Indy Telecom & Industrial Media

Fascinating visualization of US bank failures by the folks at Computational Legal Studies.

The interesting thing to note, of course, are the three key takeaways:

1. Acceleration: There were four failures in the first six months of 2008, followed by another 22 failures in the next six months. By January of 2009, there were 21 failures in the first three months of the year, followed by 138 from April to last Friday.
3. Magnitude: Failures in the past two years have cost the Depositors Insurance Fund an estimated $57B. The IndyMac failure of July 2008 accounted for $10B alone, followed by BankUnited at $4.9B and Guaranty Banks at $3B.
4. Spatial Correlation: There is a significant amount of spatial correlation in California, Georgia, Florida, Texas, and Illinois. These states account for 77% of the total costs to the Depositors Insurance Fund. Furthermore, most of the losses in California and Georgia were concentrated highly around a few urban centers.

(Link du jour Paul Kedrosky)

Following Berkshire Hathaway’s SEC filing last Friday, I received the ballot to vote on the splitting of Berkshire Hathaway Class B stock.

To me, it is an unfortunate sign because this would effectively invite every option trader to speculate on Berkshire Hathaway — and BRK will move away from being one of the few remaining investment equities and go towards being a speculative equity (although, one may argue that all equities are by definition speculative).

Doing some rough math, the number of Class B shares would go up from ~47 million to potentially ~2.33+ billion.  And that would also raise the issuing maximum from the current 57.7 million to 3.23 billion.

Cheap options and easier buy = higher noise and higher volatility.

We should all rejoice, for it signifies the return of Gen Braham, the rather Unintelligent Speculator.

I’ve been meaning to post this for a while now.

Some time ago, the WSJ had an excellent interactive graphic that chronicled the timeline of credit crisis by stacking the 6 key financial indicators through these two years.

The key indicators were DJIA, Treasury Yields, Libor, Commercial Paper Yields, CDS Spreads & Mortgage Backed-Securities Spreads.

Lately, everyone has been abuzz about the Jon Stewart/Jim Cramer showdown.

I know lots of folks who know Cramer personally, and he’s supposed to a good, sharp guy, even if I do hate his show. On the other hand, I also like Jon Stewart and think he’s a funny, intelligent actor and that we need more of his kind out there.

But either way, I found the exchange between them to be rather sad and quite distasteful.

First of all, who does Jon think CNBC’s customers are? The regular joe or the guys on Wall Street? To answer that, look at who pays for most of the ads that are shown.  So, does it surprise people that CNBC targets Wall Street?

And secondly, while responsibility on CNBC’s part is certainly a laudable goal, let me play the devil’s advocate here for a minute.  Why should CNBC have any responsibility? At the end of the day, they are a TV channel. If SEC regulators and corrupt politicians did not foresee the economic problems of the day, we certainly cannot and should not expect a for-profit organization to. If anything, expecting them to do so is unfair and hypocritical.

Jon was being an ass to a guest who was doing a mea culpa. And worse yet, Jon didn’t care about Cramer. He just wanted to use him as a platform for for this entire thing.

Yes, it is wonderful to look back and blame people — but remember, at the end of the day, some of the smartest folks out there missed this coming. That’s the whole point of a bubble. But let me ask Jon this question. What about all those people who were said this was coming? Nassim Taleb, Warren Buffett, George Soros, Nouriel Roubini and a ton of others? Where was the daily show when these guys were talking about this? I did not see Taleb on the daily show in 2006. Oh wait, Jon was busy making fart noises and funny sounds.

But more importantly, Jon must realize one thing — if someone knew that this was all going to come down, it was more than likely that they were going to try and capitalize on this. You see, not everyone has jobs where they can get on prime time TV and make millions making fart noises. It’s just the way the cookie crumbles.

This happened earlier in the month, when the markets were sorta bullish.

Me: Bloody markets are up.
Friend: Yeah, don’t know why. Freaking annoying.

Of course, this was long before the current carnage.

Two great pieces by the wonderful folks at PIMCO -

•  Hairy Lips Sink Ships by Bill Gross
  
• Saving Capitalistic Banking From Itself by Paul McCulley

(via Paul Kedrosky)

An unsual paper by Benmelech and Bergman that examines the contagion effect of bankruptcies within a given industry (airline, in this case). As someone who has been consulting for this industry the past year, this is quite interesting to me.

While it is difficult to separate the link between the bankruptcy of competitors with the state of the industry in identifying this contagion effect, Benmelech and Bergman use what they call a “collateral channel” to identify a, “causal link from bankrupt airlines to the cost of debt capital in non-bankrupt airlines.”

Using transaction prices of secured debt tranches issued by U.S. airlines, we identify a causal link from bankrupt airlines to the cost of debt capital of non-bankrupt airlines. We use the term ‘collateral channel’ to describe this effect.

This is interesting for several reasons. Firstly, generally, poor performance of a major player in an industry usually results in a fall in valuation of assets of its competitors (because the fallen player’s assets would be available at lower than fair-market prices). Secondly, as an industry begins to be affected by bankruptcies, the constituent companies become a little wary of acquiring more assets for many reasons (e.g. conservative spending, wary of market perception, flooded supply lowering demand etc).

Given this, Benmelech and Bergman make a rather interesting observation that lower secure debt tranche prices are closely associated with an increase in potential buyers who are in bankruptcy.

But what is most interesting about this paper is the data that they used to arrive at these results. Very unique and gives you something to think about. You can find the paper on their website.

It was bound to eventually happen, given the hue and cry over bonuses. And so it did.

Today, UBS announced what they call “Maluses” where previously earned bonuses will be forfeited if they underperform.

Just as bonuses (Latin for “good”) are paid out for good performance, maluses (“bad”) will be meted out if the bank subsequently makes losses or if the employee misses performance targets, UBS said. The maluses could wipe out all previously agreed share bonuses and two thirds of all cash bonuses under stringent new rules designed to align the interests of executives and traders with those of shareholders.

So, can we also extend this to the salaries of people, as well? After all, if you have to give up your bonuses when you underperform, why not give up your salaries and promotions when you underperform, as well?

Something tells me that this is not a good precedent — nevertheless, I see a lot of cheering from the sidelines for this move, unfortunately.

More Taleb, yes.  An excellent essay in the Edge Foundation’s Third Culture by Taleb on statistics, and how it is often misused.

And here is an interesting analogy from the essay, comparing a Thanksgiving turkey fed consistently until its unfortunate end, and IndyMac’s performance.

Oh my.

I’ve been meaning to write about this for the longest time. While the state of the American economy is of much concern, the current state of affairs in the Europe makes our problems look like a walk in the park.

The fundamental problem in Europe has been the attempt at consolidating disparate economic systems and values into a single source, thanks to the Euro. While this has had some success when things were going well, it would seem that this is not particularly true when things are going badly.

This is also complicated by the political climate in the constituent countries and of course, the display of absolute maturity over silly rivalries (because all those Saxons, Anglo Saxons and Vikings are *oh-so-different*).

But there is a deeper issue here. And that is that while the American financial system has been mismanaged, that does not compared to the way Europeans have mangled theirs.

Paul Kedrosky recently had a post on How the US Saved the European Banking System.  In his post, he quotes a short report by Daniel Gros & Stefano Micossi that provides an interesting little table (The beginning of the end game [PDF]).

And to give you an idea of the leverage issues, Lehman had a leverage of 24 (gross, of course — net leverage ratio was 12, which is debt-times-equity).

Goldman keeps its leverage trimmed at around 17-22 (depending on the time of the day and market conditions, of course). Of course, Goldman’s leverage has also been more sustainable in general because Goldman hasn’t needed to borrow as much as its competitors.

The other factor is even more scary. And that is the asset valuation of the financial institutions relative to the GDP of their host nations.

To make it worse, countries are worried about pooling money to help banks in other countries within the EU when their own institutions are struggling. And can you really blame them? This, more than anything, calls into question the sustainability of Euro as a currency.

The other thing that I’ve heard from my friends in the industry is that certain European banking laws give banks the option of not disclosing certain pieces of information that are necessary for banks in other countries. This, of course, makes it hard to estimate the exact financial health of these institutions.

So, given these facts, is it any wonder that European banks and governments are scared? For example, the whole exchange between UK and Iceland seems childish (a friend called it Britain’s revenge for the Viking invasion of 400 800 A.D.). But then, people do funny things when they are scared.

So, Euro death watch, anyone?

How long until DJIA goes below the 10,000 mark?

After hours trading is killing the market. I predict that immaterial of what happens, within the next few days, a few regional banks will either go down or get bought.

My eye is on National City and Fifth Third. Let us see.

Update: Turns out that I am not alone, not after a 52% fall.

…and we live in interesting times.

The markets are scary to watch right now.

If this bill does not go through, the harm done to the markets may take a long, long time to recover.  I once made a wager with a friend that the Dow will almost certainly not hit 4 digits.

Now, I’m not so sure.

Goldman Sachs and Morgan Stanley have asked for and been approved the bid to become banks, marking the end of the investment banking era on Wall Street.

The more interesting part is that in the past couple of months, every weekend has been mired with some eventful occurrence or the other, on Wall Street. That said, this is indeed a sad day when all the major i-banks have either gone under, been bought out by bigger, regular commercial banks or have elected to become commercial banks.

Goldman, the largest and most profitable of the U.S. securities firms, will become the fourth-largest bank holding company. The firm already has more than $20 billion in customer deposits in two subsidiaries and is creating a new one, GS Bank USA, that will have more than $150 billion of assets, making it one of the 10 largest banks in the U.S., the firm said in a statement last night. The firm will increase its deposit base “through acquisitions and organically,” Goldman said in a statement last night.

The change is also likely to lead to less risk-taking by the companies and possibly lower pay for their employees. Both Goldman and Morgan Stanley held more than $20 of assets for every $1 of shareholder equity, making them dependent on market funding to operate.

While I am not sure if that is entirely a good thing, market sentiment is what market sentiment is. Either way, Wall Street won’t quite be the same again.

My tailor has a quote that says something along the lines of dressing for the job you want, unless you are an investment banker – I guess that wouldn’t be holding true for much longer.

Quote of the week, by Akshay:

 ”…and while we’ve been out, intimate, with our respective petites amies, Merril Lynch and Lehman Brothers have collapsed.”

So, the awesome folks at Dealbreaker have posted two equity research reports by Oppenheimer that talk about the current valuations of US banks (Oppenheimer Note-US Banks and Oppenheimer-US Bank Slide Show). The crux of the reports is that for the current financial markets to stabilize, valuations need to be address “true asset values” and get back to adjusting their books to that effect (and for whatever reason, this is stated oh-so-many-times in both the documents).

Not that I disagree with the fundamental premise of the reports, but one thing is that while fundamentals are certainly very crucial, a lot of valuation is also driven by sentiments. This is particularly true in banking, and one but need look at Bear Stearns (and currently, Lehman) to understand this.

And as far as liquidity is concerned, the economy is quite flushed with money, thanks to our wonderful Fed (and Uncle Benny).  It would be hard not to be, given the current rates of inflation and interest rates. That is not the problem. The problem is that the current market sentiment is driving folks towards more and more liquidations, and a lot of it is used to hedge against what the market perceives to be a free fall.

Quite obviously, this is compounded by increasing oil prices; however, oil is also heavily driven by market sentiment. As a result, we are seeing a rise in what is otherwise quite an inelastic market. Eventually, however, this is already beginning to have impact on oil consumption, which could potentially drive oil prices down.

That said, it is also quite possible that oil producing economies could cut supply to ensure that prices stay high. I would think that this would be beneficial to them on one hand; however, given increasing inflation concerns and low consumption, it might not be in their best interest to do so.

Here are some links for this week –

• Analysts Lose 17% for Investors in Brokerage Picks — Twice the decline of the Standard & Poor’s 500 Index.
• Warren Buffet’s bet against hedge funds — I agree with a lot of what Mr. Buffet has to say; this is just not one of them.

Here are some interesting links that I’ve been meaning to post for a while –

• Old-School Economics: An interesting article on the NYT on the current recession stagflation.
• Anti-bubble: What’s up with all these attempts to coin weird sounding terms, anyway?
• It’s not over until the fat lady sings.