Career trades and object lessons

The WSJ carried an interesting story today (subscription required) about hedge fund bearishness on the euro relative to the USD (i.e., a falling euro exchange rate):

Some heavyweight hedge funds have launched large bearish bets against the euro in moves that are reminiscent of the trading action at the height of the U.S. financial crisis.

The big bets are emerging amid gatherings such as an exclusive “idea dinner” earlier this month that included hedge-fund titans SAC Capital Advisors LP and Soros Fund Management LLC. During the dinner, hosted by a boutique investment bank at a private townhouse in Manhattan, a small group of all-star hedge-fund managers argued that the euro is likely to fall to “parity”—or equal on an exchange basis—with the dollar…

Our interest isn’t motivated by the anti-euro call, which is rather conventional and uninteresting (Robert Mundell, one of the intellectual architects of the EMU, has recently predicted movement towards EUR-USD parity, and USD parity is something of an underlying objective of the EMU, if not the ECB).

Rather, it’s in the social and market dynamics involved, and how strongly they illuminate the ongoing importance of financial market regulatory reform.

The WSJ notes that this was an invitation-only event at a private home, and included some major global macro hedge fund players. While that’s not a bad thing per se, it definitely creates some potential market asymmetries and risks:

• Asymmetries to the extent that a small number of players with (relatively) massive amounts of capital and the ability to take highly leveraged bets (that’s the implication of “career trade”) may all be thinking and moving in the same direction; and
• Market and economic risks may because concerted, highly leveraged bets are likely to accelerate what might otherwise be a more orderly return to parity, i.e., one that unfolds over a longer period of time that allows for interested agents to adjust without too much trouble.

That last one is the more interesting point in our opinion, because of what it implies about the theoretical ideal of market efficiency. If EUR-USD is bound to return to parity, is it less destructive to let it “happen naturally”, or is it healthier in the long term to allow levered up speculators to (attempt to) correct mispricings as soon and as quickly as possible?

We have some qualms with the latter approach, because: (1) it may create more market and economic havoc than would otherwise occur; (2) if successful, the “rents” associated with the resulting dislocation (even beyond the mere price adjustment) accrue to a small number of privileged players; and (3) if those bets go badly, the damage could very well spread beyond the hedge funds’ assets (LTCM being the archetypal example).

Of course, those rents accrue to a hedge fund’s passive partners too, so there may be outside institutions that benefit, rather than just the funds’ general partners (emphasis on “may”). But speculators aren’t just messing with an asset class here; they’re impacting the very measuring rods of economic activity and financial obligations, and some of them are able to employ astronomical leverage in doing so, if they desire. 

If the net social costs of that activity are negative, it becomes immaterial who the ultimate beneficiaries of the managing partners’ actions are. It also highlights how critical it is to do regulatory reform well, but soon. Speculators are absolutely critical to financial markets and economies, but optimization requires some degree of financial constraint. How many more ‘object lessons’ will we require on that point?

URLs:

http://online.wsj.com/article/SB10001424052748703795004575087741848074392.html

http://en.wikipedia.org/wiki/Long-Term_Capital_Management

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC is a state registered investment advisor. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy nor a solicitation to sell any security, or to engage in any investment strategy.

Fiduciary churn

Ouch! Research by finance professor Scott Stewart finds that the decisions made by plan sponsors on behalf of pensions, endowments, and foundations have persistently negative economic value.  

Using the most conservative approach for interpreting his results, Stewart concluded that plan sponsors had collectively squandered $170 billion in value over the two-plus decades he studied… 

“Plan sponsors never make their money back,” Stewart told me. “If they simply went on vacation, they could save their clients $170 billion – and that doesn’t count transaction costs.” 

The good news for plan sponsors? They’re less bad than most:

Plan sponsors are, of course, not unique in their ability to destroy value in this manner. Numerous studies, including those by Dalbar and Morningstar, have documented that individual investors, for example, buy mutual funds more heavily at the market peak and tend to sell them at the market bottom.  Plan sponsors should be more sophisticated than individual investors and, according to Stewart, they are. “Although they behave like retail investors,” he said, “the amount of value they destroy is a fraction of that destroyed by individuals.”

URLs:  

http://www.advisorperspectives.com/newsletters10/pdfs/How_to_Squander_$170_Billion.pdf  

Marshall the Moody’s Mauler

Marshall Auerback offered up a brutal dismantling of rating agencies’ negative outlooks on sovereign debt issuers like Japan, the U.K., and the U.S.

America’s Triple AAA credit rating could be at risk should its nascent economic revival not develop into a full-blown recovery, Moody’s Investor Service warned yesterday…

Sound familiar? The so-called “Big Three” ratings agencies have been making claims like this for years: in Japan, the UK and, now, the United States. It is worth recalling that these are the same organizations which, as recently as 2007, were conferring Triple AAA ratings on subprime mortgage paper…

Unlike Moody’s, we think it is absurd to say that the government is going to ‘run out of money’ as our President has repeated. It is not dependent on China or anyone else. There is no operational limit to how much government can spend, when it wants to spend. This includes making interest payments and Social Security and Medicare and Medicaid payments. It includes all government payments made in dollars to anyone.

And if Moody’s (or any other ratings agency) genuinely thinks that government debt is intrinsically evil and that surpluses should be the stated goal of US government policy (in order to safeguard America’s Triple AAA rating) then it must spell out the full consequences of this policy choice. The ratings agencies appear incapable or (at the very least) unwilling to explain the essential sectoral relationships that link the government, private and external sectors. They seem to think that you can have everything – a budget surplus and high private saving and debt reduction. You cannot as a matter of plain accounting logic unless you suddenly start net exporting in great volumes, (which has not happened to the US in its post W.W. II history), or if the domestic private sector is either choosing to deleverage or use leverage less than in the past, that means it will take large and increasing fiscal deficits, or small and decreasing trade deficits, or some combination of the two, in order to achieve trend real GDP growth paths. Otherwise, the result is stagnation or in the extreme, debt deflation. That will not do much to enhance America’s credit rating.

If there’s one thing that Auerback and his fellow neo-chartalists stand out on, it’s this: rating agencies, policymakers, economists, pundits, and many, many others think and speak about debt, deficits, and money as if the world still operated on some type of commodity standard. It does not. Smaller economies may be forced by circumstance to be on hard currency standards, at least operationally, and that is somewhat analogous to a commodity standard. But there is no compelling reason why any issuer of the world’s major currencies (ex-ECB ) should ever miss a debt payment. It’s preposterous.

And yet people actually buy protection against default on U.S. treasury debt via credit default swaps (CDS)! That’s a financial snake oil that comes with potentially significant economic costs. Here’s why:

• Holders of Treasury debt are giving away money to the counter parties selling CDS protection.*
• If it were possible for the U.S. government to default, what counter party could possibly cover its obligations? Diligence schmiligence?
• Leverage, insufficient regulation, and herding behavior have actually made the long CDS trade a winner at times over the past several years.
• That means a greater amount of capital becomes (mis)allocated to people who have done nothing to improve overall economic well-being.
• Those winners will suffer delusions of genius, which almost guarantees they’ll make bad decisions in the future.
• If those bad decisions are levered highly enough, their errors will have systemic implications.
• Add opportunity costs to the risk of systemic damage and the net long term social costs of such behavior are almost certainly negative.

* It might not seem like much — at 50 basis points it costs $50,000 to “insure” $10MM of Treasury debt — but if we assume, for example, that a pension fund is on the long side of the swap, it’s giving away the equivalent of one or two pensioners’ incomes. And while it might look like a good move as long as speculation in Treasury CDS continues to run, the real economic value is ZERO, for the reasons outlined by Auerback.

URLs:

http://www.newdeal20.org/?p=8162

http://www.reuters.com/article/idUSN0524400220100205?loomia_ow=t0:s0:a49:g43:r1:c1.000000:b30347234:z0

Paging Doctrinaire Katsenelson

We might have found a fellow traveller on our lonely wing nut sojourn! Value investing maven Vitaliy Katsenelson has put his Capitalist Pig Party membership on the line in calling for tighter government regulation of the financial sector:

…at the risk of been kicked out of the Capitalistic Pig Party, I support tighter regulation of too-big-to-fail (TBTF) institutions…  

Lack of tight regulation in the TBTF space leads to the worst economic system of all: asymmetric socialism. Enormous gains are reaped by employees and shareholders, but losses are socialized and paid for by taxpayers.  That is simply immoral. 

It’s a well written piece and definitely recommended. Nothing in it about public debt hysteria, so there’s limited confirmation bias available to us. Still, it’s good to see that Vitaliy’s  not a slave to dogma.

If his party does exile him, perhaps we can commiserate over Northern Lights somewhere in ‘New Siberia’ (I might even try to change his mind about hamburgers).

URLs:

http://contrarianedge.com/2010/01/29/even-capitalist-pigs-should-love-bank-regulation/

http://sportsillustrated.cnn.com/vault/article/magazine/MAG1119401/index.htm

http://contrarianedge.com/2009/06/07/the-making-of-capitalistic-pig-expanded/

Dollar Strength & Foreign Credit

We came across an interesting piece on the relationship between the USD and commercial credit activity outside the U.S., as shown in the chart below. The implication, based on a quick and dirty visual analysis, is that if USD strengthening continues (the red line, which is plotted inversely), then foreign commercial paper (the blue line) is likely to contract. In other words, a dearer dollar could spell trouble for foreign economies, and that would have negative implications for economic activity, commodities, and risky assets abroad, all else equal.

This piece of evidence, combined with our strong dollar call yesterday, raises some fascinating possibilities. A rush to the USD was not on many strategists’ radar in 2009, or even to this point in 2010. Judging by markets’ performance today and yesterday, we could be seeing a significant break from those views. Then again, we might just be seeing the first notable stock market correction since last year; a USD squeeze might also be a short lived phenomenon.

We see too many moving parts to make a firm call either way. The markets continue to face the spectre of tightening federal purse strings and a ‘less easy’ Federal Reserve in 2010, and as of this week, they are now sitting in the middle of the open conflict that has broken out between the administration and the financial industry.  

We also see complexities in that battle that make it hard to come down on either side. We offered criticism of Obama’s initial remarks on the financial assets tax, though we later qualified it, and some of his remarks today were spot on. And while government policies and institutions certainly set up incentives to greed and stupidity, the actions embodying greed and stupidity (and the massive trading of rents that did little or nothing — arguably less – for economic welfare) were taken by individuals and organizations in the financial industry. And yet the overall tone of hawkishness from policymakers has negative implications for everyone, regardless of what street they make a living on.

There’s also a little noted irony in the apparent desire of some Democrats to constrain the size and activities of the financial sector. If Ajay Kapur’s research is on the mark, the sector is going to be shrinking in the years ahead regardless of regulatory changes, due to the shrinking ratio of middle aged adults.  A more interesting thing to speculate on, given the continuing centrality of the USD in the global economy, is how well those faster growing regions of the world will cope with tigher global liquidity. 

[UPDATE 1/21/2010 - In a CNBC interview moments ago, House Financial Services Commitee chairman Barney Frank put a far kinder and gentler spin on the recent presidential bluster, saying that a regulatory regime shift would have to be drawn out over several years and do a minimal amount of harm. This appears to have calmed frayed nerves in the market, and is a nifty scoop for Burnett and Cramer. Cramer's inferring that Paul Volcker (a man with a history of bull-in-a-china-shop approaches to policy) has the President's ear, while Frank comes down with the more nuanced regulatory views of Fed and Treasury, which could make for some political drama in the year ahead. It could even be a high stakes game of good cop, bad cop -- time will tell.]

http://shadowcapitalism.com/2010/01/20/the-implications-of-a-dollar-squeeze-on-foreign-banks-credit-access/

http://www.miraeasset.com/data/download.jsp?file_path=upload&file_name=MiraeAsset_TheGlobalInvestigator_20090812.pdf

http://www.cnbc.com/id/15840232?video=1340630859

http://www.cnbc.com/id/34979114/site/14081545

2004 CSE Not to Blame for Crisis?

We’ve argued in several places that changes to the SEC’s Consolidated Supervised Entity’s program in 2004 contributed to the dramatic rise in systemic leverage that precipitated the financial crisis. The SEC’s Director of Trading and Markets offered a rebuttal to this argument back in April 2009: http://www.sec.gov/news/speech/2009/spch040909ers.htm

Today, I want to discuss a Commission action that I believe has been unfairly characterized as being a major contributor to the current crisis. I am referring to the Commission’s 2004 rule amendments to the broker-dealer net capital rule that established the consolidated supervised entity (CSE) program. Since August 2008, commenters in the press and elsewhere have suggested that the 2004 amendments removed a leverage restriction that had prevented the firms from taking on debt that exceeded more than twelve times their capital and, as a consequence, the Commission allowed these firms to increase their debt-to-capital ratios to unsafe levels well-above 12-to-1, indeed to 33-to-1 as some have suggested. These commenters point to the 2004 amendments as a significant factor leading to the demise of Bear Stearns. While this theme has been repeated often in the press and elsewhere, it lacks foundation in fact.

It’s an interesting speech, but several facts still argue against letting the SEC and other regulators off the hook. First, leverage at the largest investment banks, including Bear Stearns, Lehman Brothers, and Merrill Lynch — and in the financial system as a whole — was far beyond anything that could be considered prudent. So whether due to CSE changes or something else entirely, this is still a clear sign of regulatory failure. Second, Christopher Cox, towards the end of his tenure as SEC chief, took actions and made statements that were damning of the CSE:

Washington, D.C., Sept. 26, 2008 — Securities and Exchange Commission Chairman Christopher Cox today announced a decision by the Division of Trading and Markets to end the Consolidated Supervised Entities (CSE) program, created in 2004 as a way for global investment bank conglomerates that lack a supervisor under law to voluntarily submit to regulation. Chairman Cox also described the agency’s plans for enhancing SEC oversight of the broker-dealer subsidiaries of bank holding companies regulated by the Federal Reserve, based on the recent Memorandum of Understanding (MOU) between the SEC and the Fed.

…Because of the lack of explicit statutory authority for the Commission to require these investment bank holding companies to report their capital, maintain liquidity, or submit to leverage requirements, the Commission in 2004 created a voluntary program, the Consolidated Supervised Entities program, in an effort to fill this regulatory gap.

As I have reported to the Congress multiple times in recent months, the CSE program was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate of the CSE program, and weakened its effectiveness.

It sounds like Director Sirri’s argument, that the CSE did not explicitly allow higher leverage ratios, might very well hold water. But his speech does not address the issues that Chairman Cox’s statement raised — namely, that the CSE left gaping holes in financial regulation that were ruthlessly exploited by the largest investment banks.

URLs:

http://www.sec.gov/news/speech/2009/spch040909ers.htm

http://www.sec.gov/news/press/2008/2008-230.htm

Between a ‘Derm and a Donkey

=====

2010.01.14  MEA CULPA – The following entry was based on a news report that mislabeled bank assets (loans, credit) as liabilities (deposits, capital). That’s a common mistake — most people would tend to think of money that someone else put into their care as an “asset”. After reading the FT’s front page story on the proposed bank levy, we note that it’s designed to be applied to exactly the kinds of assets that helped to precipitate the financial crisis. We therefore apologize for calling it a joke, and for the other aspersions we cast in its direction (see below). Our initial assessment was obviously wrong. It might not be a bad idea, and perhaps the Obama administration has taken the position that it will be easier to administer than tighter capital requirements; or perhaps the threat of the tax is being used as leverage in tightening long term capital requirements.  However…

(1) A fifteen basis point haircut on typical investment bank returns, especially if nothing is done about the leverage that can be employed, is awfully skimpy;  

(2) There are still risks in who will actually bear the cost;

(3) the activities of investment banks actually do some social good, believe it or not;

(4) The President and Congress are still more like Herbert Hoover than FDR/JFK/RR; and

(5) We’re still stuck between ‘Derms and Dems for the foreseeable future.

=====

In our latest Idle Speculator, we asserted that in the years ahead, the U.S. economy was likely to remain stuck between a pachyderm and a donkey. If today’s events are any indication, it’s a good call. President Obama called for a punitive tax on large banks, and the only Republican response we’ve heard so far is from a Congresswoman who mostly railed against public spending. In our view, both sides continue to make little if any sense. 

President Obama’s bank tax would apply only to institutions with $50B or more in assets, and the rate would be 15 basis points (0.15%). However, the levy would not be on bank income, but rather on banks’ liabilities, i.e., deposits. What does this mean? We’d need to take a closer look once legislation is drafted, but based on what’s been said, here’s our initial impression:

First, the large banks aren’t going to pay a damn thing. Depositors (savers) are simply going to take a 0.15% haircut on the interest rate they receive, all else equal. Essentially, this will just act as an additional tax on people who deposit funds with large banks, and/or as a marginal incentive to deposit funds with other institutions.

Second, it won’t do anything to prevent the systemic leverage and boneheaded risk taking that got us into this mess. Systemic fragility arises when banks create too many assets (by extending credit) relative to their liabilities and capital. If the government wanted to prevent this through taxation rather than regulation (probably a bad idea to begin with), then it should be taxing bank assets. Of course, even then, it would simply mean that debtors’ interest rates would go up by the amount of the tax…which means the banks still wouldn’t pay a damn thing (refer back to point one).

In his remarks, the President said:

“My determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at the very firms who owe their continued existence to the American people who have not been made whole, and who continue to face real hardship in this recession…”

As in his recent comments on the jobs situation, the President shot well wide of the mark. While it’s reportedly an attempt to marshall populist support by attacking a particulary unpopular industry, the approach is a joke (as supporting evidence, we’d point out that Financials are the third best performing sector in the S&P 500 today, and that Money Center and Regional Banks are among the best performing industries within it). 

We can only infer that of late, the President has been listening to the very worst strategists in his Cabinet, folks who would recommend Herbert Hoover’s approach to economic crisis and recovery over FDR’s (or JFK’s or Reagan’s if you prefer) at a time when the latter’s is far more appropriate. Obama’s current hawkishness is evident in the AP article:

Obama said he was determined that every dollar spent from the $700 billion Troubled Asset Relief Program to rescue Wall Street firms, auto companies and mortgage holders is either repaid or paid for in some fashion.

His party’s hawkishness is also evident in the continuing failure to extend the COBRA subsidy under ARRA (a cynic might infer that this is intended to garner more support for heath care reform, but it’s a hawkish action either way). Thus, despite all the talk on the right and among tea party goers about “tax and spend liberals”, the reality looks quite different to us. The American electorate continues to be presented with only two choices — revenue hawks and budget hawks, i.e., higher taxes or lower spending – and those are essentially flip sides of the same coin.

In any case, forcing depositors to take a haircut, forcing debtors to pay marginally higher interest rates, or recovering every single dollar issued under TARP will do nothing to remedy the real hardships being faced by the American people in this recession. It also does nothing to prevent another financial crisis. If the President really wants to accomplish something on those counts, here are a few suggestions:

• Push hard for focused, meaningful financial regulatory reforms that will prevent excessive systemic fragility.
• Use the federal government’s creditworthiness and risk taking capacity to provide more direct assistance (i.e., employment) to the underemployed. 
• Stop being so terrified of budget deficits. Thinking about structural deficits is OK, but acting now to solve them could actually make the problem worse (ask Japan).
• Let private sector intermediaries (banks) use a historically steep yield curve to continue repairing their balance sheets by financing public deficits.
• If you insist on attacking TARP recipients, target the agents who control them (e.g., executive compensation or bonuses above a certain level), not owners, depositors, and borrowers.
• Enact policy measures that lower uncertainty, raise optimism, and thus increase the private demand for credit and investment.

You might also demand some accountability from whichever advisors had the most influence over today’s statement and last Friday’s…

URLs:

http://symmetrycapital.net/idlespeculation/20100112.pdf

http://news.yahoo.com/s/ap/20100114/ap_on_bi_ge/us_obama_bank_fees

http://biz.yahoo.com/p/

http://biz.yahoo.com/p/4conameu.html

http://www.dol.gov/ebsa/faqs/faq-cobra-arra.html

http://www.ft.com/cms/s/0/a025fd26-00ad-11df-ae8d-00144feabdc0.html

http://ftalphaville.ft.com/blog/2010/01/14/126481/the-back-of-the-envelope-bank-levy/

Rubin to the Rescue?

In Newsweek, former Goldman Sachs CEO, Clinton Treasury Secretary, and Citigroup bigwig Robert Rubin offers his analysis of the Great Recession and proposed nostrums for preventing another:

Given my views as to the causes of the crisis, I would recommend the following:

• There should be greatly increased capital and margin requirements for derivatives and other instruments of financial engineering to create a greater cushion when trouble develops and to reduce risk exposure. I developed this view during my many years of working with derivatives before entering government, as described in my 2003 book, In an Uncertain World.
• Standard derivative contracts should trade on an exchange to increase transparency. Transactions that are custom designed would not be exchange traded but would be subject to the same capital and margin requirements as listed transactions. Disclosure requirements could be considered for customized transactions, to provide private counterparties and regulators with the transparency to understand the risks.
• There should be two sets of more stringent leverage limitations for systemically significant institutions, one defined by risk-based models and the second by much simpler measures, since mathematical models can’t capture the full range of real-world possibilities.
• There should be significant constraints on off-balance-sheet financing; for example, institutions must retain ownership of a portion of off-balance-sheet assets.
• We need a change in accounting systems to avoid the artificial effects of mark-to-market accounting for illiquid assets on balance sheets and on markets. There are other accounting approaches that would better reflect long-run values for these assets.
• We should also provide effective mechanisms for dealing with systemically important nonbank financial institutions—including bank holding companies—that get into trouble, to mitigate “too big to fail” concerns, but practical ways to do this need to be developed.
• There should be greatly increased protections, both to safeguard consumers and to reduce systemic risk. The elements should include readily understandable disclosure, suitability requirements, prohibition of practices or instruments inherently susceptible to abuse, and, if some practical way can be found, personalized advice for the most vulnerable consumers.

Fair enough, mostly no brainers, but is Rubin being disingenuous? As we’ve previously written, there seem to be growing threats to to the man’s political capital, particularly within the Democratic party. And judging by this piece from Marshall Auerback, those threats still exist, and have intensified since 2006:

As one of the people whose policies threw the global economy off the rails, Rubin may be uniquely qualified to provide solutions as to how to get the economy back on track. But that would presuppose that the man actually acknowledged mistakes (as some of his other Goldman Sachs/Clinton Administration colleagues, such as Gary Gensler, have done) and displayed at least a marginal understanding of where he went wrong.

No such luck. We get the usual self-serving “nobody could have possibly predicted a crisis of this magnitude” right at the start…

Auerback cites a damning interview with the former head of the CFTC, Brooksley Born (a position now held by the aforementioned Gary Gensler):

…as analysts sort out the origins of what has become the worst financial crisis since the Great Depression, Born has emerged as a sort of modern-day Cassandra. Some people believe the debacle could have been averted or muted had Greenspan and others followed her advice.As chairperson of the CFTC, Born advocated reining in the huge and growing market for financial derivatives.

According to Auerback:

Rubin now suggests that Born’s problem was one of style, rather than substance: she, being “too confrontational”, risked aborting any politically feasible reform of OTC derivatives. That’s certainly an interesting reinterpretation of Rubin’s actual role as Treasury Secretary, during which he laid the groundwork for today’s crisis through an aggressive championing of financial deregulation. It’s hard to think of one instance where the former Goldman Sachs CEO actually came down hard on his former Wall Street colleagues. Had he at least acknowledged some remorse or recognition of error, he would be more appropriately suited for an advisory role on how to fix the global economy, much as a reformed criminal often has useful insights on penal reform.No such luck here. If being one of the worst Treasury Secretaries ever wasn’t enough, Rubin left another unfortunate legacy at Citigroup, where he was a senior advisor after he quit the Treasury. He left Citi just before its near collapse amidst criticism of his performance. A distinguishing moment of his tenure was when Rubin got hold of Peter Fisher in the US Treasury Department to try to put pressure on the bond-rating agencies to avoid downgrading Enron’ debt which was a debtor of Citigroup…

Letting him publicly expound on getting the global economy back on track is akin to providing Kim Il Jong-il a public platform on human rights. Unlike Greenspan, who at least admitted mistakes, Rubin expects to be taken seriously as a policy maker despite acknowledging zero responsibility for the debacle that threw millions of Americans into unemployment. People around the world have lost their jobs, savings, and more largely thanks to the policies championed by this misguided deficit warrior.

Ouch.

We’ll pile on by reminding people that as Treasury Secretary, Rubin presided over implementation of the “strong dollar” policy designed by his predecessor, Lloyd Bentsen, which had damaging effects on many developing nations’ economies. He’s also featured prominently in a recent list at Motley Fool of “The 10 Dumbest Banker Quotes of All Time”. And we agree with Auerback that a sincere mea culpa for past errors, whether at Treasury or Citigroup, would buy the man some badly needed goodwill. We think he should also expand his bullet points to include the following: 

• Let’s not repeat the mistake of believing that experts always know best.
• Let’s agree that optimal outcomes often require more than just unbridled private actors.
• Let’s resolve not to get caught up in any more cults of personality, whether adorer or adoree.

Update 01/07/2010 (via Mark Thoma) – Larry Summers, who is currently President Obama’s National Economic Council chief, and was Robert Rubin’s protege and eventual successor at the Clinton Treasury, also finds his political capital under attack from both the left and the right.   

IMPORTANT DISCLOSURE: Symmetry Capital Management, LLC is a member of the Amazon Associates program, and earns a revenue sharing fee of approximately 4% on qualified purchases made by clicking through from our website.

URLs:

http://www.newsweek.com/id/225623/page/2

http://www.amazon.com/gp/product/0375757309?ie=UTF8&tag=symmetrycapit-20&linkCode=as2&camp=1789&creative=390957&creativeASIN=0375757309

http://www.newdeal20.org/?p=7270

http://www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html

http://www.fool.com/investing/general/2009/11/25/the-10-dumbest-banker-quotes-of-all-time.aspx

http://www.economicprincipals.com/issues/2010.01.03/880.html

http://capitalgainsandgames.com/blog/bruce-bartlett/1373/summers-out

IMF: Political Lobbying ~ Financial Risk

A new IMF analysis tests the common sense assertion that some mortgage lenders engaged in heavy political lobbying in the years prior to the financial crisis, and that the political results helped to precipitate the financial crisis (emphasis added):

On December 31, 2007, the Wall Street Journal reported that Ameriquest Mortgage and Countrywide Financial, two of the largest mortgage lenders in the nation, spent respectively $20.5 million and $8.7 million in political donations, campaign contributions, and lobbying activities from 2002 through 2006. The sought outcome, according to the article, was the defeat of anti-predatory lending legislation. In other words, timely regulatory response that could have mitigated reckless lending practices and the consequent rise in delinquencies and foreclosures was shut down by some mortgage lenders. Such anecdotal evidence suggests that the political influence of the financial industry contributed to the 2007 mortgage crisis, which, in the fall of 2008, generalized in the worst bout of financial instability since the Great Depression.

The researchers’ findings lend strong empirical support to the common sense:

Using detailed information on lobbying and mortgage lending activities, we find that lenders lobbying more on issues related to mortgage lending (i) had higher loan-to-income ratios, (ii) securitized more intensively, and (iii) had faster growing portfolios. Ex-post, delinquency rates are higher in areas where lobbyist’ lending grew faster and they experienced negative abnormal stock returns during key crisis events…These results show that lobbying lenders engage[d] in riskier lending.

URLs:

http://www.imf.org/external/pubs/ft/wp/2009/wp09287.pdf

Great Quote

From a posting by David Merkel of The Aleph Blog, in a review of the book Nerds on Wall Street:

On Wall Street, if you are really, really smart, they will hand over to you exceptionally advanced tools that you can use to destroy yourself in a unique and memorable way.

URLs:

http://alephblog.com/2009/10/31/book-review-nerds-on-wall-street/

http://www.amazon.com/gp/product/0471369462?ie=UTF8&tag=symmetrycapit-20&linkCode=as2&camp=1789&creative=390957&creativeASIN=0471369462

DISCLOSURES: Symmetry Capital Management, LLC earns a commission on book sales purchased via Amazon Associates links on our website. Symmetry Capital, its clients, and its principals do not own shares of any companies mentioned.