Total Borrowings of Depository Institutions from the Fed: (FRED Graph)
http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=TOTBORR&s[1][range]=5yrs
Troubled insurance companies are such great investments. One of my favorites, LaSalle Re, just announced it is likely to pay out $9 to $10 a share for preferred stock that was selling for $.25 a few years ago.
Of course, most folks who bought BEFORE the bankruptcy felt lucky to get anything over $.25.
MLM - go to theroxylanr and click on discount window in first sentence...for the FRED Graph. Sorry my links are bad. Too much J&B. The Theroxylandr in Flame
The Friday night announcements (always grim) are now so routine that it seems like CR should not be expected to post anything on a Friday until after 4 p.m. EST. During the rest of the day he should get deep Swedish massage and have his cuticles neatly trimmed.
Nemo, I hold a PhD from Princeton. I have seen the faculty up close and personal. They are all very smart, as measured by IQ. Yet, there was something that always bothered me about them, which I couldn't put a finger on until I came and joined the real world (work in a small private company now).
The academics just don't have a gut-feel for the real world at all. Most of them have been students or professors their entire life. Go look up Bernanke's resume - the man has never met a payroll or made an investment decision in his life.
Here is a bet I will make: this thing is going to end in disaster, and they will revise their textbooks afterwards. In 2030, they will talk about how Bernanke f*ked up, because he hadn't considered ....
CR
There was talk yesterday of loosening the Basel requirements for banks, as the 'nuclear option' to free up credit markets. Would this make everything OK, or would it have uninteded consequences?
Its Saturday, time to reminisce about the days SRB was a regular feature. My nomination is inspired by the Krugman post: a song about Beautiful Houses, Large Automobiles and After the Money's Gone (and something about being underwater).
For many, it very well may pose the key question: "How did I get here?"
Just for once I think CR has missed the main point of yesterday's announcement by Moody's - it gets the bond insurers out of jail for now. 'AAA' ratings for MBI and ABK were affirmed.
One can't help but be cynical about these moves. We know that a tiny amount of capital is supporting the whole valuation house of cards at present.
The ratings agencies say "we may downgrade the monolines if they don't find more capital". A few days later announcements are made of capital infusions (miniscule amounts in the context of things - and what would make a player like Warburg Pincus suddenly want to put $1 billion into MBIA?). So conveniently the ratings agencies now say "panic over, ratings confirmed, but we're still on negative outlook".
Who knows, maybe it only buys time, but once again the losses are kept from the balance sheets.
Is the term 'teeming and lading' used in accountancy anymore?
mp -
the answer is simple - they have too much money than they know what to do with - the next few years will probably yield the worst returns the private equity guys have ever seen and its funny because I think both they and their LPs know it. There will be a small minority who will do very well by actually paying attention to fundamental analysis but that will be few and far between - as that world has become infested with fee driven momentum investors that have been excessively rewarded for the past 4-5 years by simply putting money to work in anything they saw as valuations continued to illogically expand with lending multiples and terms that loosened each year until about July of this year. The game is now over and most of those 2007 deals (and 2006 deals) will be losers. Now all these private equity momentum investors think they are contrarian investors by investing in things like MBIA now and subprime/housing related businesses early this year. The majority of the private equity industry thinks we will avoid a recession and things will bounce back quickly - the reason they believe that is that they need to in order for their business models to work if they are momentum investors - which I would say represents more than 90% of the industry. The old school and disciplined 10% that have always focused on value will probably do quite well and emerge from the other side of this mess relatively unscathed and with happy investors. But the vast majority of the industry could/should be gone in 5-7 years. Just like the hedge fund business. Time will tell - but to be cliche, "there's too much money chasing too few deals" - therefore the bad ones will continue to get funded until there's no money left - and thats going to take awhile....
IvyLeague, that is why I'm looking to short Google at some point. Lots of PhDs.
Aside from the fact that computer science PhDs are very different from economics PhDs, Google is very interesting company (my wife, who is a PhD student, has worked there as an intern). All the R&D they do has to be tied to a product that has real world practicality. It is far more practical a place than Microsoft Research or IBM Labs (which I am also familiar with).
Google's revenue base is pretty solid. The danger is not the PhDs screwing it up. The danger is from competition of PhDs at Yahoo (which has made a major hiring push in the past year) and other places.
""Stocks are sort of in la-la land when they start to forecast a renewed double-digit profit gains in 2008. That's just not going to happen," Gross said. "We're already below the line, and with GDP growth targeted to 1 to 2 percent, it just doesn't produce profit growth of any kind.""
"Standard & Poor's estimates 15.6 percent earnings growth for the S&P 500 in 2008. "Part of that is because this year we're about break-even," said S&P analyst Howard Silverblatt. "With a few more charges, we'll have a flat year (for 2007)." Reuters Estimates forecasts 2008 earnings growth for the S&P 500 at 15.7 percent, which would follow an estimated 2.6 percent growth for this year."
Google's revenue base is pretty solid.
Walker
a while ago someone wrote here that 25% of googles ad revenue comes from all the subprime advertising, so good luck with this statement. besides, what is the first thing companies save on during a recession? advertising
OT, a while ago someone wrote here that 25% of googles ad revenue comes from all the subprime advertising, so good luck with this statement
google's revenue stream is diversifying to some extent. Google Checkout will beging collecting transaction fees on Feb 1st 2008. GC is pretty much a competitor to PayPal. The initial fees being quoted ($0.20 + 2%) are lower than what PayPal charges most sellers. I expect some to defect to GC.
This is not Bernanke's "fuc* up". This is about Greenspan and his incompetence as a Fed Chairman. The US should have went through a recession in 2001 after the internet and Y2K bubble. Now, after three consecutive back-to-back bubbles, one of which happens to be the largest in US history, there is no telling how this is all going to end.
As Dr. Marc Faber has said, "These guys should be put in jail."
Personally, I think Greenspan should be put in the electric chair.
Cops in my California coastal county just raided indoor marijuana-growing operations in five houses. All five had been bought by the same partnership of owners in 2005. Cops say:
"It appears they've been financing the houses with the cultivation and sales of marijuana," Carney said."
Say what you will: these owners weren't going to walk away from their contractural obligations, bygawd.
And what's the scoop with ACA Financial?
ACA got delisting notice from NYSE, and then they issued 8K saying they do not believe they will be able to do anyting to maintain listing (e.g., they do not believe they will be able to raise capital). So the equity has essentially disappeared. While technically delisting not a default, S&P still holds them at A/Negative.
What gives?
I agree it is not a Bernanke f**k up - yet. It will be, soon enough.
On the Ivy League priesthood: take Paul Krugman, an economist I have some respect for. Read his academic analysis of the Thai Baht crisis of 1997 (which begat Russia, which begat LTCM, which begat the Nasdaq bubble via Greenspan, which begat the current mess - but I digress ...) Krugman came up with mathematical models to "explain" why entrepreneurs took excessive risk. I found his whole approach baloney, yet that is perfectly mainstream in academia today. Yes, I can do the math with the best of them.
In fact, it was my discomfort with the world being run by such mathematical modelers that led me to the Austrian school, which is how I eventually found this site. It is instructive to know that the Soviet's were fascinated with applying statistical modeling and control to the economy, and a lot of probability/statistics underlying present-day econometric models came from Soviet work (Note: I am not saying the present day econometrists are Soviet-inspired, just that the math progressed due to the Soviet fascination with applying it to control the economy).
So, Nemo - be suspicious of the mathematical priesthood running the show. LTCM showed how Nobel-prize winning geniuses can fail (and when they fail, they fail big, don't they?)
risk,
I could never believe people of means handed over lots of money to hedge funds. Managed mutual funds are a big enough scam. Now someone comes along and wants to take 22% off the top on the upside and 2% on the downside? They must have good marketing to convince wealthy people that they have a crystal ball.
My favorite quote in today's papers (from the NYT article about Sheila Bair):
"Many of the sweeping relief plans floated by the Democrats ignore the fact...that many [buyers] simply lacked the financial means to be homeowners. Representative [Barney] Frank told me that in Minneapolis recently, where he held a hearing on the subprime crisis, one couple told him that 'we got evicted so we bought a house'. That's just crazy."
I don't care if you're an academic or not. There is no solution to this part of the problem other than the obvious - foreclosure. Roby
lama, theres a saying: "the percentual number of stupid people is the same in all countries". i know a lot of people that are plain stupid, but they are succesfull because they go too much into risk. so if they have been doing well through their entire life by taking risks, why shouldnt they not take risk later by investing in hedge fonds.
i have a friend, who investen in a mm fond even though i warned him months before that his money is not protected by fdic and that by fact that our currency is increasing on a mad scale he wont have the returns he believes he will get. now a year later, i have from a cd after tax gain with zero risk of 3%, he has after tax and fees gain 1,5%
"I could never believe people of means handed over lots of money to hedge funds."
I agree, primarily due to the lack of disclosure and the inherent conflicts of interest.
Pension funds and endowments are overly exposed, sold a garbage diversification story. For the most part, the reurns are based on concentration and more concentration.
Confession time is right around the corner and my opinion is that this cycle is over, the hedge craze will soon be in hibernation.
Oh and the finger pointing will be deafening. How you can have unregulated entities trade in a regulated market is beyond me.
Similar to the allowance of off-balance sheet shit, that too will end when all is said and done.
I believe that smaller, thinly traded companies in the U.S. and emerging markets will absorb negatives in the next round. They are way over-valued relative to large-cap.
Absolutely correct. Suggest you add MZZ to your list.
one more point, it is the exact same as having a corresponding lending channel practicing fraud in an unregulated setting packaging product to be sold into a regulated channel of fee-hungry, greedy bastards who are selling it to unsophisticated baffoons hiding under the guise of sophistication and fiduciary capacity.
Hedge funds are no different, the enablers and greed created this mess.
So, Nemo - be suspicious of the mathematical priesthood running the show.
My own degree is in mathematics from M.I.T., so I am not exactly engaging in blind faith here. (Although I am still learning the econ stuff.)
I do not think they are gods. I think they are smart people using what they believe are the best available models and data to achieve their mandate of "stable prices" and "maximum employment".
Perhaps those models should be a little more Austrian and a little less Keynesian... But it is extremely unlikely that you (or I) will be able to answer that question from our armchairs. As far as I can tell, the evidence is mixed. It is "not a solved problem".
LTCM showed how Nobel-prize winning geniuses can fail (and when they fail, they fail big, don't they?)
You know, according to the standard narrative, the moral of LTCM is "the 'smartest guys in the room' finally got their comeuppance". They relied too heavily on their oh-so-clever models and got burned by the "fat tails" of the market, etc.
But if you read interviews with the principals, they tell a rather different story,.. And I think the evidence is on their side. The moral of LTCM is that if you get big enough to be worth crushing, the major Wall Street firms will crush you.
LTCM took on investors from the Big Five investment banks, so those entities had some guess what LTCM's holdings were, especially once they grew into the billions. When one or two trades started going bad, word went out on the Street and all the big boys shorted the heck out of their other positions and then issued margin calls.
Had LTCM been able to hold on, they would have been fine; their positions ultimately moved exactly as their models predicted. The geniuses were right. But they got large enough to be worth driving into the ground.
Now the former LTCM employees all work for Goldman Sachs and Lehman Brothers and Morgan Stanley, doing pretty much the same things using pretty much the same models and making gobs of money. Only now that money goes to the same old players instead of the upstart. Problem fixed!
Everybody likes to assume that "geniuses" have no common sense, because it is uncomfortable to think that there could be people -- perhaps many people -- who are better than you at everything. And that is why we all gobble up the standard narrative about LTCM...
Coming full circle, I do not have blind faith that the Fed is always right. But I do think that if they are wrong, I am almost certainly not qualified to see it except in hindsight. Neither is anyone whose thoughts I have access to on the Internet.
And so I read, and I watch, and I worry, and I wait for more data.
For every hedge fund you read about that collapses, another has probably doubled. It is extremely unlikely that a few guys at GS were the only ones shorting the ABX all year...
"MONTREAL, Dec 15 (Reuters) - A blue-chip investor group trying to fix Canada's frozen C$33 billion market ($32.4 billion) for third-party asset-backed commercial paper missed Friday's deadline for a deal, but said on Saturday it extended a standstill pact on the complex workout plan to Jan. 31.
In a statement, the Pan-Canadian Investors Committee for Third-Party Structured Asset Backed Commercial Paper said substantial progress had been made in establishing a framework to restructure the ABCP issued by the 21 remaining trusts covered by an Aug. 16 standstill agreement known as the Montreal Accord.
The group, formed by Quebec's public pension fund manager Caisse de depot et placement and led by veteran corporate lawyer and business executive Purdy Crawford, remains on target to close the restructuring plan by March 14, it said."
Too bad for me that the company I work for has $360 million of our pension fund invested in Coventry. It's a good thing that this whole mess is contained.
a while ago someone wrote here that 25% of googles ad revenue comes from all the subprime advertising, so good luck with this statement.
Revro,
nahhh.. they'll just make up the difference from all the law firms advertising. There will be a lot who specialize in prosecuting sub-prime lenders over the next few years.
For every hedge fund you read about that collapses, another has probably doubled. It is extremely unlikely that a few guys at GS were the only ones shorting the ABX all year...
Nemo, I disagree, I have sat at the table with some of the folks now running the Fed. The RBC models are so seductive with mathematical tractibility- hence their heavy use for theory. The econometrics used is also heavily driven by data rich environments. So,if you arrive at an area where you don't have a decent model to plum the depths of possibility, you are quickly at sea.
Consider that, and as for LTCM, their convergence theory was for sh*t. NNT has proven essentially that we can't use most of the standard pricing models to reliably predict future prices. Markets are run by monkeys acting in herd behavior. Not anything like homo rationalis that is necessary for most of the theory to hold up. Now, over the long run, as posited in the title of LTCM, you can generate statistical validity, but as old man Keynes said "The markets can remain irrational longer than you can remain solvent."
So, in essence, the national economy may indeed make it through this crisis, but looking to academic models that might has assumed stability in a critical factor is simply hoping that we have all of our thousands of assumptions correct.
I have no such hopes. As for qualifications, don't make me laugh. Anybody who can do some fairly advanced math competently can get a PhD in Econ. I almost did, but I found the real world much more amenable to my mindset than academia. Further, most of the PhD profession is a closed shop- question certain assumptions and you won't get a PhD committee to ever finish your dissertation.
Nothing like self censorship to promote academic advance. Want to kill any chance- just mention Austrian economics and you are basically put out to pasture.
Mathematics is different to some extent- after all the proof works, or it is flawed. Economics literally deals with people, so by it's very nature it is flawed, and incapable of providing certainty.
As for the common touch, that too is sadly lacking. BDL demonstrates that on a easily seen basis. It is very difficult for persons who have been groomed from a very early age to find and perform at a very high level to understand the actions of persons who just made it through high school, took a couple of years of college, dropped out, and work for a living as a plumber, or a shift supervisor.
Trust me, I have navigated the run between academia and the real world, and the real world's rules are quite the mystery to academia at times.
For instance, when was the last time you bought a lottery ticket?
I would imagine that the sum total of all hedge funds' returns is equal to the growth of the overall economy, less fees and transaction costs. Same as managed mutual funds with a greater standard deviation.
The losers close out their funds and work with the winners. Of course, the winners' names are the ones promoted upon an opening of a new fund. Again, same as managed mutual funds.
Here is a bet I will make: this thing is going to end in disaster, and they will revise their textbooks afterwards. In 2030, they will talk about how Bernanke f*ked up, because he hadn't considered ....
IvyLeague
Oh, it will definitely be a disaster, but the academics aren't the ones who caused it. It was Greenshill and his fellow whores who bailed out LTCM, thereby creating the largest moral hazard the world has ever seen. Bernanke is a boob, but he isn't the root cause of this, and Greenhole is no academic.
Re: Math Rigor vs. Street Smart
The thing is that you need both.
You have to be guided by math because it really helps to synthesize historical experiences.
At the same time you cannot let math make decisions for you as the assumptions it relies on are just that, assumptions, not physical laws.
Math-based approach works wonderfully most of the time, except when it does not and the trick is to realize the exception ex ante
allen:
why do you think the people at the fed are blind to the reality of markets etc? these are a fairly bright bunch of people with access to more quality real time data than anyone on the planet. i'd say their real problem is that they are trying to do something that is inherently impossible, and that is to set a risk free rate of return which somehow is optimal for some set of metrics (price stability and growth).
the reason we have this 'war' is not the talents of the fed so to speak but the political reality which brought it into existence in the first place. as long as we have a fractional reserve banking system based on the full faith and credit of the US gov, we are going to have goofy economic outcomes.
i'll probably cast a useless vote for ron paul (though i disagree strongly with his idea of a gold standard, and some of his social ideas) just as a protest, then go back to trying to figure out how best to live within the rules that the rest of society has laid down. one of the glories of inefficient markets is that there is money lying around waiting to be picked up by those clever enough to see how. oddly enough, the smaller of an investor that you are, the more the opportunities abound...
NEMO
I too read When Genius Failed, a great read on the collapse of LTCM. Their models may have been correct in the long run but that misses the essential point. They had so much faith in those models that they levered up on a relatively small capital base (over 200-1 near the end if I recall) so it was excessive faith in their math that led the inevitable event (Russian bond default in this case) to bring down the house of cards. Academic hubris.
Lots of nuggets in this Housing Wire piece. Ironic in that it details the scope of ratings downgrades on ABS (including subprime and option arm) at the same time that Moody's is giving Ambac and MBIA a free pass.
Ultimately, it was the lawyers that had to decide on the Moody's bond insurer ratings actions. The firm had to be sure that the present value of law suit damages was less than the potential loss of earnings from bond insurer downgrades. That calculation may yet change...
I would imagine that the sum total of all hedge funds' returns is equal to the growth of the overall economy, less fees and transaction costs. Same as managed mutual funds with a greater standard deviation.
The losers close out their funds and work with the winners. Of course, the winners' names are the ones promoted upon an opening of a new fund. Again, same as managed mutual funds.
This is not far off. We expect stocks to rise long-term by the rate of overall earnings growth, not GDP growth.
The best indexes of hedge fund returns are C/S Tremont. But there's debate about whether they are juiced by "survivor bias." This means that they exclude results of hedge funds that went bust due to bad performance and aren't in the index any more.
The biggest component of hedge fund return lately has been carry, which is obtained by borrowing cheap money and leveraging it up into returns higher than the cost of money. In today's market, where hedge funds have become hugely long but markets are wobbling, carry is turning negative. The only way hedge funds can maintain positive carry in declining markets is to borrow money and invest it short.
David,
Not blind, but constrained by their academic training. Do you know any of the fed researchers? Do you know what it takes to climb the ranks of literally thousands of fed researchers and employees? I have a pretty good idea having interviewed there, participated in numerous seminars, and talked with them over a three year period that I participated in academia- in the mid 90s- so my experience is not that stale.
Like any profession that self regulates, the norms are vigoriously enforced by the folks who hold a certain set of beliefs. Don't hold the same beliefs, you don't play the game. Access to data is nothing without the ability to think outside the box. The box is very tight, and believe me, fairly well enforced. Why do you think the Mises institute is where it is? Um, Mississippi?
Now, read the big mainstream journals and read what get's published in the publish or perish race.
When you begin to understand the profession, you begin to understand some of CR's apparent surprise at some of the events progression over the last year. Not to criticize him, but you have to understand where he comes from. Tanta's depth of experience shows much more knowledge of the financial interconnections and underlying assumptions- experience you only get in the real world.
My criticisms of the profession have been aired here before, and many folks think of the Fed as an all seeing, all knowing entity. Reality is quite different, and would be quite surprising if widely known.
The real story is that if insurance is deemed shaky then people won't buy it at all. California sold $1b GO bonds in November without insurance. When insurance gets more expensive than the rate premium the business goes into a death spiral.
I could never believe people of means handed over lots of money to hedge funds. Managed mutual funds are a big enough scam. Now someone comes along and wants to take 22% off the top on the upside and 2% on the downside? They must have good marketing to convince wealthy people that they have a crystal ball.
lama
One word, lama, GREED. When the greedy rich see that manager who pulled in 50+% that one year, they want some of that. Simply put, they got greedy.
Anastasia Beaverhausen (if that IS your real name). I have been wondering why I haven't heard of any litigation support work for the bagholders or middlemen. If there were much of that work, I would have heard by now.
unsophisticated baffoons hiding under the guise of sophistication and fiduciary capacity.
Hedge funds are no different, the enablers and greed created this mess.
risk capital
rc, agreed! I'm happy to see your rose-colored glasses have shattered. I have been irritated for some time about the psychological warfare using the phrase "sophisticated investor" as a means of suckering in the money from unsophisticated schmucks who want to believe they are "sophisticated investors".
And everywhere the motto was reinforced, buying CDOs was for sophisticated investors, investing in hedge funds was for sophisticated investors. In fact, flipping houses with ARMs and using the new house equity gain as collatoral for more leveraging was also a 'sophisticated investor' vehicle.
Amazing how stupid those 'sophisticated investors' are turning out to be.
What they really were was naive and greedy, and in denial about both.
Allen:
I don't have any first hand knowledge of the people in the Fed. About the closest I've been is to read some of the papers. To me, some are thought provoking, some not so. In any event I can't quarrel with you over their talent or lack thereof.
Since you didn't take my bait with regards to eliminating the whole idea, and it sounds as if you have strong disagreements with current policy, what would your tonic be at the moment, 2% funds rate or 6.50%? (its not fair to sidestep the question and say that if you were in charge we would not be in this position in the first place because we are).
d
there are a few things that piss me off, one is hedge funds and the other is pension accounting.
The recent study which I put up here a couple of times proves that the hedge assholes fudge returns and bill on fraudulent marks, this alone is cause for regulation and the fact that they are now riddled throughout a pension system representing unsophisticated investors, a pension system with fiduciaries who lack the ability to clearly see the investment concentration & leverage used by the vehicles in which they allocate OPM. Why anyone would allocate funds into an opaque vehicle with no disclosure is beyond me. Based on the argument that "they provide diversification and liquidity", bullshit, these are reckless assholes.
Back in Feb or March, I remember seeing an interview with a 26 year old hedge fund manager stating that he was buying the ABX indexes because he saw value, WTF, this moron hasn't even worked a market cycle and couldn't see 4 feet in front of his face and likely got annilated. Between BS and the run to the Cayman's and the recent quant fiasco there is absolutely no reason any pension fund manager should be allocating funds to these opaque scheme's devised for one purpose, to bill 2 and 20.
Pension accounting is a whole different story, many assumptions are so flawed that any regulator with half a brain would call the shit into question. I can think of one investigation in regard to pension accounting that has now dragged on for years with no resolution, this is beyond comprehension.
David, some of the folks are talking about how a lower rate would just restart the cycle of boom and bust again. Never the less, I would be applying the Bagehot theory, I would be monetizing the paper with the caveat that if it is bad it will come right out of your bottom line as an eventual loss. That would freeze a lot of the crappy paper and allow the mostly good stuff to be packaged off to allow the lodging of the bad paper firmly on the big wall street banks and big mainstreet banks where it belongs. I would require that SIVs not be recognized as off balance sheet in computing capital adequacy.
Without recognition of the losses, and attempting to conceal the losses, Fed policy is just one small lever in the game. What really should be happening involves a whole plethora of policy responses from places that haven't exactly been forthright.
OCC- that means you, direct supervisions of some of the banks lies elsewhere. Congress, and especially the SEC- funny how there seems to be no official SEC investigations into some of these firms now hauling out the dead. BSC's relationship with ACA- the whole stinky mess of the Moody's/S&P/Fitch ratings scam springs to mind. I can go on and on, and this mess is truly beyond just a few fed rates and emergency liquidity measures.
We dismantled the 1930's solutions to the problems of lending long and borrowing short and did not replace them with anything that makes rational sense in actual operation.
While Glass Steagal and a whole bunch of other legislation was restrictive there was indeed a legitimate purpose to their existence, a purpose that was forgotten in the popular deregulatory times of the last three decades.
Was there too much regulation in 1970? Undoubtedly. Is there too little today? Undoubtedly.
So a few changes in the rates and some more money printed are not a viable solution when the system of finance related to providing liquidity to our capital markets isn't working because of too much gaming the system.
Nemo, I took the two-quarter Ph.D. core finance sequence at U. of Chicago, and seriously considered going the Ph.D. route (I chose to remain in the M.B.A. program, after all).
In two quarters, Eugene Fama taught me blind reliance on efficient markets, indexing, random walk, etc. I believed it, and it served me well in my personal investing over '92-'03.
Then, in '04, after reviewing the data with fresh eyes, I came to the conclusion that the dotcom crash was perfectly foreseeable. Taking that clear-eyed approach further, I concluded -- with the help of many, many fine books, such as 'Irrational Exuberance' -- that the U.S. economy was terribly at risk due to the unprecedented household debt/income ratio and unusually low interest rates. I've taken action -- not buying a fourth California home, being 100% in gold and gold mining stocks over '05-'06 -- that has served me remarkably well.
We'll see how this turns out. But, I've gone to school with and have been taught by the best and brightest crowd. Blind reliance on mathematical models is a recipe for disaster. I used to do that; no more.
Read some Murray Rothbard; he's clear, logical, and, to me, irrefutable. He's the antithesis of my Chicago training: no math.
But, he makes most compelling cases.
Please quit calling us with a different read of the same fact pattern bozos.
Anyone who thinks that there will be a fairly consistent trend favoring large caps over small caps should consider a futures spread. Long S&P E-mini, short Russell 2000 E-mini. A one percent difference between the two is worth about $750 on one contract. One could just short the Russell 2000, but that is a bit scary, since one contract controls $75k of stock. The margins on a spread are rather small, probably
"Blind reliance on mathematical models is a recipe for disaster. I used to do that; no more."
I never studied this stuff in school. But I learned a little trading equities (which I do on a technical basis). Bond investing gets boring after a while .
One big problem with many mathematical models - similar to technical trading systems - is a lack of data. My data set is pretty good for what I do (I've been collecting and trading data for a long time). Yet only 1 security (SP500) goes back more than 50 years (to 1928). I don't know when the tbond futures started trading - but my data only goes back to 1979.
A lot of "black box" mathematical models rely on correlations - or lack of correlations - among multiple variables. But those models are - inevitably - doomed to fail when the correlations break down. As they do from time to time. For example - a simple correlation might be interest rates go down - equities go up. There were decades of historical data which showed this - like from 1980 to 2000 - before the model collapsed in the 2000's. But a few decades of data isn't enough to show anything - because secular trends can last for many decades.
By the way - one advantage of a mathematical model - or a trading system - is it does take emotions out of decisions.
Also - although a financial event may be foreseeable - figuring out when it will happen is quite another matter. A lot of people have lost a lot of money when they were correct about something happening in the future - but off in their estimate about when it would happen. Roby
risk, I've wondered if private corporations get away with fraudulent pension accounting because states and municipalities do it too....actually, nevermind, that wouldn't stop them from prosecuting. I'm working on another theory.
jg, I was working at a conglomerate just before the dotcom blowup. I did notice they were slashing their technology budgets for 2000 as they spent so much the prior 2 years in fear of Y2K. I dumped everything, mostly small caps, only to see most of them rise another 50%. 3 years later I looked like a genius, but it was mostly luck.
I got back in just as we started bombing Iraq as it the mood was so negative. I was just lucky again.
Can investors see something coming? Sure, but when? I was wondering when RE would implode back in 2003.
I am somewhat flummoxed by your wholesale rejection of all things "mathematical"... surely there's something between "blind reliance on mathematical models" and ignoring any diversification and being 100% in gold? It might work, it might not; but this wholesale rejection of established risk-reduction methods (suggested by "mathematics") seems like yet another extreme.
That said, glad you've done well... (but is it time to hedge your successful bets a bit?)
Yep, lama, that timing stuff is tricky. I've been 100% in SDS (double inverse of the S&P 500) since March; I'm a bit down, but feel confident that the market will tank, soon. But, it is painful waiting.
DC, I figure that I am hedged with my 100% bets: if I am right on SDS, I make a lot of money (but will be out of a job, given the following collapse of venture capital investing). If I am wrong, I lose some money on SDS, but still have a job.
Mathematical models are useful, DC: I analyzed the '90s San Diego housing downturn and upturn, and found that three factors led the upswing in prices: declines in defaults, increases in employment, and increases in home sales. So, my San Diego home pricing model will guide my decision when to buy.
Tricky times these are. They will be good times for those with sizeable savings and low/no debt.
I am also wondering where all the litigation work is. I have heard of a few small time cases, mostly against groups of individuals who bought and sold houses using fraudulent appraisals to get cash out.
Everybody in the food chain should be looking into their rights. Instead they are apparently just hoping it will be OK. Maybe they all know they won't get anywhere with litigation because they all knew what was happening and were complicit.
Anyway, this is why I'm not surprised the markets haven't crashed yet. If the players are still in denial it's no wonder most of the spectators haven't figured out what's going on.
One area I don't get is the endowment funds of mega universities. They have abandon traditional investing with outstanding results.
I don't know how to tell if their success is based on a superior strategy or additional risk + luck. Also, even if the dozen or so endowmenets over $5 billion can do it, they are being copied by all the non profits.
In theory an endowment has a different/longer time horizon then most players in the capital markets and it could generate above average returns.
In fact, if Harvard lost 23% or $5.7 billion that they made last year, people would go nuts.
"The returns were led by large gains in emerging-market stocks, real estate and private equity. After factoring in the university's annual distributions and the new donations to the school, the endowment's size increased by $5.7 billion from the previous year.
The value of all assets managed by Harvard Management Co., including staff pensions, trusts and other related accounts, grew to $41 billion from $33.7 billion."
The S&P returned 18%+ during that period, which makes the returns a little less impressive.
Even if they can do it, not everyone can and there have to be some big losers.
JG - Why will the broader market (SP500) tank soon? Maybe it will - maybe it won't - I just want to know what your thesis is.
FWIW - the trend is still more or less sideways. I trade sector funds - 42 of them. The best - Energy Services - is up 50% YTD. The worst - Home Finance - is down 40% YTD. And there are a whole lot in the middle between those. Which is why IMO the broader market has basically been going sideways. Roby
In the U.S. the staff of the sec wanted to proceed with both of its inquiries. However, they were stopped abruptly in 1992 by the Commission itself, led by Chairman Richard Breeden, not long after British Prime Minister John Major spent a weekend with President George Bush at Camp David. Had Major persuaded Bush to call off the investigation, as British press reports speculated at the time? Both Bush and Major, through spokesmen, say they don't recall discussing Lloyd's. Former Chairman Breeden, who had been a key White House aide under Bush, told Time that the sec decision against proceeding "was not because Mr. Major and Mr. Bush said anything to each other" but because the SEC decided that disputes between Names and Lloyd's should be resolved in English courts. "We didn't make a judgment that the way (Lloyd's) allocated risks among syndicates wasn't sleazy," Breeden told Time. "We didn't make a judgment that their practices were honest."
The problem with wannabe mathematicians masquerading as economists is that you get addicted to "tractable" models, which yield beautiful theorems. That is how the academic pecking order works. They won't dare go into math itself, because getting a job is next to impossible, and pay is abysmally low. So you stick to a fashionable subject like Economics (or Computer Science or Electrical Engineering or ...) but crank out heavily mathematical papers, proving this and that.
Real world if far too messy. True even in "tractable" fields like electrical engineering, but infinitely more so in Economics.
Allen, as someone with a mathematics and computer science background, with an MBA and 20 years of teaching (mostly adjunct) I absolutely understand the seduction of going with the mainstream thought and the isolation of academia. Because I have always straddled both worlds, it is second nature to me that most career academics have no idea what the real world is like on a "gut" level. That's what has made me a great professor all this time...I teach people in a style that gives them what they need to know to survive out there, not what they need to know for the next degree level.
One of the best things I took away from Bschool was methodology of the case study. And by that I mean, there you are reading these cases and you constantly say to yourself "how the hell did these guys not see this coming? these are VERY smart people, the signs are all there and yet, the company or the stuation blew up". The reason, most of the time, is that it is very hard to see outside your frame of reference when all the people around you belong to the same frame. That the Fed, or anyone else could not see this coming reads like a business case. These are smart people. The guys that write the models are smart people. None of them will see it coming because they are too busy marvelling at how good this all works and because everyone else around them belongs to the same frame. And further, many people don't WANT to see it coming, and just party on until the lights finally come on.
The models are seductive...and nothing gives you a jolt like running through some of that stuff because it is just so logical...logical to those that always think that way. But the world doesn't behave that way. And that's where the end game is. And when someone can model the irrational, then I'll start to put more faith in those models. Or maybe I'll just quietly start a hedge fund when I figure it out
busy marvelling at how good this all
works and because everyone else
around them belongs to the same frame.
I think about once a month lately I've sent a draft back to the marketroids telling them that if they actually go to print bragging that the company hires 'the best and the brightest' they're going to bring up associations they're all far too young to understand.
I wonder how many do recall what it means -- just that kind of self-assured blindness by smart people.
What I ask myself is, with this much stuff showing up in business as done by supposedly conservative, well educated US businesspeople -- what the hell has been going on elsewhere.
Has the rest of the world been smarter and more honest in doing business nowadays than the people who killed the US market for a little brief personal profit? Or is there another wave coming of vapor paper, from other directions?
Maybe that "goose that laid the golden eggs" story needs to be told in business schools too, eh?
Yes, we academics do have our own brand of conventional wisdom, which governs things like what lines of thought will get published or (even more important these days) attract grant money.
However, my sense is that the Fed is subject to political pressure, and private sector often has to tailor results to reach the conclusion management wanted from the beginning.
This is ridiculous and just another among many missteps by Moody's in 2007, which started with the equally foolish ratings of Icelandic Banks as "AAA" based upon an iffy assumption that they would be government backed in a distressed situation.
Anyone with any ounce of common sense realizes that the credit ratings of MBIA and Ambac do not equate to those of J&J and GE. What is this analysis based upon? A boatload of "phantom" capital mysteriously appearing near-term. Clearly if you look at CDS spreads, you don't see too many people clamouring to invest in highly uncertain "black box" risks like MBIA and Ambac right now.
The greatest irony right now is that Moody's and most likely the other rating agencies will concentrate on the near-term and affirm the monolines to keep the muni bond and structured finance ratings business going. But, in the long term, they destroy their credibility in the process and seriously damange their franchise value.
Bad decisions come from bad management. Isn't it time for the Moody's board to wake up and make a change at the top?
It's comforting to know that at $90+ per barrel of oil, OPEC has all the money we need to come in and shore up our bond insurers! Shwew.
The equity mkts were kind of puny today given that the news wasn't as bad as it has been on occasion since Aug.
Total Borrowings of Depository Institutions from the Fed: (FRED Graph)
http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=TOTBORR&s[1][range]=5yrs
Troubled insurance companies are such great investments. One of my favorites, LaSalle Re, just announced it is likely to pay out $9 to $10 a share for preferred stock that was selling for $.25 a few years ago.
Of course, most folks who bought BEFORE the bankruptcy felt lucky to get anything over $.25.
FFDIC - can you fix that link?
Tx
Washington Post - Fed Plans To Curb Mortgage Excesses
Fed Plans To Curb Mortgage Excesses - washingtonpost.com
MLM - Lets try again...FRED Graph:
http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=TOTBORR&s[1][range]=5yrs
You know, when I was a perma bear, I really did not think it would really happen.
MLM - go to theroxylanr and click on discount window in first sentence...for the FRED Graph. Sorry my links are bad. Too much J&B.
The Theroxylandr in Flame
So what is the best way to play the falling prices in CA - Proshares SRS?
it's not the JB, FFDIC.. haloscan doesn't want to play nice with the brackets..
even when I do proper html.. it just chops off everything after the first bracket.
I manually reconstructed it though.. neat graph..
Thanks FFDIC. Looks like it could be a seller's market in "TAFs" next week...
Oh, after loading that Fed graph.. check out Sept 2001.. you get a big spike up to 13 billion from Sept 11th, I presume.
So.. I think we can do better! or... well, we could be doing worse?
Mish has a new post up on Ambac and MBIA. He seems to be thinking we can do better too...
Mish's Global etc.
WSJ - Moody's Legg Mason Outlook Dims
Moody's Legg Mason Outlook Dims - WSJ.com
when do we get to where Moody's Fitch & S&P start downgrading each other?
WSJ - A Citi That Gets No Sleep/Bank Must Move Fast To Shore Up Capital After More Downgrades
A Citi That Gets No Sleep - WSJ.com
For all you working stiffs Jos.A.Bank has $60 to $80 dress shirts on sale for $19 Dec. 15th 12AM-1PM ONLY! Sale on now!
http://ebm.cheetahmail.com/c/tag/hBHYvE1AXuQo6Bn$PJ8AMUcRB.AYEm2KJR/doc.html?RAF_TRACK=&email=clarence.smith@ranincusa.com
The Friday night announcements (always grim) are now so routine that it seems like CR should not be expected to post anything on a Friday until after 4 p.m. EST. During the rest of the day he should get deep Swedish massage and have his cuticles neatly trimmed.
definitely another "OH SHIT!" moment.However the ratings agencies do have a little more credibility than the NAR.A little.oh.shit.
Note to self: when I'm rich and can found a bigshot financial company, I will not pick a ticker symbol that ends in "BK".
Moody's, a company with zero credibility, is threatening to lower the ratings of a group of bond insurers who have no credibility. The irony...
edgar,
Not quite as cute as one IB downgrading the stock of others. Talk about glass houses!
tj,
They circled the wagons, and then started shooting at each other! LMAO!
Wondering... since Citi's attempting to clean house if they'll start issuing tougher (i.e., more realistic) assessments of their brethren.
(response to Nemo from an earlier thread)
Nemo, I hold a PhD from Princeton. I have seen the faculty up close and personal. They are all very smart, as measured by IQ. Yet, there was something that always bothered me about them, which I couldn't put a finger on until I came and joined the real world (work in a small private company now).
The academics just don't have a gut-feel for the real world at all. Most of them have been students or professors their entire life. Go look up Bernanke's resume - the man has never met a payroll or made an investment decision in his life.
Here is a bet I will make: this thing is going to end in disaster, and they will revise their textbooks afterwards. In 2030, they will talk about how Bernanke f*ked up, because he hadn't considered ....
FFDIC, I didn't expect to get my once-per-year clothes shopping done here at Calculated Risk. I got 4 $19 shirts. Thanks!
IvyLeague,
Sounds a lot like the hedge fund crowd, at least per what I've read in "Hedgehogging" and "When Genius Failed".
Hey, it's the INFLATION, stupid. That is what will bring things tumbling down.
I guess DEFLATION is here, I heard you can get $80 shirts for $19!
U.S. Treasury slashes savings bond purchase limit from $120k to $20k (per year).
Wall, meet writing.
CR
There was talk yesterday of loosening the Basel requirements for banks, as the 'nuclear option' to free up credit markets. Would this make everything OK, or would it have uninteded consequences?
Cutting through the normal banking rules - Telegraph
IvyLeague, that is why I'm looking to short Google at some point. Lots of PhDs.
Its Saturday, time to reminisce about the days SRB was a regular feature.
My nomination is inspired by the Krugman post: a song about Beautiful Houses, Large Automobiles and After the Money's Gone (and something about being underwater).
For many, it very well may pose the key question: "How did I get here?"
Once In a Lifetime
Just for once I think CR has missed the main point of yesterday's announcement by Moody's - it gets the bond insurers out of jail for now. 'AAA' ratings for MBI and ABK were affirmed.
One can't help but be cynical about these moves. We know that a tiny amount of capital is supporting the whole valuation house of cards at present.
The ratings agencies say "we may downgrade the monolines if they don't find more capital". A few days later announcements are made of capital infusions (miniscule amounts in the context of things - and what would make a player like Warburg Pincus suddenly want to put $1 billion into MBIA?). So conveniently the ratings agencies now say "panic over, ratings confirmed, but we're still on negative outlook".
Who knows, maybe it only buys time, but once again the losses are kept from the balance sheets.
Is the term 'teeming and lading' used in accountancy anymore?
FTX- "...what would make a player like Warburg Pincus suddenly want to put $1 billion into MBIA?"
That's a damned good question.
mp -
the answer is simple - they have too much money than they know what to do with - the next few years will probably yield the worst returns the private equity guys have ever seen and its funny because I think both they and their LPs know it. There will be a small minority who will do very well by actually paying attention to fundamental analysis but that will be few and far between - as that world has become infested with fee driven momentum investors that have been excessively rewarded for the past 4-5 years by simply putting money to work in anything they saw as valuations continued to illogically expand with lending multiples and terms that loosened each year until about July of this year. The game is now over and most of those 2007 deals (and 2006 deals) will be losers. Now all these private equity momentum investors think they are contrarian investors by investing in things like MBIA now and subprime/housing related businesses early this year. The majority of the private equity industry thinks we will avoid a recession and things will bounce back quickly - the reason they believe that is that they need to in order for their business models to work if they are momentum investors - which I would say represents more than 90% of the industry. The old school and disciplined 10% that have always focused on value will probably do quite well and emerge from the other side of this mess relatively unscathed and with happy investors. But the vast majority of the industry could/should be gone in 5-7 years. Just like the hedge fund business. Time will tell - but to be cliche, "there's too much money chasing too few deals" - therefore the bad ones will continue to get funded until there's no money left - and thats going to take awhile....
ow that precedent has been set, others will follow-
Bank of Montreal Working on SIV Plan, Bourdeau Says (Update3) - Bloomberg.com
abcp takes another hit-
UPDATE 2-U.S. ABCP market smallest since fall 2005-Fed
| Reuters
IvyLeague, that is why I'm looking to short Google at some point. Lots of PhDs.
Aside from the fact that computer science PhDs are very different from economics PhDs, Google is very interesting company (my wife, who is a PhD student, has worked there as an intern). All the R&D they do has to be tied to a product that has real world practicality. It is far more practical a place than Microsoft Research or IBM Labs (which I am also familiar with).
Google's revenue base is pretty solid. The danger is not the PhDs screwing it up. The danger is from competition of PhDs at Yahoo (which has made a major hiring push in the past year) and other places.
OK, who is lying through their teeth?-
""Stocks are sort of in la-la land when they start to forecast a renewed double-digit profit gains in 2008. That's just not going to happen," Gross said. "We're already below the line, and with GDP growth targeted to 1 to 2 percent, it just doesn't produce profit growth of any kind.""
"Standard & Poor's estimates 15.6 percent earnings growth for the S&P 500 in 2008. "Part of that is because this year we're about break-even," said S&P analyst Howard Silverblatt. "With a few more charges, we'll have a flat year (for 2007)." Reuters Estimates forecasts 2008 earnings growth for the S&P 500 at 15.7 percent, which would follow an estimated 2.6 percent growth for this year."
Double-digit profits unlikely in '08: strategists
| Reuters
Google's revenue base is pretty solid.
Walker
a while ago someone wrote here that 25% of googles ad revenue comes from all the subprime advertising, so good luck with this statement. besides, what is the first thing companies save on during a recession? advertising
EPD,
I believe that smaller, thinly traded companies in the U.S. and emerging markets will absorb negatives in the next round.
They are way over-valued relative to large-cap. They've been propped up by speculative, leveraged hedge fund money.
They are over-leveraged on their balance sheets and will pay more for credit, if they can get it.
Their earnings are dropping through the floor.
They are tied to the failing U.S. economy, either because they don't have exports (U.S. companies) or depend on them (emerging markets).
SDD 2X small cap 600
TWM 2X Russell 2000
EEV 2X emerging markets
OT,
a while ago someone wrote here that 25% of googles ad revenue comes from all the subprime advertising, so good luck with this statement
google's revenue stream is diversifying to some extent. Google Checkout will beging collecting transaction fees on Feb 1st 2008. GC is pretty much a competitor to PayPal. The initial fees being quoted ($0.20 + 2%) are lower than what PayPal charges most sellers. I expect some to defect to GC.
Sorry, all these are 2X short.
IvyLeague-
This is not Bernanke's "fuc* up". This is about Greenspan and his incompetence as a Fed Chairman. The US should have went through a recession in 2001 after the internet and Y2K bubble. Now, after three consecutive back-to-back bubbles, one of which happens to be the largest in US history, there is no telling how this is all going to end.
As Dr. Marc Faber has said, "These guys should be put in jail."
Personally, I think Greenspan should be put in the electric chair.
a while ago someone wrote here that 25% of googles ad revenue comes from all the subprime advertising, so good luck with this statement
Interesting.
OT, but I couldn't resist:
Cops in my California coastal county just raided indoor marijuana-growing operations in five houses. All five had been bought by the same partnership of owners in 2005. Cops say:
"It appears they've been financing the houses with the cultivation and sales of marijuana," Carney said."
Say what you will: these owners weren't going to walk away from their contractural obligations, bygawd.
Home - Santa Cruz Sentinel
And what's the scoop with ACA Financial?
ACA got delisting notice from NYSE, and then they issued 8K saying they do not believe they will be able to do anyting to maintain listing (e.g., they do not believe they will be able to raise capital). So the equity has essentially disappeared. While technically delisting not a default, S&P still holds them at A/Negative.
What gives?
I agree it is not a Bernanke f**k up - yet. It will be, soon enough.
On the Ivy League priesthood: take Paul Krugman, an economist I have some respect for. Read his academic analysis of the Thai Baht crisis of 1997 (which begat Russia, which begat LTCM, which begat the Nasdaq bubble via Greenspan, which begat the current mess - but I digress ...) Krugman came up with mathematical models to "explain" why entrepreneurs took excessive risk. I found his whole approach baloney, yet that is perfectly mainstream in academia today. Yes, I can do the math with the best of them.
In fact, it was my discomfort with the world being run by such mathematical modelers that led me to the Austrian school, which is how I eventually found this site. It is instructive to know that the Soviet's were fascinated with applying statistical modeling and control to the economy, and a lot of probability/statistics underlying present-day econometric models came from Soviet work (Note: I am not saying the present day econometrists are Soviet-inspired, just that the math progressed due to the Soviet fascination with applying it to control the economy).
So, Nemo - be suspicious of the mathematical priesthood running the show. LTCM showed how Nobel-prize winning geniuses can fail (and when they fail, they fail big, don't they?)
here we go-
Searock Capital Liquidating $750 Million Hedge Fund | FINalternatives
Institutional Investor
risk,
I could never believe people of means handed over lots of money to hedge funds. Managed mutual funds are a big enough scam. Now someone comes along and wants to take 22% off the top on the upside and 2% on the downside? They must have good marketing to convince wealthy people that they have a crystal ball.
My favorite quote in today's papers (from the NYT article about Sheila Bair):
"Many of the sweeping relief plans floated by the Democrats ignore the fact...that many [buyers] simply lacked the financial means to be homeowners. Representative [Barney] Frank told me that in Minneapolis recently, where he held a hearing on the subprime crisis, one couple told him that 'we got evicted so we bought a house'. That's just crazy."
I don't care if you're an academic or not. There is no solution to this part of the problem other than the obvious - foreclosure. Roby
lama, theres a saying: "the percentual number of stupid people is the same in all countries". i know a lot of people that are plain stupid, but they are succesfull because they go too much into risk. so if they have been doing well through their entire life by taking risks, why shouldnt they not take risk later by investing in hedge fonds.
i have a friend, who investen in a mm fond even though i warned him months before that his money is not protected by fdic and that by fact that our currency is increasing on a mad scale he wont have the returns he believes he will get. now a year later, i have from a cd after tax gain with zero risk of 3%, he has after tax and fees gain 1,5%
"I could never believe people of means handed over lots of money to hedge funds."
I agree, primarily due to the lack of disclosure and the inherent conflicts of interest.
Pension funds and endowments are overly exposed, sold a garbage diversification story. For the most part, the reurns are based on concentration and more concentration.
Confession time is right around the corner and my opinion is that this cycle is over, the hedge craze will soon be in hibernation.
Oh and the finger pointing will be deafening. How you can have unregulated entities trade in a regulated market is beyond me.
Similar to the allowance of off-balance sheet shit, that too will end when all is said and done.
I believe that smaller, thinly traded companies in the U.S. and emerging markets will absorb negatives in the next round. They are way over-valued relative to large-cap.
Absolutely correct. Suggest you add MZZ to your list.
"I could never believe people of means handed over lots of money to hedge funds."
risk capital,
Ironic, that term "hedge fund". Way back when I first heard of them, I thought they were designed to reduce risk. Oh how naive.
-
lama-
one more point, it is the exact same as having a corresponding lending channel practicing fraud in an unregulated setting packaging product to be sold into a regulated channel of fee-hungry, greedy bastards who are selling it to unsophisticated baffoons hiding under the guise of sophistication and fiduciary capacity.
Hedge funds are no different, the enablers and greed created this mess.
IvyLeague --
So, Nemo - be suspicious of the mathematical priesthood running the show.
My own degree is in mathematics from M.I.T., so I am not exactly engaging in blind faith here. (Although I am still learning the econ stuff.)
I do not think they are gods. I think they are smart people using what they believe are the best available models and data to achieve their mandate of "stable prices" and "maximum employment".
Perhaps those models should be a little more Austrian and a little less Keynesian... But it is extremely unlikely that you (or I) will be able to answer that question from our armchairs. As far as I can tell, the evidence is mixed. It is "not a solved problem".
LTCM showed how Nobel-prize winning geniuses can fail (and when they fail, they fail big, don't they?)
You know, according to the standard narrative, the moral of LTCM is "the 'smartest guys in the room' finally got their comeuppance". They relied too heavily on their oh-so-clever models and got burned by the "fat tails" of the market, etc.
But if you read interviews with the principals, they tell a rather different story,.. And I think the evidence is on their side. The moral of LTCM is that if you get big enough to be worth crushing, the major Wall Street firms will crush you.
LTCM took on investors from the Big Five investment banks, so those entities had some guess what LTCM's holdings were, especially once they grew into the billions. When one or two trades started going bad, word went out on the Street and all the big boys shorted the heck out of their other positions and then issued margin calls.
Had LTCM been able to hold on, they would have been fine; their positions ultimately moved exactly as their models predicted. The geniuses were right. But they got large enough to be worth driving into the ground.
Now the former LTCM employees all work for Goldman Sachs and Lehman Brothers and Morgan Stanley, doing pretty much the same things using pretty much the same models and making gobs of money. Only now that money goes to the same old players instead of the upstart. Problem fixed!
Everybody likes to assume that "geniuses" have no common sense, because it is uncomfortable to think that there could be people -- perhaps many people -- who are better than you at everything. And that is why we all gobble up the standard narrative about LTCM...
Coming full circle, I do not have blind faith that the Fed is always right. But I do think that if they are wrong, I am almost certainly not qualified to see it except in hindsight. Neither is anyone whose thoughts I have access to on the Internet.
And so I read, and I watch, and I worry, and I wait for more data.
One more comment:
For every hedge fund you read about that collapses, another has probably doubled. It is extremely unlikely that a few guys at GS were the only ones shorting the ABX all year...
From Reuters:
By Robert Melnbardis
"MONTREAL, Dec 15 (Reuters) - A blue-chip investor group trying to fix Canada's frozen C$33 billion market ($32.4 billion) for third-party asset-backed commercial paper missed Friday's deadline for a deal, but said on Saturday it extended a standstill pact on the complex workout plan to Jan. 31.
In a statement, the Pan-Canadian Investors Committee for Third-Party Structured Asset Backed Commercial Paper said substantial progress had been made in establishing a framework to restructure the ABCP issued by the 21 remaining trusts covered by an Aug. 16 standstill agreement known as the Montreal Accord.
The group, formed by Quebec's public pension fund manager Caisse de depot et placement and led by veteran corporate lawyer and business executive Purdy Crawford, remains on target to close the restructuring plan by March 14, it said."
Canada investor group misses debt deal deadline
| Reuters
Too bad for me that the company I work for has $360 million of our pension fund invested in Coventry. It's a good thing that this whole mess is contained.
I know this is off topic--but does anyone know why Kudlow's blog shut off the comment section???--lol
a while ago someone wrote here that 25% of googles ad revenue comes from all the subprime advertising, so good luck with this statement.
Revro,
nahhh.. they'll just make up the difference from all the law firms advertising. There will be a lot who specialize in prosecuting sub-prime lenders over the next few years.
or.. well, that's my guess.
Bloomberg.com
Ambac Reinsures $29 Billion Portfolio to Keep Rating (Mish has something to say about it on the blog)
Ambac Reinsures $29 Billion Portfolio to Keep Rating (Update4) - Bloomberg.com
For every hedge fund you read about that collapses, another has probably doubled. It is extremely unlikely that a few guys at GS were the only ones shorting the ABX all year...
FT.com / UK - US hedge fund makes 1,000% return betting against subprime
Well, I'm sure the mathematical average of all hedge funds out there is fair to middling, but the volatility is just outrageous.
-
Nemo, I disagree, I have sat at the table with some of the folks now running the Fed. The RBC models are so seductive with mathematical tractibility- hence their heavy use for theory. The econometrics used is also heavily driven by data rich environments. So,if you arrive at an area where you don't have a decent model to plum the depths of possibility, you are quickly at sea.
Consider that, and as for LTCM, their convergence theory was for sh*t. NNT has proven essentially that we can't use most of the standard pricing models to reliably predict future prices. Markets are run by monkeys acting in herd behavior. Not anything like homo rationalis that is necessary for most of the theory to hold up. Now, over the long run, as posited in the title of LTCM, you can generate statistical validity, but as old man Keynes said "The markets can remain irrational longer than you can remain solvent."
So, in essence, the national economy may indeed make it through this crisis, but looking to academic models that might has assumed stability in a critical factor is simply hoping that we have all of our thousands of assumptions correct.
I have no such hopes. As for qualifications, don't make me laugh. Anybody who can do some fairly advanced math competently can get a PhD in Econ. I almost did, but I found the real world much more amenable to my mindset than academia. Further, most of the PhD profession is a closed shop- question certain assumptions and you won't get a PhD committee to ever finish your dissertation.
Nothing like self censorship to promote academic advance. Want to kill any chance- just mention Austrian economics and you are basically put out to pasture.
Mathematics is different to some extent- after all the proof works, or it is flawed. Economics literally deals with people, so by it's very nature it is flawed, and incapable of providing certainty.
As for the common touch, that too is sadly lacking. BDL demonstrates that on a easily seen basis. It is very difficult for persons who have been groomed from a very early age to find and perform at a very high level to understand the actions of persons who just made it through high school, took a couple of years of college, dropped out, and work for a living as a plumber, or a shift supervisor.
Trust me, I have navigated the run between academia and the real world, and the real world's rules are quite the mystery to academia at times.
For instance, when was the last time you bought a lottery ticket?
Think about it.
Someday this war's gonna end...
FFDIC:
Thanks for the shirts savings!!
I would imagine that the sum total of all hedge funds' returns is equal to the growth of the overall economy, less fees and transaction costs. Same as managed mutual funds with a greater standard deviation.
The losers close out their funds and work with the winners. Of course, the winners' names are the ones promoted upon an opening of a new fund. Again, same as managed mutual funds.
Here is a bet I will make: this thing is going to end in disaster, and they will revise their textbooks afterwards. In 2030, they will talk about how Bernanke f*ked up, because he hadn't considered ....
IvyLeague
Oh, it will definitely be a disaster, but the academics aren't the ones who caused it. It was Greenshill and his fellow whores who bailed out LTCM, thereby creating the largest moral hazard the world has ever seen. Bernanke is a boob, but he isn't the root cause of this, and Greenhole is no academic.
Re: Math Rigor vs. Street Smart
The thing is that you need both.
You have to be guided by math because it really helps to synthesize historical experiences.
At the same time you cannot let math make decisions for you as the assumptions it relies on are just that, assumptions, not physical laws.
Math-based approach works wonderfully most of the time, except when it does not and the trick is to realize the exception ex ante
allen:
why do you think the people at the fed are blind to the reality of markets etc? these are a fairly bright bunch of people with access to more quality real time data than anyone on the planet. i'd say their real problem is that they are trying to do something that is inherently impossible, and that is to set a risk free rate of return which somehow is optimal for some set of metrics (price stability and growth).
the reason we have this 'war' is not the talents of the fed so to speak but the political reality which brought it into existence in the first place. as long as we have a fractional reserve banking system based on the full faith and credit of the US gov, we are going to have goofy economic outcomes.
i'll probably cast a useless vote for ron paul (though i disagree strongly with his idea of a gold standard, and some of his social ideas) just as a protest, then go back to trying to figure out how best to live within the rules that the rest of society has laid down. one of the glories of inefficient markets is that there is money lying around waiting to be picked up by those clever enough to see how. oddly enough, the smaller of an investor that you are, the more the opportunities abound...
NEMO
I too read When Genius Failed, a great read on the collapse of LTCM. Their models may have been correct in the long run but that misses the essential point. They had so much faith in those models that they levered up on a relatively small capital base (over 200-1 near the end if I recall) so it was excessive faith in their math that led the inevitable event (Russian bond default in this case) to bring down the house of cards. Academic hubris.
Lots of nuggets in this Housing Wire piece. Ironic in that it details the scope of ratings downgrades on ABS (including subprime and option arm) at the same time that Moody's is giving Ambac and MBIA a free pass.
Mortgage Market Roundup : HousingWire || financial news for the mortgage market
Ultimately, it was the lawyers that had to decide on the Moody's bond insurer ratings actions. The firm had to be sure that the present value of law suit damages was less than the potential loss of earnings from bond insurer downgrades. That calculation may yet change...
This is not far off. We expect stocks to rise long-term by the rate of overall earnings growth, not GDP growth.
The best indexes of hedge fund returns are C/S Tremont. But there's debate about whether they are juiced by "survivor bias." This means that they exclude results of hedge funds that went bust due to bad performance and aren't in the index any more.
The biggest component of hedge fund return lately has been carry, which is obtained by borrowing cheap money and leveraging it up into returns higher than the cost of money. In today's market, where hedge funds have become hugely long but markets are wobbling, carry is turning negative. The only way hedge funds can maintain positive carry in declining markets is to borrow money and invest it short.
David,
Not blind, but constrained by their academic training. Do you know any of the fed researchers? Do you know what it takes to climb the ranks of literally thousands of fed researchers and employees? I have a pretty good idea having interviewed there, participated in numerous seminars, and talked with them over a three year period that I participated in academia- in the mid 90s- so my experience is not that stale.
Like any profession that self regulates, the norms are vigoriously enforced by the folks who hold a certain set of beliefs. Don't hold the same beliefs, you don't play the game. Access to data is nothing without the ability to think outside the box. The box is very tight, and believe me, fairly well enforced. Why do you think the Mises institute is where it is? Um, Mississippi?
Now, read the big mainstream journals and read what get's published in the publish or perish race.
When you begin to understand the profession, you begin to understand some of CR's apparent surprise at some of the events progression over the last year. Not to criticize him, but you have to understand where he comes from. Tanta's depth of experience shows much more knowledge of the financial interconnections and underlying assumptions- experience you only get in the real world.
My criticisms of the profession have been aired here before, and many folks think of the Fed as an all seeing, all knowing entity. Reality is quite different, and would be quite surprising if widely known.
Someday this war's gonna end...
The real story is that if insurance is deemed shaky then people won't buy it at all. California sold $1b GO bonds in November without insurance. When insurance gets more expensive than the rate premium the business goes into a death spiral.
Interesting article @ SFGate:
MORTGAGE MELTDOWN
Interest rate 'freeze' - the real story is fraud
The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.
Read the rest here...
MORTGAGE MELTDOWN / Interest rate 'freeze' - the real story is fraud / Bankers pay lip service to families while scurrying to avert suits, prison
I could never believe people of means handed over lots of money to hedge funds. Managed mutual funds are a big enough scam. Now someone comes along and wants to take 22% off the top on the upside and 2% on the downside? They must have good marketing to convince wealthy people that they have a crystal ball.
lama
One word, lama, GREED. When the greedy rich see that manager who pulled in 50+% that one year, they want some of that. Simply put, they got greedy.
Anastasia Beaverhausen (if that IS your real name). I have been wondering why I haven't heard of any litigation support work for the bagholders or middlemen. If there were much of that work, I would have heard by now.
unsophisticated baffoons hiding under the guise of sophistication and fiduciary capacity.
Hedge funds are no different, the enablers and greed created this mess.
risk capital
rc, agreed! I'm happy to see your rose-colored glasses have shattered. I have been irritated for some time about the psychological warfare using the phrase "sophisticated investor" as a means of suckering in the money from unsophisticated schmucks who want to believe they are "sophisticated investors".
And everywhere the motto was reinforced, buying CDOs was for sophisticated investors, investing in hedge funds was for sophisticated investors. In fact, flipping houses with ARMs and using the new house equity gain as collatoral for more leveraging was also a 'sophisticated investor' vehicle.
Amazing how stupid those 'sophisticated investors' are turning out to be.
What they really were was naive and greedy, and in denial about both.
Allen:
I don't have any first hand knowledge of the people in the Fed. About the closest I've been is to read some of the papers. To me, some are thought provoking, some not so. In any event I can't quarrel with you over their talent or lack thereof.
Since you didn't take my bait with regards to eliminating the whole idea, and it sounds as if you have strong disagreements with current policy, what would your tonic be at the moment, 2% funds rate or 6.50%? (its not fair to sidestep the question and say that if you were in charge we would not be in this position in the first place because we are).
d
dotcom-
there are a few things that piss me off, one is hedge funds and the other is pension accounting.
The recent study which I put up here a couple of times proves that the hedge assholes fudge returns and bill on fraudulent marks, this alone is cause for regulation and the fact that they are now riddled throughout a pension system representing unsophisticated investors, a pension system with fiduciaries who lack the ability to clearly see the investment concentration & leverage used by the vehicles in which they allocate OPM. Why anyone would allocate funds into an opaque vehicle with no disclosure is beyond me. Based on the argument that "they provide diversification and liquidity", bullshit, these are reckless assholes.
Back in Feb or March, I remember seeing an interview with a 26 year old hedge fund manager stating that he was buying the ABX indexes because he saw value, WTF, this moron hasn't even worked a market cycle and couldn't see 4 feet in front of his face and likely got annilated. Between BS and the run to the Cayman's and the recent quant fiasco there is absolutely no reason any pension fund manager should be allocating funds to these opaque scheme's devised for one purpose, to bill 2 and 20.
Pension accounting is a whole different story, many assumptions are so flawed that any regulator with half a brain would call the shit into question. I can think of one investigation in regard to pension accounting that has now dragged on for years with no resolution, this is beyond comprehension.
David, some of the folks are talking about how a lower rate would just restart the cycle of boom and bust again. Never the less, I would be applying the Bagehot theory, I would be monetizing the paper with the caveat that if it is bad it will come right out of your bottom line as an eventual loss. That would freeze a lot of the crappy paper and allow the mostly good stuff to be packaged off to allow the lodging of the bad paper firmly on the big wall street banks and big mainstreet banks where it belongs. I would require that SIVs not be recognized as off balance sheet in computing capital adequacy.
Without recognition of the losses, and attempting to conceal the losses, Fed policy is just one small lever in the game. What really should be happening involves a whole plethora of policy responses from places that haven't exactly been forthright.
OCC- that means you, direct supervisions of some of the banks lies elsewhere. Congress, and especially the SEC- funny how there seems to be no official SEC investigations into some of these firms now hauling out the dead. BSC's relationship with ACA- the whole stinky mess of the Moody's/S&P/Fitch ratings scam springs to mind. I can go on and on, and this mess is truly beyond just a few fed rates and emergency liquidity measures.
We dismantled the 1930's solutions to the problems of lending long and borrowing short and did not replace them with anything that makes rational sense in actual operation.
While Glass Steagal and a whole bunch of other legislation was restrictive there was indeed a legitimate purpose to their existence, a purpose that was forgotten in the popular deregulatory times of the last three decades.
Was there too much regulation in 1970? Undoubtedly. Is there too little today? Undoubtedly.
So a few changes in the rates and some more money printed are not a viable solution when the system of finance related to providing liquidity to our capital markets isn't working because of too much gaming the system.
Someday this war's gonna end...
don't mention pension accounting for god's sake . . . you'll bring back Moe Showers or Doc Holiday or whoever he is today.
Canadian snow geese swooping up empty nests in Arizona. Can't help but wonder if this is a case of catching falling knives.
404 Error, No such article | Chron.com - Houston Chronicle
And sorry if this story about the Senate FHA bill has already been posted.
404 Error, No such article | Chron.com - Houston Chronicle
Nemo, I took the two-quarter Ph.D. core finance sequence at U. of Chicago, and seriously considered going the Ph.D. route (I chose to remain in the M.B.A. program, after all).
In two quarters, Eugene Fama taught me blind reliance on efficient markets, indexing, random walk, etc. I believed it, and it served me well in my personal investing over '92-'03.
Then, in '04, after reviewing the data with fresh eyes, I came to the conclusion that the dotcom crash was perfectly foreseeable. Taking that clear-eyed approach further, I concluded -- with the help of many, many fine books, such as 'Irrational Exuberance' -- that the U.S. economy was terribly at risk due to the unprecedented household debt/income ratio and unusually low interest rates. I've taken action -- not buying a fourth California home, being 100% in gold and gold mining stocks over '05-'06 -- that has served me remarkably well.
We'll see how this turns out. But, I've gone to school with and have been taught by the best and brightest crowd. Blind reliance on mathematical models is a recipe for disaster. I used to do that; no more.
Read some Murray Rothbard; he's clear, logical, and, to me, irrefutable. He's the antithesis of my Chicago training: no math.
But, he makes most compelling cases.
Please quit calling us with a different read of the same fact pattern bozos.
Anyone who thinks that there will be a fairly consistent trend favoring large caps over small caps should consider a futures spread. Long S&P E-mini, short Russell 2000 E-mini. A one percent difference between the two is worth about $750 on one contract. One could just short the Russell 2000, but that is a bit scary, since one contract controls $75k of stock. The margins on a spread are rather small, probably
JG wrote:
"Blind reliance on mathematical models is a recipe for disaster. I used to do that; no more."
I never studied this stuff in school. But I learned a little trading equities (which I do on a technical basis). Bond investing gets boring after a while .
One big problem with many mathematical models - similar to technical trading systems - is a lack of data. My data set is pretty good for what I do (I've been collecting and trading data for a long time). Yet only 1 security (SP500) goes back more than 50 years (to 1928). I don't know when the tbond futures started trading - but my data only goes back to 1979.
A lot of "black box" mathematical models rely on correlations - or lack of correlations - among multiple variables. But those models are - inevitably - doomed to fail when the correlations break down. As they do from time to time. For example - a simple correlation might be interest rates go down - equities go up. There were decades of historical data which showed this - like from 1980 to 2000 - before the model collapsed in the 2000's. But a few decades of data isn't enough to show anything - because secular trends can last for many decades.
By the way - one advantage of a mathematical model - or a trading system - is it does take emotions out of decisions.
Also - although a financial event may be foreseeable - figuring out when it will happen is quite another matter. A lot of people have lost a lot of money when they were correct about something happening in the future - but off in their estimate about when it would happen. Roby
risk, I've wondered if private corporations get away with fraudulent pension accounting because states and municipalities do it too....actually, nevermind, that wouldn't stop them from prosecuting. I'm working on another theory.
jg, I was working at a conglomerate just before the dotcom blowup. I did notice they were slashing their technology budgets for 2000 as they spent so much the prior 2 years in fear of Y2K. I dumped everything, mostly small caps, only to see most of them rise another 50%. 3 years later I looked like a genius, but it was mostly luck.
I got back in just as we started bombing Iraq as it the mood was so negative. I was just lucky again.
Can investors see something coming? Sure, but when? I was wondering when RE would implode back in 2003.
jg,
I am somewhat flummoxed by your wholesale rejection of all things "mathematical"... surely there's something between "blind reliance on mathematical models" and ignoring any diversification and being 100% in gold? It might work, it might not; but this wholesale rejection of established risk-reduction methods (suggested by "mathematics") seems like yet another extreme.
That said, glad you've done well... (but is it time to hedge your successful bets a bit?)
Yep, lama, that timing stuff is tricky. I've been 100% in SDS (double inverse of the S&P 500) since March; I'm a bit down, but feel confident that the market will tank, soon. But, it is painful waiting.
DC, I figure that I am hedged with my 100% bets: if I am right on SDS, I make a lot of money (but will be out of a job, given the following collapse of venture capital investing). If I am wrong, I lose some money on SDS, but still have a job.
Mathematical models are useful, DC: I analyzed the '90s San Diego housing downturn and upturn, and found that three factors led the upswing in prices: declines in defaults, increases in employment, and increases in home sales. So, my San Diego home pricing model will guide my decision when to buy.
Tricky times these are. They will be good times for those with sizeable savings and low/no debt.
lama:
I am also wondering where all the litigation work is. I have heard of a few small time cases, mostly against groups of individuals who bought and sold houses using fraudulent appraisals to get cash out.
Everybody in the food chain should be looking into their rights. Instead they are apparently just hoping it will be OK. Maybe they all know they won't get anywhere with litigation because they all knew what was happening and were complicit.
Anyway, this is why I'm not surprised the markets haven't crashed yet. If the players are still in denial it's no wonder most of the spectators haven't figured out what's going on.
One area I don't get is the endowment funds of mega universities. They have abandon traditional investing with outstanding results.
I don't know how to tell if their success is based on a superior strategy or additional risk + luck. Also, even if the dozen or so endowmenets over $5 billion can do it, they are being copied by all the non profits.
In theory an endowment has a different/longer time horizon then most players in the capital markets and it could generate above average returns.
In fact, if Harvard lost 23% or $5.7 billion that they made last year, people would go nuts.
Harvard Fund Hits a Record - WSJ.com
"The returns were led by large gains in emerging-market stocks, real estate and private equity. After factoring in the university's annual distributions and the new donations to the school, the endowment's size increased by $5.7 billion from the previous year.
The value of all assets managed by Harvard Management Co., including staff pensions, trusts and other related accounts, grew to $41 billion from $33.7 billion."
The S&P returned 18%+ during that period, which makes the returns a little less impressive.
Even if they can do it, not everyone can and there have to be some big losers.
JG - Why will the broader market (SP500) tank soon? Maybe it will - maybe it won't - I just want to know what your thesis is.
FWIW - the trend is still more or less sideways. I trade sector funds - 42 of them. The best - Energy Services - is up 50% YTD. The worst - Home Finance - is down 40% YTD. And there are a whole lot in the middle between those. Which is why IMO the broader market has basically been going sideways. Roby
Robyn:
What do you do when an entire sector has a market cap less then a single large cap company?
I have never invested this way, but given it some thought.
AllenM
Like father, like son:
In the U.S. the staff of the sec wanted to proceed with both of its inquiries. However, they were stopped abruptly in 1992 by the Commission itself, led by Chairman Richard Breeden, not long after British Prime Minister John Major spent a weekend with President George Bush at Camp David. Had Major persuaded Bush to call off the investigation, as British press reports speculated at the time? Both Bush and Major, through spokesmen, say they don't recall discussing Lloyd's. Former Chairman Breeden, who had been a key White House aide under Bush, told Time that the sec decision against proceeding "was not because Mr. Major and Mr. Bush said anything to each other" but because the SEC decided that disputes between Names and Lloyd's should be resolved in English courts. "We didn't make a judgment that the way (Lloyd's) allocated risks among syndicates wasn't sleazy," Breeden told Time. "We didn't make a judgment that their practices were honest."
The problem with wannabe mathematicians masquerading as economists is that you get addicted to "tractable" models, which yield beautiful theorems. That is how the academic pecking order works. They won't dare go into math itself, because getting a job is next to impossible, and pay is abysmally low. So you stick to a fashionable subject like Economics (or Computer Science or Electrical Engineering or ...) but crank out heavily mathematical papers, proving this and that.
Real world if far too messy. True even in "tractable" fields like electrical engineering, but infinitely more so in Economics.
Allen, as someone with a mathematics and computer science background, with an MBA and 20 years of teaching (mostly adjunct) I absolutely understand the seduction of going with the mainstream thought and the isolation of academia. Because I have always straddled both worlds, it is second nature to me that most career academics have no idea what the real world is like on a "gut" level. That's what has made me a great professor all this time...I teach people in a style that gives them what they need to know to survive out there, not what they need to know for the next degree level.
One of the best things I took away from Bschool was methodology of the case study. And by that I mean, there you are reading these cases and you constantly say to yourself "how the hell did these guys not see this coming? these are VERY smart people, the signs are all there and yet, the company or the stuation blew up". The reason, most of the time, is that it is very hard to see outside your frame of reference when all the people around you belong to the same frame. That the Fed, or anyone else could not see this coming reads like a business case. These are smart people. The guys that write the models are smart people. None of them will see it coming because they are too busy marvelling at how good this all works and because everyone else around them belongs to the same frame. And further, many people don't WANT to see it coming, and just party on until the lights finally come on.
The models are seductive...and nothing gives you a jolt like running through some of that stuff because it is just so logical...logical to those that always think that way. But the world doesn't behave that way. And that's where the end game is. And when someone can model the irrational, then I'll start to put more faith in those models. Or maybe I'll just quietly start a hedge fund when I figure it out
I think about once a month lately I've sent a draft back to the marketroids telling them that if they actually go to print bragging that the company hires 'the best and the brightest' they're going to bring up associations they're all far too young to understand.
I wonder how many do recall what it means -- just that kind of self-assured blindness by smart people.
What I ask myself is, with this much stuff showing up in business as done by supposedly conservative, well educated US businesspeople -- what the hell has been going on elsewhere.
Has the rest of the world been smarter and more honest in doing business nowadays than the people who killed the US market for a little brief personal profit? Or is there another wave coming of vapor paper, from other directions?
Maybe that "goose that laid the golden eggs" story needs to be told in business schools too, eh?
Yes, we academics do have our own brand of conventional wisdom, which governs things like what lines of thought will get published or (even more important these days) attract grant money.
However, my sense is that the Fed is subject to political pressure, and private sector often has to tailor results to reach the conclusion management wanted from the beginning.
Nothing's perfect.
This is ridiculous and just another among many missteps by Moody's in 2007, which started with the equally foolish ratings of Icelandic Banks as "AAA" based upon an iffy assumption that they would be government backed in a distressed situation.
Anyone with any ounce of common sense realizes that the credit ratings of MBIA and Ambac do not equate to those of J&J and GE. What is this analysis based upon? A boatload of "phantom" capital mysteriously appearing near-term. Clearly if you look at CDS spreads, you don't see too many people clamouring to invest in highly uncertain "black box" risks like MBIA and Ambac right now.
The greatest irony right now is that Moody's and most likely the other rating agencies will concentrate on the near-term and affirm the monolines to keep the muni bond and structured finance ratings business going. But, in the long term, they destroy their credibility in the process and seriously damange their franchise value.
Bad decisions come from bad management. Isn't it time for the Moody's board to wake up and make a change at the top?
did someone bring up pensions?