ProPublica has a devastating take down of some of the self-inflicted wounds the big bailed out banks caused, all in the pursuit of bigger bonuses. Merrill lynch, CitiGroup, UBS, Goldmasn Sachs all come in for scathing criticism for their circular CDO sales to themselves:
“Over the last two years of the housing bubble, Wall Street bankers perpetrated one of the greatest episodes of self-dealing in financial history.
Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses: They created fake demand.
A ProPublica analysis shows for the first time the extent to which banks — primarily Merrill Lynch, but also Citigroup, UBS and others — bought their own products and cranked up an assembly line that otherwise should have flagged. The products they were buying and selling were at the heart of the 2008 meltdown — collections of mortgage bonds known as collateralized debt obligations, or CDOs. “
This is a very clear (written for a non-technical audience) and focused article. Pro Publica doesn’t claim they are the first to report this (“Individual instances of these questionable trades have been reported before”). But ProPublica’s investigation (in partnership with NPR’s Planet Money), is comprehensive and written for the layperson. And, there is lovely chart porn (below) and a cartoon graphic.
Kudos to Jesse Eisinger and Jake Bernstein.
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Sources: Banks’ Self-Dealing Super-Charged Financial Crisis
Jake Bernstein and Jesse Eisinger
ProPublica, August 26, 2010 http://www.propublica.org/article/banks-self-dealing-super-charged-financial-crisis
What’s most interesting about the debate on what, if anything, the Fed should do next and the unfortunate belief that we need to hang on every single word uttered by Bernanke, especially today, is corporate America at this point could care less what the Fed does next. They know that interest rates are already at historic lows and the average business person, whether for a big company or small knows that the cost of money at this point is not a factor in the decision of whether to expand/hire or not. From the perspective of the consumer, they are only interested in paying down debt and saving and if anything, more ‘easing’ by the Fed just makes saving that much more difficult. Thus, it may be just us guys and gals who work in the financial markets and stare at flashing screens all day that will have the volume up at 10am thinking that what Bernanke is going to say is actually going to matter for those that aren’t paying attention anymore.
Via Pro Publica comes the latest tale of theft and woe of the big banks derivatives scams: Selling products to themselves, artificially creating fraudulent profits (capturing big bonuses). Whent he underlying assets drop, the derivatives become worthless — but the bonuses are already spent!
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Sources: Welcome to CDO World!
Al Granberg, Special to ProPublica
ProPublica, August 26, 2010
Aug. 26 (Bloomberg) — Mark Zandi , chief economist at Moody’s Analytics Inc., talks with Bloomberg’s Margaret Brennan about the outlook for the U.S. economy and possibility for
another recession. (Source: Bloomberg)
Zandi on his predictions re: double-dip recession:
“I put it that 1 in 3 right now. If you’d ask me 4-8 weeks ago, I would have said 1 in 4, 12 weeks ago, 1 and 5. So it is rising uncomfortably high. I am assuming that tax rates on upper income households will in fact occur on January 1st. If that doesn’t happen, it could reduce the odds back closer to 1 in 4. But 1 in 3, that is uncomfortably high. Particularly we’re at a 9.5% unemployment rate. If we go back into recession, it’s going to be very difficult to get out of it in any king graceful way.”
On whether the economy will backtrack into a recession:
“I do think that the Federal Reserve will restart quantitative easing over the next few months. I think the economy is going to be, at best, very weak, so weak that unemployment will begin to rise again and I think that will be a signal for the fed to resume quantitative easing.”
On whether he expects job growth in the current market:
“I do expect some job growth, yes, but not enough to forestall further increase in unemployment. Just to give you a number, we need approximately 150,000 jobs per month just for a stable rate of unemployment. Since the beginning of the year, we’ve been getting closer to 100K, subtracting the ups and downs of census hiring. Over the next few months, I would expect no more than 50K given the recent weakening in economic growth. And so that’s not enough to forestall further increases in unemployment.”
Zandi on expectations for Bernanke’s speech tomorrow at the Kansas City Fed:
“The first thing he needs to do is put the string of economic data we’ve been getting into some context. How weak does he think the recovery really is? Then I think he needs to explain more clearly the FOMC’s actions a few weeks ago. Why hold the balance sheet constant? What was the logic behind that? It would be helpful if he could then give as benchmarks for understanding when they possibly could resume quantitative easing, start buying more treasuries, securities and growing the balance sheet.”
On news today that U.S. mortgages with overdue payments have risen in Q2:
“That is a bit disconcerting. It is clear the foreclosure crisis continues on, by my data, we have 4.3 million first mortgage loans are in default or 90 days delinquent and thus headed to default. That is a lot of loans to work through and many will go into foreclosure sale. One more reason to believe that house prices will decline. One encouraging thing was the decline in early stage delinquency. The recent bump up is a bit disconcerting. I do not think it is the beginning of a trend. I am hopeful, that in the next few quarters, we’ll see that come back down again given the tightening in the underwriting and the view that we’ll get some job growth.”
On whether Congress should raise the tax rate for the top 2% in 2011:
“I think if we raise those tax rates, in all likelihood the recovery will still remain intact but I think that is a gamble that would be unnecessary. I do think it would prudent given how fragile the recovery is not to raise any more taxes in 2011. Now in 2012, 13, 14 when the economy is up and running, raising those tax rates in upper income households, I don’t think we’ll have any meaningful impact on their spending and saving on the broader economy and would help with respect to fiscal problems. But I just wouldn’t do it at 2011. It is one more thing for the economy to overcome when the economy has a lot to overcome.”
On what he thinks will tip us towards a second recession:
“It could be, for example, if angst about the European debt situation were to flare up again and we’d see the equity market, stock prices fall another 5% or 10%. I think that would certainly qualify and that could push us back into recession.”
On the European debt situation:
“We’re watching very carefully. The coast isn’t clear. The European economy is holding up better than I would have thought to this point. But it has a lot of headwinds, the fiscal austerity, the financial constraints given the problems in their own banking system, so there is a lot more work to be done. I don’t think they will work to the problem quite yet.”
On tomorrow’s GDP figure and whether he agrees with the consensus is 1.4%:
“I think that is about right. That would be reduction of about a percentage point in estimated growth. Most of that because of a wider trade deficit, some of it related to less inventory. But it clearly highlights the economy lost momentum in the Q2.
In the always fickle AAII measurement of stock market sentiment of individual investors, today’s Bull reading at 20.7 is down from 30.1 last week and is at the lowest level since March ’09 when it got as low as 18.9 when the S&P’s were below 700. Bears rose 7 pts on the week to 49.5 but still remain below the recent high in July at 57.1. The March ’09 high in Bears hit 70.3.
A day before we hear from Bernanke and following an amazing Treasury rally since the Aug 10th FOMC statement, the 7 yr auction was good. The yield at 1.989% is below the when issued of 2.0% and the bid to cover of 2.98 is above the 1 yr average of 2.80 and matches the 2nd highest since the 7 yr was reintroduced in Feb ’09. My thoughts on tomorrow’s Bernanke’s speech are this: all he will do is elaborate on and clarify the FOMC statement of 2 1/2 weeks ago. There will be nothing new as Bernanke wants to see the economic response, if any, to the new leg lower in interest rates after QE1.5 was announced on Aug 10th.
Dan M is a buyside analyst at a small macro hedge fund. He had the following observations regarding the significance of Google search data.
My personal views of contrary indicators are more nuanced, but I thought this was a very interesting approach to looking at Google trend. It is a decidedly different perspective, one worth thinking about.
Enjoy:
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A popular meme these days has been to look at sentiment as a contrary indicator. I personally have used this argument many times, the theory being that when *everyone* feels a particular way, then the market has likely overpriced that in due to the “dumb money” pushing that meme too far as is always the case. The argument goes that the opposite is then prone to occur, because the dumb money always loses.
I had a fresh contrary look at this as reflected in the frequency of searches on Google via Google Trends (link), based on a few examples.
• Positive correlation w/ economic activity
• But does this work w/ price behavior?
• “stock market crash” was a leading indicator
• “Housing bubble” was a leading indicator
• “housing crash” was a leading indicator
• Relevance now – “double dip” implies double dip recession
• Relevance now – “hindenburg omen” implies … ?
• Relevance now – “bond bubble” implies Treasuries are rich?
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Positive correlation w/ economic activity.
For one, there is the fact that economic activity actually has had a *positive* correlation to search term frequency. We have detailed at length this in the past – one example of this is search frequency for the term “recession”, which showed a clear initial peak in January 2008, a mere one month after the recession began (chart):
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We have also shown charts that detail how this has also been the case as far back as 1980 onwards (chart:).
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But does this work w/ price behavior?
One could say that economic activity is different from price behavior. Price behavior is based on the interaction of buyers and sellers, while economic activity is not zero sum at all.
“Stock market crash” was a leading indicator.
An interesting case study of this is a search for the term “market crash” or “stock market crash”, backed up to the very start of the market crash itself.
This is the graph of search frequency for “stock market crash”, which is largely similar to that for “market crash” (chart):
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Note the clear peak in September 2008, with nothing really before that. The January 2008 spike was largely the same as what we saw in ~February 2007.
The simple response to this is “oh yeah, this simply peaked while the crash was happening”… but that might be a false assumption. Digging into the weekly data seems to paint a different picture, interestingly enough. We got a reading of 4 in the chart above on … September 15th 2008 (chart):
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On September 14th, the S&P was at 1255. Heck, even when Search Terms went to 6.4, the S&P was still at a fairly rich 1099.
In other words, a spike to 4 actually *led* the crash, and was *not* a lagging indicator after the fact.
Over the past few years, I have urged HNW clients to consider alternative investments, including collector automobiles (Most recently, here).
I even mentioned it on Yahoo’s Tech Ticker (whereis that link?) last year, which led to some jeers.
As it turns out, that advice was pretty good. Here’s Bloomberg:
“Collectible cars have outperformed stocks, at least in the past four years, according to the Hagerty’s Cars That Matter “Blue Chip” Index, compiled by auto appraiser David Kinney of Great Falls, Virginia. The index, which contains the estimated values of 25 of the most popular collectible autos, increased more than 61 percent from September 2006, when it started, to the end of July.
That compares with a 16 percent loss in the Standard & Poor’s 500 Index. The 1958 Ferrari 250 GT California Spyder LWB gained 131 percent in that period to an estimated value of $3.3 million, according to the HCTM index . . .
Seeking Hard Assets: Today, with the stock market in the doldrums, investors seeking hard assets are turning to vintage cars — often for more than $1 million, says Keith Martin, publisher of Sports Car Market magazine in Portland”>
Now, I have a new excuse to go upgrade the sheet metal in my garage . . . I have an old 560 SL, which is worth about double what I paid for it — but about 10% less than I have put into it over the past 5 years.
After the sticker shock report last week of 504k (revised from 500k), Initial Claims totaled 473k, 17k below expectations. The 4 week average though did tick up to 487k from 484k and is at the highest since late Nov ’09. Continuing Claims, delayed by a week and lasting up to 26 weeks, fell by 62k but Extended Benefits rose by 301k and is up 1.9mm over the past three weeks as those that temporarily lost benefits, after the expiration and prior to the re-initiation of another benefit extension by Congress, rejoin. Bottom line, after last week’s disappointing figure, today’s # is certainly a relief but it doesn’t change the fact that it’s still very elevated at this point of an economic expansion as the labor market still remains very sluggish with businesses still reluctant to hire and take risk.
"I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." -Thomas Jefferson (letter to John Taylor in 1816)
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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