Friday, April 30, 2010

The bums will always lose!

You don't go out looking for work dressed like that, do you? 

Greece has agreed the outline of a €24bn (£21bn) austerity package, including raising the retirement age from an average of 53 to 67, in return for a multibillion-euro loan from its eurozone partners and the International Monetary Fund, according to people familiar with the talks.

On top of a three-year wage freeze, public sector workers will lose their 13th and 14th monthly salaries, paid at Christmas and Easter, and see further cuts in allowances.

Er, is today the 14th month?


Tuesday, April 27, 2010

In America

We have a trickle down system of corruption.  Other former colonies, from what I've seen, tend to be corrupt from the bottom up, or at all levels equally.  In the US, we are outraged if we have to bride the cop or the building inspector, but somehow we accept as inevitable the fact that the President lies us into a fake war or that laws are written by the companies who sponsor them.  Basically, most Americans like to play by the rules, they like to trust one another, and they like to deal fairly with people (and be dealt with fairly) even when there's probably no explicit enforcement mechanism and it would be easy to get away with being corrupt at an individual level.  We might relate this to our Protestant heritage, and the way it creates a culture of social trust that is not based on the family, as it so often is in more Catholic countries. 

This little personal reverie is meant as introduction to a very interesting post over at The Big Picture.  Barry's got a former SEC attorney explaining how the bureaucracy of the SEC works and in what sense the Goldman case is "political".  The case, of course, IS political, but only in the sense that normally, politics would have squashed it from the top down by now. 

... it's up to the lower-level enforcement attorneys to decide when to bring the case to the Commissioners. It is possible that these attorneys saw that it was politically convenient to bring their action now — actually, 8 months ago when they got approval for the Wells notice — but their motivation was not political: It helps their careers (and mental well being) to get their cases approved.

Attorneys are unwilling to put a case up for a commission vote if they didn't think it was strong enough. These attorneys are judged on the success of the actions they bring and wouldn't jeopardize that to appease the politicians that are currently serving on the Commission. The senior people who make promotion decisions will see Commissioners and Presidents come and go but senior staff outlasts them all.

The Commissioners power is wielded not to instigate investigations but to kill them by not approving them — this was rampant during the Bush administration.

This is one instance, but you can see the same thing in lots of places (eg. Gillian Tett's discussion of the rating agency emails).  In my opinion, this is the American way.  The lower level guys are just doing their jobs and trying to get ahead.  They take the rules as given, and play the game they see in front of them without really trying to change it.  Not that they are especially moral, mind you.  When the boss says kill some towel-heads or rate some AAA, you don't fuck around with the obvious idiocy of these requests, you just look at your co-worker, cite some Dilbert, and git'er'done.  But it's not like they would have come up with this crap on their own.  It's not like the individual guys at the rating agency thought they could get Goldman to pony up a little extra for a phat rating, or the individual attorneys at the SEC had politics in mind. 

For all its rugged individualism and entrepreneurialism, the corruption in the US starts at the top and trickles down.  Which is why it's hardly a surprise that our great financial meltdown occurred on the watch of our most corrupt president.

Thursday, April 22, 2010

I never liked calculus

Alan Blinder usually has a balanced and useful perspective on political/regulatory issues.  I remember being impressed by his speech at last year's Minsky conference -- it kinda made me think of what I imagine Paul Volcker is like when there's no TV cameras (Volcker having become the administration's thick-browed-big-stick-wielding-bank-basher for the moment).  From today's Journal:

Derivatives dealers have already shed crocodile tears over the alleged benefits of customization to end users. After all, how else could, say, an airline swap February euros for May jet fuel? Well, I've got an answer. It could sell standardized February euro contracts (for cash) and buy standardized May jet fuel contracts (with cash), on organized exchanges, paying vastly smaller fees to dealers in the process.

Yes, there are unusual cases in which customization is important. But let's not deceive ourselves: The primary beneficiaries of customization are the dealers, not the customers. In the U.S., that basically means five big Wall Street firms—each of which has an enormous stake in the outcome. If they can stave off standardization and exchange trading, comparison shopping will remain very difficult and profit margins will remain sky high. But if reform makes standardized, exchange-traded products dominant, competition will squeeze profit margins to the bone. Here we have what may be the clearest divergence between the interests of Wall Street and Main Street.

I liked this point.  Even though I rarely have much to do with Goldman or Morgan's three-card-monte divisions, every 10-K has disclosures about a company's derivatives position, so I do get a first hand view of this industry (if such a term can be used in reference to footnote 945697/b).  And I rarely see any fancy stuff.  People hedge currencies,interest rates, and maybe the price of one or two major commodities, that's about it.  I don't feel like looking up the statistics, but I would guess that accounts for 90% of the derivatives that Main Street uses.  Yeah, occasionally people fashion crazy custom weapons of mass destruction (as Buffet calls them).  I remember having the guys in a big bank's leveraged loan division explain to us (6 times) how one company had directly pledged a percentage ownership of their natural gas fired power generation assets as collateral for one leg of a complicated a spark spread hedge.  The basic idea was that as gas got more expensive the price of electricity went up, so despite the fact that gas was the major cost they were trying to hedge, the company's assets were more valuable.  Instead of putting up more cash collateral  to cover the hedge, they simply has someone agree to own more of a now more profitable generation asset.  Or something like that.  I don't remember the other legs of the trade, and yes, the company had recently emerged from bankruptcy and was already flirting with it again, why do you ask?

My point being that I have also understood the whingeing about higher collateral requirements to be coming mostly from the banks, and not from the corporate end-users of these things.  These contracts should by and large be transparent, plain vanilla, adequately collateralized in cash, and traded on exchanges.  If you want a custom derivative, by all means, go to Vegas baby!  And if you truly don't have the capital to put up for a real hedge, do what anybody with a solid idea and a decent reputation does -- borrow it.  I don't think the banks have a leg to stand on here.  They are just resisting their clubby high cost barter system being turned into the ultimate commodity: money.  Not that I blame them really.  Resisting commoditization is every businessman's first priority, unless of course you build your business on inducing it.

Wednesday, April 21, 2010

Tuesday, April 20, 2010

Thank You Sir May I have Another

Wow.  That was some bailout they engineered.

Yields on Greek bonds pushed to fresh highs on Monday and shares in Athens sank as investors continued to worry about the country’s near-term ability to finance its debt. Some raised the specter of default even if international aid arrived soon.

Monday, April 19, 2010

Rebooting Democracy

The evolution of Larry Lessig from copyright critic to corruption crusader continues.  Here is the latest version of his presentation.  I think his solution of calling a constitutional convention would be the greatest thing that's happened to the US in a long time.

For good measure, I looked up the two studies he mentioned.  One asserting that the return on investment for a particular piece of lobbying was 22,000% and another a quite obvious model answering the question of why "there isn't more money in politics".  This last contention appears over and over again from people who claim that if there were really $100 bills lying around Washington someone would already have picked them up.  I've always considered that logic about as compelling as the economic version, but it's nice to see someone work out in empirical detail why the actual funds disclosed are less than you would at first imagine (short version -- nobody counts the unconsummated threat to give you opponent money).  Lobbying is just another business expense -- you try to minimize costs and maximize the returns.

Friday, April 16, 2010

Financial reverse engineering

Da Wolf, at it again.

First, it would be extremely helpful to reform the taxation of companies, to promote investment. In an interesting discussion of this issue, Andrew Smithers of Smithers & Co argues that a radical reform of corporation tax, to end interest deductibility, offset by a lower rate of tax would reduce indebtedness and lower the pre-tax return needed to achieve a given post-tax return on equity. The result should be a bigger capital stock. Such a measure could be combined with higher deductibility of investment, which would be helpful to manufacturing.

Trust me

I spend money way more carefully when it comes out of my own pocket. 

Posted via email from The Capitalist Axiomatic

Monday, April 12, 2010

Further fascinating attempts to square the circle

I'm just waiting for the "angels on the head of a pin" debate to really take off.  If a tree falls in the woods, is it really a bailout?

From the NYT:

Under the plan, Greece would receive loans at about 5 percent interest, significantly lower than the rate of 7.5 percent that the markets were demanding last week, though not as low as Greece had wanted.

Mr. Peruzzo said he expected the interest rate on Greek bonds to drop sharply when markets opened Monday. The rate of 5 percent "is now the benchmark," he said. "This is a step of clarification the markets are waiting for."

Yeah, for about 5 minutes or until the Greeks decide it's time to ask the Germans to bend over for round two (you know they secretly love it).

The Greek finance minister, George Papaconstantinou, said his country would try to avoid drawing on the European Union and I.M.F. money. "The aim is for us to continue borrowing as normal from the markets, and we believe we will be able to do this now," he said.

He added: "The Greek government has not asked for the activation of this mechanism despite the fact that it is immediately available."

Hmmm ... where have I heard that one before?

And here's the biggest howler:

The loan rates are "nonconcessional," or close enough to market rates that they do not constitute a bailout, Mr. Juncker said.

If Greece is not being given any concessions, how exactly is this going to help their budget situation?  Do we really think that the 2.5% less interest they will pay on the15% of their total debt they need to issue this year will solve all their problems, even if they do get the don't-call-it-a-bailout?  They will or they won't put their fiscal house in order.  I'm guessing they won't, and this loan will be necessary and politically very unpopular both in Germany and Greece.  We'll see what happens then.

Friday, April 9, 2010

Another round ...

... in the ongoing saga called, "politicians don't understand markets".  This one brought to you by Greece (again).

The presence of the aid package might have been expected to calm markets, but continued opacity over its workings and fears that political disagreement could prevent swift disbursement have left investors with more questions than answers. Greek 10-year bond yields hit 7.49% Thursday, a level unseen since 1998, sending the country back to pre-euro-era borrowing costs. But the real damage is at the short end of the curve and in the volatility of prices: Two-year Greek bond yields have risen more than two percentage points in just two days to 7.68%, 6.75 percentage points above German debt.

Remember how if Hank Paulson had a bazooka in his pocket there was no way he was going to need to take it out in order to keep the other boys at the urinal in line?  Well, looks like Merkel's wasn't big enough either.  Not that you can't fool the market some of the time -- there really are such mysterious things as self-fulfilling prophecies in finance -- but it was pretty obvious even to a naive observer like myself that the "bailout" was all smoke and mirrors.  "We'll help if things get really bad" has about as much logic as "it's so crowded nobody goes there anymore".