The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Play with the Search Globe here. You will need a modern browser and probably a non-sucky computer.

Perhaps the best thing that came out of this announcement is the discovery that Google has a Data Arts Team.

Source:
(Flowing Data)

. . .  crawling in the dirt, and for all the little piggies, life  is getting worse !  Credit Default Swaps of the Portugal, Ireland, Italy, Greece and Spain:

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Courtesy of Bianco Research

Since QE2, Volatility has been falling.

As the fascinating chart below from Ron Griess shows, the volatility of markets, post Flash Crash was drifiting lower until the modest sell off in March 2011 sent the VIX spiking.

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How did I forget to mention this yesterday? My Sunday Washington Post column on the varied skills required to become a better investor was published.

Its called The many hats of great investors.

Here is an excerpt:

“Great investors are savvy generalists. I can think of five fields that are hugely helpful to asset management. If you were to study these disciplines, your understanding of how markets work would greatly improve. And you would be a better investor.

How? You will generate better risk-adjusted returns; meaning, you will get the most bang for the bucks you are putting at risk. You will suffer less from volatility — the stomach-churning ups and downs in the markets that are one part risk, one part opportunity. And you will avoid the typical mistakes that most investors make.”

The five disciplines that help you become a better investor: Historian, Psychiatrist, Trial lawyer, Mathematician/statistician, Accountant. (The full column at the Washington Post)

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Source:
The many hats of great investors
Barry Ritholtz
Washington Post, May 22, 2011, Page G6

http://www.washingtonpost.com/business/on-investing-the-many-hats-of-great-investors/2011/05/17/AFN02c8G_story.html

Following much weaker than expected NY and Philly Fed manufacturing surveys, the Richmond region reported an outright contraction as their index fell to -6 from +10, the 1st negative reading since Sept. This area covers mfr’s in DC, Maryland, Virginia and West Virginia and New Orders went to -15 from +10 and Backlogs fell to -19 from -1. Positively, even with the broad weakness, the Employment component remained unchanged at 14 but the average workweek fell to zero from 7 and wages were down to 6 from 22. While current conditions softened, the outlook remains still upbeat. Bottom line, the Richmond survey is never market moving as its not widely followed but its another piece in the anecdotal puzzle of the moderation seen in manufacturing in May with the obvious hope that its just a midcycle misstep before the next acceleration. The ISM national number is out next week.

Continuing the trend of bouncing along the bottom, New Home Sales totaled 323k annualized, 23k more than expected and is up from 301k last week. While it’s off the 50+ yr low of 274k in Aug, its well down from the bubble peak of 1.389mm. Because the absolute number of homes for sale fell by 5k to 175k, the lowest since at least 1963, months supply fell to 6.5 from 7.2, a one year low. Due to the competition from a still large amount of existing homes, where many are selling below replacement cost and in foreclosure, home builders still have a bumpy ride ahead but that’s not new news to any of us. The best response on the part of builders is to shoot themselves in the foot for as long as they can financially stand so the market can more quickly absorb the excess inventory of existing homes which make up most of the overall market.

Bill Black is an Associate Professor of Economics and Law at the University of Missouri – Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics.

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Roger Lowenstein has just taken the brave step of praising the failure to prosecute elite financial managers for fraud as a demonstration of the greatness of America. Lowenstein declares (1) that Blankfein was right – Goldman really was doing “God’s work,” (2) virtually no financial elites committed crimes, (3) any crimes they may have committed were trivial and played no material role in causing the crisis, (4) those that wish to hold fraudulent elites accountable for their crimes are (a) financially illiterate, (b) paranoid conspiracy theorists equivalent to those claiming the U.S. attacked the twin towers on 9/11, (c) a threat to our democracy and constitutional rights, and (d) engaged in “punishing profit,” (5) the prosecutors who refuse to bring criminal charges where they find elite frauds are the heroes safeguarding our democracy and constitutional rights, (6) the FBI is conducting a “serious” investigation of the elite financial frauds (despite points one through four above), and (7) the crisis was caused by “society” – because we’re all guilty no one should be held accountable – except those paranoids who want to destroy America’s greatness by prosecuting financial CEOs on fraud charges.

Wall Street: Not Guilty (May 12, 2011)

Lowenstein’s former colleague at the New York Times, Andrew Ross Sorkin, twittered that Lowenstein was “courageous” and “probably right.”

I join Lowenstein and Sorkin in denouncing the demagogues that denounce America’s financial CEOs for fraud and corruption and those that denounce our economic system for cronyism. My research has detected the ravings of two of the worst examples of this form of parasite. Two of the nation’s leading financial commentators have filled their books and columns with demagogic attacks on the productive class. Here are some of one’s vicious assaults on America’s CEOs and capitalist system.

“[Vast] pay-offs for failed executives exposed [American capitalism] as a fraud at its uppermost reaches.”

The author goes on to describe how senior corporate officials routinely engage in accounting fraud to make “the number” and maximize their bonuses. He stresses the complicity of the outside auditors and banks in aiding accounting control fraud. He claims that at investment banks: “the system was designed for cronyism” (emphasis in original). Indeed, he offers a comprehensive account of the criminogenic environment that creates the incentive and ability to engage in fraud with impunity. The author claims that the officers that control accounting frauds like Adelphia successfully manipulate banks by creating conflicts of interest because they believe that doing so will make it more likely that banks will fund their frauds – and he charges that our most elite banks are eager to be suborned and to turn a blind eye to the underlying fraud.

“The repeal of the Glass-Steagall Act, a Depression-era banking law, had paved the way for commercial banks like Citibank and Bank of America to get into the more lucrative business of underwriting. Adelphia’s Brown shrewdly exploited the banks’ greed. In a memo to bankers early in 2000, which cordially began, ”I hope your New Year is off to a great start,” Brown pitched the co-borrowing idea and pointedly observed, ”All of the lead managers and co-managers of each of these credit facilities are expected to have an opportunity to play a meaningful role in . . . public security offerings.”

In others words, if the banks lent the Rigases/Adelphia money, then Adelphia would spill some gravy onto their investment-banking divisions. When the bankers saw that, their mouths watered. This was exactly the sort of conflict that Glass-Steagall had been intended to prevent. The banks went for it. From 1999 to 2001, three banking syndicates, led by Bank of America, Bank of Montreal and Wachovia Bank, allowed the Rigases/Adelphia to borrow a total of $5.6 billion, a staggering sum. Citigroup, J.P. Morgan, Deutsche Bank and scores of other banks participated.
Anyone looking for mere gaps in the Chinese wall is missing the larger point: banks weren’t trying to separate departments but to integrate them. That was the whole reason they had lobbied for Glass-Steagall’s repeal. Thus, the banks would send teams of 8 or 10 investment bankers and commercial bankers — no distinction was evident, according to Tim Rigas — to Adelphia pitching every financial service under the sun.

Bank of America’s securities unit was so proud of the way it combined its services, which it referred to as ”delivering the one-stop shop,” that it produced a case study for interns in 2001 on how the technique had worked with a particular client. The client was Adelphia. Page after page describes how Bank of America had devised ”an integrated financing solution” for Adelphia, including underwritings, strategic advice, supportive (i.e., positive) research from its analyst and co-borrowing debt. Apparently, the only time Bank of America did not have an integrated approach to Adelphia was when it added up the debt that was disclosed in Adelphia prospectuses.”

The author stresses the negative effects of changes in the law that made it harder to bring civil suits against accounting fraud and the anti-regulatory agenda of industry. In the 1990s:

“Fueling the permissive climate, the Justice Department showed little interest in prosecuting cases of accounting fraud, which was not considered a major problem. These developments gave executives, accountants, and corporate lawyers a general sense that the risk to themselves had diminished. Veteran investors detected a new swagger in the executive suite.”

This is precisely the kind of attack on the Justice Department that Lowenstein decries. It is, of course, inconceivable that the Bush administration would have proven even more opposed to regulating and prosecuting elite white-collar criminals than the Clinton administration.

The author also attacks the private sector. Neoclassical economists have long assured us that fraud is impossible in the securities markets because creditors and investors exercise effective “private market discipline.” Private market discipline is the core function essential to efficient markets and capitalism, but the author claims that private market discipline has become so perverse that the supposed sources of discipline actually aid what criminologists call “accounting control frauds.”

“However badly the Rigases behaved, they were helped along the way by lenders and investment bankers, auditors, lawyers, analysts — just about anyone whose job it should have been to protect the public. And this is what truly distinguishes the latter stages of the last bull market: not that a handful of executives got greedy but that the safeguards supposedly built into our financial culture stopped functioning.”

The author writes that the Rigases involved facts so egregious that any honest lender should have refused to lend to them.

“Even to people familiar with Wall Street scandal, the central detail of this one remains astonishing. Somehow, the Rigases persuaded a network of commercial banks to lend to them more than $3 billion that not only the family, but also Adelphia, a public company with public shareholders, would be liable for repaying. The money was used, in large part, to buy Adelphia securities, which subsequently lost most of their value, as well as to make payments on stock the family had bought on margin. It was also used as a sort of A.T.M. to finance extravagances of the Rigases both small and not so small.”

“[I]nvestment banks floated billions of dollars of securities to the public with detailed descriptions of Adelphia’s finances that somehow neglected to mention the extra $3 billion of indebtedness. Even the S.E.C. was aware that Adelphia and the Rigas family each let the other borrow on its own credit, an unusual arrangement that, by its very nature, was vulnerable to abuse. But the S.E.C. apparently never investigated it.”

“And now that the stock market is back in the pink, a collective amnesia has settled over Wall Street, which takes comfort from the notion that the system essentially worked. The only problem is, it didn’t.”

Read the rest of this entry »

Carl Richards has a fascinating little article up at the NY Times that is sure to generate lots of hate mail:

Gold is not an investment. It’s a speculation.

Investments are made by evaluating underlying value. Speculative bets are made by looking at the price of something and simply hoping the price goes up. Investing is about value; gambling is about price.

Gold has no real underlying value. I know there is a market for it. I know it is real, just like real estate was real in 2007.

But what is the value of a bar of gold?

It has no value except the one assigned by a herd of speculators. This is true for most commodities. They don’t actually produce anything. They are raw material. No value. No dividend. No cash flow.

Note that he does not say you should not own gold, or that its a scam, or hat its going to zero. His comments are that people buying gold have no true way to value ti, and therefore are speculating, not investing.

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Source:
Gold is Not an Investment
CARL RICHARDS
Bucks Blog, May 23, 2011, 12:53 PM
http://bucks.blogs.nytimes.com/2011/05/23/gold-is-not-an-investment/

Very cool visualization from Jess3, including how it was made:

With Greece’s back officially against the wall and the sand slipping thru the hour glass of fiscal stability, their government said they will speed up the privatization process. This is their last stand against an extension of the payback of their obligations but it won’t be enough. The WSJ is saying the government wants to raise as much as 5.5b euros by yr end ’11, up from an initial goal of 2-4b euros they had a few weeks ago. On top of this they want 6b euros more of budget cuts. This still won’t get them to the 30b euros of extra money they need but Greek bonds are rallying after yesterday’s sharp selloff and Greek stocks are higher. After one ECB member said last week that a Greek restructuring would be a “catastrophe,” another today said it would be a “horror story.” Oh the hyperbole but nothing will be pretty about what comes next for Greece. In addition to the rally in Greek bonds and stocks today, the better than expected German IFO business confidence # has the euro bouncing somewhat vs the US$.

Well. Isn’t this a welcome development?

Last week, we heard the announcements by New York Attorney General Eric Schneiderman that his office is investigating fraud in mortgage securitization — originally focused on Goldman Sachs, Bank of America, and Morgan Stanley, this morning expanded to include JPMorgan, UBS, and Deutsche Bank.

Previously, the Florida AG had published a brutal analysis on Florida foreclosure fraud.

We now learn that California is stepping up to the plate: California Attorney General Kamala Harris is creating a 25-person task force to target mortgage fraud of any size.  It includes a team of 17 lawyers and eight special agents from the state Department of Justice. The focus will be on three key areas:

• Corporate fraud: including instances in which bundled mortgages were sold as securities to the state or its pension funds under false pretenses, using California’s False Claims Act, which makes false claims submitted to the state a felony;

• Scams: including instances in which consultants, lawyers and others took fees from people in foreclosure, saying they would help the homeowners get loan modifications or other remedies, but delivered nothing.

• Origination Fraud: Fraudulent lending practices, including deceptive marketing, failure to fully disclose loan terms. This includes qualifying people for loans who couldn’t afford the terms.

Note that this initiative is distinct from the multistate investigation because “it would go after all aspects of the mortgage-lending business.”

That statement makes the third item above quite fascinating: It means that the California AG is looking into something that no one else has been willing to touch: Origination Fraud. Any finance firm that lent money to people they knew could not possibly pay is back could be prosecuted under these terms.

Even more significant is the possibility of “Systemic Origination Fraud” — the no doc loans where lenders voluntarily kept themselves ignorant about the borrowers ability to repay loans.

Understand what the New York and California Attorneys General just did: They raised the bar for what it is going to take to stay in office as an elected AG. I expect we should soon hear from the Attorneys General offices Arizona and Nevada undertaking similar prosecutions.

If not, angry citizens in these foreclosure heavy, fraud ridden states will become very frustrated. Voters will be asking: “If NY and California and Florida can do this, why aren’t we?”

I imagine that any AG that refuses to hold corporate interests accountable should best prepare to return to the private sector.

Previously:
Follow the Money: How Systemic Bank Fraud Contributed to the Financial Crisis (April 12, 2011)

Florida Attorney General Report on Fraudclosure (January 5, 2011)

Dodo Bird Bankers (May 9, 2011)

Sources:
California creating mortgage fraud task force
Alejandro Lazo
Los Angeles Times, May 23, 2011
http://www.latimes.com/business/la-fi-mortgage-fraud-20110523,0,1196882.story

New York Investigates Banks’ Role in Financial Crisis
GRETCHEN MORGENSON
NYT, May 16, 2011 
http://www.nytimes.com/2011/05/17/business/17bank.html