W(h)ither Geithner and his TALF
Posted: April 23, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, U.S. Economy, Uncategorized | Tags: banks, Elizabeth Warren, TALF, TARP, Timothy Geithner Comments Off on W(h)ither Geithner and his TALF
Neil Irwin of WAPO reported today that the TALF is not having the results trumpeted by the Obama administration. This is leading, again, to speculation about the relevancy of most of these plans and, of course, job security of Treasury Secretary Timothy Geithner.
In its first two months, the government’s signature initiative to support consumer lending has fallen well short of expectations, deploying only a fraction of the amount officials had hoped to extend to stimulate auto loans, student loans and credit card lending.
The slow rollout of the program has frustrated staff at government agencies working on the effort and diminished hopes that they could engineer a rapid return to healthy lending levels, according to interviews with government and industry sources. The initiative also serves as a window into the complexities of designing a giant rescue of the financial system.
The TALF is the private-public partnership that couples the funds of private investors, like hedge funds, and the FED. The hedge funds invest small amounts that are matched by much larger amounts that would presumably come from the Treasury and Tax Payers if they wind up being nonprofitable. The combined funds will supposedly purchase non-toxic, virgin, high rated rated securities to fund everything from student loans and car loans to inventory and capital loans for business. As of yet, they really have failed to do so.
Officials envisioned TALF supporting tens of billions of dollars a month in new lending, saying it could eventually total $1 trillion. But in March, when it was launched, it backed only $4.7 billion in auto loans and credit cards. For April, it logged only $1.7 billion.
Sources involved in the program said private investors have been reluctant to work with the government, which they view as an unreliable business partner. Separately, the brokerage houses that are crucial intermediaries are being exceptionally cautious in the contracts they draw up with participants in the program, in part out of wariness that any mistakes could draw the ire of Congress or the media.
In congressional testimony on Tuesday, Treasury Secretary Timothy F. Geithner said that overall progress is “pretty good” for a program in its early days. Still, he acknowledged that participation was “lower than expected” because of “concern about the conditions that come with the assistance in the program . . . and uncertainty about whether they may change in the future.”
Meanwhile, on the bank front, stupid accounting tricks abound! Which begs the question is any one stupid enough to believe the numbers? Every large financial institution appears to be jumping on the band wagon of conveniently forgetting the month of December. What does this say about the state of public accounting today and Wall Street’s gulliblity?
Irrational numbers
Posted: April 21, 2009 Filed under: Equity Markets, Global Financial Crisis | Tags: behavioral economics, behavioral finance, Daniel Kahneman 7 Comments
I’ve sat in two doctoral level investment classes for my degree. It’s not one of my fields because I just don’t want to take the derivatives seminar. I actually have a lot of disdain for the field now that I’ve done the proofs on the major models. My ex husband worked 20 years for an insurance company in their investment department doing the real thing. It was one of the reasons I actually left him. I find the entire field pretty insufferable. Unfortunately, it’s also one of the highest paying fields you can have as an academic. It’s much easier to get big publications in Finance than Economics. That’s basically because there really isn’t an awful lot of theory in finance. It’s mostly data mining looking for some kind of theory. As you can probably tell by now, I’m not really popular with the Investment professors. They don’t understand me primarily because I’m not out to make money. (Well, that and I refuse to call Eugene Fama God) My research is always based on contrariness about the current asset pricing models we teach. I especially disdain the ones that we teach to MBAs and Finance majors.
A lot of Finance is based on two assumptions that I can’t buy. One is that the market follows a random walk. (This is Fama’s big contribution for which he expects to get a Nobel, but hasn’t managed to date.) A lot of time is spent looking at the equity markets saying you can’t beat the market or really forecast it because it’s a completely random series. The second is that the investor is a rational being. Most of the field total ignores the old Keynesian idea of ‘animal spirits’. That’s the idea that the market can get a herd mentality and spook at various events and move like a bunch of scared cows.
There’s a field in Finance that’s beginning to get a little bit of respect but still is considered a little out there. That’s probably, why it’s the only parts of Finance and Investment theory that intrigues me. It’s called Behavioral Finance. It looks for anomalies in the market and tries to find the reasons for them based more on human psychology rather than trying to just call them odd events. That’s why I was happy to read this account, Irrational everything, written by Guy Rolnik on Prof. Daniel Kahneman. Kahneman’s a collector of stories of irrational behavior when it comes to people and finance decisions. His voice would really add some flavor to the current collapse of modern finance. Here’s a non finance example that just tickles me every time I read it.
But the story Kahneman recalls when asked about the economic models at the root of the current financial crisis is actually taken from history, not an experiment. It concerns a group of Swiss soldiers who set out on a long navigation exercise in the Alps. The weather was severe and they got lost. After several days, with their desperation mounting, one of the men suddenly realized he had a map of the region.
They followed the map and managed to reach a town. When they returned to base and their commanding officer asked how they had made their way back, they replied, “We suddenly found a map.” The officer looked at the map and said, “You found a map, all right, but it’s not of the Alps, it’s of the Pyrenees.”
According to Kahneman, the moral of the story is that some of our economic models, perhaps those of the investment world, are worthless. But individual investors need security – maps of the Pyrenees – even if they are, in effect, worthless.
What are the Equity Markets Smoking?
Posted: April 13, 2009 Filed under: Bailout Blues, Equity Markets, U.S. Economy 2 CommentsI’m torn between relief at watching my 403(b) improve and wondering why the stock markets appear so oblivious to reality at the moment. Stock markets appear to be celebrating the loosened mark-to-market rules and only the Greater Ethos would know what else. (Perhaps Spring break and more Girls Gone Wild Videos in the offing?) During the 14 trading days prior to March 27th, the S&P 500 index jumped 21%. That would be akin to the steepest rally since 1938. At the same time, the corporate bond market saw 35 defaults. Moody’s stated that number of defaults has not been seen in single month since the Great Depression. The Economist (April 11, 2009), in the article Whistling in the Dark thinks Equity investors have been humming the Monty Python Classic.
As American companies begin the first-quarter earnings season, the news on that front is hardly encouraging either. Profits are forecast to be down by 37%, according to Bloomberg. That will be the seventh straight quarterly drop, the longest losing stretch since, yes, the Depression.
So what explains this dichotomy between share prices and fundamentals? Markets fell so far, so fast that they already reflected a lot of bad news. And prices rarely drop in a straight line. They often rebound as investors who have gone short (bet on falling prices) take profits. There were five rallies of 20% or more between 1930 and 1932, during the worst bear market in history.
So, who is right? I’m going with the bond markets. They usually have the inside track on what is going on with the companies themselves because they are, well, bond holders. At least Equity Market Volatility is down and the markets appear ready to acknowledge bottom shortly. This is better than the recent series of financial and economic variables that look more like the trails of lemmings over precipices than randomly varying series. Still, the bond markets and most economists are somber because the real numbers still aren’t pointing to recovery despite what Bernanke and POTUS say recently about Green Shoots and Glimmers of Hope.
But David Rosenberg of Bank of America Merrill Lynch, one of the few Wall Street economists to predict the current recession, is sceptical. He points out that although the Institute of Supply Management’s index of American manufacturing has rebounded from 32.9 to 36, the latter figure is still the fourth worst in the last 27 years. Capital Economics, a consultancy, says its recovery index suggests the probability that the American recession has ended is less than 10%.
Other indicators also cast doubt on the idea of a sharp rebound. The Baltic Dry Index of freight rates is seen as a measure of global trade activity (although it is also affected by the supply of shipping). It bottomed in December, a staggering 94% below the May 2008 high. From that point, it more than trebled by early March, a sign of a rebound in activity. But it has since resumed falling and is down by around a third in the last four weeks. Nor is there any sign of a big pickup in commodity prices; the Dow Jones AIG index is above its recent low on March 2nd but is still less than half last July’s peak.
Greenshoots or False Spring?
Posted: April 6, 2009 Filed under: Equity Markets, Festivities, Global Financial Crisis, U.S. Economy | Tags: altman, bernanke, cowen, Depression, greenshoot, recession, recovery, thoma Comments Off on Greenshoots or False Spring?
Miss Strawberry with the Winners of the Strawberry Bakeoff
I woke up this morning to a chill in the air. When I came back home from university today it was a chilly 60 in the house. There’s a frost warning for the North Shore and I had to put the heater back on and pull at the flannels. I walked the dog in a fleece jacket and had to put socks on. This weekend was just warm, sunny, and great and the Strawberry Festival was in full swing? WTF happened here in Southeastern Louisiana? One day I’m basking in the first hint of a warm sun enjoying fresh strawberry shortcake and the next I’m hoping that the magnolia blossoms are safe. Yes, there’s a Strawberry Queen, a Strawberry Ball, and Strawberry Royalty. If you gotta work somewhere, it might as well be the Strawberry Capitol of the Word.
So, having been raised in the Great Flyover and spent most of my childhood watching my Dad’s business sell F-150s to the local farmers, I know a lot about a false spring. That’s when Mother Nature messes with you by giving you just enough spring to think the worst of winter is over and then hits you with the cold blast of reality. Thankfully, my cold blast didn’t include the blizzard that hit the heartland, but it is a cold blast. That’s why I’m having so much fun with the economic word-de-jour. That would be Ben Bernanke’s “green shoots”. An Ivy-leaguer from South Carolina should know about about false springs. Bloomberg picks at the analogy too in Bernanke ‘Green Shoots’ May Signal False Spring Amid Job Losses.
April 6 (Bloomberg) — It will be months before it’s clear whether what Federal Reserve Chairman Ben S. Bernanke calls the U.S. economy’s “green shoots” represent the early onset of recovery, or a false spring.
The Labor Department’s April 3 report that the economy shed an additional 663,000 jobs last month, while the unemployment rate rose to 8.5 percent, will be followed by months more of bad-news headlines, economists say. The recession, now in its 17th month, has already cost 5.1 million Americans their jobs, the worst drop in the postwar era; unemployment may hit 9.4 percent this year, according to the median estimate in a Bloomberg News survey, and may top out above 10 percent in 2010.
The risk is that the jobs picture turns even more bleak than forecast or the drumbeat of bad news still to come causes consumers, whose spending has firmed up in recent months, to hunker down again.
“If something happens to spook consumers and they crawl back into their tortoise shells, that would be terrible news,” says Alan Blinder, former Fed vice chairman and now an economics professor at Princeton University.
Consumer spending, which accounts for more than 70 percent of the economy, rose 0.2 percent in February after climbing 1 percent in January, breaking a six-month string of declines.
Inquiring Minds also Blog
Posted: April 5, 2009 Filed under: Equity Markets, Global Financial Crisis, Team Obama, U.S. Economy | Tags: audit failure, bank bailout, bank failure, Elizabeth Warren, PKMG, regulator failure, Tyler Cowen Comments Off on Inquiring Minds also Blog
The two regulators who don’t appear captured by the regulated are both women. FDIC’s Sheila Bair has been quietly closely down the bankrupt quite efficiently and ensuring every one knows that the FDIC will stand by its insurance commitments. Elizabeth Warren who is the head of the group watching the TARP funds is calling this week for the ousting of derelict bank executives. This includes Citibank and AIG. Is this the beginning of High Noon on Wall Street?
Warren also believes there are “dangers inherent” in the approach taken by treasury secretary Tim Geithner, who she says has offered “open-ended subsidies” to some of the world’s biggest financial institutions without adequately weighing potential pitfalls. “We want to ensure that the treasury gives the public an alternative approach,” she said, adding that she was worried that banks would not recover while they were being fed subsidies. “When are they going to say, enough?” she said.
She said she did not want to be too hard on Geithner but that he must address the issues in the report. “The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous.”
Meanwhile, many finance and economics bloggers have looked into legal issues surrounding the Obama/Geithner bailout and believe laws are being broken. Both Boston Boomer and Sam point to this at George Washington’s Blog.
Geithner’s statements that he didn’t have the power to close down the big banks is false. Moreover, Geithner and Paulson actually broke the law which requires the government to close down insolvent banks, no matter how big.
The Prompt Corrective Action Law (PCA) – 12 U.S.C. § 1831o – not only authorizes the government to seize insolvent banks, it mandates it.
An earlier post here contains the interview with William K. Black, a senior regulator during the S&L crisis and Associate Professor of Economics and Law at the University of Missouri and Bill Moyers. Even more interesting news has appeared recently as it looks like regulators aren’t the only ones dropping the ball. Is this a repeat of the Aurthur Anderson/Enron failure of Public Accounting?
New Century, one of the country’s top subprime lenders, went bankrupt shortly after disclosing that its financial statements were misstated. Its creditors are now suing KPMG, New Century’s auditor, for at least $1 billion in damages. In the years leading up to the financial crisis, some of the nation’s largest accounting firms failed to properly examine the reserves that banks and other lenders set aside to cover losses, records from a federal oversight board show.
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