Monthly Archives: December 2009

Bond Investors Beware – Don’t Underestimate Current (Escalating) Risks — Seeking Alpha

The 2007-2009 global financial panic and collapse provided investors with a once in a lifetime rollercoaster ride as all asset classes except for treasury bonds dropped to extreme lows. A vast spectrum of emotions accompanied investors on this thrill-ride and not surprisingly many of these emotions are shaping investors’ current investment decisions.

In a search for safety and income, investors are stampeding into the apparent safety of government bonds and bond mutual funds. Over the last year, bonds have been purchased in record amounts despite historic low interest rate levels. It is likely that many of these investors do not understand the risks in bonds. These investors, with a false sense of security, are unknowingly setting themselves up for another rough rollercoaster ride ahead.

Warning Sign: High Level of Flows to Bond Funds

Despite the remarkable rally in stocks over the last nine months, the distrust in equity markets is still widespread. The cash flow figures into bond mutual funds this year illustrate this point (click on chart below) as almost $313 billion has been invested in bond funds compared to the $2 billion added to stock funds through October. In addition, insignificant yields on money market funds are testing investors’ patience and are yet another reason for the remarkable cash flow into bonds.

History shows that cash flows to mutual funds tend to follow strong outperformance by a particular asset class and can provide a contrarian warning sign when a particular class is becoming too popular.

via Bond Investors Beware – Don’t Underestimate Current (Escalating) Risks — Seeking Alpha.

via Bond Investors Beware – Don’t Underestimate Current (Escalating) Risks — Seeking Alpha.


Can Wall Street Save the World? – Tobin Tax

When President Obama wrangled an agreement in the waning hours of the Copenhagen climate change summit, left unsaid was how agreed-upon subsidies from wealthy nations to poor nations will be paid.

The ambiguity of the agreement, which calls for $100 billion to be doled out annually beginning in 2020, along with an appeal from several European Union members to tap into the financial markets, has given momentum to the prospect of a worldwide financial transaction tax to help pay the freight for climate change solutions.

Supporters say the money would be a boon to the environmental movement, helping developing nations deal with the ramifications of climate change.

“We support the fund, and we think it needs to be paid for and we think the U.S. ought to do its part,” said Bob Deans, of the National Resource Defense Council. Deans said the council has not taken a specific position on the tax, adding that it is one of many ways aid to developing nations could be funded. “There are several hundred million people right now dealing with the ravages of climate change, so we feel this needs to be funded in some way.”

If imposed, the tax would tack on a fee – 0.25% is the number mentioned most, but some envision it as high as 0.5% – to most financial transactions worldwide, including stock and bond purchases, currency transactions and derivative trades.

Estimates from various groups put the amount of potential revenue from the tax in the hundreds of billions of dollars annually, with more than $170 billion coming from the United States alone.

Also known as the Tobin tax, it is named for late economist James Tobin, who first proposed it in the 1970s when the United States abandoned the gold standard for its currency. Tobin theorized that an additional fee on currency transactions would discourage speculators and keep exchange rates stable.

via Can Wall Street Save the World? –

via Can Wall Street Save the World? –

Bank Bailouts –

In September 2008, as the worst of the financial crisis engulfed Wall Street, George W. Bush issued a warning: “This sucker could go down.” Around the same time, as Congress hashed out a bailout bill, New Hampshire Sen. Judd Gregg, the leading Republican negotiator of the bill, warned that “if we do not do this, the trauma, the chaos and the disruption to everyday Americans lives will be overwhelming, and thats a price we cant afford to risk paying.”In less than a year, Wall Street was back. The five largest remaining banks are today larger, their executives and traders richer, their strategies of placing large bets with other peoples money no less bold than before the meltdown. The possibility of new regulations emanating from Congress has barely inhibited the Streets exuberance.But if Wall Street is back on top, the everyday lives of large numbers of Americans continue to be subject to overwhelming trauma, chaos and disruption.It is commonplace among policymakers to fervently and sincerely believe that Wall Streets financial health is not only a precondition for a prosperous real economy but that when the former thrives, the latter will necessarily follow. Few fictions of modern economic life are more assiduously defended than the central importance of the Street to the well-being of the rest of us, as has been proved in 2009.Inhabitants of the real economy are dependent on the financial economy to borrow money. But their overwhelming reliance on Wall Street is a relatively recent phenomenon. Back when middle-class Americans earned enough to be able to save more of their incomes, they borrowed from one another, largely through local and regional banks. Small businesses also did.Its easy to understand economic policymakers being seduced by the great flows of wealth created among Wall Streeters, from whom they invariably seek advice. One of the basic assumptions of capitalism is that anyone paid huge sums of money must be very smart.

via Bank Bailouts –

via Bank Bailouts –

Trading Profits Up 11 Percent For Banks; JPMorgan Chase Leads The Way

Despite controversy surrounding the financial instruments known as derivatives — and legislation that might finally start to regulate them — the nation’s top five banks are, for now, maintaining their stranglehold on the derivatives market, accounting for 97 percent of the $204.3 trillion in total volume last quarter, the Office of the Comptroller of the Currency reported Friday.

The lobbyists for the nation’s biggest banks are fighting ferociously against legislation that would regulate the over-the-counter derivatives market. What is now essentially a market in which traders deal directly with one another would instead be diverted to public exchanges or other central facilities, though major loopholes remain.

Overall, the nation’s banks saw an 11 percent increase in their trading revenue last quarter, turning a $5.7 billion profit — their fourth-best quarter ever.

JPMorgan Chase led the way in the third quarter, making nearly $3.1 billion off its trading and derivatives activity, a 60 percent increase from the previous quarter. The banking behemoth has earned more than $8.1 billion trading thus far this year, already eclipsing its year-end totals for each of the last two years.

Goldman Sachs’s profits declined 37 percent to $691 million, due to big losses on its foreign exchange trading, according to the report. Those losses were hedged by profits on interest rate contracts, but they weren’t enough to make up for the substantial decrease in overall profits.

Citibank continues to lose money off its trading and derivatives contracts. The partially-taxpayer owned bank lost $211 million last quarter and $238 million in the second quarter, the report shows.

Bank of America made $467 million last quarter, a $650 million swing from its second-quarter loss. Wells Fargo, on the other hand, turned a loss, losing $78 million in the third quarter compared to its $306 million profit during the second quarter.

At Goldman Sachs, trading continues to make up a significant part of the banks’ profits. Trading revenue accounts for 59% of Goldman Sachs’ overall revenues, according to the report.

via Trading Profits Up 11 Percent For Banks; JPMorgan Chase Leads The Way.

via Trading Profits Up 11 Percent For Banks; JPMorgan Chase Leads The Way.

Robert Reichs Blog: The Great Disconnect Between Stocks and Jobs

The result, overall, is an asset-based recovery, not a Main Street recovery. Yes, the economy is growing again, but the surge in productivity is a mirage. Worker output per hour is skyrocketing because companies are generating almost as much output with fewer workers and fewer hours. The Fed, meanwhile, has become an enabler to all this, making it as cheap as possible for companies to axe their employees. Money costs so little these days it’s easy to substitute capital for labor. It’s also easy to buy up foreign assets with cheap American money. And it’s now blissfully easy for Wall Street to borrow money almost free and buy all sorts of interests in foreign assets, especially commodities. Thats why were seeing the prices of foreign commodities and other assets go through the roof. At the same time, the Treasury continues to be fixated on keeping banks afloat. The Administrations mortgage mitigation efforts are lagging. Small businesses are starved of credit. The White House has announced a “jobs summit,” which is better than nothing but not nearly as good as pushiing immediately for a larger stimulus, a new jobs tax credit, and a WPA-style jobs program. The Fed and the Teasury have, in effect, placed a huge bet on a recovery driven by asset prices. That’s a bad bet. The great disconnect between the stock market and jobs is pushing stock prices way out of line with the real economy. This isnt sustainable.

via Robert Reichs Blog: The Great Disconnect Between Stocks and Jobs.

via Robert Reichs Blog: The Great Disconnect Between Stocks and Jobs.

Keep Wall Street risks away from Main Street |

The four biggest banks — JPMorgan Chase, Citigroup, Bank of America and Wells Fargo –now control more than two-fifths of all bank deposits, more than 66 percent of all credit card accounts and more than half of all mortgages in the U.S.Unfortunately, they also run trillions of dollars in risky trading ventures that could blow up in our faces again.We need to keep risk where it belongs — on Wall Street — and security where it matters — on Main Street. That way, if the derivatives cowboys want to take obscene risks, they can but without driving the rest of us to the brink of financial oblivion.

via Keep Wall Street risks away from Main Street |

via Keep Wall Street risks away from Main Street |

A Practical Way to End “Too Big to Fail”

If forcing breakups isn’t realistic, what is? One solution is to simply give banks an incentive to downsize. Philip Purcell proposed a practical way to do so earlier this week in the Financial Times.

Purcell, if you’re curious, is the former chairman and CEO of Morgan Stanley (NYSE: MS), and an unsung hero in my book. In 2005, he was ousted primarily because he wasn’t willing to engage in reckless risk-taking. He understood how dangerous it was.

But swinging for the fences was fun back then, so Purcell was replaced with current CEO John Mack, who swung wildly. Risk-taking ratcheted up. Three years later, the firm was nearly bankrupt. A coincidence, I’m sure. �

The answer

Anyway, Purcell’s op-ed in the Financial Times recommends a doable approach to overcoming “too big to fail.” In his own words:

Smaller banks are now required to have 8 per cent tangible equity per dollar of assets (the leverage ratio). This stronger capital structure will reduce bank failures.

Too-big-to-fail institutions, however, should have a higher ratio of 10 to 12 per cent … The public bears the cost of too big to fail. Since capital is the public’s main protection, it should be high.

via A Practical Way to End “Too Big to Fail”.

via A Practical Way to End “Too Big to Fail”.