• A Conspiracy of Ignorance
    Posted by on February 22nd, 2010 at 2:59 pm

    I’m not very impressed by the various people who now claim to have predicted the credit crisis. The point I like to make is that if a person really thinks they predicted it then they probably don’t understand what happened. The complex nature of the credit crisis prevented itself from being predicted. And no, predicting a crisis every year or saying that housing was a bubble doesn’t qualify as predicting the credit crisis.
    Far too many people want to see the credit crisis as the result of a massive conspiracy engineered by Goldman Sachs or the Fed or George Soros or the Illuminati or who knows what else.
    Actually, you could say there was a large conspiracy in one sense. No one—not the government, not the banks, not investors—had any idea of the consequences of their actions.
    Jeffrey Friedman writes:

    Given the large number of contributory factors — the Fed’s low interest rates, the Community Reinvestment Act, Fannie and Freddie’s actions, Basel I, the Recourse Rule, and Basel II — it has been said that the financial crisis was a perfect storm of regulatory error. But the factors I have just named do not even begin to complete the list. First, Peter Wallison has noted the prevalence of “no-recourse” laws in many states, which relieved mortgagors of financial liability if they simply walked away from a house on which they defaulted. This reassured people in financial straits that they could take on a possibly unaffordable mortgage with virtually no risk. Second, Richard Rahn has pointed out that the tax code discourages partnerships in banking (and other industries). Partnerships encourage prudence because each partner has a lot at stake if the firm goes under. Rahn’s point has wider implications, for scholars such as Amar Bhidé and Jonathan Macey have underscored aspects of tax and securities law that encourage publicly held corporations such as commercial banks — as opposed to partnerships or other privately held companies — to encourage their employees to generate the short-term profits adored by equities investors. One way to generate short-term profits is to buy into an asset bubble. Third, the Basel Accords treat monies set aside against unexpected loan losses as part of banks’ “Tier 2” capital, which is capped in relation to “Tier 1” capital — equity capital raised by selling shares of stock. But Bert Ely has shown in the Cato Journal that the tax code makes equity capital unnecessarily expensive. Thus banks are doubly discouraged from maintaining the capital cushion that the Basel Accords are trying to make them maintain. This litany is not exhaustive. It is meant only to convey the welter of regulations that have grown up across different parts of the economy in such immense profusion that nobody can possibly predict how they will interact with each other. We are, all of us, ignorant of the vast bulk of what the government is doing for us, and what those actions might be doing to us. That is the best explanation for how this perfect regulatory storm happened, and for why it might well happen again.

  • Business at AIG Is Stabilizing
    Posted by on February 22nd, 2010 at 11:11 am

    It’s amazing what $183 billion will do.

    American International Group Inc., the troubled financial firm that threatened to bring down the U.S. economy, is showing stable revenue for its insurance units and improving its ability to repay taxpayers 17 months after a bailout that swelled to $182.3 billion.
    AIG property-casualty businesses, contributing more than a third of the company’s revenue, posted sales increases in three straight quarters last year after plunging 23 percent following the company’s near-death experience in September 2008. Life insurance and retirement-products sales, AIG’s other main operations, rose for the first time since the bailout in the three months ended September 2009. AIG gained 6.5 percent in New York trading today.
    “There are clear signs that AIG has pulled out of what could have been a death spiral,” said David Havens, managing director in credit trading at Nomura Securities International Inc. in New York. AIG’s insurance results have been improving “after dropping off a cliff following the bailout,” he said.

    Tim Geithner said that it’s possible that the government might in fact possibly lose some money on AIG depending, of course, on its eventual outcome.
    The GAO said we’re out $30 billion.

  • Wall Street Loves to Round Up
    Posted by on February 22nd, 2010 at 9:44 am

    Last week, the WSJ highlighted a fascinating study. Two academics looked thousands of earnings reports down to the tenth of a cent. They found an unusual dearth of earnings-per-share that fell on the 0.4 cent level. This implies that a larger-than-expected amount of companies were trying to round up their EPS to the next whole cent.

    (T)he overall effect is striking. In theory, each digit should appear in the 10ths place 10% of the time. After reviewing nearly 489,000 quarterly results for 22,000 companies from 1980 to 2006, however, the authors found that “4” appeared in the 10ths place only 8.5% of the time. Both “2” and “3” also are underrepresented in the 10ths place; all other digits show up more frequently than expected by chance.
    Companies tracked by Wall Street analysts are less likely to report “4s” in the 10ths place of an earnings-per-share figure particularly when their results are close to analysts’ predictions. Companies with high price-to-earnings ratios also report fewer “4s.”
    In their most intriguing finding, the authors found that companies that later restate earnings or are charged with accounting violations report significantly fewer 4s. The pattern “appears to be a leading indicator of a company that’s going to have an accounting issue,” Mr. Grundfest said.

    Missing earnings can be a big deal. As is often the case, the scandal isn’t that people are breaking the rules. The scandal is what the rules allow. Companies have enormous latitude with their earnings reports. This is one of the reasons why I stress investing in high-quality companies. I have much greater faith that companies like AFLAC (AFL) or Johnson & Johnson (JNJ) won’t abuse the rules.

  • The New Yorker Profiles Krugman
    Posted by on February 22nd, 2010 at 8:43 am

    Clocking in at over 10,00 words, it’s pretty much what you’d expect:

    Krugman was bemused by the reactions. True, he had accused Chicago economists of espousing ridiculous ideas in part because of financial incentives—sabbaticals at the Hoover Institution, job opportunities on Wall Street. But when those economists responded with anger he was surprised. “There was no personal invective in what I wrote,” he says. “I never insulted anybody’s personality. It was always at the level of ideas.” Krugman has a peculiar blind spot when it comes to scorn. Even as he delights in the scorn of others (a recent blog post was titled “Today in Exquisite Insults”), he imagines himself to be a rather dry, abstract writer who takes little interest in individuals. There is, it’s true, an understanding in some parts of academia that calling a colleague’s ideas stupid is not supposed to be taken personally, but Krugman goes well beyond this.

  • 30 Years Ago Today
    Posted by on February 22nd, 2010 at 7:18 am

  • World Markets Pause for Man Who Hits Ball with Stick
    Posted by on February 20th, 2010 at 1:21 pm

    Priorities people:

    For a few minutes, Tiger Woods was bigger than Ben S. Bernanke.
    The CHART OF THE DAY shows that a day after the Federal Reserve chairman and his colleagues raised the rate charged to banks for direct loans, investors took time out from trading to watch Woods apologize for his marital infidelity and “repeated irresponsible behavior.”
    New York Stock Exchange volume fell to about 1 million shares, the lowest level of the day at the time, in the minute Woods began a televised speech from Ponte Vedra Beach, Florida, headquarters of the U.S. PGA Tour. Trading shot to about 6 million when the speech ended, the highest for any period except just after exchanges opened, data compiled by Bloomberg show. Trading on all U.S. bourses declined during the press conference, falling to 456 million shares from an average of 576.8 million during the five previous 15-minute segments, Bloomberg data show.

  • The World’s Biggest Debtor Nations
    Posted by on February 19th, 2010 at 1:25 pm

    From CNBC:
    20. United States
    External debt (as % of GDP): 95.9%
    19. Australia
    External debt (as % of GDP): 108.8%
    18. Hungary
    External debt (as % of GDP): 124.2%
    17. Italy
    External debt (as % of GDP): 154.6%
    16. Greece
    External debt (as % of GDP): 175.3%
    15. Spain
    External debt (as % of GDP): 184.7%
    14. Germany
    External debt (as % of GDP): 189.4%
    13. Finland
    External debt (as % of GDP): 205.7%
    12. Norway
    External debt (as % of GDP): 208.9%
    11. Hong Kong
    External debt (as % of GDP): 218.8%
    10. Portugal
    External debt (as % of GDP): 231.5%
    9. France
    External debt (as % of GDP): 247.2%
    8. Austria
    External debt (as % of GDP): 268.9%
    7. Sweden
    External debt (as % of GDP): 275%
    6. Denmark
    External debt (as % of GDP): 315.2%
    5. Belgium
    External debt (as % of GDP): 345.6%
    4. Switzerland
    External debt (as % of GDP): 390%
    3. Netherlands
    External debt (as % of GDP): 395.6%
    2. United Kingdom
    External debt (as % of GDP): 427.6%
    1. Ireland
    External debt (as % of GDP): 1,352%

  • Weakest Inflation Since 1982
    Posted by on February 19th, 2010 at 9:59 am

    Today’s CPI report shows that seasonally adjusted core prices had their biggest drop since 1982:
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    The AP is calling this “the first monthly decline since December 1982,” although there were two microscopic monthly declines in 2008.

  • Many ETFs Swing and Miss
    Posted by on February 18th, 2010 at 11:15 pm

    This is kind of scary. Outside of S&P 500 ETFs, many exchange traded funds have significant tracking errors:

    Last year, 54 ETFs showed tracking errors of more than three percentage points, up from just four funds the prior year. And a handful of the 54 missed by more than 10 percentage points.
    Nearly all exchange-traded funds, which are baskets of securities that trade all day like stocks, are designed to track indexes. So investors expect returns to closely mimic those of market gauges like Standard & Poor’s 500-stock index or the Barclays Capital (formerly Lehman) U.S. Aggregate Bond Index.
    Indeed, many of the larger ETFs that follow the broad market often produce investment returns that miss benchmark returns by only a few hundredths of a percentage point each year. The SPDR (SPY), the largest ETF on the market, missed matching the return of the S&P 500 by just 0.19 percentage point last year. Large-company stock funds from Barclays Capital’s iShares and Vanguard Group were even more precise.
    On the other hand, the $40 billion iShares MSCI Emerging Markets Index ETF (EEM) returned 71.8% in 2009, lagging the 78.5% return for its benchmark by 6.7 percentage points.
    The $3.7 billion SPDR Barclays Capital High Yield Bond ETF (JNK) posted a return of 50.5% versus 63.5% for the index it tracks, trailing by about 13 percentage points. The misses aren’t always on the negative side: The $200 million Vanguard Telecom Services ETF (VOX) returned 29.6%, overshooting its benchmark’s 12.6% return by some 17 percentage points.

  • Reuters: Only 19% of Americans Are Confident Stock Investors
    Posted by on February 18th, 2010 at 10:43 pm

    Yet they all write for Seeking Alpha:

    Fewer than two in 10 Americans are confident of their ability to invest in the stock market, although 60 percent still believe equities are important in a portfolio.
    The findings come in preliminary results of a survey by AXA Equitable Life Insurance Company that polled 1,000 American between the ages of 25 and 70.
    In 2008 the financial crisis wiped more than 37 percent off the value of share prices as measured by the broad S&P 500 index. That has left many investors shell shocked and distrustful of equities.
    U.S. investors pulled around $242.7 billion out of stock funds in 2008 and 2009 and put $401.7 billion into safer bond funds over the same period, according to the Investment Company Institute.
    That seeming aversion to the stock market came even as the S&P 500 jumped 65 percent from March 2009 to the end of the year.
    In the first decade of the new century the value of top 500 U.S. stocks, which make up a large part of retirement assets, have fallen more than 24 percent.
    Because of that and an increase in life expectancy, the survey showed 42 percent of Americans will delay retirement by an average of six years. More than four in 10 now expect to retire at 68 rather than 62.
    Falling stock prices have eaten into family nest eggs. Almost three in 10 Americans plan to go back to work after retiring, according to the survey, which shows 84 percent are worried about inflation and losing money.