Posts filed under “Bailouts”
Last night on Fast Money, there was a heated debate on who was to blame for the Housing boom and bust, and the credit crisis, and the current economic malaise (see this and this from last night’s show).
Tonite I will be on Fast Money with Dylan Ratigan debating the crew on this. I name names, assess blame, and point fingers. All the problems seem to be one after another in a series of unintended consequences.
We will go over the facts about the cause and who is the blame:
• Federal Reserve (FOMC)
• Mortgage brokers
• Federal Government
• Fannie Mae
• Lending banks
• Wall Street firms
• CDO Managers
• Credit agencies (Rating Agencies)
• Hedge funds
• Institutional Investors (pensions, insurance firms, banks, etc.)
• And back to regulatory role of the Federal Reserve
For a longer perspective, please see these previously published commentaries:
First Consumers, now Structured Financing: The Ongoing Impact of the Housing Sector (and who is to blame?)
Investor Insight, August 24, 2007
Real Estate and the Post-Crash Economy
FrontlineThoughts, December 29, 2006
UPDATE Here is the Video:
We start about a minute in . . .
Here’s the video I did for the WSJ on Tuesday — it was the #2 video on the WSJ.com site yesterday:
“Barry Ritholtz, the writer behind the popular economics blog “The Big Picture,” discusses his soon-to-be-published book, “Bailout Nation.” He tells WSJ’s Christina Jeng the government might be too quick to come to the rescue and it might not even benefit the economy. (Sept. 23)
Most people are unfamiliar with the evolution of financial management over the years. It began as a clubby old boys network, who you knew mattered more than what you knew. It evolved over time. Starting in the late 1970s, retail stock brokerage became a telemarketing sales business. Although that model is clearly changing, there is still trillions of assets under management today that got that way via the cold call.
The cold calling sales approach was developed and refined at Lehman Brothers (perhaps their collapse was Karma). It was encapsulated by a man named Martin D. Shafiroff, who wrote up, refined and perfected various phone techniques. These include the straight line, the first trade, the trust close. All of his various techniques were published in the book “Successful Telephone Selling in the ’80s” and subsequent editions (’90s, etc.)
Having worked on the Sell side for the first decade of my Wall Street career, I am intimately familiar with the various pitches the retail world uses to obtain clients and assets. There is not a single retail broker of my acquaintance that does not have Shafiroff’s how-to on his bookshelf.
The reason I bring this up today is due to the latest sales pitch from various people, aggressively pushing the bailout plan. The newest spin on the massively expensive plan is “Hey, its a jumbo money maker!”
The spin reminds me of the classic retail stock jockey. The guy has buried his clients in a series of bad trades, bad judgment, poor risk management — all motivated by his self-interested, commission-generating trades. The only way out of the money losing mess, pitches the broker, is a big, Hail Mary trade.
This technique is one of the last ones in the the Shafiroff book. Once an aggressive retail broker is upside down, the plea goes out for raising more money from the
mark client. “Believe me, I hate being under water more than you. I pulled in some favors, this is the trade that makes it all back for us and then some. I could even get in trouble telling you this, so don’t mention this to your pals. This is the one — but I need you to send in more capital so we can recoup the prior trades that went bad on us.”
I guess Paulson read the book in the early days of his career. That line of bullshit is identical to what the public is now being fed. A series of OpEds in the Washington Post and the Wall Street Journal (and who knows where else) are all pushing the same nonsensical line: The bailout plan is a big money maker:
Andy Kessler in the WSJ:
“My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion — yes, with a “t” — for the United States Treasury…
Now Mr. Paulson is pitching Congress for $700 billion or more to buy distressed loans and CDOs from the rest of Wall Street, injecting needed cash onto balance sheets so that normal loans for economic activity can be restored. The trick is what price he will pay. Better mortgages and CDOs are selling for 70 cents on the dollar. But many are seriously distressed (15-25 cents on the dollar) because they are the last to be paid in foreclosures. These are what Wall Street wants to unload the quickest.
Firms will haggle, but eventually cave — they need the cash. I am figuring Mr. Paulson could wind up buying more than $2 trillion in notional value loans and home equity and CDOs for his $700 billion.”
Mr. Gross said there was nothing wrong with that advocacy because Pimco had no official role in formulating the plan to rescue Fannie Mae and Freddie Mac.
“We had a role on CNBC,” he explained, “in that every time we were asked, or I guess every time that The New York Times would call, they would say, ‘What are you doing?,’ and we would say: ‘Well, we want safe, agency-guaranteed mortgages. We don’t want to take a lot of risks in subprime space.’ ”With the liquidity crisis extending into virtually every sector of the investment markets, any firm in a position to advise the Treasury on its rescue plans would have potential conflicts of interest, Mr. Gross said.
“There’s fewer of them here than anywhere else,” he added. “Simply because we saw the crisis coming and we don’t have much of this paper.”
The Pimco trading floor is less like the cacophonic pits that cable news channels usually use to illustrate stories about financial market turmoil, and more like a library. The sound of clacking keyboards often drowns out the low murmur of conversation among portfolio managers. Mr. Gross, a lanky 64-year-old who practices yoga and who sometimes speaks so softly that co-workers lean toward him, as if on an E. F. Hutton commercial, drifts around the room, an unknotted pale blue Hermès tie draped around his neck like a scarf, his gray and brown hair extending down over his ears, a style reminiscent more of the 1970s than today.
Pimco’s headquarters building sits on a bluff overlooking the Pacific Ocean, where on a clear day the view extends westward beyond Catalina Island, which sparkles like a jewel in the midday sun.
The windows on the Pimco trading floor, however, where Mr. Gross spends most of his time, face in the opposite direction – eastward, toward Wall Street and Washington, two arenas where Mr. Gross and his firm carry outsized influence.
That is why some investors might be keen to hear Mr. Gross’s thoughts about the Treasury’s rescue plan. He favors broader relief for homeowners and others weighed down by unmanageable debt and recommends that foreign banks should be allowed to take part in the program. But he also argues against any measures that would try to restrict executive compensation.
“I don’t even know if it’s legal,” he said of attempts to limit executive pay. “And so I think that complicates the situation. That’s not to defend those that are making big checks, but I don’t think it should be attached to this.”
Mr. Gross is also skeptical of proposals to have the Treasury take ownership stakes in banks that sell troubled assets to the government.
Buying a pool of subprime mortgages is not like buying part of a company, he said. The Treasury will own something – the mortgages themselves, which if they pay the right amount for those loans, could earn the Treasury a return of 12 to 13 percent.
“So that’s 100 percent equity in these pools they’ll be buying, and they can take capital gains on them because they own them and all the capital gains will accrue to the Treasury,” he said. “There’s tons of equity here. It’s just that it’s very difficult for American taxpayers to understand.”
The key, of course, is price, which is where the Treasury’s adviser would come in. Much of the opposition to the plan has come from a misunderstanding that the Treasury would buy troubled mortgage bonds for their face value, Mr. Gross said.
On the contrary, Mr. Gross said he would advise the Treasury to pay something closer to 65 or 60 cents on the dollar for the mortgage bonds.
“If the price is right, the Treasury’s going to make money,” Mr. Gross said. “They made money on Chrysler. They can make money on this.”
Mr. Gross also advocates allowing foreign banks to take part in the Treasury’s program to buy troubled assets – a necessary step to keep markets liquid. “Foreign banks have branches here in Newport Beach, they have branches everywhere. And so to discriminate in terms of ownership would again cut off your nose to spite your face. It’s these foreign branches that are lending money to the American public.”
Even if the Treasury’s $700 billion program is approved and carried out under the management of the most selfless investment professionals, that is not likely to solve all of the financial sector’s problems. Asked his view of the economy here and abroad over the next year, Mr. Gross responded simply: “Not pretty.”
“There will definitely be a prolonged period of either slow growth or recession for 12 to 18 to 24 months,” he predicted. “We’re not going to get out of this easily or scot-free. It’s just gone too far to now turn around quickly and to move into a positive growth mode.”
In the meantime, a surge in regulation of the financial sectors will be unleashed, probably an inevitable result of the meltdowns and rescues of recent months. “Twelve to 24 months down the road, all of these high-flying investment banks and banks will be re-regulated and downsized,” Mr. Gross said.
“They won’t become arms of the government, but they will supervised and held on a tight leash. And in addition to the slow-growth-slash-recession that I talked about, what the American economy and the American public can look forward to is a substantially different private sector than what you saw before.”
The greater regulation should draw people back to the investment and financial markets and away from what seems to be their current strategy – stuffing their cash in a mattress.
Even Mr. Gross admits that he has been at times reluctant to commit.
“We were offered this morning a six-month sizable piece of Morgan Stanley,” he said Tuesday. “Here’s the surviving investment bank that just last night got equitized or bailed out by a Japanese bank. We were offered a sizeable piece of a six month Morgan Stanley obligation at a yield of 25 percent, O.K.?”
Pimco didn’t buy the bonds, however, “because we thought we could get it even cheaper,” Mr. Gross explained. “That’s where the fear builds in and makes for totally illiquid markets. Where no one trusts anybody; no one trusts any price. There’s a total lack of trust and confidence in the markets. And that’s what a market depends on.”