Posts Tagged ‘financial crisis’

Must-read: How Goldman Sachs secretly bet on the housing crash

1 November 2009

. . . while selling $40 billion of mortgage-backed securities that it claimed were safe.  The article, by Greg Gordon of McClatchy Newspapers, is based on a five-month investigation.

Yves Smith at Naked Capitalism has a few words on the matter and on the article, here.

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Trophies for everyone!

26 April 2009

“Too big to fail” evidently means “too big to fail a stress test,” too.  Although the results of the recently conducted stress tests on the nineteen largest U.S. banks won’t be made public until May 4, the advance word on Friday, April 24 was a Whole Lotta RosieFrom the NYT:

‘On Friday, the Federal Reserve reported that the banks whose books it had analyzed recently had enough capital to offset a raft of new losses, . . .’

So everybody’s solvent!  And those toxic assets are both nutritious and delicious!  I bet my students would love it if I could get Tim Geithner or the Fed to write my final exams — nobody would be allowed to fail.

‘. . . reinforcing the belief that the government would support the largest banks even if their financial health eroded, and buoying the stock market.’

Um, didn’t the government already do that, to the tune of $700 billion, not counting the Fed’s waves of loan/subsidies?  But of course those subsidies came with some conditions, from the understandable ($500,000 pay cap) to the asinine (don’t hire no foreigners), so the big banks are naturally eager to pay back those loans and return to looting.  As long as they can still count on a fresh round of bailouts when their losses become too gaping to hide, they’re in a perfect position.  The old mantra of “privatize the profits, socialize the losses” doesn’t quite convey the apparent duplicity at work here.  It leaves out the “fabricate the profits” and “hide the losses” steps.

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Lies, damned lies, and bank profits

21 April 2009

Remember the good old days when “creative accounting” was an oxymoron?

Ever since Citigroup last month projected a profit for the first couple months of the year, big banks have been startling the Street with better-than-expected quarterly earnings reports.  And for a while, the Street was overjoyed and stock prices shot up for banks and overall.  But um, shouldn’t we have been taking these profit figures with a big grain of salt?

  • Advance manipulation (read: lowering) of expectations so that you can miraculously beat those expectations is an old, old game.
  • Accounting chicanery played no small part in getting us into the current mess.   Covering up losses to impress the market, just like covering up profits to thwart the taxman, is legal and commonplace, under generally accepted accounting practices.
  • An excessive focus on short-term profits also played a big part in getting us into this mess.  Shouldn’t we be looking at other factors, too?  In particular: Bank share prices were way down because of the widespread belief that the banks were either insolvent or headed that way.  Positive short-term profits (cash flow) and solvency (assets greater than liabilities) are two different things, and can coexist at least for a little while.
  • The federal government has subsidized the big banks to the tune of tens of billions of TARP money apiece.   Shouldn’t that make it easier for them to be profitable?  (The whole point was that the banks would loan that money out profitably.  Granted, that hasn’t happened to the desired extent — I just heard on the radio that total lending is lower now than before the TARP legislation — but banks are surely using their TARP money for something that generates income, like T-bonds, no?)

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Soros gets it right

9 April 2009

Yahoo Finance’s Tech Ticker has a nine-minute interview with George Soros, and a quick summary, here.

Nothing too shocking here, but on target and well stated.

Simon Johnson’s latest analysis of the situation is even better, though his assessment of the circle-the-wagons politics of it all is mighty bleak.  Don’t miss Johnson’s link to a January 2009 WSJ piece about financial economist Raghuram Rajan, one of the high-profile Cassandras who predicted the current implosion and who met a hostile “Jane, you ignorant Luddite” response from a star-studded 2005 gala of economists including Larry Summers.

(The money quote from Summers: “[I find] “the basic, slightly lead-eyed premise of [Mr. Rajan’s] paper to be misguided.”  Lead-eyed?  Not in the dictionary; seems to be a fishing term.  Maybe he said “Luddite” and was misquoted?)

Enlightened rant

27 March 2009

Glenn Greenwald’s recent missive on Salon, “Comparing the U.S. to Russia and Argentina.” With links to several favorites of this blog.

Killer documentary on the meltdown

3 March 2009

“Frontline’s” excellent hour-log documentary of the financial crisis, “Inside the Meltdown,” aired on PBS a few weeks ago.  I was pleased to find out just now that the whole thing is online and free.  I highly recommend it.

Blinder on blunders

2 February 2009

Alan Blinder has long been both one of the best policy economists and one of the best writers in the profession, so it’s no surprise that his recent New York Times column, “Six Blunders En Route to a Crisis,” has great pith.   He is fair-minded enough to “omit mistakes that became clear only in hindsight.”  The list, in his words:

wild derivatives, sky-high leverage, a subprime surge, fiddling on foreclosures, letting Lehman go, TARP’s detour.

For quick insights on the current crisis, it’s a great resource.

(Note:  The title I provide is the one from the print edition.  The online edition employs a more prosaic title that does not allude to either Pirandello or Nixon.)

Michael Lewis on the financial mess

5 January 2009

Great op-ed by Michael Lewis and David Einhorn, “The End of the Financial World as We Know It,” in Sunday’s New York Times.  Epic, too — two full newspaper pages.  I’ve been a big Michael Lewis fan ever since Liar’s Poker, but this is in a different category — not breezy and funny as usual, but serious and long on specifics.  Einhorn is a president of a hedge fund, so the relative wonkiness of the piece likely reflects his contribution.

Some highlights from the first half:

“Americans enter the New Year in a strange new role: financial lunatics.

“… the collapse of our financial system has inspired not merely a national but a global crisis of confidence.  Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?….

“The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.

“It’s not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.”

The first half also tells “the strange story of Harry Markopolos,” an officer at a Boston investment management company who blew the whistle on Bernard Madoff’s Ponzi scheme for nine years beginning in 1999 with repeated communications to the S.E.C. that got ignored.   (Lewis and Einhorn tout Markopolos as a natural for the S.E.C.’s next Chief of Enforcement.  If only.)

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I yield to my distinguished colleague, Senator Ricky Ricardo

16 December 2008
Lucy has some splainin to do

“Timothy Geithner, President-elect Barack Obama’s choice for Treasury secretary, has some explaining to do.” — editorial, New York Times, 15 Dec. 2008

“President-elect Barack Obama’s economic team is drawing mostly rave reviews, but some see too much of the old regime that helped get us into this mess.  In particular, Lawrence Summers and Timothy Geithner, nominated for the respective positions of National Economic Council Chairman and Secretary of the Treasury, have some explaining to do.” — the old version of this blog, circa 26 Nov. 2008

(No no no, I’m not accusing the Times of copying me.  If only.)

The Times‘ main beef with Geithner is that the Fed has been less than forthcoming, maybe less than truthful, in explaining why they let Lehman Brothers go bust and then bailed out AIG two days later.  The apparent inconsistency in saving one and not the other is one thing, maybe forgivable in view of what unchartered waters these were, but making up bogus excuses about a lack of legal authority to help Lehman is worrisome.

My beef had been about (1) Geithner’s drafting of the AIG bailout itself, which seemed to give no-strings-attached bailouts a bad name, and (2) his history as a protege of the deregulation-happy Robert Rubin in the Clinton Administration.   Chris Whalen, via Naked Capitalism, has the rundown on (1).

Overall, I’m confident that Geithner, as reported, is a bright guy who learns from his mistakes and, as president of the New York Fed, knows the tools of the trade as well as anybody.   And I doubt there’s anyone of similar experience whose record is spotless.  But the Senate will have to grill him on these matters.

Tom Tomorrow: the crisis in two cartoons

15 December 2008

This new one

and this old one (23 September 2008).

Right on target.  Simple, but illustrates the phenomenon that seems to underlie just about all of this:   the desire for reward without risk (not just a free lunch, but a delicious calorie-free lunch) on the part of investors who should know better, and the eagerness of investment managers without scruples to con them into thinking they had just the ticket for that.

The breaking story of the $50 billion Ponzi scheme run by former Nasdaq President Bernard Madoff seems to be rooted in the same.