Financial News

[bmags]

Yeah, so whatever fault on GS, Greece, or EU for not following the law...

 

but what I haven't seen (not saying it doesn't exist), is articles or news on whether the EU is doing about these budget constraint laws and how to help countries in their union fundamentally f***ed because of the euro.

 

Like Spain, for instance, Spain was not cooking their books, they were in good financial shape. And as spain goes, so goes portugal. The housing bubble brings a flood of money into Spain, their wages go up, and then the crash. But, they can't depreciate their currency, and they are forced to stick to these budget constraints, and so they are just forced to be especially screwed. Now, I understand that if you are gonna benefit from the increaded power and flow of the euro, then you need to blah blah when it fails. But are they doing anything to fix the labor problem within the EU with things like this?

[NorthSideSox72]

That assumes that things haven't changed in the last 10 years or so.

 

I think the simplest question in response is...if these folks are so careful about accounting, then how did they accidentally miss an $8 trillion housing bubble in the U.S. (and, as is now becoming apparent, have the same thing happen in country after country. Dubai, Greece, Spain, etc.)

 

My explanation is that they didn't miss it...but that we've set up a system that provides strong incentives for short-term gains but no downside for intermediate or long-term losses. Thus, we've incentivized having Wall Street creating bubbles and taking huge profits on the way up, while someone else takes the losses on the way down.

I think you have the cause and effect backwards, to an extent. The incentive for both short and long term gains is not new, its been there forever. If they see a bubble, they should and will act to make money off of it, within the bounds of the law. And individual consumers should be smarter as a whole as well, in the same sense.

 

[mr_genius]

but what I haven't seen (not saying it doesn't exist), is articles or news on whether the EU is doing about these budget constraint laws and how to help countries in their union fundamentally f***ed because of the euro.

 

Like Spain, for instance, Spain was not cooking their books, they were in good financial shape. And as spain goes, so goes portugal. The housing bubble brings a flood of money into Spain, their wages go up, and then the crash. But, they can't depreciate their currency, and they are forced to stick to these budget constraints, and so they are just forced to be especially screwed.

 

 

Excellent point. I actually read an article about this yesterday. I'm trying to remember where the article was...

 

[southsider2k5]

That assumes that things haven't changed in the last 10 years or so.

 

I think the simplest question in response is...if these folks are so careful about accounting, then how did they accidentally miss an $8 trillion housing bubble in the U.S. (and, as is now becoming apparent, have the same thing happen in country after country. Dubai, Greece, Spain, etc.)

 

My explanation is that they didn't miss it...but that we've set up a system that provides strong incentives for short-term gains but no downside for intermediate or long-term losses. Thus, we've incentivized having Wall Street creating bubbles and taking huge profits on the way up, while someone else takes the losses on the way down.

 

Thank you Barney Frank.

[StrangeSox]

Barney Frank single-handedly made Wall Street incredibly reckless and focused on immediate short-term gains.

[jasonxctf]

Empire State Manufacturing Index Jumps To 24.9 In February

5 hours ago

(RTTNews) - Conditions for New York manufacturers improved at a healthy pace in February, according to a report released by the Federal Reserve Bank of New York on Tuesday, with the index of regional manufacturing activity rising by much more than anticipated.

 

The New York Fed said its index of activity in the manufacturing sector rose to 24.9 in February from 15.9 in January, with a positive reading indicating growth in the sector. Economists had been expecting a more modest increase by the index to a reading of 18.0.

[Balta1701]

If it wasn't for the tax cuts in the stimulus, I'm pretty sure I'd be paying a bit higher of an effective tax rate than this.

In 2007 the top 400 taxpayers had an average income of $344.8 million, up 31 percent from their average $263.3 million income in 2006, according to figures in a report that the IRS posted to its Web site without announcement that were discovered February 16. (For the report, see Tax Analysts Doc 2010-3372 .)

 

The figures came at the peak of the last economic cycle and show that widely published reports in major newspapers asserting that the richest Americans are losing relative ground and "becoming poorer" are not supported by the official income data.

 

The long-term data show that under current tax and economic rules, the incomes of the top earners rise when the economy expands and contract during recessions, only to rise again. Their effective income tax rate fell to 16.62 percent, down more than half a percentage point from 17.17 percent in 2006, the new data show. That rate is lower than the typical effective income tax rate paid by Americans with incomes in the low six figures, which is what each taxpayer in the top group earned in the first three hours of 2007.

 

Taxpayers on the 95th to 99th steps on the income ladder paid an effective income tax rate of 17.52 percent, according to calculations by the Tax Foundation, a nonprofit research group that favors less taxation and lower rates. Taxpayers in this category earned between $255,000 and $451,000 in 2007, compared with an average daily income of almost $945,000 for the top 400, who paid lower effective tax rates on average.

 

Payroll taxes did not add a significant burden to the top 400, not changing the rounding of rates by even one decimal. With payroll taxes taken into account, the effective tax rate of the top 400 would be 17.2 percent in 2006 and 16.6 percent in 2007, my analysis shows -- the same as not counting payroll taxes. As a point of comparison, about two-thirds of Americans pay more in Social Security, Medicare, and unemployment taxes than in federal income taxes.

 

The top 400's share of all income grew from 1.31 cents out of every dollar earned by all Americans to 1.59 cents.

 

Adjusted for inflation to 2009 dollars, the top 400 enjoyed a 27 percent increase in their income, or nine times the rate of increase for the bottom 90 percent, based on an earlier analysis of tax data published by Profs. Emmanuel Saez and Thomas Piketty, economists at the University of California at Berkeley who have been studying global income trends.

[Cknolls]

URL: http://www.rollingstone.com/politics/story..._bailout_hustle

 

 

Railin on GS again.

[Balta1701]

Bankers threaten to leave over UK bonus tax...then don't actually leave.

Fears of a mass exodus by London's financiers to the more favourable tax climate of Switzerland appear to have been exaggerated: fewer Britons applied for permits to work in the Swiss financial services sector last year than in 2008.

 

Research by Channel 4 News shows that, despite warnings by Boris Johnson, the mayor of London, that 9,000 high-­flying City workers would decamp to escape the windfall levy on bonuses and the 50p income tax rate, just 1,079 British citizens joined the financial sector in the Alpine state last year – and about two-thirds of those were applying for IT or other back-office jobs. That represented a 7% decline on the number of Brits applying for a carte de séjour – work permit – in the financial services sector in 2008.

[NorthSideSox72]

This was a truly "wow" level surprise - the number of people getting first month behind on mortgages fell significantly in January, even though that number usually goes UP in that same period, even in good years. Foreclosure actions also dropped, and so did overall rates for 1-to-4 unit residential properties. I think most of us were expecting, at BEST, that the foreclosure numbers would increase a little or at least stay level for the next few months. But this data suggests the foreclosure situation may be improving sooner than expected.

 

Article. WSJ has one too, its better, but its behind the subscriber wall.

 

[NorthSideSox72]

Senate passes procedural hurdle for new Jobs Bill, 62-30. This is a $15B version, much smaller and narrower than the $154B House version, and the $60B original Senate version. Major components are:

 

The 4-prong bill would:

 

*Exempt employers from Social Security payroll taxes on new hires who were unemployed;

 

*Fund highway and transit programs through 2010;

 

*Extend a tax break for business that spend money on capital investments like equipment purchases;

 

*Expand the use of the Build America Bonds program, which helps states and municipalities fund capital construction projects.

 

Those all seem reasonable, though I'd want to know more abiout the 2nd point.

 

[Balta1701]

Yay! Credit Default Swaps! I can't imagine anything bad ever happening because of more of those!

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

 

These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

 

“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

 

As Greece’s financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country’s problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.

 

Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations.

 

A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.

[NorthSideSox72]

Yay! Credit Default Swaps! I can't imagine anything bad ever happening because of more of those!

Another article written by someone who doesn't know what this market really is. Markit is a major player in that space. And having CDS contracts on the market actually helps PROTECT debtors, not make things worse. The issue isn't about swaps - its about how swaps are settled and cleared, and the capital requirements (and valuation) that should be associated with them. If the market is cleared and regulated properly, it can be a very positive thing for the overal global debt markets.

 

Ugh.

 

I'm not defending the particular situation the Greeks got themselves into, nor am I saying that swaps are great. But there is this bizarre idea out there that anything called a "derivative" is somehow an evil plot to destroy the world. Its just stupid.

 

[southsider2k5]

Another article written by someone who doesn't know what this market really is. Markit is a major player in that space. And having CDS contracts on the market actually helps PROTECT debtors, not make things worse. The issue isn't about swaps - its about how swaps are settled and cleared, and the capital requirements (and valuation) that should be associated with them. If the market is cleared and regulated properly, it can be a very positive thing for the overal global debt markets.

 

Ugh.

 

I'm not defending the particular situation the Greeks got themselves into, nor am I saying that swaps are great. But there is this bizarre idea out there that anything called a "derivative" is somehow an evil plot to destroy the world. Its just stupid.

 

Especially for a party that is running a trillion and a half deficit, plus looking to add much more.

[NorthSideSox72]

Especially for a party that is running a trillion and a half deficit, plus looking to add much more.

What the heck does what I said have to do with a political party?

 

[Balta1701]

What the heck does what I said have to do with a political party?

You voted in the last election and it wasn't straight-ticket Ron Paul supporters.

[Balta1701]

So, more seriously, I think the whole key to that article is this concept...

“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

Do you dispute that? If so, I'd like to hear why, it's not clear to me from your initial response.

[NorthSideSox72]

So, more seriously, I think the whole key to that article is this concept...

Do you dispute that? If so, I'd like to hear why, it's not clear to me from your initial response.

Of course I do.

 

First of all, most of the CDS swaps written out there, are made involving the holder of the debt. So its not all thrid party like they portray it. Though I admit I don't know the exact ratios.

 

Second, This is NO DIFFERENT than the rest of the debt market, in the sense of how reputation is effected. When a corporation or country or anyone issues debt, and shows indications of struggling with it, their ratings go down, debt gets more exepnsive and harder to get. This also happens to individuals via their credit rating. So the idea that this creates some sort of unusual spiral effect is simply false.

 

Third, the idea that an incentive is created for debt failures is stupid on its face. How is GS going to "burn down the house" here? If Greece makes its obligations, there is nothing to be done. Further, WHY would GS want Greece to fail so miserably? They don't, by the way. They are playing at the volatility, and insuring themselves, because Greece is a customer of theirs. That is the real story here.

 

[Balta1701]

Third, the idea that an incentive is created for debt failures is stupid on its face. How is GS going to "burn down the house" here? If Greece makes its obligations, there is nothing to be done. Further, WHY would GS want Greece to fail so miserably? They don't, by the way. They are playing at the volatility, and insuring themselves, because Greece is a customer of theirs. That is the real story here.

There have been arguments that what you say here is impossible is exactly what happened in the case of the runs on indymac, Bear, and Lehman. They got themselves into high-debt positions, but it was also set up through the CDS market that their principle lenders could make a large amount of money if they went under and defaulted on their debt, so those people who held the debt of those companies had incentive to basically freeze their lending to the in-debt firms and then use their research arms to question their stability, making sure that no one else would lend them short-term dollars and pushing them under.

 

If I can make a 20% profit on them paying off their debt, but I can make a 200% profit by buying up CDS insurance contracts that will pay the full value several times over if the debtor defaults, that's why they would want (fill in the blank) to fail.

 

(Then of course, you've also sold off the debt to others but held the CDS contracts, so you don't lose money if they go under but you make money if the CDS contracts pay off...that's the AIG game)

[NorthSideSox72]

There have been arguments that what you say here is impossible is exactly what happened in the case of the runs on indymac, Bear, and Lehman. They got themselves into high-debt positions, but it was also set up through the CDS market that their principle lenders could make a large amount of money if they went under and defaulted on their debt, so those people who held the debt of those companies had incentive to basically freeze their lending to the in-debt firms and then use their research arms to question their stability, making sure that no one else would lend them short-term dollars and pushing them under.

 

If I can make a 20% profit on them paying off their debt, but I can make a 200% profit by buying up CDS insurance contracts that will pay the full value several times over if the debtor defaults, that's why they would want (fill in the blank) to fail.

 

(Then of course, you've also sold off the debt to others but held the CDS contracts, so you don't lose money if they go under but you make money if the CDS contracts pay off...that's the AIG game)

What?

 

I didn't say anything was impossible. I don't understand where you are getting this.

 

And you have some whacked out numbers there. No one makes 20% off corporate debt - that's like payday loan type rates. But secondly, I think you misunderstand what a swap is. Its not a lottery ticket. You don't get a 200% profit. If you call the debt, you get the face value of the debt, and no further cash flows (if you were getting any to begin with) from the debt instrument (if you even held it).

 

[Balta1701]

What?

 

I didn't say anything was impossible. I don't understand where you are getting this.

 

And you have some whacked out numbers there. No one makes 20% off corporate debt - that's like payday loan type rates. But secondly, I think you misunderstand what a swap is. Its not a lottery ticket. You don't get a 200% profit. If you call the debt, you get the face value of the debt, and no further cash flows (if you were getting any to begin with) from the debt instrument (if you even held it).

I made those numbers up fully at random just to make the point.

 

I think you're missing the one key point of those swaps, at least as how they ran in the U.S. market. It didn't matter how much actual debt there was, you could keep taking them out; that's the gambling aspect, and that's where I came up with the 200%.

 

So, if someone (say Lehman or Greece) has x amount of dollars out in debt, you could cheaply take out insurance that would pay off 10x the amount of debt that you'd actually insured. You take out CDS insurance 10x on $1 billion in Lehman debt, and if Lehman goes under, AIG the Federal government pays out $10 billion.

 

Thus, if the person signing the other side of the CDS contract bases the cost of that CDS deal on the risk of default but doesn't take into account the fact that the person buying the contract suddenly has a large incentive to see that the debt does go into default, there's a possibility for a large profit by causing that default.

 

(Note, I'm also not saying this is certainly happening, although its been suggested for the other companies. But with the ability to take out CDS contracts for several times the value of the debt, the possibility is there).

[NorthSideSox72]

I made those numbers up fully at random just to make the point.

 

I think you're missing the one key point of those swaps, at least as how they ran in the U.S. market. It didn't matter how much actual debt there was, you could keep taking them out; that's the gambling aspect, and that's where I came up with the 200%.

 

So, if someone (say Lehman or Greece) has x amount of dollars out in debt, you could cheaply take out insurance that would pay off 10x the amount of debt that you'd actually insured. You take out CDS insurance 10x on $1 billion in Lehman debt, and if Lehman goes under, AIG the Federal government pays out $10 billion.

 

Thus, if the person signing the other side of the CDS contract bases the cost of that CDS deal on the risk of default but doesn't take into account the fact that the person buying the contract suddenly has a large incentive to see that the debt does go into default, there's a possibility for a large profit by causing that default.

 

(Note, I'm also not saying this is certainly happening, although its been suggested for the other companies. But with the ability to take out CDS contracts for several times the value of the debt, the possibility is there).

Seriously Balta, you can assume I know the basics here. Yes, I realize that swaps do not have to have ownership ties to the underlying instrument.

 

But its simply not true to say they can "cheaply" take out a 10x payment. Because the nature of the swaps is such that you have to PAY for protection - usually some number of basis points that is a significant chunk of the return. For example, if a bond pays 7%, you make pay 2% to insure it. You do that 10 times, and you are now paying 20% on that debt, just to hope that it collapses.

 

Now, you may ask, if a debt is about to fail, why not jam in some buy-portection swaps at the last minute to cash in? Well sure, but this is a contract between two parties. Someone would have to be stupid enough to insure that debt. And if the debt instrument is so weak that companies are trying to pile up returns that way, no one in their right mind is going to take the sell protection side.

 

AIG collapsed in great part due to CDS's, but its not for the reasons you seem to think. No one bullied AIG into a corner.

 

[Balta1701]

AIG collapsed in great part due to CDS's, but its not for the reasons you seem to think. No one bullied AIG into a corner.

Because they based the CDS rates on the assumption that the housing market wouldn't go down and that Lehman would never go under.

 

Basically, your argument is that no one would be crazy enough to under-estimate the risk of a Greek default and thus no one would ever sell off ridiculous values of CDS insurance contracts at rates that were low enough for some firm to play this game.

 

Except...we already know that AIG was doing exactly that. So you're basically arguing that no other bank would make the same silly mistake that AIG made.

 

Except...because of the pay structure that incentivizes short term gains with no penalty for long term losses, if I was working for a company with a AAA rating selling these CDS contracts, I could make a killing by doing exactly that, planting additional CDS bombs and leaving someone else to foot the bill if one of them goes off.

[NorthSideSox72]

Because they based the CDS rates on the assumption that the housing market wouldn't go down and that Lehman would never go under.

 

Basically, your argument is that no one would be crazy enough to under-estimate the risk of a Greek default and thus no one would ever sell off ridiculous values of CDS insurance contracts at rates that were low enough for some firm to play this game.

 

Except...we already know that AIG was doing exactly that. So you're basically arguing that no other bank would make the same silly mistake that AIG made.

 

Except...because of the pay structure that incentivizes short term gains with no penalty for long term losses, if I was working for a company with a AAA rating selling these CDS contracts, I could make a killing by doing exactly that, planting additional CDS bombs and leaving someone else to foot the bill if one of them goes off.

You keep applying arguments to me that I have never, ever said. I did not say, and would not say, that no one is crazy enough to underestimate risk in Greece, or anyone else. I am in fact quite sure that would happen, and will continue to happen. I was, for one thing, saying your scenario of buying up 10x protection on debt on a junky instrument is going to be rare - and it is. Also, I've been saying, the problem isn't about CDS's existence, or risk-taking. Its about capitalization, valuation, clearing and regulation.

 

Here is what I mean. If AIG had been required to value swaps in a more accurate way... if they were required to keep capital segregated for losses on their swaps at a reasonable level... and if the clearing bodies and regulatory agencies had addressed the swaps problem when it was clearly an issue a decade ago... that this whole mess wouldn't have occurred. And that CDS's could still be used, and used properly.

 

[Balta1701]

So, considering how hard the banks lobby against any requirements that they increase capital or decrease leverage amounts in good times, and how successful they are...and how the same banks that nearly blew up in 2008 are even more over-leveraged now, why shouldn't I panic?