Posts filed under “Really, really bad calls”
“Normal distribution curves — if I would submit to you — do not exist in financial markets. Its not that they are fat tails, they don’t exist. I keep hearing about fat tails, and Jesus, it’s only supposed to occur every 100 years, and it appears every 10 years.”
-Former Federal Reserve Chairman Paul Volcker
Real Time Economics reports that former Fed Chair Paul Volcker ditched his prepared remarks at a Federal Reserve of Chicago event yesterday. In its stead, he opened fire on all of the corruption in banking and Wall Street.
It was a “blistering, off-the-cuff critique leveled at nearly every corner of the the US financial system.”
Volcker unloaded on banks and CEOs; he trashed regulators and the inept business schools. He opened fire on the Fed, bombed money-market funds. And while he had good things to say about the financial overhaul law, the bottom line is the system remains at risk.
Rather than subject us to future “judgments” of regulators — all subject to capture by “relentless corporate lobbying by banks and politicians to soften the rules.”
Volcker made a plea for “structural changes in markets and market regulation.”
Real Time Economics noted the following:
Banking: Investment banks became “trading machines instead of investment banks [leading to] encroachment on the territory of commercial banks, and commercial banks encroached on the territory of others in a way that couldn’t easily be managed by the old supervisory system.”
Financial system: “The financial system is broken. We can use that term in late 2008, and I think it’s fair to still use the term unfortunately. We know that parts of it are absolutely broken…”
Business schools: I think that was the general philosophy that markets are efficient and self correcting and we don’t have to worry about them too much.
Central banks and the Fed: “Central banks became…maybe a little too infatuated with their own skills and authority because they found secrets to price stability…I think its fair to say there was a certain neglect of supervisory responsibilities” [nonfeasance]
On procyclicality: “It’s the hardest thing as a regulator in my opinion…when things are really going well, the economy is going well, the market is not disturbed, but you see developments in an institution or in markets that is potentially destabilizing, doing something about it is extremely difficult.
Risk management: “Markets that are prone to excesses in one direction or another are not simply managed under the assumption that we can assume that everybody follows a normal distribution curve.
Derivatives: “I’ve heard so many stories about how important” derivatives are but “there doesn’t seem to be much doubt that the creation of derivatives has far exceeded any pressing need for hedging.”
Money market funds: “Money market funds have encroached so much on the banking market. They are nothing, in my view, but a regulatory arbitrage.
The Fed and Dodd-Frank: Volcker said it was a “miracle” that despite all the criticism aimed at the Fed the central bank “came out with enhanced regulatory authorities rather than reduced regulatory authorities.”
Go read the entire write up, its outstanding.
If this guy was in charge of Fin Reg, the market would be appreciably healthier over the long run. Yet another great missed opportunity . . .
Volcker Spares No One in Broad Critique
Real Time Economics, September 23, 2010
Some years ago when I was on the sellside, I would occasionally got dragged into these banking meetings to discuss funding new and existing companies. I had a good understanding of Tech, and apparently lent gravitas (ha!). These sorts of meeting request went up after the media exposure increased.
I got into a bit of hot water at some of these for saying what I thought. I recall one of these meetings was with a group that had made a large previous investment into Blockbuster (I don’t recall if they bought via public or private equity).
Curious, I asked what the value was: This wasn’t a turnaround play, it was more of a sell off the whale oil and meat to recoup what was left from the carcass play.
“You describe this as if its a dying industry.”
Well, duh. “Isn’t it? Isn’t Netflix and internet delivery going to make driving to a store and renting plastic discs ancient history? You could no more turnaround a steam engine company once gasoline engines came around.”
The bankers were not happy with me, but I certainly saved them (or their investors) money, as Blockbuster just filed for Chapter 11, wiping out shareholders, and reducing their debt load 90% from nearly a billion dollars to about $100 million or so.
Somewhere between then and now, we rec’d shorting BBI, but it was a tough borrow, and a regular squeeze play.
CrowdQuery: Who is the next major company, business, or sector to go belly up?
Let’s consider 3 categories:
1) who goes down in 2010 or ’11
2) who is in danger between now and 2015.
3) Whose long term prospects are clouding up?
What say ye?
video after the jump
The following is from independent banking analyst XXX, who has been accurately forecasting the crisis and its structural underpinnings. He wonders why (generally nice guy) Mark Zandi has become a favorite of public policy makers, despite his rather lackluster track record. ~~~ The Fed, Treasury and the Senate Budget Committee appear to have a favorite…Read More
From today’s WTF file, the Florida Mortgage Mill Machinery, hard at work: “When Jason Grodensky bought his modest Fort Lauderdale home last December, he paid cash. But seven months later, he was surprised to learn that Bank of America had foreclosed on the house, even though Grodensky did not have a mortgage. Grodensky knew nothing…Read More
“What were the alternatives to the bailouts?” In light of the Summer’s resignation, its worth looking at the question I still hear from time to time. This article, Stopping a Financial Crisis, the Swedish Way, published exactly 2 years ago today, provides an answer: “A banking system in crisis after the collapse of a housing…Read More
Karl Smith is a Professor at UNC-CH and blogger at Modeled Behavior. He was a graduate fellow at the Institute for Emerging Issues, where his work was focused on state and local tax reform. Smith holds a BA and a PhD in economics from North Carolina State University.
The Conservator’s Report on Fannie and Freddie is out.
Fannie Mae and Freddie Mac are members of a long list of individuals and entities including Gary Condit, Tom Delay, Michael Jackson, Rod Blagojevich and JonBenet Ramsey’s parents. These are folks who were unjustly tried and convicted in the popular press essentially on the grounds that they were creepy or otherwise unsavory characters.
As I hope to continue to argue, being creepy, a bad person, or even a usual suspect does not make one automatically guilty of any particular crime. In this case government subsidies in the housing market are a bad idea for a host of reasons and have been for years. I will testify to this with vigor and passion.
However, that does not mean that Fannie or Freddie caused the housing bubble. Indeed, by my count they were among the biggest victims of it.
The proper question is not: What story is consistent with my general philosophy or worldview?
The proper questions is: What story is consistent with the facts?
Fact One: Fannie and Freddie’s primary business of subsidizing conventional loans was not a driver of the housing the bubble.
Indeed, conventional loans represented less than a third of all mortgage originations during the peak price acceleration years.
This was a phenomenon of private-label non-conventional loan securitization.
1.1 Peaking in 2006 at a third of all mortgages originated, the volume of Alt-A and subprime mortgages was extraordinarily high
between 2004 and 2007. In 2005 and 2006, conventional, conforming mortgages accounted for approximately one-third of all
[ . . .]
1.2 Private-label issuers played a large role in securitizing higher-risk mortgages from early 2004 to mid-2007 while the Enterprises
continued to guarantee primarily traditional mortgages.
Fact Two: Fannie and Freddie lost market volume during the boom.
That is, during the boom not only did the fraction of loans securitized by Fannie and Freddie fall, but the absolute number fell. At the same time the absolute number of private-label securitizations rose.
There is a simple and obvious reason for this. The development of structured products meant that for many consumers the free market offered a more attractive loan than the government subsidized one.
The good news: Summers is gone Jan 1 (no word yet on Geithner). The bad news? I am not sure what (if any) impact this will have on the administration’s economic policies. To review: Summers is the former Clinton Treasury Secretary, mentored by Robert Rubin. As such, he was one of (many) architects of the…Read More
I wanted to share an interesting email exchange from this weekend. “R” writes: “You occasionally shred an argument with more than a hint of animus. I don’t want to say its ad hominem, but it comes damn close. Some people get viciously disemboweled, while others are more gently corrected. Why?” That’s a fair question. You…Read More
I don’t know what is more idiotic: This horrific Reuters misquote, or the impossibly idiotic commenting system they have in place. First, the misquote: “Turning to the housing market, Barry Ritholtz at The Big Picture is predicting the worst in housing is likely over. Sure prices could fall another 33 percent — but it’s unlikely…Read More
As we noted in these pages a few weeks ago, Paul Kasriel gave Michael Boskin’s selective memory a who-dat-what-for.
This morning, Barron’s picks up the same theme:
IT’S PERVERSE OF US, WE ADMIT, but we get a real kick out of a dust-up between economists. If nothing else, it demonstrates that the dismal science is not a science and not necessarily dismal.
What occasions this somewhat less than profound observation is a recent commentary of Northern Trust’s director of economic research, Paul Kasriel, taking issue with an op ed piece in our sister publication, The Wall Street Journal, by Michael Boskin, a former chairman of the Council of Economic Advisers under the first President Bush.
Mr. Boskin blamed the lackadaisical recovery on the Obama administration’s economic policies, a view that is widely shared these days. Paul avers his intention is not to argue for or against those policies, but to express wonder that in fingering the causes of the feeble recovery Mr. Boskin somehow neglected to include the extraordinary contraction in bank credit.
In making his case, Mr. Boskin compared the current recovery with more robust ones, particularly the first quarter of 1983, when Martin Feldstein was chairman of the Council of Economic Advisers under President Reagan.
On that score, Paul finds it “curious” that Mr. Boskin makes no reference to the 1991 recovery when he was the Council’s top dog. Our initial reaction to the omission was, for gosh sakes, Paul, since when is modesty a sin?
Paul then proceeds to note that one year into the rebound in 1983, GDP growth weighed in at 7.7%, accompanied by a 6.4% growth in bank credit. That’s significantly better than the 3% rise in the first year of the present recovery, when bank credit actually contracted an awesome 7.9%.
And it also happens to be a heap better than the 2.6% rise in GDP in 1991, when bank credit rose only 1.4%.
It goes without saying, Paul concedes, that other factors besides bank credit play a part in GDP growth. But he insists that the shrinkage in bank credit has been a substantial element in the disappointing pace of this dispiriting recovery.