Aug 04, 2007 9:59 pm Post subject: GREED born of FEAR |
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I believe this relentless bull market for the past half-decade has its paradoxical origns in fear.
Yes, there's the great streamlining, outsourcing, firings; the cash hoards, globalization and overly-developed developing countries. There's technology and, not least of all, there's money. But at the soul of this market, and its driving force, lurks a strange and fascinating perversion of the late-great millenial bubble we couldn't shake--its' "crash."
The 90's bull showed us what can be accomplished; if only in terms of moving price up a curve. Stocks crashed up. But the legacy is bitter and in gathering up the shards of the Enron age a pervasive sense of history took hold. Something of historic proportions had occurred, the information age blossomed from its rich bed of ground-up investors--a fertile soil made of millions plowed under. Never again.
What to make of this new, this historic future? Success was measured in recovery. But lean and mean showed that while the tree may not grow to the sky there was plenty fruit to bear down low. So focus turned to consolidation, dividends, to cash flow....to earnings, --to "yield." The "market" was forgotten even as it was being rebuilt. Nay, even rejected.
So here we have the first of many epigrams describing that old market adage, "To Climb a Wall of Worry"--twisted beyond recognition.
Banks:
| Quote: | HEADLINE: Now banks must relearn their craft JOHN GAPPER
BYLINE: By JOHN GAPPER
BODY:
What is a bank? Fifteen years ago, there was an easy answer to that question. It was a financial institution that lent people money.
That was also the answer to the question on Friday. At the end of last week, commercial banks such as JPMorgan Chase and Citigroup suddenly found themselves on the hook for billions of dollars as the market for loans and bonds to back private equity acquisitions dried up and investors pulled back.
It is a shock to banks to have to hold such big loans on their balance sheets and bear the risk of customers defaulting. Worries about a resulting credit crunch led to a sharp fall in markets last week. But it is worth remembering that, not long ago, banks did this all the time. In the intervening years, they stopped taking such risks and moved into another business. Instead of lending money, they took fees for arranging loans
and getting other investors to bear the risk.
This was a superior way to earn a living. Instead of depending on loan interest and having to write off capital when clients defaulted, they became intermediaries. They took fees, did not risk capital and were clear of the scene when things went wrong. Their return on equity went up, their earnings grew less volatile and investors loved them.
Banks, in other words, turned into investment banks. The latter had to take a bit of risk when underwriting initial public offerings or buying and selling blocks of shares, but they passed it on to investors as quickly as possible. Similarly, banks came to treat loans as just another kind of tradable security to be packaged, sold and forgotten about.
What took them so long?
Well, this is going to sound very strange to younger readers but a long time ago there was no such thing as a credit derivative. Banks shuffled loans around among themselves in syndicates so none was too exposed to the collapse of one company. But they had no way of slicing up loans into tranches, securitising them and selling them to European insurers.
Imagine that!
Once banks could do it, they did. They securitised and sold loans in every market, from residential mortgages to leveraged finance. The hurdle for doing business ceased to be whether a bank trusted a borrower to be a sound long-term credit risk - the craft in which generations of bankers had been trained. Instead, the question was whether it could collect a fee and sell a credit-rated security on to someone else.
Chuck Prince, Citigroup's chief executive, summed up the new world of banking neatly a couple of weeks ago when asked whether private equity buy-outs were about to hit trouble. "As long as the music is playing, you've got to get up and dance," he said. "We're still dancing." A short while after he spoke, the music duly stopped.
Which brings us to Friday.
From the perspective of financial stability, credit derivatives brought a lot to the party. Because credit risk is spread across investment and financial institutions around the world, even multi-billion-dollar failures of companies or funds can be absorbed without any single bank being fatally wounded, as some were in past downturns. But the change in banking created two dangers that are now becoming obvious.
First, lending standards loosened. Banks used to balance two factors in deciding whether to make a loan - how much a borrower would pay in interest and fees and how likely it was to default. They refused to lend if they thought the risk of default outweighed the reward because they would be the ones to suffer. But, as the risk that they would be hit if borrowers ran into problems receded, they became less cautious.
You would have expected this to result in banks arranging more loans for riskier borrowers who paid bigger fees. That is indeed what occurred, both for residential mortgages and private equity. Subprime mortgage borrowers were encouraged to take out those loans not only by intermediaries but also by banks.
Private equity funds are the institutional equivalent of subprime mortgage holders. They have been willing to pay big fees for banks to arrange and securitise high-yield loans and exotic forms of bridging finance. As the private equity market has stuttered, bankers such as Jamie Dimon of JPMorgan Chase grew nervous about such instruments but too late to prevent their banks from getting caught last week.
Second, debt securities have become so complex that investors in them have not understood precisely what kind of credit or market risks they are taking on. That was made clear last month when two Bear Stearns hedge funds investing in collateralised debt obligations got into trouble. Their values fell suddenly although the securities in which they invested were not publicly traded.
Investors are now reading across from mortgage-backed securities to other debt instruments, worrying that the latter face a similar reckoning. The market faces a credit crunch: not the traditional kind in which banks that made losses pulled back from lending but a new variety caused by debt investors worrying that they have been taken for a ride.
So banks find themselves thrust back to their old business. Their balance sheets are stuffed with loans that could be there for a long time. Instead of passing on risk quickly and profitably, they may have to live with it. It is an unfamiliar challenge for a generation that grew up in credit markets but there is a precedent. Welcome to banking.
LOAD-DATE: July 30, 2007 |
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Last edited by rffrydr on Thu Mar 05, 2009 7:57 am; edited 2 times in total |
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rffrydr
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| Posted: Thu Apr 08, 2010 7:32 am Post subject: |
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RIO aside, we forget just how much M&A is driven by weak growth. It is precisely in weak economies, where organic development is hard to come by and rates are low (and under a debt-subsidized tax structure) that takeovers assert themselves. This was true back before the "Death of Equities" Businessweek cover and this was true of the '03-'07 binge. And could very well be true of the period before us after some catch-up in labor et cetera. And one thing we know is true is M&A is the mother's milk of Wall St.
We got more coming in the banks.
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rffrydr
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| Posted: Thu Mar 25, 2010 10:02 am Post subject: |
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Leaving aside the international measures for the moment:
Tom Graff
Extended period
3/25/2010 11:51 AM EDT
| Quote: |
A lot of macro economists are focusing their time on the causes of the crisis. The more interesting work should really be on monetary transmission. We know that in 2000-2004, highly accomodative monetary policy did not translate into any inflation. Using my favorite inflation measure, the Median CPI calculated by the Cleveland Fed, the highest year-over-year print from 2002-2008 was 3.3%. despite the Fed holding rates below 2% for nearly 3 years.
What is clear is that low rates flowed into asset markets. Whether this was a primary cause of the crisis or just part of the puzzle doesn't matter. It shows that the Fed was unable to stimulate nominal spending through standard monetary policy. Something was different about the monetary transmission during 2000-2004. Why it was different is still unknown.
Now we ask if the 2008-2010 period of highly accomodative monetary policy will play out as it has traditionally or as it did in 2000-2004. The consequences for markets are radically different. My concern is that the Fed seems to be focused on measured inflation as its indicator to whether policy is too accomodative or not. If the monetary transmission has permanently changed and the link with inflation is now weak, then the Fed needs to be watching asset markets more closely. |
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rffrydr
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| Posted: Tue Feb 23, 2010 9:04 am Post subject: |
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Will we ever match the 144 2000 high on the on Consumer Confidence Index again? '07 spike came close. The ABC "comfort poll" never did get positive this cycle:
http://www.pollingreport.com/consumer.htm
PS I'm looking for good pop in this next month after the end of winter and US Olympic performance.
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rffrydr
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rffrydr
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rffrydr
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rffrydr
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| Posted: Thu Mar 06, 2008 9:48 am Post subject: |
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Why this Bull was built on leveraged yield? Maybe it was never a bull at all. Hussman's secular bear as mentioned in Barron's and picked up earlier here from H. Simons.
http://www.hussmanfunds.com/wmc/wmc080225.htm
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rffrydr
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rffrydr
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rffrydr
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| Posted: Sun Sep 09, 2007 8:37 pm Post subject: |
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"Repricing" as a market mechanism has become a myth:
http://www.ft.com/cms/s/3d8ee2c8-5f00-11dc-837c-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F3d8ee2c8-5f00-11dc-837c-0000779fd2ac.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fhome%2Feurope
Beware such "comfortable" nomenclature of past crises: all credit crunches may be the same but they are also all different. Greenspand has so attested.
That most fundamental of assets, real assests were as much created by the excesses of "imagination" during the last bubble as anything intrinic to themselves: Kratrina hit more than New Orleans. Real assets, reality, has fired the imagination to unprecedented levels of abstraction in the name of "conservation," "diversification," "yield"--in the name of fear. This is perhaps the most anticpated upchucking in market history, fully lacking the retail investor (unless...) but that doesn't mean it will be any less virulant or more contained. In the name of spreading risk to all this market has assigned blame to all. Once having to look nowhere the evil-eye now looks everywhere--and at every one. This inversion of values, the only good sign of a market top, has given birth to a village of the damned. Smile, for it's our home. 
All of that for 6%, you ask? Those moneymen unmoved by emotion, technicians, call it a "divergence."
http://www.marketthoughts.com/forum/irrational-exuberance-again-t286,highlight,lawyers.html
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