Posts filed under “Blog Spotlight”
My afternoon train reads:
• Markets Saved by the Kid From South Carolina, Again (MarketBeat)
• The 40 Highest-Earning Hedge Fund Managers And Traders (Forbes) see also David Tepper Tops 2012 Hedge Fund Earnings (Forbes)
• Michael Mauboussin: Think Twice (Outlook Business)
• Lazy Portfolios at war with Wall Street casinos (MarketWatch) see also The (Really) High Price Of Active Management (The Capital Spectator)
• Why It’s Smart to Be Reckless on Wall Street (Scientific American)
• The Consequences of Sequestration (The Diplomat) see also Austerity Kills Government Jobs as Cuts to Budgets Loom (NYT)
• Gold Bugs Need to Replenish the Hive (MarketBeat)
• Apple Should Stay Prudent With Cash: Analyst (MarketBeat) see also Apple’s ‘Very Active’ Cash Talks Won’t Assuage Investors (Bloomberg)
• Deficit hawks’ ‘generational theft’ argument is a sham (Los Angeles Times)
• When Diet Meets Delicious (NYT)
What are you reading?
S&P500 PE Ratio
Source: Chart of the Day
Bill Black, author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Professor Black has been publishing a lot lately (see the 3 part series on How to regulate mortgages) and recently launched a more active web presence…Read More
This is weird: On Wednesday, May 20, (Recall Why TARP Funds Were Necessary) I wrote the following:
“Lastly, I would like to see a bi-partisan, Blue Ribbon panel put together analyzing why this occurred. Put an Elizabeth Warren or a Paul Volcker in charge, and give them 6 months to create a comprehension assessment of what went wrong, along with recommendations on how to fix it.”
That night, I read in the NYT The Caucus:
“President Obama on Wednesday signed legislation aimed at curbing financial fraud in the mortgage and other industries, including a provision that created an independent panel to investigate the root causes of the nation’s economic downturn.“
That was obviously in the works for a long time . . . but the coincidental timing was sure funny.
Now, let us see who gets put on this panel, and who chairs it.
The Economic Populist is a Community Blog and Forum. Leave your partisanship at the door, bring your shrinking middle class paycheck and let’s discuss real trade, economic, budget, fiscal, tax, labor and immigration policy that is in our interests and the United States National Interest
On December 3, John Bergstrom of Bergrstrom Automotive, a major auto dealer, appeared on CNBC and said,
on about September 10, we saw our business fall off 30-35%.
A similar sudden decline in consumer spending during September was reported by Shoppertrak:
Throughout 2008, the American shopper has endured record high gasoline prices, hurricanes and flooding, and a stalled housing market in their quest to shop. While the consumer has remained fairly resilient during this time, two very recent events are dramatically impacting mall visits and consumer confidence.
- Once the financial crisis emerged at the beginning of September, retail traffic declined even further. Between August 31 and September 20, SRTI total U.S. traffic fell an estimated 9.2 percent per day….
- After the failure of Washington Mutual, President Bush’s address to the nation, the presidential debate and the initial rejection of the TARP bailout, traffic fell by an average of 10.5 percent (September 21 – 29).
- The day the TARP bailout package was rejected by congress (September 29) and the NYSE Dow Jones Industrial Average lost 778 points, consumers again responded negatively as shopper traffic fell 12 percent as compared to the same day in 2007
- Sales, which were up 4.0 Percent for the Month of July, and up 3.5 Percent for the Month of August, fell 1.0 percent in September – “the first year-over-year sales decline since March 2003.”
Shoppertrak has subsequently reported that “retail sales rebounded slightly, posting a very slight 0.7 percent increase in October. sales for the week ending November 15 dropped 3.1 percent as compared to the same period in 2007.” But car sales have not recovered at all. In August car sales were already down about 19% YoY. In September the loss was 21%. In October it was 23%. By November car sales had declined close to 40% from already depressed levels in 2007.
And the stock market, which was only down (-18%) from its all time high in 2007 of 1565 to 1282 at the end of August, by October 10 was down (-43%) to 899.
In the 40 day period between September 1 and October 10, the shallow recession which had crippled the housing industry and Wall Street, but left Main Street virtually intact, suddenly metastasized into a collapse of the consumer economy that some were beginning to liken to the 1930s.
This diary is “the first draft of history”, an attempt to look at not only what has happened, but as best we can tell from the vantage point of several months later, why it happened.
Part 1. In August, the Real Economy just had a Cold
Now we know. From the vantage point of December 2008, the NBER, which is the official arbiter of these thiings, has reported that a recession began a year ago in December 2007. The official report of GDP for the 4th quarter of 2007 shows a decline of ( -0.2%). Until revised away (not unlikely) the first quarter of 2008 was mildly positive ( +0.9%), and marked by the receipt of $250 billion worth of stimulus checks, the 2nd quarter of 2008 was more robust at ( +1.9%). By the end of August, it seemed likely that the economy was undergoing a mild recession even though Wall Street was suffering a near-catastrophe.
The first ill winds of the present calamity began in February 2007 as the “subprime mortgage market” began to collapse, with mortgage brokers “Imploding” seemingly by the day. Although the Best and Brightest of new finance assured us that this was a minor, “contained” malady, in August 2007 the destruction of bad debt suddenly spread to hedge funds, as two Bear Sterns funds which had improvidently made leveraged bets on bad mortgages, blew up. Despite this the stock market made new highs in October 2007, as measured in both the DJIA and the S&P 500, before beginning to decline.
In March 2008 the financial system suffered its first major shock with the failure and forced merger of Bear Sterns, Wall Street’s fifth largest investment bank. Many thought that the worst was over, and stock markets ralied back for several months. Then, in July, after unnerving warnings from the Bank of International Settlements in its annual report warning of a global economy at a “tipping point,” and possibly an orchestrated bear raidcampaign of naked shorting, America’s two mortgage giants, Fannie Mae and Freddie Mac, nearly failed and at the insistence of foreign sovereign bondholders, the US formally agreed to backstop their debt. This happened only days after Fed Chairman Ben Bernanke told Congress that the two mortgage giants were adequately capitalized, and were in no danger of failing.
At virtually the same time, one of the biggest bank underwriters of toxic subprime mortgages, Indy Mac Bank, failed, and was taken over by the FDIC, resulting in a ~$6 billion loss to the fund, the second largest outlay ever.
Despite all of these things, the unfolding events seemed to be a Neutron Bomb over Wall Street, leaving Main Street unscathed. For example, Prof. Brad DeLong, who has been an astute observer of the collapse, noted that
The Financial Economy Has Galloping Pneumonia, Influenza, *and* the Grippe, But the Real Economy Just Has a Cold
Very cool article in the Sunday Boston Globe: A field guide to economics and finance blogs: “As the bailout plan unfolded, the bloggers offered historical context along with cutting critiques of the proposal. More important still, they offered counterproposals: direct capital injections into banks, for example, or direct purchases of mortgages. Many of their readers…Read More
• Citigroup had poor risk controls.
• As a result, the bank owned $43 billion of mortgage-related assets that it incorrectly thought were safe.
• They weren’t.
• And so as a result the market value of Citi has collapsed by a factor of ten: from $200 billion to $20 billion.
To which the only appropriate response is: “Huh?” How can losses out of $43 billion of optimistically overvalued asserts eliminate $224 billion of value? Eric Dash and Julie Creswell don’t answer that question. They don’t even seem to recognize that it is a question that they should be interested in. That they were given this story to write, and that no editors said “wait a minute! this doesn’t add up!” is yet another signal that the New York Times is in its death spiral: not the place to go to learn anything about an issue.
I think he is a little rough to criticise the NYT for that – or for that matter any other paper – because at the moment the Treasury and the FDIC are also acting (at least until now) as if they do not know the answer.
The answer is that the crisis is not about the amount of losses yet realised or yet to be realised, and it is not about capital adequacy of the banks and it is not about their level of leverage. It is simply about the question “do we trust them to repay their debts”. You might think is about capital or losses or leverage – but even if the bank has adequate capital and losses come are relatively small if we believe collectively that they can’t repay then they can’t repay. Sure more capital would produce more trust – but the level of distrust at the moment is so high that nobody can tell you how much capital is needed. All estimates are a shot in the dark. In reality all that is needed is more trust.
The short answer to the Brad deLong question is that due to the losses and the lack of risk control people stopped believing in Citigroup – and hence Citigroup dies without a bailout. It was however pretty easy to stop believing in Citigroup because nobody (at least nobody normal) can understand their accounts. I can not understand them and I am a pretty sophisticated bank analyst. I know people I think are better than me – and they can’t understand Citigroup either. So Citigroup was always a “trust us” thing and now we do not trust.
The long answer has to be a replay of the various themes of this blog. So lets do it in pieces.
1). The losses in the banking system in America are not unmanageably large. Anyone that tells you otherwise just hasn’t done the maths (and that is most people). I have written this idea uphere… and nobody yet has an adequate response though Mark Thoma has tried and even Kevin Drum on the Mother Jones blog has commented on it.
One offender not doing the maths is (very surprisingly) Paul Krugman – although his last post in which he blamed lack of capital for the crisis was March – so maybe he has done some maths since. Krugman usually does the maths and is spot-on in his analysis of Fannie and Freddie. I am usually an unabashed fan of the Shrill Professor – so his various diagonoses leave me perplexed.
Its been quite a while since our last edition of Blog Spotlight: Tonite, I am pleased to present Yves Smith’s naked capitalism.
Yves is a refugee from a big Wall Street iBank, and has put serious time into a well known consulting firm. I have been particularly impressed with Yves coverage of the monoline insurers (Ambac (ABK), MBIA, FGIC). As you will see, her thoughtful post below reflects both his sharp wit, worldly banking experience and insight into this sector.
This is part of our ongoing short list of excellent but somewhat overlooked
blogs that deserves a greater audience. I hope you find it as illuminating as I have . . .
Posted by Yves Smith at 8:55 AM, Feb 19, 2008
Ever since Eliot Spitzer threatened the troubled monoline insurers
that he’d break them up, everyone has acted as if that’s a viable
But this talk of a split reminds me of movies about Hollywood, where someone buttonholes a producer with his pet idea:
it’s like Flashdance, except you reverse it: the girl is a Hispanic
ballerina who started stripping to pay her student loans…."
Like the film proposal, the break up notion is still at the high
concept stage, little more than, "let’s separate the muni operations
from the rest."
And while admittedly Ambac has had only the long weekend to work on its plan, the update as of Monday evening via the Wall Street Journal suggested that the group is flailing around.
Category: Blog Spotlight