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The Banks: those closest versus outside economist? What's the truth?


Guest JackRiver
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Guest JackRiver

A few vocal economist have come out lately to deride the treasury secretary's plan.  I'm having a difficult time understanding why they appear so confident in their assertions given that they couldn't possibly know what is going on inside the banks better than those who actually are inside the banks. 

 

Does this seem strange to anybody else?  Maybe it's not so unusual given that of late those outside the banks have been more right than those with access inside.

 

When I started out in the business one of the first things that I was cautioned against was listening to investment analysis from an economist.  My actual experience up till this point has so far proven that true, that they may know a lot about the economy but have little clue about business valuation even though they have all the requisite accounting and finance background as well.  Now given recent experience I'm wondering who to believe.  Weird. Who's really being honest about what's going on at the banks?  or is everybody full of it?

 

Yours

 

Jack River

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After reading the debates of several economists on various topics the conclusion I reached a few years back is this: For every economist there is an equal and opposite economist. Each is equally convinced that all the facts support only his position and does not give the least bit of credence to the other view.

 

What this tells me is that economics as a profession is not yet mature enough and progressed far enough at this point to offer unambiguous guidance.

 

Vinod

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A bit of both JackRiver... Black Swan Guy, Krugman, and Roubini are making hay while the sun shines.  The cannot possibly know in any kind of detail what is on each banks balance sheets.  They have an agenda the same as anyone else.  The lecture circuit is lucrative.   

 

On the other hand any bank in danger of insolvency isn't going to tell us until they are actually taken over. 

 

The stock market is telling us that things are improving.  I have no reason to believe that it isn't the best forecaster at this point.  Geithner's stress tests will publicly reveal those of the top 20 that are weakest.  Others are being nationalized at a moderate clip by the FDIC anyway. 

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I tend to agree with Krugman and Roubini

 

The people in the administration were deeply involved with the creation and early solutions to the crisis and have avoided leveling with the American people throughout the ordeal. It seems like nationalization would be the simplest way to deal with this but that's dirty socialism.

 

The arguments against nationalization and for propping up zombie banks and insurance companies dont make a lot of sense and this public private partnership also seems retarded.

 

I go with logic regardless of what side it comes from.

 

 

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Guest Broxburnboy

The only way to judge any analyst, is on track record. The official spokesman for the banks will always blow sunshine,

trying to put the best face on. When things are good, they will crow and strut like a barnyard rooster. Some have mastered

this art when things are truly in the tank (like now). Their job is to put the shineola on the boot, the lipstick on the pig.

My favorite of these in Canada is Jeff Rubin from CIBC world markets. He always makes bold predictions, that echo or exagerate the current market

trends.. he boldly predicts the future by looking in the rear view mirror. He is almost always wrong, to the point that he is not a bad

negative leading indicator.

Economists are not stock pickers, for the most part they try to anticipate economic trends either for public or private clients.

Beware the predictions of professional economists who are paid by a self interested party. They are often hired to state the economic case

for an obviously failed policy. Economists tied to political parties also are hired to justify a self interested policy... like tax cuts in the middle

of a public spending spree, or the rosy economic case for foreign wars.

Listen closest to those who have been correct in predicting current economic reality and discount those who have been consistently wrong.

There is a lot of noise out there, and a lot of "experts" make very vocal mouth bets... but putting money where the mouth is is the most sincere

commitment to predictions. What insiders truly believe can be best judged by the insider trading reports.

The team at FFH has been prescient in calling the financial implosion, and acted accordingly (no mouth bets) to the

benefit of all who listened over the last couple of years. They have recently been selling their Treasuries (at the top of the market) and buying

decent yeilding munies guaranteed by Berkshire Hathaway. I would read this as a negative vote on the credit quality of the US Treasury and by

extension a bearish call on the economy. It seems to be a flight to safety and yield.

 

In this environment Krugman and Roubini have been accurate, the corporate shills have not.

 

Investors like Prem, Soros, Sprott seem to have got it right. Follow the money.

 

 

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Basically, we aqre getting two basic kinds of calls:

1.) things are likely going to get worse (Roubini & Taleb)

2.) things are likely going to bottom out in 2H 2008 and get better next year (Bernanke)

 

Bottom line is, more than at any time in the past 50 years, economists (and pretty much everyone else) really doesn't have much of a clue as to what is going to happen in the next 12-24 months. Inflation or deflation? Are the gov't programs helping or hurting? Are the banks solvent or insolvent? U shaped recovery or L shaped depression?

 

Should we care? My answer is absolutely!

 

What does it mean for investing? My 'big' guess is we will see lots of wicked volatility. What this means for me is when the value stuff I really like gets dirt cheap I will buy (and perhaps a lot). And when it runs up 20-50% I will sell. Until I get better visability as to just what the future holds I will be content to hold lots of cash and simply pick my spots with my inverstments and play the volatility. This strategy has helped me largely miss the sell off last year and earlier this year (i.e. capital preservation) and actually generate decent returns.

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Thats my strategy. To play the range bound market theory. I am tired of seeing my holdings at my basis and then down 30% then at my basis again within weeks. I have sold at my basis and will be buying on the next jobs report or whatever seems to kill the market. I will then hold a core position and will trade trading positions until things actually look decent going forward.

 

 

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What makes anyone think that because these guys are on the inside that they have any clue what's going on?  The bank and financial co. CEO's completely missed the oncoming train.  How many times did Dick Fuld, Ken Lewis, Ken Thompson, Stanley O'Neill, John Thain, Chuck Prince, Jeff Immelt, etc. publicly state in no uncertain terms that they had no need for new capital and they had no intention of cutting their dividend.  Were they lying or did they not understand the risks they had exposure to?  I'm inclined to believe the latter but either way why would anyone take anything they had to say seriously?    

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Guest dealraker

Aren't they all bankrupt occasionally anyway?  Hell, any business having leverage of 10-20 to one has got to be technically insolvent doesn't it?  With real estate prices going up 15% one year and down 50% (in certain areas) another all leveraged-to-loans organizations are defunct unless they only loan 50-60% of the original appraisal.

 

Roubini?  Hell, he is in the consistency principal, operant conditioning, social proof, "authority" and whatever-the-hell-else psychology.  No matter what he's got to say the same thing for quite some time and he just can't change his mind or he'll be considered weak.

 

Roubini?  Geez, where do these guys come from.  I haven't owned a bank stock in 10 years and I thought this was the easiest thing to see in the history of finance.  But at some point and maybe after an 84% decline, the banking industry is a screaming buy!

 

38% of all banks went out during the Great Depression.  Something to stimulate your senses if you are a bank investor like me.

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How many times did Dick Fuld, Ken Lewis, Ken Thompson, Stanley O'Neill, John Thain, Chuck Prince, Jeff Immelt, etc. publicly state in no uncertain terms that they had no need for new capital and they had no intention of cutting their dividend.

 

Many of them completely missed the scale of the meltdown and really didn't know what to do.  I am left wondering how badly Jack Welch would have been hit if he was still in charge at GE.  I expect he is thanking his lucky stars he wasn't in charge, if he is humble enough.

 

If anyone wondered if most CEOs are overpaid I think we have probably answered the question in the affirmative. 

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Guest JackRiver

Thanks for all the replies, but sorry  :-\ , it's not really what I was trying to get at.  My original post was not clear.

 

Do economist spend too much time drawing inferences from summary statistics and ratios and not enough time in the sausage factory?  And if so, is some of that or a lot of that going on right now?  As an example:  Someone might look at a stock with a P/E of 20 and summarily say it is too much, but someone else who is looking at the balance sheet of the company will realize that the company's assets are 50% cash and also they have no debt. 

 

I know little about banking, but I think a few guys here spend some time following them.  For those of you who follow banks is there any indication to you of the type of flaw/disconnect I describe above?  I do realize that the board members here are outside the bank much like the media prone economist, that is, you aren't regulators or bank executives who would have specific knowledge of the assets inside.

 

Yours

 

Jack River

 

 

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Guest JackRiver

Aren't they all bankrupt occasionally anyway?  Hell, any business having leverage of 10-20 to one has got to be technically insolvent doesn't it?   With real estate prices going up 15% one year and down 50% (in certain areas) another all leveraged-to-loans organizations are defunct unless they only loan 50-60% of the original appraisal.

 

Roubini?  Hell, he is in the consistency principal, operant conditioning, social proof, "authority" and whatever-the-hell-else psychology.  No matter what he's got to say the same thing for quite some time and he just can't change his mind or he'll be considered weak.

 

Roubini?  Geez, where do these guys come from.  I haven't owned a bank stock in 10 years and I thought this was the easiest thing to see in the history of finance.   But at some point and maybe after an 84% decline, the banking industry is a screaming buy!

 

38% of all banks went out during the Great Depression.  Something to stimulate your senses if you are a bank investor like me.

 

 

What you are saying, insolvency, is absolutely true or maybe the better short term term for it is illiquid.  That's why we have the fed and they get to decide in times like this who they want to survive, right?  So it is kind of stupid that these economist run around saying the banks are all insolvent because they are insolvent only when the fed decides they are. 

 

Yours

 

Jack River

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The problem with banks right now is that nobody, inside or outside, knows what their assets are really worth.  When your balance sheet is made up of a bunch of guesses because there is no bid for the assets you hold, no one can say whether or not the company is fairly valued.

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When a bank's financial ratios fall below the Fed's standards the Fed seizes them and generally finds another bank to take them over. With the notion of some banks 'too big to fail' and non-banks (Lehman, AIG) entering the current fiasco it's a new world for 'economists.'  

 

I'm not sure the 'economists' or 'babbling heads' as the case may be, barking 'the banks are insolvent...nationalize them' fully understand the Federal Reserve and public banking system. Fannie and Freddie were different and are now nationalized as they were initially government sponsored enterprises (GSEs). The Federal Reserve and Treasury are ill equipped to 'operate banks.' It simply is not the way they operate. But thankfully the banking system is ultimately backstopped by the full faith and credit of the US Government.

 

With the TARP capital infusions and the rest of the Fed/Treas programs we're seeing the full faith and credit of the US Government being used to support a portion (ok large) of the public banking system. There are over 8,000 banks in the country and 500 ? (couldn't find the number) received TARP funds. Many banks didn't need, or want the funds, but many of the new 'too big to fail' required support.

 

Unfortunately the Fed and Treasury are doing what they are 'supposed to' - but without a playbook for 'too big to fail' banks and non-banks. As long was we've got a printing press, we'll be in business!

 

 

 

 

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A few vocal economist have come out lately to deride the treasury secretary's plan.  I'm having a difficult time understanding why they appear so confident in their assertions given that they couldn't possibly know what is going on inside the banks better than those who actually are inside the banks. 

 

Does this seem strange to anybody else?  Maybe it's not so unusual given that of late those outside the banks have been more right than those with access inside.

 

When I started out in the business one of the first things that I was cautioned against was listening to investment analysis from an economist.  My actual experience up till this point has so far proven that true, that they may know a lot about the economy but have little clue about business valuation even though they have all the requisite accounting and finance background as well.  Now given recent experience I'm wondering who to believe.  Weird. Who's really being honest about what's going on at the banks?  or is everybody full of it?

 

Yours

 

Jack River

 

Exactly, which is why I shyed away from making any more investments in them after my experience with them (IR and management calls) late 2008.

 

They bought these assets at par value, and now the market will only pay 30c on the dollar. Prior to this, the market for those toxic assets were completely shut down. The banks aren't willing to offload these assets at unreasonable prices.

 

The Geithner plan seeks to bring in private players who may make a more rational marketplace bid for those assets, but my question is, if they weren't willing to pay 30c on the dollar then, why would they do it now?

And even if they get like 70c on the dollar ... that's still going to result in losses which, in all eventuality, will reduce the equity capital.

 

 

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I'll take the outsider any day...

 

Insider (former): http://manualofideas.com/blog/2009/03/greenspan_opines_in_ft_should.html

Outsider: http://www.nytimes.com/2008/08/15/opinion/15krugman.html

 

PS: I cannot understand why FT gave Greenspan an editorial

 

Here's a taste of the non-sense:

"Speculative fever creates new avenues of excess until the house of cards collapses. What causes it finally to fall? Reality. An event shocks markets when it contradicts conventional wisdom of how the financial world is supposed to work. The uncertainty leads to a dramatic disengagement by the financial community that almost always requires sales and, hence, lower prices of goods and assets. We can model the euphoria and the fear stage of the business cycle. Their parameters are quite different. We have never successfully modelled the transition from euphoria to fear."

 

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" bit of both JackRiver... Black Swan Guy, Krugman, and Roubini are making hay while the sun shines.  The cannot possibly know in any kind of detail what is on each banks balance sheets.  They have an agenda the same as anyone else.  The lecture circuit is lucrative"

 

They are just being good businessmen or politicians. What is the incentive for them to be optimistic? If they are pessimistic and they are right, they will win untold media glory. If they are optimistic, like everyone, they will fade into history. So it makes quite a bit of sense for them to perpetuate their point of view, even if wrong, as insurance.

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Guest Broxburnboy

Many of the posters seem to be missing a very important point, which even the authorities acknowledge... the risk of failure here is systemic.

It's not whether an individual bank will prosper or not, but whether the whole banking system will survive.  The existence  of the credit default

swap (and other derivatives) market interconnects every banking institution in the financial world. Because the market is huge, unregulated and decentralized,

the consequences of the failure of one counter party threatens to collapse the whole system.

 

At the root of the problem is the fact that insurance has been sold on debt issues to more than one party. There can be many holders of insurance on one bond

issue. Although it doesn't effect risk assessment to a single insurer, this practise magnifies the risk to the system. If insurance (CDS) is written on a 10MM bond issue

and there are ten counterparties who have issued insurance on it (CDS), and the bond defaults, the effect to the system is a loss of 100MM dollars which generates

the liquidation of banking assets to pay the bet. Leverage in reverse. One bad loan reverberates throughout the system.

The smarter individual banks hedged their own risk by balancing their CDS sales and purchases... however this hedging did not consider the risk of counterparty default and

the "smart" banks are in deep as well.

 

When Lehman brothers failed, it reverberated  throughout the system because they were the counterparty on many of these swaps, making the swaps worthless and

generating margin calls throughout the system. AIG failed because (being an insurance company) they wrote a lot of CDS swaps for premiums which were not priced

to reflect the real risks including systemic failure. The government must continue to backstop AIG's derivative insurance book to avert further catastrophic delevering.

Judging by the cash infusions to AIG and major banks this last month, the process of delevering is still continuing and will continue until all the losses to the system have been

absorbed by the taxpayer.

 

We all hope the "bailouts" will be successful and lending velocity resumes. There are several risks that the effort will fail, not the least of which is the taxpayer's reluctance

to foot the bill. The regulatory environment has not been changed. Because the market for these "toxic" derivatives is unregulated, decentralized, private and poorly understood no one is really sure how big the problem is, and banks are hording their cash to mitigate their exposure. Credit is largely frozen.

 

It may be necessary to nationalize all the shaky banks then reorganize and recapitalize them. In this context individual equity investors should consider the systemic risk

before making calls on investments in individual banks. Although a lot of fortunes have been made in buying bank stocks at the bottom of the depression, there is no evidence that

bottom has been reached.

 

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Guest ericopoly

"...there is no evidence that bottom has been reached."

 

They don't ring a bell at the bottom... :)

 

 

Come on Ben, you can easily see the bottom by just looking at a chart, long after the fact.

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They don't ring a bell at the bottom...

 

I thought Business Week published a cover saying "Equities are dead!"  Seriously though, Sir John Templeton always said to buy at the point of maximum pessimism. I don't think we are there yet.....

 

 

cheers

Zorro

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"I don't think we are there yet....."

 

Well, here is an anecdote for you (I'm not calling the bottom, this I just though was interesting):

 

I sent out a request for funds / new accounts on the weekend of March 7th to all clients and potential clients.  In the letter I basically said "Look, I'm not going to call the bottom, but their are some crazy deals, if you're on the sidelines, now might be a time to invest, double down, etc..."

 

In the letter I highlighted FFH and WFC (and preferreds) as example ideas of why the market was crazy.

 

I received an email back from a friend who is not a client but had another HF/RIA manage his money.  He replied and told me that said HF manager was waiting for Wells to get to $3/share before buying.... this manager is a fundamental analyst.

 

The thing that is curious to me about this statement is that it doesn't make sense to me.  I understand people who won't touch WFC with a 10ft pole, they are the same folks who basically won't invest in banks due to leverage (B. Berkowitz, some folks on this board, etc)... I TOTALLY get it.  But the statement of "I'll buy at $3" was bizarre.  Yeah, I know a lot of people who will be paying 50% of annual PPTI for one of the best big banks in the nation, but I don't know ANYONE who would be 'truely' willing to do so who would not also be buying at multiples above that price.... I know some of this guys' other investments, and his MoS is not 95% or some crazy shit.

 

When I start to hear these kinds of statements from supposedly intelligent people, I start to wonder.  Just look around at the investment world:  On this and other message boards everyone is talking about reflexivity like its some new concept when it is just an excuse to intellectually validate why you aren't buying stocks (or bonds) on the 50-80% off sale (I'm a big believer in reflexivity, but I find the new found belief in it hilarious...).  It's all the rage now for folks to dramatically change up their investment style as well given all the 'new learnings' of the last 2 years... call me skeptical how much most people have really learned that they didn't already know but just ignored.

 

Mainstream economists are now forecasting near 10% unemployement within 4 quarters, so many people claim that 'all big banks' are technically 'insolvent' that I've lost count.  All the bearish (and correct voices) for the past two years are having their day in the sun, but their confidence of their own omnipotence is growing to a level I find disturbing and they should too (Krugman and Roubini's blanket statements astound me at times).  Buffett has been deploying so much cash that he's sold holdings to fund the new purchases.  Prem is fully long buying GE and WFC etc and we all sit here wondering what he sees as if it's not obvoius... they are cheap.  I would estimate that roughly 50% of the employees at my work (anecdotally) are in 100% cash in their 401(k)s, or have stopped contributions to their stock accounts until 'things stabalize'.

 

I don't know if we are at the bottom, fundamentally, I'm sure we could shave another 50-60% from here off the market... but the fact that we *could* see those levels does not imply you are prudent for 'preparing' for them by avoiding buying 50 cent dollars... I'm sure the folks who were in cash in 1982 felt pretty prudent too but it didn't make it so.  The stats above make me look around and think 'now is a pretty good time to buy stocks' all things taken together.

 

I agree with those who are a bit pessimistic on the stock market relative to bonds as the latter does seem to be puking up some crazy deals lately... HOWEVER, relative value and value are seperate concepts, and the further opportunities in individual names is much more stratified. 

 

This isn't meant to beat up anybody here, but we can all point to the past and say XYZ happened at the bottom, pessimism can always increase, P/S ratios can be lower... yes yes yes, all true.  But all these discussions seem like excuses for avoiding doing what we should all focus on 1) Buy cheap stocks and 2) protect your downside and 3) make money :).  Doing too much focusing on #2 at the exclusion of #3 may seem smart, but may not be wise in the long run.

 

Just my 10 cents.

 

Ben

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