Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Commercial Property Shoe To Drop?From The Financial Times:US banks warn on commercial property Financial Times By Francesco Guerrera and Greg Farrell in New York Published: July 22 2009 19:21 | Last updated: July 22 2009 19:21 Two of America's biggest banks, Morgan Stanley and Wells Fargo, on Wednesday threw into sharp relief the mounting woes of the US commercial property market when they reported large losses and surging bad loans. The disappointing second-quarter results for two of the largest lenders and investors in office, retail and industrial property across the US confirmed investors' fears that commercial real estate would be the next front in the financial crisis after the collapse of the housing market. The failing health of the $6,700bn commercial property market, which accounts for more than 10 per cent of US gross domestic product, could be a significant hurdle on the road to recovery. Read the rest of the article Labels: baillout, commercial property, derivatives, financial crisis, Morgan Stanley, mortgage meltdown, Wells Fargo Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). If You Liked CDOs, You'll Love CLOs...From the Financial Times:Night of zombie company looms as debt burden remains large By Anousha Sakoui Financial Times Published: July 2 2009 20:50 | Last updated: July 2 2009 20:50 Third time lucky is a phrase often quoted by bankers who believe it takes several debt restructurings to get a company's balance sheet right. The phrase is even more relevant today amid growing concerns that debt restructurings are leaving companies saddled with too much debt, even at the end of the process. Part of the blame has been laid at the feet of capital-constrained banks which have been reluctant to write down the debt because it could create losses that would further weaken their balance sheets. Debt and bankruptcy specialists warn that trend risks creating a new breed of zombie companies--those which survive simply to repay their debts but cannot move forward because their debts remain so large. An even greater problem is posed by collateralised loan obligations--complex funds that pooled loans and at the height of the credit bubble were buying up to 60 per cent of leveraged loans. Read the rest of the article Labels: bailout, banking system, bankruptcy, collateralized loan obligations, derivatives, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Michael Greenberger on DerivativesC-Span had a nice segment on Friday with Michael Greenberger, a law professor at the University of Maryland, on derivatives. He characterizes derivatives as like bets, and many of them as essentially bets on other people's misfortune. The callers' questions are great too. His answer to the last question, in which the caller raises the notion that it was regulators that caused all the trouble by requiring banks to make risky loans, is nice and concise—a good response without being overheated. I wish he'd added that far from making loans because the gov't required them to, banks were falling all over themselves to make such loans once it was clear how much money was to be made by packaging the loans and selling derivatives based on them.I would embed the video here, but C-Span doesn't appear to provide a mechanism for doing so. Hat-tip to LF. Labels: Barack Obama, derivatives, Michael Greenberger, mortgage backed securities Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Wall Street Digs InGood online piece from Newsweek from a while ago (April 10th). The subtitle is confusing, though: clearly Obama is getting the message (from Wall St.)!Wall Street Digs In The old system refuses to change. Is Obama getting the message? Michael Hirsh | Newsweek Web Exclusive Not long ago, a group of skeptical Democratic senators met at the White House with President Obama, his chief economic adviser, Larry Summers, and Treasury Secretary Tim Geithner. The six senators—most of them centrists, joined by one left-leaning independent, Vermont's Bernie Sanders—said that while they supported Obama, they were worried. The financial reform policies the president was pursuing were not going far enough, they told him, and the people Obama was choosing as his regulators were not going to change things fundamentally enough. His appointed officials and nominees were products of the very system that brought us all this economic grief; they would tinker with the system but in the end leave Wall Street, and its practices, mostly intact, the senators suggested politely. In addition to Sanders, the senators at the meeting were Maria Cantwell, Byron Dorgan, Dianne Feinstein, Carl Levin and Jim Webb. That March 23 gathering, the details of which have gone largely unreported until now, was just a minor flare-up in a larger battle for the future—one that may already be lost. With the financial markets seeming to stabilize in recent weeks, major Wall Street players are digging in against fundamental changes. And while it clearly wants to install serious supervision, the Obama administration—along with other key authorities like the New York Fed—appears willing to stand back while Wall Street resurrects much of the ultracomplex global trading system that helped lead to the worst financial collapse since the Depression. At issue is whether trading in credit default swaps and other derivatives—and the giant, too-big-to-fail firms that traded them—will be allowed to dominate the financial landscape again once the crisis passes. As things look now, that is likely to happen. And the firms may soon be recapitalized and have a lot more sway in Washington—all of it courtesy of their supporters in the Obama administration. With its Public-Private Investment Program set to bid up and buy toxic assets, the administration is handing these companies another giant federal subsidy. But this time the money will come through the back door, bypassing Congress, mainly via FDIC loans. No one is quite sure how the program will work yet, but it's very likely going to make a lot of the same Wall Street houses much richer at taxpayer expense. Meanwhile, the big banks that still need help will almost certainly get another large infusion once the stress tests are completed by the end of the month. The financial industry isn't leaving anything to chance, however. One sign of a newly assertive Wall Street emerged recently when a bevy of bailed-out firms, including Citigroup, JPMorgan and Goldman Sachs, formed a new lobby calling itself the Coalition for Business Finance Reform. Its goal: to stand against heavy regulation of "over-the-counter" derivatives, in other words customized contracts that are traded off an exchange. Companies like these kinds of contracts, which are agreed to privately between firms, because they allow them to tailor a hedge perfectly against a firm-specific risk for a certain time period. But in order to preserve its right to negotiate these cheaper private contracts, Wall Street is apparently willing to argue for the same lack of public transparency and to permit the systemic risk that led to the crash. Geithner's financial regulation plan, announced April 2, does address some of these concerns. The Treasury chief wants all standardized over-the-counter trading of derivatives to go through an industry clearinghouse, which will give the government more oversight. Geithner said he wants to require "systemically important" firms to reserve more capital. He also wants to rein in "customized" derivatives contracts—those agreed to privately between firms. Whereas once these trades went totally unregulated, Geithner would require that they be "reported to trade repositories and be subject to robust standards" for documenting and collateralizing, among other new rules. But it's unlikely this will do much to change Wall Street. Geithner's new rules would allow the over-the-counter market to boom again, orchestrated by global giants that will continue to be "too big to fail" (they may have to be rescued again someday, in other words). And most of it will still occur largely out of sight of regulated exchanges. The response favored by the administration, the Federal Reserve and even many in Congress is to create a new all-knowing "systemic risk regulator" with as-yet-undetermined powers. Is such a person sitting at 30,000 feet really going to be able to keep up with all this onrushing complexity, especially as over-the-counter trading resumes in quiet places around the world? It is a triumph of hope over experience to think so. Meanwhile, up in Manhattan, the New York Fed has been conducting meetings on future regulation with a group of major Street insiders and their traditional regulators. At the most recent meeting, on April 1, they agreed on creating central clearinghouses for trading and "trade-information warehouses" that will track market data far better than before. But they have resisted anything more dramatic, like requiring all trading to occur on publicly recognized exchanges. Geithner has also put his stock in clearinghouses; he says he only wants to "encourage greater use of exchange-traded instruments." That has placed Geithner at odds with another Democratic senator, Tom Harkin of Iowa, chair of the agriculture committee, who wants all futures contracts traded on exchange. "The senator feels that what he's offering in his bill does include more integrity and transparency than the current Geithner plan," a Harkin spokesman told me. Officials at the firms who took part in the New York Fed meeting and at the Fed maintain that there is little difference between clearinghouses and formal exchanges; both are regulated and both are industry-run, they say. But that misses a major point, says Michael Greenberger, a former top official at the Commodity Futures Trading Commission who has been a critic of the administration's reform efforts. Exchange trading gives the government authority over fraud and manipulation and emergency powers to stop trading, he says, and it creates the kind of public transparency that isn't possible in a privately run clearinghouse. The White House and Treasury Department did not immediately respond to my requests for comment on these issues or on the March 23 meeting (beyond confirming that it took place). But it's noteworthy that more than a month and a half passed before Obama agreed to the meeting, which was prompted by a letter that Dorgan sent in early February. The senators were invited after one of the group, Sanders, put a hold on the nomination of Gary Gensler, Obama's nominee to be head of the Commodity Futures Trading Commission. In an interview, Sanders said he opposes the nomination because Gensler has spent much of his career in Washington working for Wall Street's interests. Gensler, in testimony, has said he has learned from his past mistakes. "At this moment in our history, we need an independent leader who will help create a new culture in the financial marketplace," Sanders said. Instead, the old culture is reasserting itself with a vengeance. All of which runs up against the advice now being dispensed by many of the experts who were most prescient about the crash and its causes—the outsiders, in other words, as opposed to the insiders who are still running the show. Among the outsiders is Nassim Nicholas Taleb, the trader and professor who wrote "The Black Swan: The Impact of the Highly Improbable." Taleb wrote in the Financial Times this week that a fundamental new approach is needed. Not only should firms be prevented from growing too big to fail, "complex derivatives need to be banned because nobody understands them and few are rational enough to know it," he said. Yet even as we are still picking up the debris, we seem to be ready to embrace that world once again. Read the original article. Labels: bailout, Credit Default Swaps, derivatives, financial crisis, Timothy Geithner, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Cram Down Those Loans!Senate Democrats are negotiating with banking industry lobbyists on legislation that would allow for bankruptcy judges to "cram down" (or rewrite) mortgage loans. Judges currently have the authority to do this for mortgages on second homes, yachts, and luxury automobiles, but not for primary residences.Bank lobbyists (whose salaries are paid by banks receiving billions in taxpayer bailout funds) are hoping that Senate Republicans can either stop the bill outright or force limits on who would be covered by the bill, as well as a time limit (or sunset period). The House passed a version earlier this month. Advocates for troubled homeowners are pushing for legislation that would allow bankruptcy judges the authority to change the terms of interest rates and loan principle to reflect current market rates. This would help stop the flood of houses going into foreclosure, maintain value for the banks, and prevent neighborhoods from being overwhelmed with vacant properties. The bill would not only benefit homeowners who are able to convince judges that they have the means and will to pay a mortgage brought down to reflect the current value of their homes, but also renters -- a group that represents 40% of all people at risk of eviction because of foreclosure. Banks had no qualms about extending loans on overvalued properties in good times (and then leveraging them many times over in credit default swaps and other derivatives). Their current policy is to foreclose, evict everyone, and let the government deal with the resulting mess of abandoned property and growing homelessness. Even those current on their mortgages lose out as their property values continue to plummet amid the glut of bank-owned properties on the market. With profits rising thanks to government handouts, why should banks be allowed to duck their share of responsibility for the mortgage mess? --df Labels: banking crisis, banking system, Daniel Fireside, derivatives, lobbyists, mortgage backed securities, mortgage meltdown, Renters Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Obama Plans To Tighten Financial RulesFrom The New York Times:January 25, 2009 Obama Plans Fast Action to Tighten Financial Rules By STEPHEN LABATON WASHINGTON The Obama administration plans to move quickly to tighten the nation's financial regulatory system. Officials say they will make wide-ranging changes, including stricter federal rules for hedge funds, credit rating agencies and mortgage brokers, and greater oversight of the complex financial instruments that contributed to the economic crisis. Broad new outlines of the administration's agenda have begun to emerge in recent interviews with officials, in confirmation proceedings of senior appointees and in a recent report by an international committee led by Paul A. Volcker, a senior member of President Obama's economic team. A theme of that report, that many major companies and financial instruments now mostly unsupervised must be swept back under a larger regulatory umbrella, has been embraced as a guiding principle by the administration, officials said. Some of these actions will require legislation, while others should be achievable through regulations adopted by several federal agencies. Officials said they want rules to eliminate conflicts of interest at credit rating agencies that gave top investment grades to the exotic and ultimately shaky financial instruments that have been a source of market turmoil. The core problem, they said, is that the agencies are paid by companies to help them structure financial instruments, which the agencies then grade. "Until we deal with the compensation model, we're not going to deal with the conflict of interest, and people are not going to have confidence that the ratings are worth relying on, worth the paper they're printed on," Mary L. Schapiro said in testimony earlier this month before being confirmed by the Senate to head the Securities and Exchange Commission. Timothy F. Geithner, the nominee for Treasury secretary, made similar comments in written and oral testimony before the Senate Finance Committee. Aides said they would propose new federal standards for mortgage brokers who issued many unsuitable loans and are largely regulated by state officials. They are considering proposals to have the S.E.C. become more involved in supervising the underwriting standards of securities that are backed by mortgages. The administration is also preparing to require that derivatives like credit default swaps, a type of insurance against loan defaults that were at the center of the financial meltdown last year, be traded through a central clearinghouse and possibly on one or more exchanges. That would make it significantly easier for regulators to supervise their use. Read the rest of the article Labels: bailout, banking regulation, Barack Obama, derivatives, financial crisis, financial regulation, hedge funds, Ratings agencies Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Michael Perleman's Thanksgiving RantCute piece, especially for a rant. From his Unsettling Economics siteMatter and Antimatter: How to Create a Crisis: A Thanksgiving Rant Posted November 27, 2008 Filed under: economics Skilled physicists do not know how to take nothing and turn it into matter and antimatter, but finance behaves as if it had the capacity to do something similar. Imagine a simple market economy about to create a bubble. I want to tell the story of this bubble, only to put the current, crazy stimulus package into perspective. Somebody says to me they have a piece of paper worth $1 million. I can buy for half the price. I borrow the money to cover most of the cost. People are willing to lend me the money confident in the belief that my paper will increase in value. Other people are engaging in the same transaction, spreading confidence that these papers are now increasing in value, say to $600,000. The seller of the paper now has a half-million dollars, having given up nothing but blank piece of paper. I have a capital gain of hundred thousand dollars. My lenders have a credit with a half-million dollars. We are all better off, even though nothing has been produced. Feeling secure in the increasing value of our paper, I along with the other "investors" now start consuming more, spreading prosperity for the economy. Virtually everybody is enjoying the benefit of the bubble. Within a short period of time, people throughout the economy making decisions based on the increasing appearance of health and the economy. At some point, people realize that this paper is nothing more than a blank sheet of writing paper. The bubble may have stimulated some investment that is capable of producing real economic benefits, but mostly it has induced people to consume and commit themselves to pay back debts. Remember, this prosperity was built out of nothing. In the end, matter and antimatter collided. The lenders have lost their money. The speculators and consumers are in debt. Most lack the wherewithal to repay their debts. But in the case of the current bubble, the economy does not have the productive capacity to put everything together. The loans came from abroad and so did many consumer goods. At the same time, the government loans are ultimately dependent on another set of loans, also largely from abroad. How will these loans ever be repaid? Will new loans keep coming as the bubble engulfs the rest of the world? Should the government come in and give me a half-million dollars so that I can repay my loan? Should I be rewarded for my stupidity and naivete? Will that policy really make the economy healthy? Or will it policy just facilitate the creation of even greater bubbles? Obviously, the most sensible decision would be to put the money into making a more healthy economy, one less susceptible to speculation--something impossible under capitalism, but that is another question. Eventually, somebody will have to pay the piper. The policy today seems to be an effort to shield the very people who created the crisis, placing the burden on the most innocent. The graphic picture of the stimulus package that I posted yesterday suggests a government response just as foolish as the speculations that set off the bubble in the first place. Happy Thanksgiving. Labels: bailout, derivatives, financial crisis, Michael Perleman Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Weaponizing Credit Default SwapsAnother lovely investment strategy for tough times. From Friday's Financial Times:Speculators are being armed by banks to hurt Main St By Mark Sunshine Published: November 28 2008 02:00 | Last updated: November 28 2008 02:00 Warren Buffett called credit default swaps "financial weapons of mass destruction" and they are about to annihilate Main Street. In a disturbing new trend, international banks are creating syndicated credit facilities that "weaponise" credit default swaps (CDS) by using the trading price of a borrower's CDS to set the interest rate paid by the borrower. Unfortunately, banks don't understand that they are arming speculators to ambush and kill unsuspecting and otherwise healthy companies. Regulators are oblivious to this danger as are the victims. CDS are unregulated derivative instruments that are essentially a bet on the creditworthiness of a company. CDS are traded in an unregulated, opaque over-the-counter market, where prices have questionable value and can be easily manipulated and misrepresented. Recently, it was reported that banks have started tying commercial loan interest rates to the price of a borrower's CDS. This seemingly innocuous loan provision allows speculators to bet that a borrower's stock price will go down while insuring that the bet pays off by manipulating the borrower's CDS prices upward. Read the rest of the article Labels: bailout, Credit Default Swaps, derivatives, financial crisis, Financial Times, Mark Sunshine Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Synthetic CDOs and Merrill's FallA fine piece by Gretchen Morgenson in the International Herald Tribune (as part of a series entitled "The Reckoning"):How the thundering herd faltered and fell By Gretchen Morgenson Sunday, November 9, 2008 International Herald Tribune "We've got the right people in place as well as good risk management and controls."--E. Stanley O'Neal, 2005 There were high-fives all around Merrill Lynch headquarters in New York as 2006 drew to a close. The firm's performance was breathtaking; revenue and earnings had soared, and its shares were up 40 percent for the year. And Merrill's decision to invest heavily in the mortgage industry was paying off handsomely. So handsomely, in fact, that on Dec. 30 that year, it essentially doubled down by paying $1.3 billion for First Franklin, a lender specializing in risky mortgages. The deal would provide Merrill with even more loans for one of its lucrative assembly lines, an operation that bundled and repackaged mortgages so they could be resold to other investors. It was a moment to savor for E. Stanley O'Neal, Merrill's autocratic leader, and a group of trusted lieutenants who had helped orchestrate the firm's profitable but belated mortgage push. Two indispensable members of O'Neal's clique were Osman Semerci, who, among other things, ran Merrill's bond unit, and Ahmass Fakahany, the firm's vice chairman and chief administrative officer. A native of Turkey who began his career trading stocks in Istanbul, Semerci, 41, oversaw Merrill's mortgage operation. He often played the role of tough guy, former executives say, silencing critics who warned about the risks the firm was taking. At the same time, Fakahany, 50, an Egyptian-born former Exxon executive who oversaw risk management at Merrill, kept the machinery humming along by loosening internal controls, according to the former executives. Semerci's and Fakahany's actions ultimately left their firm vulnerable to the increasingly risky business of manufacturing and selling mortgage securities, say former executives, who requested anonymity to avoid alienating colleagues at Merrill. To make matters worse, Merrill sped up its hunt for mortgage riches by embracing and trafficking in complex and lightly regulated contracts tied to mortgages and other debt. And Merrill's often inscrutable financial dance was emblematic of the outsize hazards that Wall Street courted. While questionable mortgages made to risky borrowers prompted the credit crisis, regulators and investors who continue to pick through the wreckage are finding that exotic products known as derivatives--like those that Merrill used--transformed a financial brush fire into a conflagration. Read the rest of the article Labels: Collateralized debt obligations, derivatives, financial crisis, financial crisis bailout, Merrill Lynch Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). This Isn't Even Funny AnymoreFrom today's Financial Times:Thanks to Onet? A Polish website, for the link Wall Street 'made rod for own back' By Francesco Guerrera, Nicole Bullock and Julie MacIntosh in New York Published: October 30 2008 23:34 | Last updated: October 30 2008 23:34 Wall Street unwittingly created one of the catalysts for the collapse of Bear Stearns, Lehman Brothers and American International Group by backing new bankruptcy rules that were aimed at insulating banks from the failure of a big client, lawyers and bankers say. The 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company’s assets until a court decides how to apportion them among creditors. The new rules were intended to insulate financial companies from the collapse of a large counterparty, such as a hedge fund, by making it easier for them to unwind trades and retrieve collateral. However, experts say the new rules might have accelerated the demise of Bear, Lehman and AIG by removing legal obstacles for banks and hedge funds that wanted to close positions and demand extra collateral from the three companies. Read the rest of the article Labels: AIG, bankruptcy, Bear Stearns, derivatives, financial crisis, financial crisis bailout, Lehman Brothers, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Hard New Look at Greenspan Legacy (NYT)From today's New York Times, an interesting piece about Alan Greenspan's attitude toward derivatives.By PETER S. GOODMAN Published: October 8, 2008 “Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” —Alan Greenspan in 2004 George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.” And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added. Read the rest of the article. Labels: Alan Greenspan, derivatives, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
