Scene: Harvard economics class in 2020 taught by Ben Bernanke. After a late night of studying, a student falls asleep in class. This sent Bernanke into a frenzy and he came over and pounded on the desk, demanding an answer to a question he had just posed. The student, shaken but now awake says “I’m sorry Professor, I missed the question — but the answer is increase the money supply…”
Can the US default?
April 1st, 2010 by Dina No comments »Bill Gross doesn’t think so… well, kinda. In his latest commentary, he asks if a country can get out of a financial crisis by issuing more debt, and believes that it can as long as it meets three conditions:
1. Can a country issue its own currency and is it acceptable in global commerce?
2. Are a country’s initial conditions (outstanding debt, structural deficit, growth rate, demographic balance) moderate and can it issue future public debt as a substitute for private credit?
3. Can a country’s central bank be allowed to reflate via low or negative real interest rates without creating a currency crisis?
Based on this, its fairly safe to say that the US won’t default on it’s debt, but Treasury bonds are a far cry from good investment, especially given the deficit, which, in the end, may need to be solved by printing more money. And that thing called ObamaCare certainly won’t help.
On a side note, last month Gross talked about how corporate spreads may be tightening as sovereigns become riskier and there may be a “unicredit bond market.” Interesting point – which would be safer: a global AAA-rated corporation that is essentially currency-independent or a country with trillions of dollars of debt?
innovative marketing by smith & wollensky
February 21st, 2010 by Avi 1 comment »http://www.steakforstock.com/
This highly regarded and prestigious steakhouse in midtown is adapting to the changing times. Now you can buy your excellent steak in exchange for stock. I guess the barter system is partially back. For instance one share of Citigroup will buy you 1/2 an order of creamed spinach. But a share of JP Morgan will get you a lobster tail. Hm a new valuation tool?
Wall Street vs. Pennsylvania Avenue
February 21st, 2010 by Sooyun No comments »In the wake of a financial crisis, the movers and shakers on Pennsylvania Avenue, Washington D.C. are reforming Wall Street as we know it. Or at least they’re trying to. Two years have passed since the financial meltdown, and about one years has passed since the swearing in of a promising new U.S. president who vowed to fight the evils of the banking industry, yet nothing has really changed.
New stories about the latest proposal being mulled over within the chambers of the White House pop up every day. Here’s some of the proposals being thrown around:
- Securitization: A proposal to limit the number of tranches allowed in mortgage-securitization transactions as well as for originators to keep skin in the game by keeping more of the securities on their books.
- Privatization of GSEs: The House Financial Services Committee plans to hold hearings to discuss privatization of Fannie and Freddie, which is a step towards taxpayers not having to be liable for funding government bailouts of too big to fail institutions.
- Bank tax: Obama has proposed a 10-year tax on the country’s largest banks to cover a projected $117 billion shortfall in the fund set aside for government bailouts.
- Bonus caps: As many of the banks that received TARP money pay back the loans and become free of federal compensation regulations, the Obama administration would like to see a more permanent, consistent way of regulation compensation.
- Other grandiose promises: forming one streamlined committee that would oversee and monitor system risk in the banking industry and have executive power over myriad government-financial agencies, like the SEC, the Fed, the Treasury, etc.
And only a few weeks ago, there was some commotion over Obama’s potential ban on proprietary trading at investment banks. Whatever came of that? …Whether prop trading will really be banned or not still remains to be seen, depending on how successfully the proposal passes through Congress.
Basically, whatever comes of ANY of these proposals depends on how successfully they get through Congress. And given the track record of financial reform proposals, it doesn’t look like many of them will. Only the other week, Senator Chris Dodd, head of the Senate Banking Committee, complained of the “army of lobbyists” being sent to Washington from Wall Street firms “whose only mission is to kill the common-sense financial reforms”. With the likes of banks like Goldman Sachs protesting every governmental effort to regulate the Street, like they did with the prop trading ban, Congress remains in deadlock. We won’t even mention Congress’s long-time incestuous relationship with Wall Street (Every election cycle, financial institutions pour loads of campaign money into politician’s coffers). Maybe, just maybe, that could serve to illuminate why financial reform simply hasn’t happened.
Senate Banking Committee head Chris Dodd (R) blames Congress's financial reform failures on the Street's refusal to cooperate
During the New Deal, when FDR created a new regime to regulate the banking system, the FDIC renewed confidence in the banking system, the formation of the SEC gave protection to public investors, and the Glass-Steagall Act separated federally insured commercial banks from the investment banks. His sweeping reforms may very well have saved capitalism, let alone the nation itself. Right now, I’m not seeing the same kinds of drastic changes that need to be made in order to protect the integrity of the national/global financial system. I’m only seeing a deadlocked Congress, and a lot of rosy reform proposals that don’t go anywhere. Until our good ol’ cronies on Pennsylvania Avenue stop bickering amongst each other and figure out a way to wiggle free from the clutches of Wall Street, I’m going to take all these proposals with a grain of salt.
Greece and Swaps
February 10th, 2010 by Avi No comments »http://www.spiegel.de/international/europe/0,1518,676634,00.html
Greek Debt Crisis
How Goldman Sachs Helped Greece to Mask its True Debt
By Beat Balzli
Greek Finance Minister George Papaconstantinou speaking at a conference in January.
Zoom
dpa
Greek Finance Minister George Papaconstantinou speaking at a conference in January.
Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country’s already bloated deficit.
Greeks aren’t very welcome in the Rue Alphones Weicker in Luxembourg. It’s home to Eurostat, the European Union’s statistical office. The number crunchers there are deeply annoyed with Athens. Investigative reports state that important data “cannot be confirmed” or has been requested but “not received.”
Creative accounting took priority when it came to totting up government debt.Since 1999, the Maastricht rules threaten to slap hefty fines on euro member countries that exceed the budget deficit limit of three percent of gross domestic product. Total government debt mustn’t exceed 60 percent.
The Greeks have never managed to stick to the 60 percent debt limit, and they only adhered to the three percent deficit ceiling with the help of blatant balance sheet cosmetics. One time, gigantic military expenditures were left out, and another time billions in hospital debt. After recalculating the figures, the experts at Eurostat consistently came up with the same results: In truth, the deficit each year has been far greater than the three percent limit. In 2009, it exploded to over 12 percent.
Now, though, it looks like the Greek figure jugglers have been even more brazen than was previously thought. “Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future,” one insider recalled, adding that Mediterranean countries had snapped up such products.
Greece’s debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period — to be exchanged back into the original currencies at a later date.
Fictional Exchange Rates
Such transactions are part of normal government refinancing. Europe’s governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.
But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.
This credit disguised as a swap didn’t show up in the Greek debt statistics. Eurostat’s reporting rules don’t comprehensively record transactions involving financial derivatives. “The Maastricht rules can be circumvented quite legally through swaps,” says a German derivatives dealer.
In previous years, Italy used a similar trick to mask its true debt with the help of a different US bank. In 2002 the Greek deficit amounted to 1.2 percent of GDP. After Eurostat reviewed the data in September 2004, the ratio had to be revised up to 3.7 percent. According to today’s records, it stands at 5.2 percent.
At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.
The bank declined to comment on the controversial deal. The Greek Finance Ministry did not respond to a written request for comment.
Snow Day!!!
February 10th, 2010 by Daniel No comments »In light of classes being canceled today let’s take a look at what the market has been hyperventilating against for the past few weeks – the Greek debt situation. The pundits on TV have labeling the situation as “insignificant” to the “beginning of the end for the Euro”, and everything in between.
Let’s take a look at this in a more objective manner. Here are a few my thoughts on the fact
- Greece is indeed in a bad fiscal situation, but what has happened is far from unique
- Greece accounts for a mere 3% of the Eurozone GDP
- The last time I checked, the beautiful state of California is in a similar situation with a budget gap of $22.2 billion
- Remember, CA is the world’s 8th largest economy (the size of France!) while Greece ranks #33
- How come no one is talking about the CA crisis???
- There is simply no way the EU will allow Greece to exit the Euro, a bailout of some sort will be in order
- Most likely, help will come in the form of a debt guarantee through the ECB after demanding a pound of flesh from the Greek government in terms of fiscal reform
- The market is NOT hyperventilating about the actual dollar amount or what actually occurred in Greece but the larger implications of such a bailout
- A bailout for Greece will spur requests for aid from other struggling Eurozone countries
- For years the EU has allowed the PIIGS (Portugal, Italy, Ireland, Greece, Spain) lots of leeway in terms of fiscal policy despite their prior commitment to contain deficit to 3% of GDP upon joining the Eurozone. The PIIGS routinely ran double digit deficits.
- Investors are concerned about the grand experiment that the Euro essentially is: can a group of countries with independent fiscal policies but a common monetary policy form a common currency??
It’ll be interesting to see how this plays out.
iPad
February 2nd, 2010 by Andrew No comments »Kicking off 2010 with record high earnings, Steve Jobs completely overshadowed Apple’s achievement by releasing his newest brainchild to the world, the iPad.
“Last time there was this much excitement about a tablet, it had some commandments written on it.” -WSJ
Lightweight and powerful, the iPad is Steve Job’s perfect amalgamation of the laptop and the smartphone. Jobs argues that netbooks, which claim to draw from the benefits of both devices, can’t do what a laptop does best, and can’t do what a smartphone does best. Thus, replacing the netbook in its specialty niche between the two, Jobs markets the iPad for its capacity to browse the internet, send emails, share photos, watch videos, listen to music, play games, and read ebooks, ALL better than both the laptop and the smartphone. As Jobs said in Apple’s January Event, “Netbooks are slow, have low-quality displays, and they run clunky, old PC software, so they’re not better than a laptop at anything. They’re just cheaper.”
And while I appreciate the $500 price point for a 10-hour battery 16GB non-3G iPad, I don’t necessarily buy Jobs’ pitch for the iPad.
Essentially, I see the current first generation of iPad as an overgrown iPod Touch (with the capacity for 3G if you want to pay up). Obviously its robust hardware and what looks to be a beautiful screen beat out the iPod Touch irrefutably, but the iPad does not revolutionize the netbook market- an evolution perhaps, but not a revolution. And it’s not that I don’t love Apple products. Unfortunately, I too have fallen prey to Steve Jobs, the quintessential snake oil salesman, and I’m sure by the time a few revisions are put into the iPad I too will be cradling my beautiful tablet. But, as my primary gripe about the current iPad, without the capacity to multitask, the iPad is just a nice paper weight. Without the ability to go to on the web to stream music on Pandora while reading my ebook, or going over my PDF’d notes while buying songs off the iTunes Music Store… well, the iPad is useless.
So, while I don’t see iPad sales bolstering Apple’s stock price any time soon with this current generation, like I said, Steve Jobs, the quintessential snake oil salesman, always seems to make people need things they didn’t even know they wanted. In fact, I’m sure my first, second, and third generation iPods can speak to that fact…
Look Out Below!
January 29th, 2010 by Daniel No comments »So there goes our support at 1085 on the SPX as I mentioned a few days ago. If the market cannot bounce into the close, from a technical analysis point of view, the chart looks very ugly as the uptrend since August of last year has been broken. Today’s reversal is particularly disturbing given a series of good news such as Helicopter Ben’s reappointment for another term and a surprisingly strong advance Q4 GDP at an emerging-market-like 5.7%.
Look out below!
