Banking on Change (Part 3)

By | 2014-09-05T18:48:13+00:00 April 30th, 2010|Global Market Update|

I’ll break banking reform down into two parts: what should be, and what will be. What should happen in finance is a massive simplification that deals with “too important to fail” and provides funds for all kinds of companies that need cash through their product cycle. This should be coordinated internationally, because the cross-border issues are often what makes finance so complex. As the banks get bigger they should have to set aside more and more capital, making larger institutions more resilient. This would [...]

Banking on Change (Part 2)

By | 2014-09-05T18:47:24+00:00 April 28th, 2010|Global Market Update|

So are they bankers, or are they traders? That’s the question for the big banks. And it’s a fair question for Congress too, as they debate how we should reform our financial system. Big securities dealers used to be called “bulge-bracket” firms. In the past, they mostly helped companies raise money by selling stocks and bonds, and would trade these securities for their own account. Their trading profits were a big part of their business. By contrast, banks that helped companies get loans usually [...]

Banking on Change (Part 1)

By | 2014-09-05T18:46:41+00:00 April 27th, 2010|Global Market Update|

Where is banking headed? As an investment manager, it’s my job to have an opinion about this. After all, banking and finance represent almost one sixth of the market. In order to have an opinion about the market, you have to have an opinion about the banks. And right now the banks look like they’re in trouble. The biggest banks—JP Morgan, Bank of America, Wells Fargo, and Citi—have to deal with snarking from wannbe regulators like Simon Johnson who cry, “Break them up! Investigate! [...]

The Golden Rules?

By | 2017-07-17T12:35:19+00:00 April 26th, 2010|Global Market Update|

Yesterday I made a comment on Goldman’s ethical position. I want to clarify this today. Specifically, I noted that Goldman’s negative bet on the housing market in 2006 was neither immoral, unethical, or illegal. Those are three separate considerations: Legal is the easiest. While I can’t speak to the way they bet on housing, it looks like they used approved investment vehicles in an approved manner. By following the laws, they stayed “inside the lines.” Ethics has to do with standards of professional practice [...]

Debtor’s Equity

By | 2014-09-05T18:45:19+00:00 April 25th, 2010|Global Market Update|

With all the fussing about Greek debt, Goldman’s deals, and the equity markets, it’s important to remember a few fundamentals. First, remember that every asset is someone else’s liability. If you own a bond, someone else issued debt. If you own stock, somebody raised equity. This may seem trite, but it has significant implications. The world is 100% long itself. In the end, there is no net hedging. If Goldman made money when housing crashed, someone else lost more. That happened because Goldman made [...]

Short!

By | 2017-07-17T12:35:19+00:00 April 23rd, 2010|Global Market Update|

The last refuge of financial scoundrels is to blame the short-sellers. That’s what I thought when I read about Greece, once again, blaming traders in Credit Default Swaps (CDS) for blowing up their debt. That’s what I thought when I read all the vitriol leveled at John Paulson for having the temerity to make money for his clients by betting against the sub-prime mortgage market. That’s what I think every time some corporate suit rails on a financial analyst for asking an aggressive question [...]

Into the Ash Can

By | 2014-09-05T18:43:45+00:00 April 22nd, 2010|Global Market Update|

The ash cloud that resulted from Iceland’s volcano grounded flights across Europe and cost the airlines billions. Now that flights have resumed again, what have we learned? First, systems are adaptive. Some 9 million people were affected. Some re-routed. Some drove. Many just camped out at the airport. There’s some comfort in numbers. Because so many were stranded, thousands of beds were brought in to the terminals. Second, bad news for the airlines isn’t bad for everyone. Travelers may have been stuck, but they [...]

Rent vs. Buy

By | 2014-09-05T18:41:31+00:00 April 21st, 2010|Global Market Update|

There’s a new emphasis on renting these days, and it’s a good thing. Renting requires you to suffer the scorn of real-estate agents and home-flipping friends, but for many it’s a better decision. Never mind that it would have saved millions from foreclosure and financial stress in California and Florida. For some in their stage of life renting almost always makes sense. The reason is that buying and selling a home is expensive. Total costs, including brokerage, closing, and moving are usually more than [...]

Both Sides Now

By | 2014-09-05T18:40:40+00:00 April 20th, 2010|Global Market Update|

“The first one to state his case seems right, until another questions him.” Until now we’ve only heard from the SEC on the Goldman case. The SEC’s contention is that Goldman designed and sold a bond based on sub-prime mortgages that was engineered to fail within weeks, and they lied about who was involved. But many feel that the Government’s case is weak. The security is exotic, the investors are sophisticated institutions, and the disclosures were extensive. No one is surprised when some people [...]

Breakdown

By | 2014-09-05T18:40:08+00:00 April 19th, 2010|Global Market Update|

Last week it looked like consumer prices are starting to break down: the core CPI turned negative (over three months) for the first time in decades. And small businesses seem gloomy about the economy, even as the recovery strengthens. What’s going on? The two items are linked. When the real estate bubble burst a lot of banks lost so much that it threatened their solvency. To stay in business they had to raise cash and reduce risk, and they did that by cutting back [...]