Reason vs. “Vampire Investing”
20 September 2008Tim Coldwell, who comments below on bank shares going up without reason, is right as usual. In fact, I think he may be the first person to have even used the word “reason” in this situation.
If there is any reasoning going on on the Street, it is a switch from a day earlier, when The Pack thought that all financials were worthless, to post-AIG save, when they suddenly realized this was not true, and that the government was probably going to win in preventing (short term) financial meltdown.
This raises lots of really interesting questions about market dynamics in general.
The boys at the top seem to be admitting a failure in our economic system, about which I’ve been warning for a while, under the term “vampire investing.” What is the future of a society or country in which a highly educated, highly motivated group of people find a way to extract money from all kinds of transactions, without adding value?
This is no different than a tax; it is just a private tax, paid to some unknown trading desk.
And the answer to the not-rhetorical question above is simple: eventually, this drag on transactions puts the company or country at a distinct competitive disadvantage. (It is no excuse, but it probably increases pressure to deliver undeliverable profits, and paves the way to unnatural acts like bundling mis-labeled CDOs and selling them to small towns in Norway.) It’s like a tire with a leak; the system eventually goes flat.
This is different from supply and demand and other market dynamics, and watching short teams gang up on banks in an orchestrated series of orderly attacks brings exactly the kind of example everyone can agree upon. Why allow this kind of behavior at all?
Yes, there are reasons. But those reasons are much less attractive this weekend morning than they were a week ago, or five years ago. Allowing jackals to pull apart working institutions within minutes, hours or days of an attack, is not the smartest aspect of a regulatory system. And, as if the publication of short positions isn’t enough flag for the rest of the shorts, and the following investment community, there are the efforts to insert often-false and always-negative information into the news flow about the target company. This, too, does not serve any standard supply and demand theory.
I would go so far as to assert that, even if the stocks are the target of the discussion, and not the companies themselves or the products and services they provide, it is difficult to make the case for a good deal of the shorting that goes on on the Street.
I don’t expect that Cox is up to this task, but no doubt he will not be the person asked to fix the problem.
Whoever they are, one hopes they begin by dealing with reality, on the street, vs. some outdated theory of supply and demand.
18 Responses to “Reason vs. “Vampire Investing””
September 21st, 2008 at 3:32 am
Dictatorship – Sometimes there really ARE conspiracies
by London Banker
The text of the proposed emergency markets legislation is now available. Just as expected, it will contain a provision to provide immunity from any review by any court or executive agency. Either get with the collaborationists or get with the insurgents. There is no other choice. The USA doesn’t exist as we once knew it.
http://londonbanker.blogspot.com/2008/09/dictatorship-sometimes-there-really-are.html
September 21st, 2008 at 4:38 am
True cost of the rescue
Robert Peston20 Sep 08, 02:27 PM
The US Government has just admitted that the financial system was on the verge of total meltdown. And it’s right. On Thursday, even blue chip companies were having difficulty rolling over their short-term borrowings.
Armageddon was minutes away – averted by Hank Paulson’s plan to insure money-market funds and cut the gangrene out of the banking system.
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/09/true_cost_of_the_rescue.html
Sounds good to me. Tim
September 21st, 2008 at 8:33 am
Paulson’s monster
Robert Peston 21 Sep 08, 12:56 PM
More details have been disclosed over night about the new state-owned institution being created by Hank Paulson, the US Treasury Secretary, to purchase distressed US mortgages and securities manufactured from those mortgages.
He wants to raise $700bn for this institution, from the sale of US government bonds in tranches of $50bn. That $700bn is about 35 per cent more than the entire annual budget of the US defence department.
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/09/paulsons_monster.html
An institutionalised multi-player game of chicken for those who should be institutionalised?
Maybe the treasury could sell the reverse auction TV and on-line broadcast rights world wide. Intrade would need new servers and the presidential election completely forgotten for a while – looks like a foregone conclusion anyway.
Tim
September 22nd, 2008 at 2:05 pm
Markets Vote Against Bailout Bill; Dodd Circulating Variant, Takes Equity for Dodgy Debt
Aha, Congress isn’t being so supine after all. Christopher Dodd, who in his initial press comments seemed to be behind the Paulson bailout plan, instead appears to be supportive of the general concept of Doing Something, as opposed to the particular embodiment served up by the Administration.
Dodd is circulating a draft bill of his own that is more attentive to the moral hazard issue and the need for taxpayers to share in upside than the Treasury proposal. The big difference is that his proposal gives the US a stake in companies in which it buys bad assets. This creates a disincentive against using the program casually as a dumping ground, against inflating the value of assets sold (the higher the amount sold, the greater the equity acquired) and gives taxpayers the opportunity to profit. Of course, just about anything different would be an improvement.
http://www.nakedcapitalism.com/2008/09/dodd-circulating-bailout-variant-gives.html
I’m waiting for the cartoons with Paulson and Dodds in studded leather jackets on Harleys. Tim
September 23rd, 2008 at 3:24 pm
Goldman to Raise $7.5 Billion
By BEN WHITE (NYT)
Published: September 23, 2008
The investment bank, Goldman Sachs, plans to raise $7.5 billion in fresh capital by selling $5 billion in perpetual preferred shares to Berkshire Hathaway, the conglomerate run by the billionaire investor Warren E. Buffett, and issuing $2.5 billion in common shares, according to a Goldman spokesman, Lucas Van Praag.
The move comes after Morgan Stanley on Monday raised about $8 billion by selling up to a 20 percent stake to Mitsubishi, the Japanese bank. Both Morgan and Goldman Sachs on Sunday transformed themselves into bank holding companies in an effort to broaden.
http://www.nytimes.com/2008/09/24/business/24goldman.html?_r=1&oref=slogin
Is Warren Buffet a vampire investor too? I wonder what the price is? Tim
September 24th, 2008 at 2:49 am
Is the Warren Buffet investment (bailout?) of Goldman Sachs a better model than Hank Paulson’s TARP? It looks like expensive money at first site. Could such a model be used to create a filtering process that culls the weakest banks (merge or die or take this money on our terms) that is probably good for the system. I would add a further element to any investment in any bank which is that unless a bank increases its lending over a relatively short period then, say, the rate on the prefs steps up. Maybe there would be unintended consequences but like a VC investment I’m assuming that unless the bank grows it dies/gets re-cycled.
http://bigpicture.typepad.com/comments/2008/09/i-got-75b-but-i.html
http://www.nakedcapitalism.com/2008/09/berkshire-to-invest-5-billion-in.html
She rips Wall Street a new one.
http://londonbanker.blogspot.com/2008/09/marcy-kaptur-d-oh-real-reform-now-or.html
Tim
September 24th, 2008 at 5:00 am
A more apocalyptic view from Paris.
http://www.youtube.com/watch?v=Vhf9KwSUQYw&feature=related
September 24th, 2008 at 7:00 am
Presentation errors and Unintended consequences.
http://ftalphaville.ft.com/blog/2008/09/24/16285/paulsons-oversight/
http://ftalphaville.ft.com/blog/2008/09/24/16288/another-way-the-paulson-plan-is-hurting-main-street/
September 24th, 2008 at 9:13 am
More good news from Paris – it’s all too late?
“The Vortex of Debility”
Vortex
1. a whirling mass of water, esp. one in which a force of suction operates, as a whirlpool.
2. a whirling mass of air, esp. one in the form of a visible column or spiral, as a tornado.
3. a whirling mass of fire, flame, etc.
Debility
1. a weakened or enfeebled state; weakness: Debility prevented him from getting out of bed.
2. a particular mental or physical handicap; disability.
Hmm.
Anyway, here’s the graph that makes the point for Albert Edwards, SocGen’s ultra-bear, who’s having none of this Hanky Panke bail-out nonsense.
http://ftalphaville.ft.com/blog/2008/09/24/16291/edwards-the-vortex-of-debility
September 25th, 2008 at 5:40 am
Are both Politicians and Central Bankers the main culprits?
http://farm4.static.flickr.com/3095/2886146358_6a4347f1de_b.jpg
Fingers are pointing at Clinton and the Fireman.
http://fintag.com/archive/2008/09/25/
September 25th, 2008 at 8:15 am
Xmas is near and the fools in Washington who think they are playing a game of “Chicken” will find it’s flipped to “Turkey” time sooner than they expect. Tim
September 25th, 2008 at 10:11 am
“Short sellers are not the villains in this drama”
Jim Chanos of Kynikos Associates is one smooth short-selling operator, and as the Site that Supports our Shorts, we say this approvingly.
In an interview with Gillian Tett, he argues that politicians – and not short-sellers – ought to take the blame for the ongoing financial drama.
http://ftalphaville.ft.com/blog/2008/09/25/16343/short-sellers-are-not-the-villains-in-this-drama/
Incidentally has anyone in the Chicken game asked Hank Paulson how much additional equity the $700 bn will create in the bailed out banks? Bill Gross (Pimco) seems to think not a lot – $40-40bn and they’ll need another $500 bn before they start lending again. Do you think that SWFs will ask for less than Buffet?
Bill Gross also says the treasury will have to guarantee all CDS paper too !!! WTF Tim
September 25th, 2008 at 1:00 pm
The world is facing possibly its worst financial crisis since the 1920s.
It has seen the collapse or takeover of a number of world famous financial institutions and now the US government is debating a $700bn bail-out plan.
BBC News is chairing a debate called World Economy on the Brink? to discuss the origins of the crisis, consider who might be to blame and look at possible solutions.
The discussion will be chaired by Andrew Neil and will feature leading members of the financial world including:
George Magnus, senior economic adviser, UBS
Ken Courtis, former vice chairman of Goldman Sachs, Asia
Terry Smith, chief executive, Tullett Prebon, an inter-dealer broker
Jim Chanos, founder and president of Kynikos Associates, a dedicated short-selling hedge fund
and BBC business editor Robert Peston.
http://news.bbc.co.uk/1/hi/business/7635388.stm
Note: Ken Courtis, former vice chairman of Goldman Sachs, Asia reckons this will turn out to be a $4 trillion affair! I agree. Tim
September 25th, 2008 at 2:20 pm
World economy on the brink?
Audio of the programme mentioned above in case you can’t get the video.
http://www.bbc.co.uk/mediaselector/check/worldservice/meta/tx/economy_debate?size=au&bgc=003399&lang=en-ws&nbram=1&nbwm=1
October 1st, 2008 at 7:07 am
AIG and an overlevered Europe?
Paul Kedrosky at Infectious Greed posted yesterday on how the US bailout of AIG “saved the European banking system”.
He picks up on a report from the Centre for European Policy Studies:
The AIG case shows the importance of another link across financial markets, namely massive regulatory arbitrage. The K-10 annex of AIG’s last annual report reveals that AIG had written coverage for over US$ 300 billion of credit insurance for European banks. The comment by AIG itself on these positions is: “…. for the purpose of providing them with regulatory capital relief rather than risk mitigation in exchange for a minimum guaranteed fee”. AIG thus helped to organise regulatory arbitrage on a gigantic scale. A formal default of AIG would have had a devastating impact on banks in Europe.
…
…
A blunt metric for observing a bank’s dependency on negative basis trading might be to look at leverage and compare it to capital ratios. If the two are out of sync (with, perhaps, a sector average) it might imply excessive hedging to reduce capital requirements in some way.
http://ftalphaville.ft.com/blog/2008/10/01/16559/aig-and-an-overlevered-europe/
Here is the leveraging data for a few:
Leverage ratio of financial institutions from balance sheets
Leverage Ratio (total assets/equity at 30-Jun-2008 / 2007)
UBS 46.9 / 63.9
ING Group 48.8 / 35.3
HSBC Holding 20.1 / 18.4
Barclays Bank 61.3 / 52.7
BBV Argentaria 20.1 / 18.6
Deutsche Bank ?? / 52.5
Fortis 33.3 / 26.4
KBC 24.4 / 20.5
Lloyd’s TSB 34.1 / 31.0
RBS 18.8 / 21.8
Credit Agricole 40.5 / 34.8
BNP Paribas 36.1 / 31.5
Credit Suisse 33.4 / 31.5
Note Barclays at 60 :1 and a reported core (Tier 1) capital of under 5% ! Tim
October 9th, 2008 at 5:33 am
How authorization to recapitalize banks via public capital injections (“partial nationalization”) was introduced – indirectly through the back door – into the TARP legislation
http://www.rgemonitor.com/roubini-monitor/253956/how_authorization_to_recapitalize_banks_via_public_capital_injections_partial_nationalization_was_introduced_-_indirectly_through_the_back_door_-_into_the_tarp_legislation
Final para:
Paulson should be lucky that his early opposition to such public capital injection in the financial system did not prevent Congress – via the back door – to do what was right. And he is now lucky that the first thing he could mention and did mention in his press conference yesterday was a plan to “inject capital into financial institutions” rather than the half-baked idea of spending most of the $700 bn to buy toxic assets.
/end
Maybe buying toxic assets was never the plan and Hank subscribes to Roubini’s more intelligent solutions? Yet another game of chicken with the idiot bankers. More to come. Tim
October 10th, 2008 at 5:02 pm
How true!!!!
“Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.”
- Mr John Mills, Article read before the Manchester Statistical Society, December 11, 1867, on Credit Cycles and the Origin of Commercial Panics
October 31st, 2008 at 3:11 am
London Banker
Friday, 31 October 2008
Byways and Tribal Capitalism
I have been indulging in leisure again. For nine days I backpacked along the ancient Ridgeway, the superhighway of Neolithic Britain and a trade route into the modern era. Starting about 6,000 years ago, (roughly the time Sarah Palin imagines Adam and Eve holding hands in a newly wrought Eden) the Britons occupying the plains either side of the Ridgeway were settling the river valleys to raise crops and herd animals. As the crops and herds increased, and the Iron Age and Bronze Age opened trading opportunities in new technologies, these Britons took strides that set them and their heirs on the road to market capitalism.
http://londonbanker.blogspot.com/2008/10/byways-and-tribal-capitalism.html
A good read. Tim