Posts filed under “Really, really bad calls”

Time to Overhaul the Bailout Plan

The Treasury Department TARP/Bailout plan has been an utter disaster. It has been mishandled from day one — poorly planned, poorly executed. Both Hank Paulson and Congress for passing such a shoddy piece of legislation should be ashamed of themselves for their horrific judgment and egregious failures.

It is hard to see a single thing that it has accomplished, other than giving away 100s of billions of dollars of taxpayer money. In return, the government has gotten . . . practically nothing.

No new lending, no new hiring, excess bonuses going to the creators of the mess, dividends going to the shareholders who bought these poorly managed companies. The current bailout will end up being the working definition of Moral Hazard for generations to come.

A smarter way to give away billions of dollars is to match private sector investments. Triage all the banks, put down the bad ones, and invest on the same terms as the private sector into the banks that can be saved. Warren Buffett put $5 billion into Goldman Sachs and got a good combination of warrants and yield. Why didn’t the taxpayer get the same terms?

If we had required private sector investment first (min investment, 100 million dollars), and then a 5X or even a 10X Uncle Sam match, we would have been much better off. Instead, firms like Citibank were rewarded for their reckless speculation and their gross incompetence.

Which is why this article in the Washington Post — Geithner Preparing Overhaul Of Bailout — is at least somewhat encouraging.

Confronted with intense skepticism on Capitol Hill over the $700 billion financial rescue program, Treasury Secretary nominee Timothy F. Geithner and President-elect Barack Obama’s economic team are urgently overhauling the embattled initiative and broadening its scope well beyond Wall Street, sources familiar with the discussions said.

Geithner has been working night and day on the eighth floor of the transition team office in downtown Washington with Lawrence H. Summers and other senior economic advisers to hash out a new approach that would expand the program’s aid to municipalities, small businesses, homeowners and other consumers. With lawmakers stewing over how Bush administration officials spent the first $350 billion, Geithner has little chance of winning congressional approval for the second half without retooling the program, the sources added.

That challenge is underscored by a report from a congressional oversight panel scheduled to be released today that hammers the outgoing Treasury Department for its handling of the financial rescue, including “what appear to be significant gaps in Treasury’s monitoring of the use of taxpayer money.” The report, moreover, faults the Treasury for failing to properly measure the success of the program or establish an overall strategy and skewers the department for not using any of the funds on foreclosure relief as Congress had directed.

Much of the work by Obama’s team has focused on establishing principles that would clearly define the program’s course and the conditions of government aid to financial firms.

I suspect there is a bit of revisionism in this narrative, giving Geithner some distance from the disastrous TARP plan. At the very least, the mere fact someone is thinking strategically, rather than reacting emotionally is a small step int he right direction.

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Source:
Geithner Preparing Overhaul Of Bailout
Obama Team Broadens Scope to Secure Final $350 Billion for Rescue
David Cho
Washington Post, January 9, 2009; Page A01

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/08/AR2009010804109.html

Category: Bailouts, Credit, Really, really bad calls, Taxes and Policy

Beware Wall Street’s Happy Talk

Over at Marketwatch, Paul Farrell sifts through a book (sitting on my shelf) and pulls out these embarrassing quotes. 15 reminders of how happy talk misled us a decade ago October 1999: James Glassman, author “Dow 36,000.” “What is dangerous is for Americans not to be in the market. We’re going to reach a point…Read More

Category: Financial Press, Humor, Markets, Psychology, Really, really bad calls

Former NAR Economist David Lereah is a Jackass

Alternative Title: David Lereah: Even More Full of Shit Than Previously Believed > Of all the various parties who contributed to the boom and bust in housing and credit, none have escaped more unscathed than the National Association of Realtors, and their former Baghdad-Bob-in-Chief, David Lereah. The NAR turned a blind eye to fraud amongst…Read More

Category: Contrary Indicators, Legal, Real Estate, Really, really bad calls

How to Repair a Broken Financial World

Here is another excerpt — part II — of the all consuming OpEd of the Sunday New York Times by Michael Lewis and David Einhorn: Excerpt: When Bear Stearns failed, the government induced JPMorgan Chase to buy it by offering a knockdown price and guaranteeing Bear Stearns’s shakiest assets. Bear Stearns bondholders were made whole…Read More

Category: Bailouts, Credit, Derivatives, Legal, Markets, Really, really bad calls, Regulation

The End of the Financial World As We Know It (and I feel fine)

The entire OpEd section of the Sunday New York Times has been taken over by an article jointly written by Michael Lewis and David Einhorn, titled The End of the Financial World As We Know It. Its this morning’s must read piece . . . Excerpt: “OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required…Read More

Category: Bailouts, Credit, Derivatives, Legal, Really, really bad calls, Regulation

Risk Mismanagement & VaR

Terrific l o n g article in the Sunday Times Magazine by Joe Nocera, titled Risk Mismanagement. Its all about how Wall Street developed and still uses VaR — Value at Risk.

The application of VaR remains hotly debated today. Did it contribute to the credit crisis — or was it ignored/misapplied/distorted, and THATS what was a key factor.

Excerpt:

Risk managers use VaR to quantify their firm’s risk positions to their board. In the late 1990s, as the use of derivatives was exploding, the Securities and Exchange Commission ruled that firms had to include a quantitative disclosure of market risks in their financial statements for the convenience of investors, and VaR became the main tool for doing so. Around the same time, an important international rule-making body, the Basel Committee on Banking Supervision, went even further to validate VaR by saying that firms and banks could rely on their own internal VaR calculations to set their capital requirements. So long as their VaR was reasonably low, the amount of money they had to set aside to cover risks that might go bad could also be low.

Given the calamity that has since occurred, there has been a great deal of talk, even in quant circles, that this widespread institutional reliance on VaR was a terrible mistake. At the very least, the risks that VaR measured did not include the biggest risk of all: the possibility of a financial meltdown. “Risk modeling didn’t help as much as it should have,” says Aaron Brown, a former risk manager at Morgan Stanley who now works at AQR, a big quant-oriented hedge fund. A risk consultant named Marc Groz says, “VaR is a very limited tool.” David Einhorn, who founded Greenlight Capital, a prominent hedge fund, wrote not long ago that VaR was “relatively useless as a risk-management tool and potentially catastrophic when its use creates a false sense of security among senior managers and watchdogs. This is like an air bag that works all the time, except when you have a car accident.” Nassim Nicholas Taleb, the best-selling author of “The Black Swan,” has crusaded against VaR for more than a decade. He calls it, flatly, “a fraud.” . . .

What will cause you to lose billions instead of millions? Something rare, something you’ve never considered a possibility. Taleb calls these events “fat tails” or “black swans,” and he is convinced that they take place far more frequently than most human beings are willing to contemplate. Groz has his own way of illustrating the problem: he showed me a slide he made of a curve with the letters “T.B.D.” at the extreme ends of the curve. I thought the letters stood for “To Be Determined,” but that wasn’t what Groz meant. “T.B.D. stands for ‘There Be Dragons,’ ” he told me.

Best line in the article: “When Wall Street stopped looking for dragons, nothing was going to save it.”

I particularly loved the graphics and illustrations that were part of it:

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Category: Credit, Data Analysis, Derivatives, Markets, Mathematics, Quantitative, Really, really bad calls

Vocabulary Problem: Cognitive Dissonance

Paul Krugman asks: Unusually, I’m having a vocabulary problem. There has to be some word for the kind of person who considers his mild discomfort the equivalent of torture, crippling injury, or death for other people. But I can’t think of it. What brings this to mind is this from Alberto Gonzales: I consider myself…Read More

Category: Investing, Psychology, Really, really bad calls

UPDATED: Worst Predictions for 2008

Special Schadenfreude edition: In case you missed it, here is our updated collections of the worst predictions for how 2008 would turn out: • The 10 Worst Predictions for 2008 (Foreign Policy) • The Worst Predictions About 2008 (Businessweek) • 2008 Investment Guides Are HILARIOUS (New York Magazine) • Famous Last Words (CNBC) • The…Read More

Category: Financial Press, Markets, Psychology, Really, really bad calls

2008 Investment Guides Are HILARIOUS

Via New York Magazine, comes this amusing collection of bad forecasts for the 2008 year: • Jon Birger, senior writer, Fortune Investors Guide 2008 Smart investors should buy [Merrill Lynch] stock before everyone else comes to their senses.” Merrill’s shares plummeted 77 percent. • Elaine Garzarelli, president of Garzarelli Capital, Business Week’s Investment Outlook 2008…Read More

Category: Financial Press, Humor, Markets, Really, really bad calls, Trading

The Fall of AIG

Part III of the Washington Post series on AIG. Today’s version: Downgrades And Downfall. Here’s an excerpt: Once a small part of the firm’s business, the increasingly popular [credit-default swaps] contracts had helped boost the company’s profits to record levels. The company’s computer models continued to show only a minute chance that the firm would…Read More

Category: Bailouts, Corporate Management, Credit, Derivatives, Really, really bad calls