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rffrydr
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 Posted: Tue Jun 30, 2009 9:01 pm Post subject: |
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The carrot:
http://www.ft.com/cms/s/0/095722f6-6028-11de-a09b-00144feabdc0.html
In a highly leveraged limited liability business, shareholders will rationally take excessive risks, since they enjoy all the upside but their downside is capped: they cannot lose more than their equity stake, however much the bank loses. In contemporary banks, leverage of 30 to one is normal. Higher leverage is not rare. As the authors argue, “leveraged bank shareholders have an incentive to increase the volatility of bank assets”.
Think of two business models with the same expected returns: in one these returns are sure and steady; in the other the outcome consists of lengthy periods of high returns and the occasional catastrophic loss. Rational shareholders will prefer the latter. This is what one sees: high equity returns, by the standards of other established businesses, and occasional wipe-outs.
Profs Bebchuk and Spamann add that four features of the modern financial system make the situation even worse: first, the capital of banks is itself partly funded by debt; second, the role of bank holding companies may further increase the incentives of shareholders to underplay risk; third, managers are rewarded for aligning their interests with those of shareholders; and, fourth, some of the ways managers are rewarded – options, for example – are themselves a geared play on rewards to shareholders. So managers have an even bigger economic interest in “going for broke” or “betting the bank” than shareholders. As the paper notes, the fact that some managers lost a great deal of money does not demonstrate they were foolish to make these bets, since their upside was so huge.
A solution seems evident: let creditors lose.....
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rffrydr
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rffrydr
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rffrydr
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HenryTo
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| Posted: Mon May 25, 2009 2:06 pm Post subject: |
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| Quote: | I’m sorry. I am truly and honestly heart-broken over the mess that I helped people get themselves into. I take full responsibility for presenting, packaging, and submitting some of these exotic loans that the supporters of HR 1728 are fighting to outlaw.
I could have easily told my real estate agents and clients NO - go find one of the other 38k registered NV loan officers to help you with that crazy scenario. But, I didn’t. For the sake of my past clients and local economy, I wish I had of. |
Not sure what he means by taking full responsibility - is he going to help his former clients avoid foreclosure? Is he going to open his house to former clients that are now living in trailer parks? Is he going to sell all his assets and donate the proceeds to an organization that helps homeowners avoid foreclosure? Since he helped clients lied about their income, is he going to go to jail?
It is too little, too late for the mortgage industry to propose self-regulation. |
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rffrydr
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rffrydr
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| Posted: Fri May 22, 2009 8:18 am Post subject: |
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There's a monkey on our back:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aCwz3Hlyo9sg&refer=home
| Quote: | He said that Wall Street’s pay practices, which include big year-end bonuses, encouraged excessive risk-taking and helped precipitate the financial crisis. What’s needed is a set of broad standards that financial supervisors can use to make sure that doesn’t happen again, he said.
The administration’s pay plan would be part of a proposed comprehensive overhaul of financial regulation aimed at both protecting consumers and reducing vulnerability to crises. Geithner has previously ruled out setting specific caps on pay and declined to infringe compensation contracts already agreed. |
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rffrydr
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| Posted: Sat May 09, 2009 2:16 pm Post subject: |
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How the Banks got Big:
http://www.newyorker.com/talk/financial/2009/05/11/090511ta_talk_surowiecki
The Financial Page
Monsters, Inc.
by James Surowiecki
May 11, 2009
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Amid the blizzard of economic data that the government puts out every week, last Tuesday’s report analyzing G.D.P. industry by industry got little notice. But it contained one very interesting piece of data: in 2008, for the first time in sixteen years, the finance and insurance industry shrank. Since 1980, this sector’s share of the economy has grown by almost half. Now, apparently, the worm has turned.
For many, this comes as a welcome development: the size of the banking industry has become a symbol of the much lamented “financialization” of the U.S. economy over the past thirty years, and of what the M.I.T. economist Simon Johnson has called a “quiet coup” by Wall Street. But, while banking has become a hypertrophied monster, we still need to understand how the industry got so big in the first place in order to right-size it. And although bad policy and regulatory somnambulism have something to do with it, much of the industry’s growth has been driven by major changes in the economy as a whole, rather than vice versa.
The desire to bring back the boring, small banking industry of the nineteen-fifties is understandable. Unfortunately, the only way to do that would be to bring back the economy of the fifties, too. Banking was boring then because the economy was boring. The financial sector’s most important job is channelling money from investors to businesses that need capital for worthwhile investment. But in the postwar era there wasn’t much need for this. The economy, while remarkably strong, was dominated by huge companies that faced little competition, and could finance investments out of their profits. And entrepreneurship was restrained: there were many fewer start-ups then than in the period after 1980. So the financial sector didn’t have much to do.
Two things changed this. First, in the seventies those huge companies started tottering, while the U.S. economy fell apart. Second, the corporate world was transformed by revolutionary developments in information technology and by the emergence of new industries like cable television, wireless, and biotechnology. This meant that the economy became, and has remained, far more competitive, while corporate performance became far more volatile. In the nineteen-eighties, companies moved in and out of the Fortune 500 twice as fast as they had in the fifties and sixties. Suddenly, there were lots of new companies with big appetites for outside capital, which they needed in order to keep growing. And it was Wall Street that helped them get it. Companies like Turner Broadcasting, M.C.I., and McCaw Cellular used junk bonds to turn themselves into major businesses. Venture-capital investing took off, and so did the I.P.O. market; there were twice as many I.P.O.s between 1980 and 1999 as there were between 1960 and 1979. To be sure, deregulation was also a factor, but Thomas Philippon, an economist at N.Y.U., has shown that most of the increase in the size of the financial sector in this period can be accounted for by companies’ need for new capital.
This wasn’t the first time that something like this had happened. There have been three big banking booms in modern U.S. history. The first began in the late nineteenth century, during the Second Industrial Revolution, when bankers like J. P. Morgan funded the creation of industrial giants like U.S. Steel and International Harvester. The second wave came in the twenties, as electrification transformed manufacturing, and the modern consumer economy took hold. The third wave accompanied the information-technology revolution. Each wave, Philippon shows, was propelled by the need to fund new businesses, and each left finance significantly bigger than before. In all these cases, it wasn’t so much that the bankers had changed; the world had.
The same can’t be said, though, of the boom of the past decade. The housing bubble was unique, and uniquely awful. Each of the previous waves had come in response to a profound shift in the real economy. With the housing bubble, by contrast, there was no meaningful development in the real economy that could explain why homes were suddenly so much more attractive or valuable. The only thing that had changed, really, was that banks were flinging cheap money at would-be homeowners, essentially conjuring up profits out of nowhere. And while previous booms (at least, those of the twenties and the nineties) did end in tears, along the way they made the economy more productive and more innovative in a lasting way. That’s not true of the past decade. Banking grew bigger and more profitable. But all we got in exchange was acres of empty houses in Phoenix.
There’s no doubt that the financial sector needs to be smaller; Philippon suggests that, given the demands of businesses for capital, a normal financial sector would be about the size it was in 1996. Besides just shrinking the industry, though, we have the harder task of making credit bubbles like the one we just lived through less likely. That will require limiting the ability of banks to rely on vast amounts of leverage, which clearly increases risk without adding social value. Many financial innovations also seem to be overrated; it’s not clear that they actually help finance do its core job of channelling capital to businesses. The most important change, though, may be something harder to legislate: Wall Street needs to recognize that its proper role is, as it has been in the past, to follow the real economy, rather than trying to drive it. During the housing bubble, the financial sector essentially tried to create reality. Now’s the time for it to respond to reality instead. ♦ |
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rffrydr
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HenryTo
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| Posted: Fri Apr 03, 2009 8:25 am Post subject: |
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I am not entirely sure who are the sharks - but after the analysts' scandal of the 1990s (initiated by colorful figures like Henry Blodget and investment banker Frank Quattrone) came the Chinese wall between sell side analysts and investment bankers - and today, the sell-side analysts model is broken and with the exception of Meredith Whitney, are making only 10% to 20% of what they were used to in the 1990s.
With Enron came Sarbanes Oxley.
With the 1929 crash and the subsequent Depression, a whole generation of brokers and bankers left Wall Street - and never to come back (nor did their children, or "young" come back).
We're still early in this ball game - but with more transparency and regulatory restrictions, the current hedge fund model (at least its fee structure) will probably be broken in the next couple of years, with the possible exception of funds like Renaissance Technologies or funds who invest in distressed debt as part of the government bailout (i.e. specialty funds started by PIMCO and BlackRock). The fact that the financial "talent" pool is the largest on record does not help either. |
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rffrydr
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| Posted: Fri Apr 03, 2009 6:45 am Post subject: |
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Vocabulary in need of reform. The old metaphors seem almost quaint. The "sharks" are now the government. The human capacity for inversion of values knows few limits. Bottom talk.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aJDiz3sQoUa8&refer=home
| Quote: | | “I can do very well for my clients without venturing into federal waters which are inhabited by sharks,” said David Kotok, the chairman of Cumberland Advisors Inc. in Vineland, New Jersey, who manages about $1 billion. “We are leery of doing anything with the federal government.” |
The sharks that are left out there, Mr. Kotok, won't be for long--you have already eaten your young.
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rffrydr
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| Posted: Tue Mar 24, 2009 8:20 am Post subject: |
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It's a sorry state of the "market" when the govt. has, yes has, to gets its hands on executive pay. Wall St.'s "efficiencies" couldn't even be described as "pro-cyclical."
http://www.nytimes.com/2009/03/22/us/politics/22regulate.html?_r=1&scp=2&sq=executive%20pay&st=cse
Perhaps it's time to once again ask the basic question: what is a "shareholder"? What is a Board of Directors?
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rffrydr
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| Posted: Thu Mar 12, 2009 6:35 am Post subject: |
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| Quote: | Bank reserves
Published: March 12 2009 08:15 | Last updated: March 12 2009 08:15
Counter-cyclicality is an ugly phrase. But it is all the intellectual rage. Federal Reserve chairman Ben Bernanke this week embraced the idea that pro-cyclical pressures within regulation had exacerbated the financial crisis. Banks needing to bolster their capital ratios have found markets closed. That, runs the line, inhibits lending. Instead, they should have – at the urging of regulators – built up a capital buffer in good times easing this period of stress.
One option is to set capital requirements as a range, encouraging banks to move towards (or beyond) the top end in periods of strong earnings growth and allowing them flexibility when times are tough. The markets, however, may prove unaccommodating. As investors’ perception of likely losses and relative strength shift, so do the standards to which they hold banks. After all, many banks are now comfortably above the technical definition of well-capitalised. A cushion which has stiff penalties for use is worth little.
Another route is to change how banks provision for loan losses. Now, banks can only add to loss reserves when a loss is probable and can be reasonably estimated. So-called dynamic provisioning – used in Spain – would instead mean banks build up general reserves in good times, calibrated to say loan growth, while still provisioning against specific expected losses. If properly formulated, these are then automatically drawn on in a downturn.
This measure, however, remains based upon past experience, a demonstrably poor guide. Moreover, it typically focuses on average losses, rather than the small-probability, outsize-defaults which really lead to trouble. Furthermore, this is an old debate. Measures to reduce pro-cyclicality provoke ire from the accounting profession as, in effect, smoothing earnings. The Securities and Exchange Commission, too, may balk having taken on banking regulators in the 1990s to admonish SunTrust for unduly bulking up reserves. Obscuring a true earnings picture is undesirable. But reserving for losses earlier might highlight looming problems and speed preventative action. The best loss is the first loss. |
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rffrydr
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