Financial News

[Balta1701]

The best discussion is coming from a blog, but it's interesting me. Simon Johnson (former IMF economist) is writing today that there is now some serious weakening coming from the Eurozone financial system, that could have serious repercussions worldwide if it escalates.

[StrangeSox]

lol. You are pretty much calling the entire country irrational then, because the valuations of companies are set based on order flow that comes to the marketplace. I guess we are back to the idea of not trusting people to make their own decisions.

 

Reacting that way to a simple speech that didn't even really introduce new policy is a good definition of irrationality.

[southsider2k5]

Reacting that way to a simple speech that didn't even really introduce new policy is a good definition of irrationality.

 

Except that the speeches that have been reacted to the worst are the ones where he actually does things like talking about taxing banks and punishing the financial sector in general. You know actually things that could change the worth of a business?

[NorthSideSox72]

Except that the speeches that have been reacted to the worst are the ones where he actually does things like talking about taxing banks and punishing the financial sector in general. You know actually things that could change the worth of a business?

If the bank penalties are truly just pay controls for TARP bank executives, and are only done to those banks with the government bailed out, I don't have a lot of issue with it. They took government money to stay afloat, and if they can't keep themselves honest, and are still owing the gov't money, then its just a smart business move. But if the tax or penalty or whatever it ends up being extends beyond companies who still owe the gov't money, or beyond TARP entities, then that's not doing anything other than using anger as a way of filling the government till.

 

[Balta1701]

Why would anyone ever think that anyone on Wall Street could make a stupid decision.

Former Merrill Lynch CEO John Thain, who brokered the investment bank's controversial sale to Bank of America, is taking over as chairman and CEO of CIT Group as the commercial lender continues to restructure its business following a brief stay in bankruptcy protection last year.

 

[bmags]

and then they have to, like, pass a dysfunctional congress where they can, like, lobby the hell out of it.

[StrangeSox]

Except that the speeches that have been reacted to the worst are the ones where he actually does things like talking about taxing banks and punishing the financial sector in general. You know actually things that could change the worth of a business?

 

Massive sell-off to a speech, before a bill is even crafted in either house, does not seem like rational reactions to me.

[southsider2k5]

Massive sell-off to a speech, before a bill is even crafted in either house, does not seem like rational reactions to me.

 

Mostly because you don't understand what happens at the specialist level of exchanges.

[StrangeSox]

What happens at the specialist level of exchanges that makes major market moves in reaction to a Presidential speech long before any policy comes to fruition rational?

[NorthSideSox72]

What happens at the specialist level of exchanges that makes major market moves in reaction to a Presidential speech long before any policy comes to fruition rational?

its not truly rational, but since the markets (especially in the short run) are not 100% rational, then the specialists and MM's pretty much have to work within that, now don't they?

 

[southsider2k5]

What happens at the specialist level of exchanges that makes major market moves in reaction to a Presidential speech long before any policy comes to fruition rational?

 

Their job is to constantly have pricing pressures priced into a stock. Waiting around six months for actual policy is irrational. The whole point is to be prepared for that. That's why reaction happens when it is news.

[StrangeSox]

Their job is to constantly have pricing pressures priced into a stock. Waiting around six months for actual policy is irrational. The whole point is to be prepared for that. That's why reaction happens when it is news.

 

But if no policy ever comes to fruition, what real pressure was there?

[southsider2k5]

But if no policy ever comes to fruition, what real pressure was there?

 

Then the market readjusts. It isn't that hard.

[southsider2k5]

Then the market readjusts. It isn't that hard.

 

You have to remember, companies aren't trading on their valuations today. They are trading based on their future profits and receipts. The President saying he is going to embrace or destroy certain industries has an immediate affect on their perceived future valuation.

[Balta1701]

The NY times this weekend ran a nice piece on the inner workings of how Goldman played its role perfectly in bringing down AIG and then played the federal government for suckers to the tune of billions of dollars. The summary version is:

 

Goldman buys up lots of mortgage-backed securities they think will lose value, then insures them through AIG.

 

They start to lose value, and Goldman demands large payments from AIG. Furthermore, Goldman claims the securities they owned were worth less than AIG claimed they were worth, and refused to let AIG or any outside group audit them to determine how much they were actually worth.

 

Then, the real fun begins. Goldman then releases press statements saying that AIG is struggling to meet its obligations and its creditors are refusing to negotiate. Goldman pushes other AIG creditors to demand the same thing. The main creditor that was refusing to negotiate, of course, was Goldman.

 

AIG's stock tanks, panic sets in, and the government winds up seizing AIG. (that, of course, may well have happened without any Shenanigoats from G.S., but that has been disputed before Congress in public testimony) Then, former Goldman CEO Paulson steps in and says that the government will cover AIG's creditors to avoid a panic...and pays Goldman the value on their assets that Goldman insisted they were worth, not a negotiated intermediate value, nor the value that AIG said they were worth, 100% on the dollar based on the G.S. estimates of their worth. G.S. makes a killing.

 

The price of those securities then rebounds after the Fed starts buying them up, creating a market for the paper that already had insurance paid on it. Goldman can then make money by selling those securities at elevated rates to the Fed, even after they already had been paid the insurance on their decreased values. (Basically, they got a 100% payment on a burned down house from their insurer, then they sold the house to the Fed at 75% of its pre-burned-down value)

 

Nice gig if you can get it.

[NorthSideSox72]

The NY times this weekend ran a nice piece on the inner workings of how Goldman played its role perfectly in bringing down AIG and then played the federal government for suckers to the tune of billions of dollars. The summary version is:

 

Goldman buys up lots of mortgage-backed securities they think will lose value, then insures them through AIG.

 

They start to lose value, and Goldman demands large payments from AIG. Furthermore, Goldman claims the securities they owned were worth less than AIG claimed they were worth, and refused to let AIG or any outside group audit them to determine how much they were actually worth.

 

Then, the real fun begins. Goldman then releases press statements saying that AIG is struggling to meet its obligations and its creditors are refusing to negotiate. Goldman pushes other AIG creditors to demand the same thing. The main creditor that was refusing to negotiate, of course, was Goldman.

 

AIG's stock tanks, panic sets in, and the government winds up seizing AIG. (that, of course, may well have happened without any Shenanigoats from G.S., but that has been disputed before Congress in public testimony) Then, former Goldman CEO Paulson steps in and says that the government will cover AIG's creditors to avoid a panic...and pays Goldman the value on their assets that Goldman insisted they were worth, not a negotiated intermediate value, nor the value that AIG said they were worth, 100% on the dollar based on the G.S. estimates of their worth. G.S. makes a killing.

 

The price of those securities then rebounds after the Fed starts buying them up, creating a market for the paper that already had insurance paid on it. Goldman can then make money by selling those securities at elevated rates to the Fed, even after they already had been paid the insurance on their decreased values. (Basically, they got a 100% payment on a burned down house from their insurer, then they sold the house to the Fed at 75% of its pre-burned-down value)

 

Nice gig if you can get it.

I have not yet read the linked article, but I can tell you right now that your synopsis is not particularly close to reality. The whole MBS and swap debacle just didn't happen in that way. I'd say 75% of what you typed is not reality.

 

[Balta1701]

I have not yet read the linked article, but I can tell you right now that your synopsis is not particularly close to reality. The whole MBS and swap debacle just didn't happen in that way. I'd say 75% of what you typed is not reality.

I reread the article again, and my synopsis sure sounds like reality to me.

 

GS buys coverage on those MBS contracts, already being bearish on the housing market.

 

GS starts demanding payment on those contracts

 

GS demands higher payments than AIG thinks is appropriate

 

GS refuses to negotiate, starts writing down the value of their assets and of the assets of other companies that have insured things with AIG, bringing in more creditors

 

GS publishes report asking things like if AIG “is not in a position of weakness, why would it accept anything less than the full amount of protection for which it had paid?”

 

AIG's stock tanks

 

AIG's other creditors swoop in

 

The government seizes AIG and pays the full amount that GS is asking for

 

The value of those securities begins to recover once the fed buys up $4 trillion in mortgage backed securities, and GS profits both on the way down and on the way up.

 

Doesn't excuse AIG, but the case of how GS worked to bring this whole mess to the forefront looks quite strong.

[NorthSideSox72]

I reread the article again, and my synopsis sure sounds like reality to me.

 

GS buys coverage on those MBS contracts, already being bearish on the housing market.

 

GS starts demanding payment on those contracts

 

GS demands higher payments than AIG thinks is appropriate

 

GS refuses to negotiate, starts writing down the value of their assets and of the assets of other companies that have insured things with AIG, bringing in more creditors

 

GS publishes report asking things like if AIG “is not in a position of weakness, why would it accept anything less than the full amount of protection for which it had paid?”

 

AIG's stock tanks

 

AIG's other creditors swoop in

 

The government seizes AIG and pays the full amount that GS is asking for

 

The value of those securities begins to recover once the fed buys up $4 trillion in mortgage backed securities, and GS profits both on the way down and on the way up.

 

Doesn't excuse AIG, but the case of how GS worked to bring this whole mess to the forefront looks quite strong.

Most of those individual line items are correct - but your interperetation that GS was to blame is ludicrous. GS bought protection on debt instruments, expecting the counterparty to make their obligations. When some of the securities failed, the debts were "called", and AIG couldn't cover because AIG didn't properly value or capitalize those obligations. Then of course there was a whole dasy chain thing going on, where AIG was compunded into multiple obligations on the same instruments, giving them absurdly large losses. Basically, AIG was the biggest culprit in this. GS and other firms tried to get their money, and would do anything they could - as they should.

 

Now, the industry as a whole, was heavily exposed to counterparty risk in the swap and debt markets. In that sense, GS and everyone else in those markets are partially to blame. No one had a solid idea of how to value swap positions and obligations, or what the proper capital protection levels were for those instruments. Without a clearing house in between, the smart thing would have been to be highly conservative in capital requirements - this was not done properly, at varying levels, and AIG was clearly the worst offender.

 

With now two swaps clearing houses up and running (CME/Citadel in Chicago, ISE in NY), and gov't rules changing to in essence force the markets onto them, this counterpary risk scenario is being mitigated. Its one of the areas where we are truly going in the right direction.

 

But the idea that GS was the bad guy in the relationship with AIG is absurd.

 

[Balta1701]

There are a number of issues that you're not addressing there.

 

First is the valuation issue. G.S. was pushing AIG for higher payments, as it should for its shareholders. Without knowing their contracts, it's difficult to evaluate the propriety of everything they did, but it seems astonishing that the contracts would be set up in such a way that G.S. was allowed on their own to decide how much those contracts were worth with no independent evaluation possible. If AIG wrote and accepted contracts that way then they're obviously idiots...but why should the U.S. taxpayer then be paying out 100% on idiotically written contracts that allow GS to determine the valuation?

 

Secondly, there's the hostage-taking version here...by being able to write reports that publicly effect the value of AIG's stock, GS is able to manipulate any price negotiations in a way that can benefit itself. They basically set things up where if AIG didn't give in to GS's demands, GS could produce the equivalent of a modern day bank run by suggesting the company was unsound and driving all of AIG's other creditors to demand payment simultaneously. That's a hell of a negotiating tactic...pay what we're demanding or we can destroy your company through the other arms of our business. There's been behind-the-scenes but never really investigated accusations that similar runs have played important roles in the other big failures we've seen, Bearsterns, Lehman, Indymac, etc.

 

AIG was definitely a mess and I'm not trying to excuse them, I'm trying to note several of the behaviors of GS which are legal but which destabilize the entire system by their legality, and to note how badly Paulson ripped off the US taxpayer.

[Balta1701]

Oh, and I should edit one sentence but I want to do so clearly...change "Paulson" in the last line, to "Paulson and others, likely including Geithner".

[Cknolls]

I would be highly suspect of this rally based on bilateral help to Greece from the eurozone. I am a seller here at 1075.00 future with a test of 1070. And there is a chance that a break of 1058 leads to a test of 1052.25.

[Cknolls]

I would be highly suspect of this rally based on bilateral help to Greece from the eurozone. I am a seller here at 1075.00 future with a test of 1070. And there is a chance that a break of 1058 leads to a test of 1052.25.

 

 

Who would have thought it would happen this quick? Wow trading 67.00 already.

[Balta1701]

I'm finding it interesting how this latest aspect of the "financial troubles" appears to involve nation-scale debt bailouts moving from one spot to another. Just a month ago we had Dubai, now we have Greece, with others like Spain and maybe even Italy or Britain looking troublesome at some point int he future.

 

Wonder what happens when one of these countries winds up large enough that its creditors are unable/unwilling to do something to keep the system running as-is.

[NorthSideSox72]

There are a number of issues that you're not addressing there.

 

First is the valuation issue. G.S. was pushing AIG for higher payments, as it should for its shareholders. Without knowing their contracts, it's difficult to evaluate the propriety of everything they did, but it seems astonishing that the contracts would be set up in such a way that G.S. was allowed on their own to decide how much those contracts were worth with no independent evaluation possible. If AIG wrote and accepted contracts that way then they're obviously idiots...but why should the U.S. taxpayer then be paying out 100% on idiotically written contracts that allow GS to determine the valuation?

 

You are misunderstanding how these payments work. GS bought protection - they made periodic cash flow payments to AIG, in exchange for insuring against default risk. The swap contracts would have specified what AIG had to pay - whether it was full principal or partial for securitized debt segments or tranches, and the time period for payment. The only arguments would be about when the debt(s) were actually in default. AIG was stalling and trying to not deliver full payment, because they couldn't make said payments. That is 100% on AIG.

 

Secondly, there's the hostage-taking version here...by being able to write reports that publicly effect the value of AIG's stock, GS is able to manipulate any price negotiations in a way that can benefit itself. They basically set things up where if AIG didn't give in to GS's demands, GS could produce the equivalent of a modern day bank run by suggesting the company was unsound and driving all of AIG's other creditors to demand payment simultaneously. That's a hell of a negotiating tactic...pay what we're demanding or we can destroy your company through the other arms of our business. There's been behind-the-scenes but never really investigated accusations that similar runs have played important roles in the other big failures we've seen, Bearsterns, Lehman, Indymac, etc.

 

It would make no sense for GS to want AIG to fail. None. It doesn't benefit GS. The scenario they wanted, quite obviously, is for AIG to pay what they were supposed to pay. When they couldn't, GS did the only smart thing - apply pressure to make sure they were as close as possible to the top of the pile for what few payments AIG could make. GS did not WANT the toxic unwind, they just wanted what they were contractually obligated to receive.

 

AIG was definitely a mess and I'm not trying to excuse them, I'm trying to note several of the behaviors of GS which are legal but which destabilize the entire system by their legality, and to note how badly Paulson ripped off the US taxpayer.

 

The whole toxic unwind thing was not desired by any players here, at all. AIG got hammered the worst because they were the riskiest firm in terms of how they valued swaps, and set aside capital against the risks associated with them.

 

As for the US taxpayer and the bill they had to foot, I agree that it was a rip-off. But I think you place the blame incorrectly here. The whole industry, GS included, needs a lot of blame - they put far too much capital into a market where counterparty risk was rife, valuation and risk were fuzzy, and regulation was thin. So yes, GS, and the whole industry, deserve some blame. But so does the US government, who not only did nothing to regulate and force clearing into the space until it was too late, but also who refused to see the realities of the market. And if you want to drill down and blame specific firms, then blame the ones who took the biggest risks - AIG being #1 on that list. If AIG and a few others had been more conservative with their capital (and some firms WERE more conservative), this would not have been nearly as big a debacle as it was.

 

[Balta1701]

You are misunderstanding how these payments work. GS bought protection - they made periodic cash flow payments to AIG, in exchange for insuring against default risk. The swap contracts would have specified what AIG had to pay - whether it was full principal or partial for securitized debt segments or tranches, and the time period for payment. The only arguments would be about when the debt(s) were actually in default. AIG was stalling and trying to not deliver full payment, because they couldn't make said payments. That is 100% on AIG.

As my last comment, I'd like to note that the NYT article gives a strong impression that this is not the case, and also cites a number of sources on this. Here's some selections.

The Securities and Exchange Commission is examining the payment demands that a number of firms — most prominently Goldman — made during 2007 and 2008 as the mortgage market imploded.

 

The S.E.C. wants to know whether any of the demands improperly distressed the mortgage market, according to people briefed on the matter who requested anonymity because the inquiry was intended to be confidential.

 

...

Goldman stood to gain from the housing market’s implosion because in late 2006, the firm had begun to make huge trades that would pay off if the mortgage market soured. The further mortgage securities’ prices fell, the greater were Goldman’s profits.

 

In its dispute with A.I.G., Goldman invariably argued that the securities in dispute were worth less than A.I.G. estimated — and in many cases, less than the prices at which other dealers valued the securities.

 

The pricing dispute, and Goldman’s bets that the housing market would decline, has left some questioning whether Goldman had other reasons for lowballing the value of the securities that A.I.G. had insured, said Bill Brown, a law professor at Duke University who is a former employee of both Goldman and A.I.G.

 

The dispute between the two companies, he said, “was the tip of the iceberg of this whole crisis.”

 

“It’s not just who was right and who was wrong,” Mr. Brown said. “I also want to know their motivations. There could have been an incentive for Goldman to say, ‘A.I.G., you owe me more money.’ ”

 

...

Still, documents show there were unusual aspects to the deals with Goldman. The bank resisted, for example, letting third parties value the securities as its contracts with A.I.G. required. And Goldman based some payment demands on lower-rated bonds that A.I.G.’s insurance did not even cover.

 

A November 2008 analysis by BlackRock, a leading asset management firm, noted that Goldman’s valuations of the securities that A.I.G. insured were “consistently lower than third-party prices.”

Note, that article answered the question I posed earlier but I missed it...yes, the GS/AIG contracts did have clauses allowing for outside arbitration, but GS refused it.