Thursday, September 25, 2008

The Banks KIlled The Golden Goose... What Next?

The crisis in the financial system reached epic proportions over the last few weeks. The collapse of Lehman, Bear Stearns going, AIG bail-out, Goldman and Morgan changing status and the "RTCII" bail-out being discussed at the moment has changed the landscape for the industry, but how will it look after this?

Whether you agree with the recent government moves on short sellers or not, we have to get used to the fact that this is the tip of the iceberg for knee-jerk regulatory moves, or should we say 'political moves'.

The situation is not just US based, it world-wide. German Finance Minister Peer Steinbrueck told parliament the turmoil would leave "deep marks" on both sides of the Atlantic, but called it primarily an American problem.

"The world will never be as it was before the crisis," Steinbrueck, a deputy leader of the centre-left Social Democrats (SPD), told the Bundestag lower house.

"The United States will lose its superpower status in the world financial system. The world financial system will become more multi-polar," he said.

Chancellor Angela Merkel, says "the days of laissez-faire capitalism are over".

French President Nicolas Sarkozy, whose country holds the rotating EU presidency, has called for a global summit to overhaul a "crazy" financial system.

So what have the politicians got on their minds? Steinbrueck proposed eight steps to prevent a recurrence of the turmoil, including an international ban on "purely speculative" short-selling, new rules to hold individuals accountable for financial missteps and an increase in capital requirements for banks in order to offset credit risks.

Higher capital adequacy I can live with and is a good idea, but the other stuff just shows the mentality of politicians who don't really understand the financial world.

How would you identify 'purely speculative short selling' and how would that 'fix' the financial system?

Just a few pointers to Herr Steinbrueck:

When is short selling not speculative? Would this be when a company is, in the eyes of some faceless bureaucrat, actually over-valued?

Would there then be a 'list' or a warning system saying it’s now OK to short this company? Wouldn't you like to be the first to get that list!!!!

Perhaps it’s not speculative if it’s a 'hedge'. But then you are allowing some speculators to short but not others. How would that work and who would you decide this? Would you have to submit your trades to a regulator before you placed the trade?

Let’s face it, it is a silly, naive suggestion, but remember, this is coming from a politician who actually has the powers to do this, at least in Germany.

How scary is that?

Also, shorting, far from being a 'financial weapon of mass destruction' is a way to limit risk. Lest say I am trading in the banking sector. One bank looks good to trade, the other looks a little over valued. So you 'pair-trade' them. You go short on one and long on another. If the sector as a whole takes a dive while your trade is on you win on your short and lose on your long, this risk based trading stops people losing more money than they normally would.

The problem is that short selling is an easy thing to point at for a politician. Something that is easily digestible for the average non-financial guy. The simple message is 'short sellers profit from your pension fund going down'. Easy sell n'est pas?

But if you believe in banning short sellers who profit from driving prices down, then you must ban buyers when shares are driven to unrealistic prices.

The issue that is being missed on the short selling rules is this. If a company has been driven down to a point where its shares price is way below its asset value then the market will correct it. If I saw a stock trading at a discount to its assets then, all things being equal, I would be buying like crazy. The shorts would have to cover and 'hey-presto' we have priced the stock.

The ban on short selling does not address the wider market and fundamentally avoids the real issue because saying it would be the death knell to a politician. That is that credit was too easy, people borrowed too much and now they are feeling the pain... It is not a popular story but it is at the crux of this mess.

If you want to stop this happening again, restrict credit to people who can actually pay it back, make mortgages a mandatory 20% deposit and no more than 3 times single or joint earnings.

Problem is this would hit the housing market, hit first time buyers and make property less lucrative. Is that a bad thing?

What politicians also fail to grasp is that creating or changing rules that open the doors to the creation of huge banking and trading institutions is, frankly DUMB!!

How many times have you heard this phrase in the past 6 months; 'Too big to fail'. Hello, McFly is there anybody there?

The latest round of consolidations is needed but not desirable. The easiest way to regulate this situation is not to change the law and investigate every merger/acquisition. All the regulators need to do is increase capital adequacy. Basically if you want to go ahead and merge yourself into a giant firm then the risk you pose to the market should be minimised.

Have the banks in a situation where they can only leverage once over their asset base.

Whoah! Have you any idea how much liquidity that would take out of the market? I hear you say.

The answer is yes I do. But the one thing we know about the financial system is that where there is a gap another firm will move into that space. What is wrong with spreading the liquidity/risk across 1000 firms instead of one giant one? It would be easier to manage and it would be less of a risk to the system.

But the firms wouldn't make as much money.. I hear you, but they were the ones who killed the Golden Goose, why should they be allowed to dominate the market once again?

What about hedge funds, will we see and end to them? I don't see how. Maybe they will be called something else but the genie is out of the bottle now. How will you stop them?

OK, tomorrow they ban 'hedge funds'. How do you define that? A hedge fund is simply a company that issue shares and then invests its capital. Are you going to ban investment companies?

Increasing capital adequacy for banks and traders would limited hedge fund borrowing, limit bank trading, and, ultimately make the system less volatile. Limiting credit to the credit worthy would end the ponzi scheme of the housing markets and credit cards, this is where the focus needs to be.

Think about it. How can a 20 year old straight out of university get 50k in credit from the card companies? How was that going to end well?

It is not a popular thing to say. We have all got used to the fact that we can have a slice of the dream of wealth and it was housing that drove this. The game should be over, but it is such a political hot potato. Who will be strong enough to tackle it? If Obama gets the US Presidency and the Tories win in the UK and make the painful moves necessary to restrict credit, then there will be a back lash from the public, why? Because standards of living will go down.

More expensive credit and less of it, for traders, banks and the public alike, is the key to solving this problem, anything else will be a political band-aid aimed at pulling the wool over the public’s eyes and the game will just start over again.

If we really want to change the financial system it does not mean bankers and traders will be thrown to the dogs and told they have salary caps. It will be everyone buying a cheaper house, a cheaper car, saving more, buying less and returning to a society where credit is something you earn, not simply something that is given to keep the merry-go-round going.

Tuesday, September 23, 2008

Who Is To Blame For This Mess? It Is Not Who You Think.

I have to say, reading the press recently is beginning to get right up my nose.

The sanctimonious ramblings of so-called financial journalists intent on hoodwinking the public into believing that all this mess is caused by greedy speculators trading the markets and making money at the expense of the little people.... What a crock of s***.

In the Telegraph today they were saying that the markets would be 'perfectly affective' if there were 'far fewer' traders. These 'talented people' could then get a real job in the 'professions'.
What, like a journalist? Who, from the stuff I have read recently, are at best, deluded, at worst corrupt. After all, selling newspapers is their game right? Months ago profiling hedge fund rocks stars was selling newspapers, now nailing them to the wall is flavour of the month.

First of all I will agree that the over use of leverage has contributed to the wild swings we have seen in the markets and private equity and hedge fund speculation has created short-termism in the minds of many a CEO leading to overly risky company strategy in some cases.

BUT (and it is meant to be in capitals) speculation is not to blame for the route causes of this mess. We all know that the route cause is the US housing market, and, to a certain extent, the UK housing market.

Both of these sectors have been, and no doubt will continue to be, a massive ponzi scheme in which everything is OK as long as new money is coming in. Just like a game of musical chairs, when the music stops and the new cash disappears the whole thing collapses and some people do not have a seat.

So who is to blame? For me it is the banks, mortgage brokers, the media, the regulators and the one that will make this post unpopular, Joe Public.

When I say Joe Public I mean a certain section of the public, those who thought that the housing market would go on forever and so it was worth lying about your income to get in on the game. It is not only the market speculators or traders who had over used leverage but the house buying public.

I will give you an example. I lived in a flat that was in a converted hotel. In 1999 this flat was offered to me for £180,000. Two bedrooms, paper thin walls and an odd shape. That same flat was on the market 8 years later at £600,000. Six hundred grand for a two bedroom flat? If inflation had taken it to that price, fair enough.. but it didn't.

What caused it? Cheap money from the banks, eager/greedy mortgage advisors/estate agents and some dim buyer thinking the housing market was going to go up for ever and was prepared to pay something for a flat that was no where near worth it.

Where was the trader in that equation?

When it looked liked this Ponzi sham may be over the banks came up with ever more schemes to keep it going. How about 125% mortgages from Northern Rock? What about self-certification 'liar loans' in the US.

The trader’s job, be it in a hedge fund, investment bank, or sitting at home trading online is to spot anomalies in the market and bet on making money when the price corrects, is that evil? If you saw a listed company with no income trading at a £200 million pound market capitalisation and you are able to trade it would you buy or would you short?

The housing market and its component parts was just one huge price anomaly waiting to be corrected by, yes, traders. Who else would have done it? Blaming them now is like blaming a vulture for killing an already dead animal. (Probably not the best analogy, but you get my point).

Traders are no more responsible for the housing crash and the tsunami sent through the markets as a consequence, than the guy who bought his house with a 30% deposit and mortgage payments well within his affordable income.

Journalists will no doubt say that Joe was hoodwinked into this scheme buy greedy mortgage advisors and banks giving 'teaser rates'. I would agree with that, but I find it a little incongruous that the media is getting all high and mighty after pumping out page after page of stories on how great the housing market is, and how safe an investment property is. The TV media was awash with shows such as the BBC's 'Million Pound Property Experiment' where two interior designers borrowed £100k from the BBC and would renovate and sell properties until they had a million pound house.

There were a million other shows which all gave the impression that property was a never ending game. Even the National Housing Federation is predicting, still, that house prices will rise 25% from 2008 - 2013. They may be right, but that growth is at the long end of the scale and if the cheap money system is crushed under the weight of this crisis, I would predict that 25% is 'optimistic'.

On the other end of the scale Jeremy Grantham of GMO, the $126-bn US investment fund, notes that UK house prices "could easily decline 50% from the peak, and at that lower level they would still be higher than they were in 1997 as a multiple of income!"

The blame game is, indeed, well underway. What will follow will be a slew of regulations/legislation aimed at curbing the 'excesses' of the 'greedy bankers' and 'evil' traders. This will be shouted from the roof tops by lame-ass politicians trying to cling on to power or gain power. It will be repeated gleefully by the press in a mass love-in of schaudenfraude and lapped up by a gullible Joe Public.

What they will not be shouting about is that some of these regulations (the ones that will actually work) will be aimed at Joe Public's addiction with the property market. Cheap money and easy loans are going to go away for a long, long time.

Far from it being the traders who suffer from this new regulatory world order, it will be Mrs Miggins who had dreams of buying-to-let a hundred houses on cheap leverage.

The new governments in the UK and the US will blame this all on the previous bunch, send a few bankers to jail for good measure and then say "Sorry Mrs Miggins, that was a corrupt system and the game is over".

A few years down the line when the banks recover, traders are happily making the free market work and money abounds again, the government will need a shot in the arm to get re-elected. Being the dim wits they are they will point to the housing market, do something silly and the whole game will start all over again.

I just hope that this time, the public will show a little restraint... somehow, however, I very much doubt it.

Friday, September 19, 2008

Bad Banks, Short Selling and Financial Terrorism

We said yesterday that now was the time to be trading, but we never had an inkling of the news that hit the markets last night. A possy of US financial glitterati announced last night the US government is to stage a monumental bail-out of the hundreds of billions of dollars of 'toxic' mortgages.

This move is aimed at being the silver bullet that finally brings the credit crisis to an end.

The idea appears to be the creation of what is being called a 'bad bank' which would act as a massive fund designed to suck bad debt out of the system with the US government holding this debt until maturity.

News of the plan, was greeted with cheers on the floor of the New York Stock Exchange. The Dow Jones index traded in a 617-point range, eventually closing up 410.03 points, or 3.86pc, at 11019.7, its best one-day percentage gain in six years.

Markets across Europe are being called up vastly with the FTSE, CAC 40, and the DAX all expected to make 200 point + gains. This bail-out and with the news that the FSA has banned short selling on financial stocks for 120 days is sure to make today's session an interesting one.

The FSA made the short selling move on fears that other banks could follow HBOS in being targeted by short-sellers.

Outgoing FSA chairman Sir Callum McCarthy said: "There is a danger in a trading system which allows financial institutions to be targeted and subject to extreme short-selling pressures."

The ban covers all new short-selling of financial stocks. Also, by next Tuesday, investors must disclose short positions of more than 0.25pc of a company's total value.

Traders though are none to impress, one said "This is an utter joke. There is now even less liquidity in a poor liquid market. How are the institutions going to sell?"

Short sellers are being viewed with suspicion all over the world. Jim Cramer, CNBC commentator and ex-hedgie was discussing the short selling measures in the US and even made reference to 911 and the belief in some quarters that airlines were being shorted by Bin Laden and other terrorist groups and the same could be happening with financials.

Cramer’s been talking to the short sellers he knows, and that’s the theory they’ve been putting forward. His sources said that it’s doubtful that the market’s traditional short sellers are behind the negative action we’ve seen lately.

Cramer, who was merely relaying what he heard, did say that, given the fact that the U.S. is in a “financial nationally emergency,” the “financial terrorism thing, to me, has to be put on the table just because the regular short sellers are not doing this.”

Calls to investigate who is behind short selling are coming, not just from Cramer, but from others in the financial markets. One trader who we spoke to said "Banning short selling is just madness, long term. If the FSA suspect that there is something going on other than legitimate shorting, then we will wear it until the deadline but if this becomes a permanent thing, forget it, the days of the free market are over".

The FSA have said that they believe short selling to be a legitimate tool so we believe it's unlikely that this ban will be extended indefinitely, but as we have said many, many times before, prepare for a massive tidal wave of regulation in 2009/2010.

Source: HF Markets - Online Trading

Thursday, September 18, 2008

HBOS - Another One Bites The Dust

HBOS walks warily down the street,
With its price pulled way down low
Aint no sound but the sound of its balance sheet,
Short Traders ready to go
Are you ready, are you ready for this
Are you hanging on the edge of your seat?
Out of the doorway Lloyds Bank rips
To the sound of the beat

Another one bites the dust
Another one bites the dust
And another one gone, and another one gone
Another one bites the dust
Hey, I’m gonna get you too
Another one bites the dust

(With apologies to Queen!)

I wake up on another morning where another bank is gone. Britain's Lloyds TSB sealed a 12.2 billion pound ($21.7 billion) deal to buy HBOS to create a dominant mortgage and savings bank, encouraged by the government amid fears turmoil in financial markets would claim another UK victim.

Lloyds will offer 0.83 of its shares for each HBOS share, valuing them at 232 pence based on Wednesday's closing price of 279.75p, a 58 percent premium over HBOS's last price of 147.1p.

HBOS shares were up 25 percent at 184p while Lloyds shares dipped 3 percent to 268p, trimming the value of the deal to 222p per HBOS share.

The bank said it expects the deal to boost annual earnings by over 1 billion pounds a year by 2011 through cost savings and boost its earnings per share by over 20 percent a year. Lloyds CEO Eric Daniels will remain as chief executive of the enlarged group and Victor Blank will stay as chairman.

The UK government said it intends to smooth regulatory approval of the takeover -- despite the enlarged group having a 28 percent share of mortgages -- to ensure the stability of the UK financial system.

Alistair Darling, UK finance minister, said he fully supported and welcomed the deal. But Daniels denied it was a government-brokered rescue of its rival, and said the banks have been in talks for several weeks.

"There shouldn't be any impression this is a shotgun marriage or a forced marriage, this is something that's been looked at for a good long while.

"Our most recent set of conversations have taken place over the last several weeks," Eric Daniels, chief executive, told reporters on a conference call.

All I know is someone is making a fortune

Lloyds said the combination will strengthen its ability to serve UK customers in current difficult markets.

It follows a plunge in HBOS's share price in the last six days amid fears about its funding position.

What interests us is what will come out about this deal when the short positions in the bank over the past weeks are analysed. The one thing we know for sure here is that someone has made a killing on the short side.

This will no doubt bring up the debate on short selling once again and I would suspect we will get some politician, who doesn't really understand the markets, calling anyone who was short 'Satan'.

The US SEC have recently made a call on short sellers by stiffening the rules. The SEC adopted two regulations forcing traders and brokers to close out short sales on all stocks, amid concern investors are driving down prices by flooding markets with sell orders. A third rule makes it a securities fraud when sellers deceive brokers about delivering borrowed shares to buyers.

I am not so sure about having everyone close short positions, shorting is a legitimate market tool and is creating, perhaps a false market, but the naked short rule is a good one.

Naked shorts are where people have not borrowed the shares in the market to cover their short positions. Basically if you have a brokerage account and you sell short on a 10 day settlement, for example, without shares on your account, then you will have to 'cover' your position in the market. Imagine now that thousands of traders did this on HBOS (I am not saying they did).

There could be a position (and it has been well documented in high profile cases in the US) where there are more shares being shorted than actually exist in the market. The price, therefore, is only going one way.. down the pan. But if a huge volume of the shares are naked, then it is a false price.

If you do this now in the US it is securities fraud. Personally, I think this is the most sensible thing a regulator has done for years, it almost make up for getting rid of the 'up-tick' rule that probably would have stopped a lot of this shenanigans.

My fear, however, is that Mr. Alastair Darling is now under pressure to do something about short selling in the UK. And with all due respect to Mr Darling, he has not got a great record when it comes to making decisions under pressure (non-dom tax and capital gains tax to name two).

I do sympathise, however, because it is a tough call to know what to do. The government recently stopped short selling around rights issues, and we suspect this will now be extended. A knee-jerk reaction would be to stop short selling on bank shares, however, to create a protective shell around banks on that basis may be a mistake, it depends on the view point you take.

The FSA have said that short selling is a 'legitimate tool', which I agree with, however I would like to see naked shorting stopped, it disturbs the natural order.

When the dust settle on all this I would suspect that there will be some hedge fund managers cashing in their chips and moving to somewhere they can keep a low profile, because the recriminations will be huge.

John Paulson making a 500%+ on one of his fund shorting the sub-prime market was received with applause for his heroics. The average guy in the street did not understand how this was done but had no particular problem with it. Any hedge fund manager who starts telling of the billions they have made shorting bank shares will not get the same reception. The perception will be that taxpayers are the ones who have bailed out the greedy hedge funds, and that would almost certainly put an end to the party.

I would suggest that the billions being made from shorting banks be kept very quiet indeed or you may find that the government and regulators start using the words like 'fraud', market abuse', 'market manipulation' and the Kryptonite words for hedgies 'windfall' and 'tax'.

Source: HF Markets Online Trading

Tuesday, September 16, 2008

AIG - The Next Shockwave?

Despite sell-offs on an unprecedented scale many are observing that 'it could have been worse'. This, you would imagine, would give hope to the market that we have not reached a panic selling situation, unfortunately we still have a huge monkey on our shoulder; American International Group (AIG).

The worry is that today we are going to see the failure of the giant insurer and that would bring blood on the screens again.

Matt Cheslock, a senior specialist at Cohen Specialists said "If AIG fails tomorrow morning, it's the same thing written all over this market, I don't think anyone is going to want to take any positions overnight."

The Federal Reserve refused to provide temporary financing for AIG, which has incurred $18 billion in losses over the past three quarters from soured mortgages. But the government has asked Goldman Sachs and JP Morgan Chase to lead a group of banks to offer up to $75 billion in credit for the troubled insurer.

AIG's survival, however, remains uncertain and that is not a good place to be for the markets and the dithering of the Fed on this one could cause further huge losses in the market.

"So far, the efforts of the US government have failed to bring any stability to the financial markets,'' said Kathy Lien, director of currency research at Global Forex Trading.

The events of the last few days have been a huge shift in the power structure on Wall Street, echoing or sentiments of yesterday Justin Urquhart Stewart, investment director at 7 Investment Management in London said "It's a return to pure capitalism, the survival of the fittest—the government can't and won't bail everybody out,"

AIG has reached this position because of losses on its mortgage business which has now caused it rating to be dropped by at least two notches by the top three global ratings agencies.

Moody's Investors service cut AIG rating from A2 to Aa3 Standard & Poor’s rating service cut the rating from A-minus to AA-minus and Fitch Ratings reduced from A to AA-minus. These ratings are still 'investment grade' but for how long?

Once the world's largest insurer by market capital fell 61 percent and continues to fall in today's trading.

Market commentators opinions are that AIG should be bailed out as the consequences of letting it fail could be huge. Jim Cramer, CNBC commentator and former hedgie said ""I would radically have to change my view of where the market’s going if AIG fails, this one needs to be stopped. I don't know how to stop it. AIG is too big to fail."

The affect on the wider market of a failure of AIG are wide reaching. Kenneth Lewis, chief executive of BoA, said that "I don't know if a major bank that doesn't have some significant exposure to AIG". A collapse of AIG would "be a much bigger problem than most we've looked at." He added.

The health of AIG’s book of credit-default swaps (CDS), which are contracts sold to protect debt investors, are seriously in doubt. The ratings cuts technically trigger collateral calls from the debt investors who bought those swaps, because the likelihood of default on the swaps has increased and so the investors require more of a reward to hold on to them.

Unlike Freddie and Fannie, where rumors were rife that the bail-out would be a shoo-in, market sentiment around AIG is not so positive. The people that we have spoken to today believe that the talks taking place right now are crucial to the integrity of the financial markets and should AIG be allowed to fail, all bets are off.

This is an historic week in the markets. Having been in this industry for 20 years I have seen nothing like it, the opportunities for profit are massive, the opportunity for losses, equally as massive.

One thing is for sure, when the dust settles there will be some very, very rich traders who have played this market well, and some who are significantly poorer than they were.

We wish you the best of luck, be careful out there....


Monday, September 15, 2008

Lehman - At Least The Socialists Are Happy

The Lehman crisis has dominated news today, in every quarter. Amid all the doom and gloom there are some people who are as happy as a Goldman banker at bonus time. The socialists.

I have read so much on the web about capitalism getting what it deserves (finally) and comments on blogs about 'greedy bankers' causing the downfall of the financial system.

It's all very entertaining and I can see why certain sectors of the community have no sympathy. For years now we have seen bankers and their CEO's pay themselves huge bonuses, beyond what has ever gone before and some people don't like it. When one of our number gets it in the neck you can see why the socialists would throw this in our faces.

The irony is, however, that regardless of the net affect on the global markets over the next few days, and the knock-on affects of the Lehman failure, the very fact that it is being allowed to fail is a shining example of the free market in all its glory.

Although I agreed with the Fannie and Freddie bail-outs I was becoming increasing uncomfortable that failed banks were being bailed out in the manner that they have been. A correction is the capital markets' natural way of cleansing itself and if there is no downside to moral hazard then we would be living in a socialist state, would we not?

Yes the integrity of the financial system should be kept in tact and yes, we should not let our banking system fail, so there has to be some form of support. But to let bankers pay out millions and millions of dollars to themselves on (what turned out to be) shaky financial constructs and therefore 'false' profits was, to put it mildly, irresponsible.

To then bail-out these same bankers and allow them to continue with their million dollar salaries without come-back is not what the capitalist system is all about.

Risk has an inherent reward, the more risk you take the higher the potential reward, that’s how it goes. To turn this on its head and protect the downside of dodgy financial instruments by bailing out big banks who took those risks and created those products is to destroy the system and create an 'untouchable' elite group of millionaires who will never pay a price, no matter what risks they take.

How many small wealth managers, small banks and small brokerages are suffering because of this crisis? Will they ever see any assistance if they look as though they are failing in this market? Not a chance.

I know of several owners of small companies in this industry who are now putting back their salaries and bonuses from the good times to save the businesses they have built. This is the way it works.

I have no idea how much the big wigs at Lehman earn, but I bet they are not poor. With their accumulated wealth one would assume that they could make a significant dent in the monies required to keep the company afloat. Maybe then Barclays et al would have had more confidence that the bank would survive.

The capitalist economy flourished in the early days because management had most of their wealth wrapped up in their companies, these days, this is mostly not the case. One thing I do know, however, is that a number of junior bankers at both Bear and Lehman had the vast majority of their wealth tied up in the magic beans of stock in the companies they believed in and today they must be very unhappy with their former bosses. Shouting 'Power to the People' at them today may not be good for your health.

Lehman Brothers - Natural Selection At Work

It finally happened, Lehman Brothers, the US investment bank, has said that it intends to file for bankruptcy protection "in order to protect its assets and maximise value".

Consequently, expect the markets to tank on the news as potential ripples spread through the markets today.

Barclays Bank and the Bank of America pulled out over the weekend after the potential buyers said they were not convinced that Lehman, which last week announced a loss of $3.9bn in just three months, would be a good buy for shareholders, a not so subtle code for 'they are in big trouble and we don't want to take it on'.

As of writing the Dow futures are down 330 points, an ominous sign for the open of the Euro bourses and, obviously, the US.

The good news, if there is any, is that a Lehman collapse could trigger a shake up of the entire US financial system which has been stuck in the economic doldrums since the mortgage crisis hit more than a year ago.

"The US financial system is finding the tectonic plates underneath its foundation are shifting like they have never shifted before," Peter Kenny, managing director at Knight Equity Markets in New Jersey, said.

"It's a new financial world on the verge of a complete reorganisation."

The US Federal Reserve and a banking consortium had already announced measures to offset a further credit crunch in the wake of a Lehman bankruptcy.

The consortium of 10 global commercial and investment banks had said earlier that it would provide $70bn "to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets".

Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, and UBS, said in a joint statement that they had agreed to create a "collateralised borrowing facility" of $70bn, with each bank contributing $7bn, to help ease access to credit.

"These actions reflect the extraordinary market environment," the banks said in a statement.

Emergency credit

The announcement came moments after the US Federal Reserve announced new steps to ease access to emergency credit for struggling financial companies, by broadening the collateral to be used for central bank loans.

The end of bidding for Lehman prompted a rare emergency trading session on Sunday which market sources said was initiated by the US Federal Reserve with the aim of reducing risk associated with any Lehman bankruptcy.

The lack of a government guarantee to resolve the Lehman crisis is the main reason Barclays decided to exit the negotiations, according to a person familiar with the talks.

So far this year, the government has bailed out mortgage giants Freddie Mac and Fannie Mae, and saved Lehman rival Bear Stearns from going under by extending it cheap loans and allowing its forced sale to another rival, JPMorgan Chase.

Within hours of the collapsed Lehman talks, there were already reports of talks involving the takeover of Merrill Lynch & Co and the expected sale of assets by American International Group.

Bank of America announced early on Monday that it was to buy Meryll Lynch for $80bn - creating the world's largest financial services company in the process.

Over the weekend Alan Greenspan, the former US Federal Reserve chairman, projected the failure of "other major financial firms" but added that this did not need to be a problem.

"It depends on how it is handled and how the liquidations take place," he said on US broadcaster ABC.

"And indeed we shouldn't try to protect every single institution. The ordinary course of financial change has winners and losers."

The collapse of Lehman's comes on the tail of the Fannie and Freddie 'nationalisation' and the Bear Stearns sale both of which have garnered criticism from certain quarters about tax payers dollars being used to bail out 'greedy bankers'.

While F&F was, in our opinion, a crucial move need to protect the integrity of the US financial system, a bail out of Lehman's may have been seen as the silver bullet for moral hazard. A bail out of too many of the banking institutions may have signaled that whatever problems you get yourself into the government would bail you out. This, though comforting for investors, may have paved the path to a worse financial crisis years down the road.

In our opinion, it is better to take the pain now and let this crisis run its course.

On the whole the philosophy of 'survival of the fittest' has been the key to success of the financial system for a hundred years, to give too much downside protection at this stage in the cycle could spell disaster for years to come.

Nature has a way of cleaning out the biggest users of resources in a forest by creating forest fires. After the chaos of a fire dies down new trees grow, plants that could not get enough light and whose resources were previously sucked up by big trees flourish and another forest is born.

The sad truth is that these banks that are succumbing to the fires of sub-prime gorged themselves on profits, dominated the markets and they have now slipped up. Smaller firms now have the opportunity to bask in the light and a new financial forest will be born.

Sure, it is sad to see a bank with history go, but the words of the fictional 'Gordon Gecko' from the movie 'Wall Street' should be ringing in the ears of bank executives at the moment; 'either you get it write, or you get eliminated'.


Thursday, September 11, 2008

Remembrance Thursday

They shall grow not old, as we that are left grow old:
Age shall not weary them, nor the years condemn
At the going down of the sun and in the morning
We will remember them.

Wednesday, September 10, 2008

And You Thought Bankers Spend Lots Of Cash..

Having profiled some of the hedge fund rock stars recently, we though we would take a look at those who put even our zillionaire colleagues to shame when it comes to the spending stakes.

These dictators have tastes that would require Paulson-like performance every year with fees of 2 and 50 (at least).

Ferdinand Marcos

The so-called freedom fighter turned dictator nicked billions of dollars from his countrymen and stashed it away in secret accounts.

His wife, however, took the monthly housekeeping the most seriously. When the family fled the presidential palace she left 888 handbags and 1060 pairs of shoes. Not happy with department store-type collections of shoes and handbags she coveted buildings too. $51 million for the Crown Building and $61mn for the Herald Center in New York were just two of her purchases.

In March this year 32 legal cases were dropped against her for stealing $430mn which ended up in Swiss accounts. She said "First of all, I am so happy and I thank the Lord that the 32 cases have been dismissed by the regional court here in Manila".

Only 869 to go.

Kim Jong-Il

Son of the previous dictator, Kim Jong-Il loves his luxuries. He has only slightly more homes than John McCain with 17 palaces. He has hundreds of cars and about 20,000 video tapes (one would assume he has a similar collection of DVDs). On one state visit to Russia, he reportedly had live lobsters air lifted daily to his armored private train and maintained an entourage of young lovelies known as the "Pleasure Brigade"

In 1994, Hennessy said that Kim Jong-Il was its best customer for cognac for two years running, switching from Hennessy VSOP to $630-a-bottle Hennessy Paradis in 1992. When doctors told him to stop smoking, all senior officers in his army were required to quit with him.

According to Newsweek, Kim Jong-Il has salted away more than $4 billion in Swiss bank accounts, and used forced labour to mine gold from a mountain in Korea, which is also deposited in his Swiss bank account. He has six villas in Europe, including one in Geneva, and two more in Russia and China.

Nicolae Ceausescu

Before having his head publicly aerated Ceausescu was a prolific spender. His official salary was $3,000 which he used to such great affect he could be a lesson to us all on making cash stretch.
This $3,000 managed to buy him 15 palaces, a superb car collection, yachts, fine art and, in one case of uber-spending, tens of thousands of homes were demolished to make space for his 1,100-room, 480-chandelier Palace of the Parliament in the capital, Bucharest.

Saparmurat Niyazov

President of Turkmenistan, 1990 - 2006. The President for Life and "Turkmenbashi", or Father of all Turkmen, was at the centre of an awesome cult of personality. Although there are plenty on this list who would be inline for 'nut-job of the century' this guy would have a good case.

His vanity projects included a £6 million revolving gold-plated statue of himself in the country's capital, Ashgabat. He shifted around £3 billion to overseas accounts, renamed the month of January (after himself), banned beards and ordered that his musings be displayed alongside the Koran in mosques

Idi Amin

Six foot four and, at his peak, 20 stone, the former heavyweight boxing champion of Uganda appeared to relish his monstrous reputation. Subject to "visitations from God", and reputedly boasting a collection of human heads extensive enough to require its own deep-freeze, Amin
was popularly considered to be deranged.

Self proclaimed "Lord of All the Beasts of the Earth and Fishes of the Sea", "Emperor of Uganda" and "King of Scotland" were some of the awards that Idi the idiot gave himself. This was along with a VC (the Victorious Cross), and a CBE (Conqueror of the British Empire - I kid you not). He also spent millions on a super-lavish lifestyle - maintaining a reported 30 mistresses as well as five wives and fathering at least 43 children. A typically mad-capped project was the creation of a personal bodyguard of bagpipe-playing 6ft 4in Scotsmen.

His take on opponents was: "I ate them before they ate me" - which was later given an unholy twist. His exiled Health Minister, Henry Kyemba, confessed that "on several occasions he told me quite proudly that he had eaten the organs or flesh of his human victims".

Saddam Hussein

The Baathist leader with a fondness for gold-plated bathroom fittings, and Kalashnikovs, rebuilt Babylon on kitsch rather than authentic lines, stamping each brick of the "reconstruction" with his own name in the manner of Nubachadnezzar, the ancient Babylonian king and conqueror of Jerusalem.

When Iraq was invaded, in order to help stabilise the countries financial system Saddam's confiscated cash from US bank accounts was sent to Iraq in dollars to pay government employees.

To carry out the first stage of the plan, President Bush issued an executive order on March 20, 2003, instructing United States banks to relinquish Mr. Hussein’s frozen dollars. $1, $5, $10 and $20 bills were sent to Iraq which weighed 237.3 tons.

His playboy eldest son Uday, meanwhile, kept a private zoo with lions and cheetahs at his Baghdad residence and owned a collection of 1,200 luxury cars.

Mobutu Sese Soku

President of Zaire, 1965 - 1997. Switzerland was popular with Mobutu as the "All-Powerful Warrior", was estimated to send $5 billion to his accounts in 1984 - then equivalent to his country's national debt. Mobutu's extravagances included palaces and pink champagne, yachts and shopping trips to Paris by chartered Concorde. His second wife Bobi Ladawa rivaled Imelda Marcos as a compulsive spender - with a reported 1,000-dress wardrobe.


President of Indonesia, 1967 - 1998. At least this one started off in a bank, albeit as a clerk rather than a hedge fund manager. Suharto embezzled more money than any other leader in history, according to Transparency International. In 1999, Time Asia put his family's wealth
at $15 billion.

Playboy son "Tommy" was the biggest-profile spender - lavishing money on cars and clothes and buying a majority stake in Lamborghini before a conviction for murder in 2002. His daughter "Tutut", meanwhile, spent $100,000 on chartering one shopping flight to the US.

Puts my son's recent purchase of a Playstation Portable into perspective.

Thursday, September 04, 2008

ARS Boys Under The Hammer

The auction-rate securities farce continues at a pace with more indictments, but this time it involves individuals in trouble rather than entire banks.

Federal prosecutors in Brooklyn filed charges against two former Credit Suisse brokers, Julian Tzolov and Eric Butler, for fraud in the sale of auction-rate securities to CSFB customers. Meanwhile, the SEC followed up with its own civil suit against the duo. Click here for the DOJ’s press release; here for the indictment; and here for the SEC’s complaint.

The indictment alleges that Tzolov and Butler schemed to obtain higher sales commissions by selling auction rate securities backed by mortgages to Credit Suisse clients who, in fact, had placed orders to buy ARS backed by student loans.

The defendant are said to have lied to clients and their employer by falsifying the names of the ARS the clients bought and otherwise misleading the clients into believing they had bought ARS backed by student loans. When the mortgage-backed ARS market failed, say prosecutors, the clients lost their money.

Looks like Tzolov, however, is not hanging around for the result as he is suspected of fleeing back to his native Bulgaria.

FBI Assistant Director-in-Charge Mark Mershon stated, “Investors who were told they were purchasing relatively low-risk securities backed by student loans were unwittingly purchasing high-risk mortgage-backed securities. For a nearly three-year period, what Tzolov and Butler sold their clients was a bill of goods. The FBI remains committed to policing the securities industry to protect investors from all forms of unscrupulous and illegal conduct.”

No comment has come from the defendants or their lawyers at this stage.

This, we are sure, is not the last we will have heard on the whole ARS thing nor on the hedge fund blow ups.

We wrote previously here about hedge fund rules and how they do not represent sanity when approaching this market. Although the ARS situation is a little different we do believe that reforms on hedge fund advertising and access rules could go a long way to preventing fraudulent situations occurring.

If hedge funds were able to advertise (therefore have informative web sites and information) clients would be able to evaluate those funds that perform well, those that don’t and those that are a scam. In 2007 hedge fund manager Phillip Goldstein sent the performance of his fund to a client who never actually invested. He was indicted under the hedge fund advertising rules but won his case against the SEC.

We hope the regulators will look at the various frauds and misleading situations that have happened over the last few years and look inward to assess whether the rules now need to be overhauled and brought into some semblance of sanity.

Bankers Vs Consultants

The funniest clip you will see all year. Bankers Vs Consultants.

Tuesday, September 02, 2008

Flash Gordon Sinks Further With Limp Stamp Duty Reform

Amid the meltdown of the British economy we hear Gordon Brown say that the "UK is well-placed to withstand the global downturn". Comforting Gordy, thanks, only the OECD forecast shows that Britain is the only major economy in the world which will face recession in the next six months.

The forecast is the first time a major international forecaster has explicitly said Britain is facing a technical recession, in which the economy contracts for two successive quarters.

Jorgen Elmeskov, the OECD's acting head of economics, said: "Financial market turmoil, housing market downturns and high commodity prices continue to bear down on global growth, while at the same time evolving rapidly.

So what do we have in response from Flash Gordon to save the UK? We have Alastair Darling, that’s what we have.

So, OK he has made a few cock-ups; business tax, capital gains tax etc but surely this time we will see something spectacular to give the UK the shot in the arm it needs?

(Drum roll please)... The suspension of stamp duty on properties under £175,000 for a year!!!


Stamp duty is to be suspended on homes worth less than £175,000 as part of a government bid to boost the ailing housing market. Alistair Darling announced that homebuyers will be offered a "holiday" from the tax, though it is unclear who exactly will benefit or for how long.

Forgive me for being sarcastic but isn't this a bit like giving free flights to Baghdad, free mountain tours in Afghanistan or would you like to have a free hotel stay in Mogadishu?

It's welcome, but does the labour government really think that this will help? Lets look at the average price of a house in the UK; £219,262 (according to the BBC) and the average salary in the UK (according to ONS) is approximately £22,000. Do the math on lending figures. Even if there are two people earning the national average wage they are still talking a loan of 5x earnings for an average house and they still would not benefit from this so-called 'relief package'.

In this current climate do you think that lenders will be doing much of this? Me neither. Also, do you think that suspending stamp duty will have new buyers rushing into the market, when most commentators think there is still plenty of downside? Not likely. There are other measures being brought in along with this including £200mn to help those already in homes.

While I applaud measures to help with those already in homes that are to be assisted with mortgage payments or shared equity deals, £200 mn doesn't seem a lot.

"We are looking at about £200 million over the next couple of years for families who are struggling with mortgages, there will also be £100 million to help with mortgage interest payments to keep people in their homes," Hazel Blears, Community Secretary told BBC Breakfast.

A friend (a Labour supporter) asked me recently "What would you do?". "Simple" I said

"Roll back the 1000's of stealth taxes that have been forced on the UK for the last 11 years, cut fuel tax, abolish stamp duty or re-introduce MIRAS (Mortgage Interest Relief At Source), regulate lenders more strictly so that loan procedures are followed, and suspend, for one year, all overseas spending on aid and loans.

Suspend funding of opera and any other thing that rich people can afford to fund anyway.... Basically, batten down the hatches and take a hit on revenue so that the British people can actually get through what is, no doubt, going to be a tough time.

My friend said "That's just ridiculous, can't be done, the rich should pay more in tax... that would sort it out"

And this is why the UK needs a new government, the only answer that Labour supporters have to the incompetency of this regime is to blame, and therefore tax, those who make the most money, oh and Flash Gordon... who, even in the Labour ads is known as "Not flash, just Gordon". I coudn't agree with Labour more... Flash Gordon was one of my childhood heroes...Gordon Brown couldn't be less heroic.