January 15, 2010
Obama’s Plan: Pointless But Not Without Potential
President Obama unveiled his “Financial Crisis Responsibility Fee’ plan yesterday. Below are some quotes and thoughts.
President Obama said the goal of the bank fee is "not to punish Wall Street firms but rather to prevent the abuse and excess that nearly caused the collapse of many of these firms and the financial system itself."
Try as I might, I fail to see how taxing Wall Street serves to prevent a repeat of the financial crisis.
“I urge you [the banks] to cover the costs of the rescue, not by sticking it to your shareholders or your customers or fellow citizens with the bill, but by rolling back bonuses for top earners and executives.”
And if the banks fail to roll back the bonuses will President Obama admit that he ‘stuck-it’ to shareholders, bank customers, and/or citizens?
“More broadly I’m continuing to call on these firms to put greater effort into helping families stay in their homes, to provide small businesses with needed loans, and to embrace rather than fight serious financial reform.”
But what if a family can no longer afford to live in their home? What if (for various reasons) making loans to small businesses today is considered less advantageous than other pursuits? Finally, why in the world would Wall Street embrace serious reform if any such reform is likely to infringe upon their profit-making abilities? Finally:
“…my determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at the very firms who owe their continued existence to the American people.”
But President Obama, if you are so upset about these bonuses why not try to do something other than ‘urge’ Wall Street to stop them?
Just so there is no mistake: I find Wall Street bonuses as appalling as anyone else. However, save placing more power into the hands of the shareholders, there is no satisfactory way for politicians to set compensation standards (nor should they try).
Will Real Reform Ever Arrive?
Real reform begins with auditing/breaking up the Federal Reserve System and ends with ensuring any and all financial firms can fail without threat of taking down the entire financial system and/or robbing the American taxpayer. If President Obama had any serious regulatory aspirations his words and actions would be charged with these ideologies. Unfortunately he does not, and is instead focused on taunting Wall Street for what are, arguably, political reasons.
With this said, there is one idea in Obama’s proposal that does have promise:
“The fee the President is proposing would be levied on the debts of financial firms with more than $50 billion in consolidated assets, providing a deterrent against excessive leverage for the largest financial firms. By levying a fee on the liabilities of the largest firms – excluding FDIC-assessed deposits and insurance policy reserves, as appropriate – the Financial Crisis Responsibility Fee will place its heaviest burden on the largest firms that have taken on the most debt. Over sixty percent of revenues will most likely be paid by the 10 largest financial institutions.”
While unimpressive in its current form, a more aggressive template could serve to radically change the financial system. To be sure, if the fees were to increase every year and the size of the firms being penalized decreased, risk-taking (in theory) would eventually have to be spread out among more financial market participants...
Forcibly dispersing risk-taking (or allowing the big banks to slowly break themselves up or get taxed to death) may seem draconian. Then again, it surely beats the current non-policy of allowing the firms that almost brought the entire system down to grow larger and even more systemically crucial…
And yes, a correction is required: I do see how taxing Wall Street (or threatening to do so) could serve to prevent a repeat of the financial crisis.
The President to Wall Street: "We Want Our Money Back, and We're Going to Get It” WH
January 13, 2010
The Death of Volatility, Part II?
In a recent article the Wall Street Journal noted that the ‘VIX Is No Crystal Ball’, adding that ‘it [the VIX] almost never leads the market in either direction.’ Given that the VIX itself is simply a computation of [options] market activity, this information borders on the pointless. Nevertheless, with many analysts focused on the sharp decline in volatility to begin 2010 this topic is not going away.
The latest slump in volatility has caught the attention of many analysts because the VIX has held below 20 (historically a sign of investor complacency), and because stock prices are long overdue for a correction. While it is difficult to offer an opinion on this development, it is safe to say that should the VIX keep falling and/or stock prices keep rising contrarian spirits will become more aroused.
Longer-term VIX Movements
On January 11, 2010 the VIX traded below 17 for the first time since May 2008.
The recent slump in the VIX has mirrored the previous downturn in the index: 305-trading sessions after peaking at 89.53 on October 24, 2008 the VIX is at the exact same level it was 305-trading session after its August 5, 2002 peak of 45.03 (17.55 on January 11, 2010 versus 17.62 on October 16, 2003).
 |
The data missing from the above charts is displayed below. Note how once volatility moved above its freakishly low sub-10 reading it never returned.
 |
What marked the beginning of this major trend change in the VIX? Consider Goldman, Merrill Almost `Junk,' Their Own Traders Say, dated March 2, 2007:
“Lehman and Bear Stearns credit swaps traded as if their debt were rated four levels lower than their A1 rankings…”
In other words, hindsight tells us that VIX spike in early 2007 (and the events surrounding/prompting it) signaled a coming tsunami of problems for the U.S. economy and financial markets.
With this in mind, one suggestion may be the next time the VIX spikes sharply higher read the headlines closely and try to determine whether the issues influencing the spike are burgeoning or transient. In the case of yesterday’s tiny move higher in the VIX, a predetermined pessimist expecting say Japan to soon default could relate it with the following:
“The cost of protecting Asia-Pacific corporate and sovereign bonds from default rose on U.S. earnings concerns and after China’s central bank unexpectedly moved to restrain lending…”
Given that it may be foolish to carry this potentially specious reasoning much further, let me close by saying that in the absence of a major world event a sustained move higher in the VIX is unlikely to occur until either the secular bear market returns and/or the U.S. nears another recession. That neither of these events is on the radar screen today largely explains why the VIX is trending lower…
January 9, 2010
Underwater and Lovin’ It?
The headline from MarketWatch this morning reads ‘Silver lining in job-loss data’. While you would expect to find optimistic takes on what was clearly a negative jobs report, the line below the ridiculous headline was nonetheless shocking:
“Friday's payroll report indicates Fed's unlikely to raise interest rates anytime soon.”
 |
That the U.S. recovery is so feeble the Fed can not raise rates above zero percent is considered a ‘silver lining’? By this standard Japan is the undisputed king at collecting silver linings, although for what good such linings serve I do not know...
The U.S. has lost 7.24 million jobs since January 2008 (Excel) and the U.S. government has shed 89 thousand government jobs since September 2008 (another 21 thousand U.S. government jobs were lost in December). Jobs losses at this stage of the game are ominous news for the investors, politicians, and regulators that are collectively holding their breath waiting for recovery – they have been holding their breath for about 17 minutes versus David Blaine’s under water record of 17 minutes and four seconds.
In short, the U.S. economy must (and likely will) start producing jobs very soon, or the outlook for the U.S. financial markets and U.S. dollar could turn decidedly negative as policy makers reluctantly admit defeat and plan what is sure to be yet another borrow/spend exhale strategy.
BLS ~ Northern Trust Coverage
November 27, 2009
Dubai Contagion
It is a theme that is often repeated: borrow money to build something – anything – and hope that you can pay the money back some day. For Dubai, hope has turned to heartache as conglomerate Dubai World has asked creditors for a debt reprieve until May 2010. When things were booming Dubai World constructed the world’s tallest building and one of its subsidiaries, developer Nakheel, built a palm-tree shaped island. To state the obvious, these and other extravagant projects have not produced the expected returns. In fact, in the case of the iconic Palm Island, it hasn’t even been completed yet.
“When construction began in 2001, the project was the largest land reclamation venture ever, involving close to 100 million cubic metres of sand and seven million tonnes of rock.
The development was supposed to be finished in 2005 but it is still not done. When it is complete, about two million people will live on the island's 16 palm fronds and along the 11-kilometre surrounding crescent.
Nakheel is working on two other palm-tree-shaped islands nearby and another island project shaped like the globe.”
Globe & Mail
As interesting as it is to read about Dubai’s eye-catching property developments, the measly $59 billion in liabilities at Dubai world barely seems worthy of mention. And while under ordinary circumstances this would hold true, circumstances have hardly been ordinary. Instead the markets have been on a historic roller coaster ride – rapidly plunging in 2008 as the financial system teetered on the brink and then soaring after prices ‘bottomed’ in March 2009. Now, with an 8-month financial boom on the books, the possibility of Dubai’s debt problems marking the start of the greed/fear pendulum’s swing back in the other direction has entered into mind of investors.
In short, the $59 billion number is irrelevant. What other financial nightmares, if any, are about to be unleashed is what has everyone scrambling…
Dubai struggles to assuage debt fear Reuters
The announcement sowed fear of a contagion NYT
Dubai debt drama revives fears of contagion Times Online