Tuesday, March 31, 2009
The rest is misery.
Now, reports FT.com, London's Big Bangers think they might need to enact something like … Glass Steagall.
If bond salespeople and brokers should once again be banned from commercial banks here and abroad, could bank investment advisory services make a comeback?
Monday, March 30, 2009
The trial is expected to last six months and involve some 60 witnesses, including Henry Kissinger. The mainstream media may have a profitable summer after all.
Shiller says we have to take this psychology into account when creating solutions, but he doesn't say what that means. Based upon today's stock market, I'm guessing that having the President decide who will head a car company is not the answer.
Saturday, March 28, 2009
Always? Within asset classes, much of the variation in returns seems to relate to expenses:
Let's say you tell your broker that you want to simplify your stock portfolio into an index fund. He then tells you that his firm manages an S&P-500 Index fund that is "suitable' for you. He is under no obligation to tell you that the annual expenses that his firm charges on the fund are 10 times higher than an essentially identical fund from Vanguard. An adviser acting under fiduciary duty would have to disclose the conflict of interest and tell you that cheaper alternatives are available.Where could this line of thought lead? Are trustees of 401k plans breaching their fiduciary duty if they allow a high-cost insurance or brokerage firm to handle the participants' investments?
Friday, March 27, 2009
It's today's sun. What's interesting is that there are no sunspots. As you may know, the number of sunspots rises and falls on a very regular 11-year cycle. We should have been getting more sunspots last year, but we didn't. NASA reports that its been almost 100 years since the sun has been so spotless, and 2008 was already the most spotless year of the space age.
Two years of spotlessness. So what?
Here's a graph of climate change from a post at PowerLine:
Note the "Little Ice Age" of the 1600s. It coincides with something called the Maunder Minimum, an extended period when, for unexplained reasons, there were no sunspots. We could be entering a new Little Ice Age, based upon the sun's current inactivity. However, scientists are still debating that relationship—the Little Ice Age started before and ended after the Maunder Minimum, but the minimum was its coldest part.
If it seems like the winters are getting colder, it may not be your imagination. Can we hold off on that new carbon tax until we get more data?
Thursday, March 26, 2009
*CDOs are derivatives consisting of packages of debts derived from mortgage loans, commercial loans, etc. So we're dealing with derivatives of derivatives of derivatives? I'm too old for this!
You can't just manipulate a $62 trillion market for derivatives. So what did the bears do? They looked and found an asymmetry to exploit in those same credit default swaps. If you bid up the price of swaps, because markets are all linked, the higher likelihood (or at least the perception based on swap prices) of derivative defaults would cause the value of these CDO derivatives* to drop, thus triggering banks and financial companies to write off losses and their stocks to plummet.
General Electric CEO Jeff Immelt famously complained that "by spending 25 million bucks in a handful of transactions in an unregulated market" traders in credit default swaps could tank major companies. "I just don't think we should treat credit default swaps as like the Delphic Oracle of any kind," he continued. "It's the most easily manipulated and broadly manipulated market that there is."
Those mere millionaires we mentioned recently really are moving down-market.
Wednesday, March 25, 2009
Is the disparity as great at the ten-figure level? Do mere billionaires envy James Simon, John Paulson, John Arnold and George Soros? That foursome of hedge fund managers, The New York Times reports, enjoyed ten-figure earnings last year.
Lets hope institutions that lost billions take the hedgers' windfalls philosophically. As Gertrude Stein observed, "Money is always there, but the pockets change."
We are in a recession and, at times like these, it is difficult to predict how bad and for how long. We are running GE to “weather the cycle.” However, I believe we are going through more than a cycle. The global economy, and capitalism, will be “reset” in several important ways.
The interaction between government and business will change forever. In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner.
The financial industry will radically restructure. There will be less leverage, fewer competitors, and a fundamental repricing of risk. It will remain an important industry, just different.
There are other resets as well: the diminished role of the automotive industry; a prolonged downturn in housing; a decline in the prominence of alternative investments; and the nature of executive responsibility and compensation.• • •I run a global company, but I am a citizen of the U.S. I believe that a popular, thirty-year notion that the U.S. can evolve from being a technology and manufacturing leader to a service leader is just wrong. In the end, this philosophy transformed the financial services industry from one that supported commerce to a complex trading market that operated outside the economy. Real engineering was traded for financial engineering. In the end, our businesses, our government, and many local leaders lost sight of what makes a nation great: a passion for innovation.
To this end, we need an educational system that inspires hard work, discipline, and creative thinking. The ability to innovate must be valued again.
Here's what the CBO says now about the future budget deficits:
Keep in mind, these are based upon the rosy scenario that we return to nearly 3% annual GDP growth.
ADDED: Martin Sullivan, who writes analyses for Tax Notes, is no right-winger. He suggests that March 20, the day the CBO analysis was released, is the official end of the Obama honeymoon (link requires subscription). He concludes:
When we are talking about stimulus spending, even most Republicans will give the administration a pass on large deficits. But it is an entirely different story when it comes to spending after the recession. It is the consensus view -- and it was the administration's view -- that extra efforts for deficit reduction were required after the recession was over.
Now that the CBO has let the cat out of the bag, the president -- if he is going to lead -- must be explicit about how he plans to balance the trade-off between fiscal sustainability and his plans for long-term spending. He cannot simply dismiss the CBO numbers and hope they are wrong.
Tuesday, March 24, 2009
Despite the Federal Reserve Board's latest attempts to stimulate the housing market, home lenders are keeping rates artificially high to control the volume of refinancing ...Are large financial institutions of all stripes doomed to a decade of scorn, mistrust and populist regulation? If so, could community banks and small investment-advisory firms reap benefits?
Monday, March 23, 2009
In The New Yorker, Woody Allen imagines two Madoff victims who lose their lives after losing their money and return reincarnated as…lobsters!
The pair are captured and end up tanked in a New York restaurant. Who walks in and selects the pair for his dinner? Madoff, of course:
Moscowitz and Silverman, their ire reaching cosmic dimensions, rocked the tank to and fro until it toppled off its table, smashing its glass walls and flooding the hexagonal-tile floor. Heads turned as the alarmed captain looked on in stunned disbelief. Bent on vengeance, the two lobsters scuttled swiftly after Madoff. They reached his table in an instant, and Silverman went for his ankle. Moscowitz, summoning the strength of a madman, leaped from the floor and with one giant pincer took firm hold of Madoff’s nose.We have about a dozen lobster boats in the harbor at the moment. How cool to think one of them sent Moscowitz and Silverman on their mission.
It has long been observed that if one had the magic secret to investment success, sharing the secret publicly would necessarily destroy the magic, as everyone tried to follow the formula. The article hints that Swenson deliberately did not follow his own rules, he deliberately built a cash reserve, which he is now going to use to buy up assets from other endowments being unloaded at distress prices.
Perhaps his sharing of his brand of investment magic, which seemed to be against his own self interest, was Swenson's way of legally manipulating the markets?
When the Yale endowment reach $10 billion, Nobel laureate James Tobin wrote a limerick for Swenson called “Son of Sven”:
A young Viking, a badger called DaveOne can't argue with success.
Determined poor Eli to save
First he’d be
And then make those markets behave.
Clements points out that many people with salaries way below the cap could be hit by the 90% tax based upon a spouse's income, or investment earnings. Good point. He also says that some people defer much of their bonus into a 401(k) plan, and that has already happened for the January payments (which would be hit by the new tax). Apparently the 401(k) tax deferral does not extend to this 90% bonus tax. Wow. So those people will be required to come up with 90% of their deferral to keep the 401(k) contribution, or ask for a premature distribution. Super idea!
The Clements plan for avoiding the problem is to take an unpaid sabbatical, beginning about October, to keep his non-bonus income below the magic $250,000 level. He'll have to curtail spending to make this work. As he says, good for him, not so good for the economy.
I suspect cooler heads will prevail this week.
Somehow the story of Morgan's nerve never gets old. I had to chuckle when I read the following:
His power in 1907 derived not from the size of his own fortune but from the trust placed in him by investors, other bankers and international statesman. After Morgan died in 1913, the newspapers reported his net worth as about $80 million — roughly $1.7 billion in today’s dollars. John D. Rockefeller, already worth a billion in 1913 dollars, is said to have read the figure, shaken his head, and remarked, “And to think he wasn’t even a rich man.”
Friday, March 20, 2009
... Michael Serricchio, 35, was a financial adviser for Prudential Securities in Stamford when he became one of the first National Guard members and reservists activated after the terrorist attacks. Wachovia acquired Prudential's brokerage division before Serricchio returned in 2003.***"We are considering our options, including a possible appeal," said a Wachovia spokesman.
Wachovia offered him a reduced position four months after he returned and told him he would have to rebuild his client base, which a jury determined in June violated a rule requiring employers to maintain positions for serviceman called away on active duty.
Judge Janet Bond Arterton of U.S. District Court in New Haven ruled Serricchio should receive about $800,000 in back pay, interest and damages. Wachovia also must pay Serricchio's court costs and fees, which his attorneys estimated to be more than $500,000.
"Even after the jury ruled in our favor, Wachovia took the position that they didn't do anything wrong, that they didn't owe him a penny in back pay," said Serricchio's attorney, David Golub.
In whose hands will much of this investable wealth end up, assuming it doesn't stay in home safes?
[T]he real question isn’t so much who gets the money but who gets the business model. The wealth-management industry is in turmoil as it tries to figure out how to win back client trust and guide them through a drastically different investment landscape–one in which municipal bonds are the new hedge funds.***That "most important" requirement is interesting. It can be met in two ways.
The winners will be the firms that are committed to independent advice, deliver on the services they promise and (this is the most important) actually understand the products they are selling to their clients.
1. The David Swensen way: Yale's endowment seems to have flourished (until the current fiscal year) thanks to rigorous, sophisticated analysis of varied and complex asset classes and those who manage such assets. If you have the brains, the team and the resources needed to understand almost any investment, you can invest in almost anything.
2. The Warren Buffett way: He missed the tech boom of the 1990s because he didn't understand tech and didn't want to try. He also missed the dot.com bust. If you limit your choices to investments you can understand, you're not blindsided by investments you didn't understand.
Will both models coexist? Which will prove sexier to market?
Who could have guessed that this chain of events would boost the local economy in and around Fairfield County, Connecticut? More demand for bodyguards…security services…alarm systems!
Yet that is the likely result, judging from this New York Times story. Death threats and vicious condemnation by locals are being rained upon the hapless AIG threesome we previously mentioned, as well as others. If the names of recipients of bonus bounty at Merrill Lynch are publicized, the Times notes, they too may need to up their security spending.
A financial headline this morning indicated that a certain firm was revamping its platforms, hoping to resume full production of financial products, this time in a more "transparent" manner. If the populist backlash against derivatives and those who loved them continues, is it really going to be that simple?
The article concludes that the merger could be beneficial to Apple:
A merger of IBM and Sun would result in an even tighter relationship with Apple, and could even create a market for licensing Mac OS X Server on enterprise hardware and supporting that software using a services team that Apple lacks the resources to quickly assemble from scratch.
Thursday, March 19, 2009
[Three Connecticut residents] were identified by the New York Post as recipients of the highly criticized bonuses.
The three Connecticut men work for AIG's Financial Products division in Wilton. That group entangled its parent company in a massive web of credit default swaps -- a kind of insurance policy covering debt -- that put AIG on the hook for billions of dollars when mortgage securities and other investments went bad.
Finding supporters of the titans of AIG Financial Products' division is hard. Finding anybody Wednesday to talk about [the three] in their neighborhoods proved impossible.
No one answered the door at any of their homes, well-appointed, large colonials with clapboard exteriors and manicured lawns.
That's the question, more or less, in the case of Jones v. Harris Associates. As investment managers – aka "advisers" – to certain mutual funds, Harris charged individual investors a higher percentage than it charged institutions such as pension funds.
Did Harris have a fiduciary duty to treat individual investors fairly? A federal appeals court didn't think so. Now the Supreme Court will explore the question.
"Popular Delusions" is said to remind us that human nature and human greed never change. That's not necessarily so. Investor foolishness may actually be on the increase. Consider the following, from Mackay's description of all the little stock bubbles that popped up in London's Exchange Alley at the time of the South Sea Bubble:
But the most absurd and preposterous of all, and which showed, more completely than any other, the utter madness of the people, was one, started by an unknown adventurer, entitled "company for carrying on an undertaking of great advantage, but nobody to know what it is." Were not the fact stated by scores of credible witnesses, it would be impossible to believe that any person could have been duped by such a project. The man of genius who essayed this bold and successful inroad upon public credulity, merely stated in his prospectus that the required capital was half a million, in five thousand shares of 100 pounds each, deposit 2 pounds per share. Each subscriber, paying his deposit, would be entitled to 100 pounds per annum per share. How this immense profit was to be obtained, he did not condescend to inform them at that time, but promised, that in a month full particulars should be duly announced, and a call made for the remaining 98 pounds of the subscription. Next morning, at nine o'clock, this great man opened an office in Cornhill. Crowds of people beset his door, and when he shut up at three o'clock, he found that no less than one thousand shares had been subscribed for, and the deposits paid. He was thus, in five hours, the winner of 2,000 pounds. He was philosopher enough to be contented with his venture, and set off the same evening for the Continent. He was never heard of again.Writing in 1841, Mackay assumed his readers would recognize that investing in "blind pools," as such ventures came to be known on Wall Street, was the height of folly.
Today? Blind pools known as hedge funds attract presumably sophisticated investors, pension funds and endowments. In recent years they sold particularly well as Madoff funds.
"In the present state of civilization," Mackay wrote, "society has often shown itself very prone to run a career of folly…. Melancholy as all these delusions were in their ultimate results, their history is most amusing."
Excuse us if we don't laugh, Mr. Mackay. We're too deep in melancholy.
Wednesday, March 18, 2009
How quickly fortunes turn. I.B.M. Said to Be in Talks to Buy Sun for $7 Billion reports the New York Times.
Taxpayer made a gift to child of a $2 million interest in the Madoff fund. Taxapayer used up his unified credit to avoid gift tax, but did file a gift tax return. Does he get his unified credit back now? Does it depend upon how long ago he made the gift?
"President Obama may not realize it yet, but his Katrina moment has arrived.Altmaier goes on to identify herself as an Obama voter, ands calls for deeds, not words.
"This is a defining moment for his presidency, and how he responds will determine the trajectory of his term. He needs to deal with the excesses within the financial industry with the same toughness and conviction that President Ronald Reagan brought to bear during the air traffic controllers’ strike. To date, he is sorely wanting."
Are the AIG bonuses a tipping point? They certainly make the government look hapless at the moment. What about the fact that AIG has really just been a conduit for billion-dollar payments to foreign banks and Goldman Sachs?
Tuesday, March 17, 2009
Ad spending in b-to-b magazines fell 9.7%. Ad expenditures in other print categories were hit hard, too, with steep declines at national magazines (-7.6%), national newspapers (-9.6%), local newspapers (-10.2%) and local Sunday supplements (-11.0%).Even Internet display advertising fell 6.4%. Cable TV ads were up, the only bright spot.
However, history suggests that those who advertise through tough economic times are more likely to survive them.
Under the plan, which has been reviewed by the Congressional offices, the I.R.S. will allow investors who are not suing Mr. Madoff to claim a theft-loss deduction equal to 95 percent of their investments, minus any withdrawals, reinvested gains and payouts from the Securities Investor Protection Corporation, the government-chartered fund set up to help protect investors of failed brokerage firms.
Investors who are suing Mr. Madoff, and who thus may have some prospect of recovery, can claim a deduction equal to 75 percent of their investments.
The I.R.S. is also relaxing the rules on how far back the losses can be carried. Current theft loss rules typically allow loss to be carried back 2 years and forward 20 years, but under the plan, the I.R.S. will allow losses to be carried back 5 years as well as forward 20 years.
Monday, March 16, 2009
Sunday, March 15, 2009
One of the great ironies is that if you had talked to the average investor 18 months ago, he or she would have thought it was a pretty good idea to buy stocks. In recent months, the same investors despair about their portfolio and are fearful about putting money into the equity market.
That's 180 degrees wrong. They should have been cautious 18 months ago, when prices were much higher than they are now. They should be enthusiastic today.
[N]early $33 billion in unclaimed property [sits] in state governments' coffers.
These are sums that businesses were required to turn over to the states after no activity or contact with the owner after a period of a year or more.
Items can include dividend or payroll checks that haven't been cashed, refunds, trust distributions, unredeemed money orders, insurance payments or refunds, annuities, certificates of deposit, customer overpayments and the contents of safe-deposit boxes.
Saturday, March 14, 2009
Friday, March 13, 2009
Thursday, March 12, 2009
Five years ago Martha Stewart was released from prison, having been convicted of lying to a federal officer and obstructing an agency proceeding. Her theoretical offense was that by selling shares of ImClone in 1981 based upon inside information, she avoided a stock loss of about $45,ooo. Stewart made the classic mistake of failing to "lawyer up," as they say on TV, and her statements were used against her.
Do you think that the SEC spent its time wisely in going after Martha with such enthusiasm? Because I've been thinking that maybe we would have better served if the SEC had paid more attention at the time to Bernie Madoff.
According to press reports, Madoff did not make a single trade for his clients after 1996. How could an SEC audit not notice that?
There going to be reformation of the regulation of the financial services industry, but the Stewart case suggests that regulators often get their priorities wrong.
Wednesday, March 11, 2009
We don't have J.P. to help us this time. But the current head of his bank, Jamie Dimon, today said we could get past our crisis this year, provided Democrats and Republicans cooperate and act without endless argument and delays. (Don't you wish that wasn't a sucker's bet?)
Thanks to CNBC, you can view Dimon's well-received talk at the Chamber of Commerce Summit here.
Now comes Warren Buffett, a big investor in Wells Fargo, M&T Bank and several other banks, who, during his marathon appearance on CNBC Monday, clearly called for suspension of mark-to-market accounting for regulatory capital purposes.Read the whole piece—it's an even more hopeful sign that the one below.
Mr. Buffett obviously understands where we are today, though it seems to elude many of those kibitzing about "nationalization," "letting banks fail" and other lagging notions. Since last year, our banking system no longer rests on capital, but on government guarantees. With those sweeping guarantees in place to protect their depositors and bondholders, banks now are able to earn princely spreads above their cost of funds, however questionable their balance sheets.
Banks will "build equity at a very rapid rate with the spreads that exist now," Mr. Buffett said. With the possible exception of Citigroup, he added, "the banking system largely will cure itself."
Surprisingly, sentiment is growing to stop bleeding the stronger banks in order to help the weaker ones:
Although this looks like a better policy, the Administration argues that it can't be applied to the biggest banks today. Which suggests that part of the long-term remedy could be to cap the size of banks, so that none are too big to fail.
At the height of the savings and loan crisis in the 1980s and 1990s, Congress and regulators adopted new rules known as “prompt corrective action” that required the government to quickly close weak financial institutions if they could not raise money to absorb mounting losses.
The rules were a response to a consensus that keeping weak institutions open longer, under an earlier practice known as forbearance, damaged healthy banks competing with the government-subsidized ones and ultimately destabilized the banking system. By shutting weakened institutions before their losses grew, prompt corrective action was also seen as less costly to taxpayers and the deposit insurance fund.
Schroeder introduces Warren as he and his family travel to Sun Valley in 1999 for the annual retreat hosted by Herbert Allen. Warren delivers the closing presentation. Speaking at the height of the dot.com-tech bubble, he warns the gathering of tycoons and masters of the universe that stocks are dangerously overvalued. To illustrate what could happen, he points out that the Dow was at about 874 at one point in September, 1964 and seventeen years later, in 1981,was again around 874. Was everybody ready for another 17 years of stocks going nowhere?
At the time, that thought was a real downer. Now, not so bad. Seventeen years from 1999 is 2016. Some followers of saros cycles believe the next stock market boom won't start until 2018. If Warren was right, the good times may start to roll sooner!
Tuesday, March 10, 2009
Or, maybe not.
The chap at right does look awfully healthy for a Shakespeare who, only six years later, seemed barely strong enough to sign his will:
Read the Yale Alumni Magazine's story on Shakespeare's will here.
Below is a photo of the first page of the will that accompanied the print version of the article.
Monday, March 09, 2009
The Houston Division of the Federal Bureau of Investigation (FBI) is seeking information from individuals who have invested in the Stanford Financial Group (SFG) or its affiliated companies-Stanford Capital Management, the Stanford Group Company, the Stanford International Bank, the Stanford Trust Company, or the Bank of Antigua. To facilitate information gathering, the FBI has established a dedicated investor email address Stanford.email@example.com, and an informational telephone line (713) 693-5699.Sir Allen's clients have probably lost money. Over 1,000 of Sir Allen's employees have already lost their jobs.
Friday, March 06, 2009
Any trust officer whose wealthiest client asks why he shouldn't set up his own family office should tell him about Doorly.
Googling the Ayer family takes you back to a New England that has largely vanished. The obit of Frederick Ayer, who died in 1914 at age 95, is here.
Frederick Ayer II (a grandson?) lived not quite as long. His 1998 obituary begins thusly:
Frederick Ayer II, heir to a family fortune generated by woolen mills and sarsaparilla, got the message from his father when he was a boy: He was urged to make something of himself and not merely live off his inheritance, so something would be left for future generations.A research physicist, Ayer II helped fund the sexual research of Masters and Johnson, along with research on UFOs, DNA and cancer. He collected orchids and compiled a grammar of the Balinese language.
"Go to work, support causes you believe in, and feel free to be eccentric." That's how New England once raised its trust fund babies. How did we end up with today's version?
Wednesday, March 04, 2009
"Private equity was historically viewed as the savior to higher education," writes the prof, "but it now may mean its trouble."
Which "alternative investments," if any, will survive the Great Recession?
Yesterday's remarks by the Market-Timer-in-Chief were all over the news last evening and this a.m. Will investors now hiding in T-bills consider buying equities as a result of the President's advice?
Before you answer, better take a look at our prescient post from August, 2007. Remember that unexpected commotion in the White House rose garden?
“I believe that markets ultimately look at the fundamentals of any economy,” Mr. Bush said at that time. “And the fundamentals of our economy are strong."
Tuesday, March 03, 2009
Two months later, investors feel more like a tennis ball that was just served at 130 mph by Andy Murray and returned by Rafa Nadal. "Ouch!" "Ouch!"
To distract clients from the bruises of the day, investment advisers can draw upon the long-term perspectives found in the Credit Suisse Global Investment Returns Yearbook 2009. One of the contributors is professor Elroy Dimson, previously mentioned here. A sample:
Monday, March 02, 2009
The New York Times explains: Many of the Californians and East Coasters have already left the regular income-tax system. They pay AMT, the Alternative Minimum Tax. And they'll still be paying it if the regular rates rise as proposed. The Times offers this example:
Could the proposed hike in capital gains tax, to 20%, also be rendered moot for many taxpayers because of the AMT? From personal experience, I wouldn't be surprised.