Rabbitisrich

Vinod, do risk management teams improve the culture of a company despite optimism regarding collateral and capacity, or does optimism induce management to reap profits in spite of risk management teams? At almost every major institution related to the crisis, some mid-level people spotted risks. Paulson even recruited a Bear Stearns executive to oversee the construction of his swaps! Unless the automated risk management controls buffer optimism and exuberance, they simply work until they really don't. The more faith people put into the an automated procedure--a few people have already noted sovereign risk-asset weightings--the crazier the downside. Basel III, in its current form, should make people bullish on the NRSRO system.

There is a provision that attaches a CVA capital charge to counterparties based upon a CDS derived change of expected loss. That looks a little procyclical to me as well, but I guess it depends on how you view the CDS market (there doesn't appear to be a liquidity or volume check). It also provides a major incentive to put everything through clearinghouses, although red flags should go up any time the market "craves" a risk-free pivot. This time it was the financial guarantors and NRSROs, but credulousness on a global financial scale is creepy wherever it is applied.

Another thing to consider about Basel III is that it rewards "checklist" motivated capital allocation, as seen with EZ banking allocation to sovereign bonds. There might be a period of market complacency resulting in more generous valuations even as the removal of market handcuffs weakens balance sheets. It's fairer to say that it's unlikely that banks will collapse for the same reasons they collapsed in '08. I'm overweighted on financials and insurance but there are only a handful of banks that I would feel comfortable holding to a 1.25 book premium.

Maybe, but those valuations represented a severe underestimation of balance sheet risks pre-2007, as well as an underestimation of the potential volatility of collateral. We'll see what happens in a few years when regulators lift their MOUs and the banks can attract the cash flow fetishists and the yield pigs. It's tough to be sanguine about future volatility of asset prices with current interest rates and possible exchange rate craziness.

I don't know if I should admit this, so I'll just say that "someone I know" when he was a kid would dress up in his baseball uniform and sell candy bars door to door for $1 that he bought at the store for 25cents, never mentioning that it went for anything, just saying "would you like to buy a candy bar? They're $1" people would make an assumption that it was for charity. This person never corrected them. I believe that is known as "the oldest profession". I used to see neighborhood kids preparing for their wealth management careers with this scheme when I was in college.

Sounds like a weird subsidy for inefficient and/or cyclical businesses. Maybe a low sustainable rate of return is a sign that less money should head in that direction.

It lacked the ingredient that made Wall Street II a classic: an investment banker/manager/broker/consultant/venture capitalist with no discernable talent and a lot of aggression.

Bernholz's tipping point referred to budget deficits financed almost exclusively by money printing. It's an important point regarding where we might be going, but not where we are.

Thanks for sharing.

Some of the disconnect between reported big bank results and the FRBNY data might be explained by the state level rollover and 90+ charts after page 19. The states that supported the highest volume of dumb loans and unsustainable real estate appreciation are showing continued improvement. Nevada is the major exception.

More interesting is the TRUPS are $20+ when back on that date they were $5-$8. That probably reflects the incentive for banks to issue Tier 1 common qualifying liabilities to repurchase the TRUPS by 2013, which are phased out in Basel III capital weightings, rather than confidence in BAC's long-term future. Definitely true, but this is where the big banks benefit from some of the oligarchic dynamics described by SharperDingaan. Fair or not, surely not, depositors have priced in a government backstop and sent their deposits to the very banks they disrespect. I would say that you would have roughly the same proportion saying that FFH and BRK are cheap too. Is that group think or is it because something simply becomes broadly recognized as cheap? Market prices eventually reflect intrinsic value, only once the broad consensus of investors deem it to be cheap and move from higher priced assets to the lower priced assets. A few months ago, you would have been hard-pressed to get ten people to think that BAC was cheap at the same price. Cheers! It would be interesting to see if the board is weighting BAC as heavily as it weighted popular securities in the past. I have a fair amount of exposure to BAC, but not as much as I had put into FRFHF, SNS, SD, WFC, or some of the other ideas that gained traction here.

There doesn't seem to be an obvious connection between the facts offered and the conclusion. If you ignore the disconnect between M1 and labor productivity, then I thought that you would present some method to distinguish monetary effects on the factors you mentioned from alternative explanations.

We do some very cool research and it has been an eye opener. For example, Look at the top 100 largest companies in terms of Market Cap, Profitability, and Sales. Then, take the same list except repeat the exercise with 2009-1990 (Bloomberg users can do this) You will see the amount of US companies continues to decrease year over year, quite drastically. The same goes for the Forbes Billionaire List, notice the amount of US Billionaires has remained the same for nearly a decade, while globally the amount has quadrupled. Private Debt to GDP is another tool, and its very frightening given we are less competitive and have had to incur more debt to be less competitive (IE: Laziness) http://rwer.wordpress.com/2010/12/15/graph-of-the-week-private-debt-to-gdp-ratios-for-usa-and-australia-1920-2010/ Obesity Rates as well, the less hard we work and the more we outsource the fatter we all get. It is important to really look at the posters here. I am a 54 nearing 55 year old Money Manager who has seen this cycle come about in a very aggressive way. I run a household and have seen the cost of living rise way in excess of CORE Inflation numbers. And I can connect the dots, I don't know why it sounds so sensational to Ben Michaud. All I am saying is that printing money is bad, and debt is bad because it leads to us printing money,and a fiat system is bad because it allows us to print money whenever we have too much debt, and you guys keep wasting time arguing about metaphors or the technicals of how it all works when in the end your idol the tax cheat Mosler and the Blogger Cullen Roche both agree that deficits are bad because we don't really know when watering them down causes Hyperinflation. Actually, I am quite proud of Germany for not buying into this type of academic BS. But they have had the nasty experience of the Weimar to keep them disciplined. Those stats don't necessarily make the case for a money supply and productivity relationship. Foreign billionaires might represent the misallocation of resources from privatization schemes or flexible economic regimes. Ironically, the rise of foreign companies might show malinvestment as they overpay for expansion. Similarly, high profits might reflect government intervention and/or regional specialization (natural resource boom). Looking at measures like profit margins and sales growth can be misleading indicators of productivity without some way to eliminate other explanations. Labor productivity growth has actually been pretty decent over the last two decades, somewhat mysteriously as factors like IT improvements don't fully explain differentials globally. Going back to the M1 proxy for money supply and non-farm business productivity, there doesn't seem to be a strong statistical relationship.

The goal probably has less to do with short-term price movements, and more to do with shaping the shareholder base, an agenda that Buffett has held for a long time.

moore_capital54, what are you looking at to suggest a significant relationship between money supply and productivity? Eyeballing a chart of YOY % changes in M1 and of productivity growth doesn't suggest an obvious link. (I tried to post the charts but they don't appear) http://www.bls.gov/lpc/prodybar.htm

Thanks for the link. Did you source it independently or is Fairholme distributing the document? It's interesting that BAC became Berkowitz's battleground stock despite his shareholders' fortunes being more heavily levered to AIG.

Does ECRI discuss its methodology? Mish from Mish's Global Economic Trend Analysis tried to figure out some of the components of the WLI, but Acuthan hasn't elaborated on what exactly he looks for or what factors tilted the odds of recession into "definite" category. Mish pointed out some of Acuthan's self-serving statement with respect to ignored type II errors.

The writer probably played cute with the analyst's meaning. The analyst noted that reserve releases are lower quality earnings than, presumably, recurring earnings, which is true. The writer's headline implies that low quality earnings are possibly endemic to Berkshire as a WHOLE. It's just a hack writer's gimmick of messing about with categorical boundaries.

No need for speculation. One thing you can say about Bernanke is that he has been transparent about his goals and willingness to use unconventional tools. In 2002, he laid out the blueprint: http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well. If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly.12 However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.13 The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.16 If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets. Of course, Bernanke wrote that speech before facing the glare of publicity and before $1.5+ trillion diddly squatted on excess reserves.

Haha, I've had similar conversations about this recently, and I've seen people on twitter and message boards making similar points. I don't put too much stock in originality. The only originality I respect from a secondary market player is that conviction is developed through independent and unbiased analysis. Tilson's portfolio similarities to "gurus" with much larger AUMs raises the suspicion that he may need authoritative validation before placing large bets. Who knows? If he simply cherry-picked bets from his buddies and other respected managers, then some weighted average of their returns represents an appropriate benchmark.

Thanks for sharing your experience Dwy000. Do risk managers get involved with swap construction language? A large part of negative sentiment could be allayed if every master agreement required the approval of a respected risk manager. Also, Citi reports that the majority of their CDS contracts are "bilateral". Is it fair to infer that these contracts are subject to netting arrangements following a default event?

That about sizes it up. Everyone else is buying long bonds today. The usual collective insanity has set in. That hefty 2.8% yield on the 30 year. Can you imagine locking in your returns for a theoretical 25+ yrs at 2.8% - say 2 % after tax. You can get bigger dividends from dozens of stocks from companies that are cash rich. And TIPS are still offering negative yields. The market is betting on disinflation/deflation and inflation shocks. I also see a lot of people arguing for a "total return" perspective on bonds, which seems like a fancy way of describing greater fool expectations.

I visited Sydney and Melbourne last year, and the cost of living was much higher than I expected! On the other hand, the food is wonderful, people are great, and every random coffee shop is like the best coffee shops in Los Angeles. I also love the "hotels" with no guests and a lot of beer. Amazing quality of life.

HHC enterpise value is too tempting. Reducing cash pile now.

There is even evidence that China has started its slowdown (Rio Tinto, Alpha Natural, manufacturing) and Chanos probably has a good point that China's growth is overstated due to deferred or disguised loan losses. Something similar happened with Japan in the 80s and 90s, which explains why the japanese people improved household income and consumption during the collapse of real estate and equity pricing. Michael Pettis has a good article on the subject: http://mpettis.com/2011/09/big-in-japan/