I don't see anyone looking at history here. Through Greenspan's term he tacitly allowed Wall Street Investment Banks dip into all aspects of finance. By 1999 Congress finished by overturning most of the regulations passed in 1934 to separate various forms of finance and avoid another 1929 style collapse.
JP Morgan, now has its hands in:
Retail banking, Mortgage Business, Home equity loans, Mortgage banking business, Corporate banking business, Private Equity investments, Asset management, Treasury and security services, Credit card business, Investment banking.
This is the SAME house of Morgan that vowed to return to it's former glory come hail or high water, through as many generations it takes.
Well it took less than a decade for them and every other Wall Street firm to totally greed themselves into a mess, this time with technology and products not dreamed of in the 1920's but with the same old formula, "sell junk debt and debt instruments to any idiot who will buy them and take a cut on every deal". I find it fascinating "smart" investors and "professionals" running hedge funds were stupid enough to be duped by these simple-minded 19th century egg heads.
Of course if you want to see how deep these firms are in debt markets tied to mortgages read this quote from Bloomberg:
“Merrill is at risk of losses from sub prime defaults because it participates as an investor, lender, counter party and guarantor in markets tied to mortgages. They include CDO underwriting, other structured credit products and leveraged finance, the firm said in the filing"
Unless Congress has the stomach to re-regulate these "pigs" for better lack of a word, we will not see the end of what we are seeing now until we have another "depression".
The "unregulated" world of finance controls more cash then the value of the stock market so don't be fooled into whether this thing goes up or down. The Stock market and many stocks in it are but puppets of this market now.
Monday, January 28, 2008
Unregulated Markets Risk
I have often discussed how the massive size of the unregulated financial markets pose multiple risks to the regulated financial markets. Today in the FT an article based on a recent study by a couple of academics, Henry Hu and Bernard Black, sheds some light.
See article here.
See article here.
Saturday, January 26, 2008
Soros does a nice summary...
The worst market crisis in 60 years
By George Soros --- Published: January 23 2008
The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.
However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.
Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral. Ease of credit generates demand that pushes up the value of property, which in turn increases the amount of credit available. A bubble starts when people buy houses in the expectation that they can refinance their mortgages at a profit. The recent US housing boom is a case in point. The 60-year super-boom is a more complicated case.
Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit.
Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced. The US current account deficit reached 6.2 per cent of gross national product in 2006. The financial markets encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared.
The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.
Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks' commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.
Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.
Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.
The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.
The writer is chairman of Soros Fund Management
FT Article
By George Soros --- Published: January 23 2008
The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.
However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.
Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral. Ease of credit generates demand that pushes up the value of property, which in turn increases the amount of credit available. A bubble starts when people buy houses in the expectation that they can refinance their mortgages at a profit. The recent US housing boom is a case in point. The 60-year super-boom is a more complicated case.
Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit.
Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced. The US current account deficit reached 6.2 per cent of gross national product in 2006. The financial markets encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared.
The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.
Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks' commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.
Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.
Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.
The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.
The writer is chairman of Soros Fund Management
FT Article
Wednesday, January 23, 2008
Personal Note on Fed / Markets
Well Fed bailed us out again. Only this story has not worked in past few months so there is much to be seen. I think there has been some real pain over the past 2 weeks that may take longer to heal. My bad days were over a week ago. I had several puts expire worthless or I sold them Monday and Tuesday last week only to see them triple or more in value in the 3 following days... Timing is everything and I have been trying to short this market for months only to have the Fed bail it out over and over. Needless to say, I have had marginal success since September. It seems they are looking at my cards. All was great until the big fall bounce which came out of nowhere and should have never happened. Still trying to figure it out.
Anyway, If we really do get another .50 cut in a week the Fed will have made a really big mistake, bigger then the radical rise for 18 months (from 2004-06) and subsequent market bail out moves since. The US overturned the banking laws enacted in the 1930's here in 1999. It only took a few years for Wall Street to make a mess of finance again. I cannot believe the rest of the world, especially Europe, fell for the same thing they fell for nearly a hundred years ago, buying garbage debt and debt products from New York money centers (I cannot bring myself to call these organizations "banks". It would be an insult to the term.).
They all deserve to take their losses big and the Fed is making a big mistake flooding the markets with liquidity and dropping rates in big moves.
Having said all this, I learned a long time ago (although many time tested strategies have been destroyed lately), you cannot fight the interest rate move.
Anyway, If we really do get another .50 cut in a week the Fed will have made a really big mistake, bigger then the radical rise for 18 months (from 2004-06) and subsequent market bail out moves since. The US overturned the banking laws enacted in the 1930's here in 1999. It only took a few years for Wall Street to make a mess of finance again. I cannot believe the rest of the world, especially Europe, fell for the same thing they fell for nearly a hundred years ago, buying garbage debt and debt products from New York money centers (I cannot bring myself to call these organizations "banks". It would be an insult to the term.).
They all deserve to take their losses big and the Fed is making a big mistake flooding the markets with liquidity and dropping rates in big moves.
Having said all this, I learned a long time ago (although many time tested strategies have been destroyed lately), you cannot fight the interest rate move.
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