The vast majority of US mortgages made since the crisis have been guaranteed and securitised by government agencies, while many of the resulting bonds have been purchased by the Federal Reserve and will probably be held to maturity. For better or worse, the US residential lending market has effectively been socialised.
That’s the context for an important piece in today’ FT from former Alphavillain Tracy Alloway on the US government’s attempts to revivify private-label mortgage securitisation. Apparently the Treasury department is unhappy with the current situation:
Authorities are having to walk a fine line between encouraging private capital back into the mortgage market while ensuring availability of credit to less-than-pristine borrowers and simultaneously avoiding a repeat of the subprime bubble that brought the financial system to its knees in 2008…Sales of private-label MBS total just $4.5bn so far this year, compared with $17bn sold last year. Some $726bn worth of private-label MBS was sold in 2007, at the height of the subprime mortgage bubble.
“I’d like to be instrumental in the manipulation of key interest rate benchmarks to the benefit of my employer”, said no aspiring financier ever. Equally unimaginable are freshly-minted bankers starting out wide-eyed, bushy-tailed and eager to aggressively mark books in order to disguise losses.
And yet, here we are with a plethora of scandals and misdeeds.
Why do so many in the industry lose their way? Read more
Deutsche Bank’s Stuart Parkinson and Rineesh Bansal kick off their tale of RoRo on a controversial subject: where did the phrase risk-on/ risk-off originate. We’ve had some outlandish claims sent our way in the past.
A colleague who shall remain nameless once claimed he had invented RoRo (and the question mark) but we feel there is a ring of truth to the suggestion that a company called Riskmetrics, originally a JP Morgan project born to gauge the level of risk being run by the firm, actually has the dubious honour. Read more
Standard Chartered’s increasingly bullish China team are arguing that fears of an aggressive deleveraging process are wide of the mark. If they’re right (implicit Chinese data opacity warning there), it’s a reason for some short term cheer but longer term worry — and it’s something the new leadership being ushered on to the stage in Beijing will have to take control of.
According to our numbers, China’s total leverage will rise from 191% of GDP at the end of 2011 to 206% by the end of this year, as we show in Figure 1.
Right, everyone has weighed in on the US recovery debate. Martin Wolf got in on the act on Wednesday arguing that and his voice has now been added to a plethora of others (see the ‘Related Links’ below if you want to catch up and a recent paper by Citi’s Sheets and Sockin which we’ve thrown in the usual place) with a consensus building on the R&R side of the argument.
Schularick and A Taylor have already weighed in on the US issue but where it gets fun now is that they have come back with a UK update (with our emphasis): Read more
We’ll keep this short, with a hat-tip to Barry Ritholtz. Reinhart & Rogoff, the doyens of financial remembrance, are back with a new paper and a Bloomberg piece containing some entertaining irritation.
Their main aim is…
to dismiss the misconception that the U.S. is somehow different. The latest financial crisis, yet again, proved it is not.
But they happily took some time to single out a few people who are guilty of “gross misinterpretations of the facts” too . Read more
There are many gems in the annual report of the Bank of International Settlements that came out on Sunday. One of the most intriguing is a trail which leads to an actual estimate of the cost to society of scientists becoming hedge fund managers.
The trail starts at a section about debt sustainability across a number of countries. It notes that elevated levels of debt got us into this crisis and the situation still hasn’t improved for many countries. In fact, for some countries, the debt burden of the private sector has gotten even worse. Check out the last row of these charts on debt service ratios (looking at the red lines): Read more
In ‘The Formula That Killed Wall Street’? The Gaussian Copula and the Material Cultures of Modelling, Donald MacKenzie and Taylor Spears present a history of the development of the one-factor Gaussian copula model, which is used to price various structured products, including Collateralised Debt Obligations (CDOs). As the title of the paper suggests, the model has many critics and has had a lot of blame placed at its feet.
What this paper reveals that really stands out is that the quant community also didn’t, and doesn’t, rate the Gaussian copula model highly at all. In fact, we’re putting that very mildly if the statements from quants interviewed by the researchers are anything to go by. Read more
In the first post about our meeting with Yves Smith, purveyor of the blog Naked Capitalism, we discussed the blogosphere and what prompted her to join it. Here we ask Ms Smith about her involvement with the Occupy movement and her opinions about banking and the contentious topic of bonuses.
AV: Naked Capitalism has a badge on it: “We support Occupy”. What drew you to the Occupy movement? Read more
On Wednesday, FT Alphaville met Yves Smith, proprietor of the blog Naked Capitalism. Ms Smith is the author of the book ECONned: How unenlightened self interest undermined democracy and corrupted capitalism.
Nabbing the quietest table we could find at Candle 79, we asked her a few questions about Naked Capitalism, the blogosphere, bankers, and bonuses… as well as what she does for fun. Read more
The key insight of the latest Gorton-Lewellen-Metrick paper, charted:
GMO’s Jeremy Grantham’s latest letter is briefer than his other recent efforts (in fact he says it’s his shortest ever), and it doesn’t offer much insight into the eurozone crisis other than to say it’s a terrifying situation.
But, as well as reprising some of the social equity concerns he raised earlier in the year — and decrying the state of US infrastructure, education, and politics — Grantham has a cute (that is, scary) extrapolation to make from the history of bubbles. The bubbles that burst in 2002 and 2009, he says, did not see a break below equity market trends anywhere near as low as the previous 10 bubbles: Read more
As these graphs illustrate, although it’s 2008 all over again in equities, history is not repeating itself in the commodities markets:
The Oregon Office of Economic Analysis has ventured an update to Carmen Reinhart and Ken Rogoff’s ‘This Time it’s Different‘, the seminal work on financial crises of the past – and their related analysis on the aftermath of financial crises.
The OOEA* uses both updated and revised data and, mostly, confirm that while things have of course gotten worse, they’re still inside the historical norms. For example, equity price declines: Read more
Thought the current turmoil was down to the downgrade of US debt? Wrong!
According to Societe Generale’s uber bear, Albert Edwards, this has absolutely nothing to do with S&P, the White House, Tea Party etc. It’s the economy stupid: Read more
Do US banks learn from experience?
Answer A: Yes, like lab rats and jilted lovers, they adapt and do better next time. Read more
What impact did the crisis have on the attitudes of American families toward financial risk?
A paper published last week by the Federal Reserve, and cited in a speech by Elizabeth Duke on Thuesday, begins to answer this question by looking at how US households’ wealth, savings and expectations changed between 2007 and 2009. The researchers conducted a follow-up survey in 2009 of families analysed as part of the Survey of Consumer Finances (SCF) in 2007. Nearly 89 per cent of 2007 participants were re-interviewed. Read more
Alan Greenspan’s latest in CFR’s International Finance, wherein the former Fed chair blames ‘government activism‘ for the current (paltry) state of the US recovery.
Here’s a chart to ponder as regulators continue their forensics of the financial crisis:
How much bank capital is just enough bank capital to survive a crisis?
Reading this Bank of England paper on the issue, you might think the authors are simply arguing that banks ought to be made to hold more loss-absorbing capital (double, actually) than Basel III will be asking. Read more
It was too much government support for home ownership! No, it was the savings glut in Asian emerging markets! Even the pre-emptive dissents to the Financial Crisis Inquiry Commission’s report on what caused the crisis can’t make their minds up, says the NYT. Republican members of the FCIC fault it for lacking a ‘focused explanation’ of what went wrong. Commission insiders argue by contrast that the report will end up flattering Wall Street, having failed to do proper forensic investigative work, according to Naked Capitalism. Former officials writing in the WSJ have a regulation-focused ten-point argument worth reading, which tries to move between either set of dissents.
Banks, Fed chairmen, the Bush administration, ratings agencies, the OCC, plenty of others – but not so much Fannie Mae and Freddie Mac. The NYT reports that the Financial Crisis Inquiry Commission will cast a wide net in finding blame for tanking financial markets in 2008, when it releases a final report this week. Dealbreaker has a condensed list. The main lesson of the report: “The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done.” Wall Street will probably end up bearing the brunt of the blame in any case, the FT says – and warns that if you were hoping for a modern version of the Pecora Commission’s comprehensive investigation of the 1929 Wall Street Crash, you’re likely to come away disappointed.
Goldman Sachs has revealed details of about $5bn in investment losses suffered during the crisis for the first time this week, in a move that will deepen the debate over companies’ financial disclosures, reports the FT. The figures, issued as part of internal reforms aimed at silencing Goldman’s critics, show that the bank suffered $13.5bn in losses from “investing and lending” with its own funds in 2008. But Goldman’s regulatory filings and its executives’ comments to investors at the time pointed to about $8.5bn of losses arising from its investments in debt and equity, as markets were rocked by the turmoil.
The bipartisan commission established to probe the causes of the 2008 financial crisis has split along party lines with its Republican members publishing a report placing the government rather than Wall Street at the heart of the crisis, the FT reports. The Financial Crisis Inquiry Commission was set up by the US Congress as a latter-day version of the Pecora commission that examined the causes of the Great Depression. But its descent into bipartisan rancour means those examining the causes of the crisis in the future will confront duelling reports rather than an authoritative single account of what led to it. The official report, which is now set to be authored only by Democratic commissioners, is due to be published early next year. The FCIC announced last month that it would miss its Wednesday deadline.
It’s amazing how little a few trillion dollars gets you these days.
We like a wee bit of historical perspective here on FT Alphaville, and this week’s edition compares the costs of the recent financial crisis with those of its antecedents. Read more
The head of the Bank of England sought in 2008 to set up a group with the US, Switzerland and Japan to recapitalise top global banks six months before the financial crisis engulfed them, US diplomatic cables show, reports Reuters. In a March 2008 cable leaked by the website WikiLeaks to the Guardian newspaper, Bank governor Mervyn King told US ambassador in London Robert Tuttle that UK banks needed capital injections and that central bankers should coordinate their efforts. In a confidential memo, Tuttle said it “could be a temporary group” and that King had suggested central banks and finance ministers of the US, the UK and Switzerland could coordinate talks with countries that had large pools of capital.
The Federal Reserve will today have to disclose details concerning emergency loans made during the financial crisis, Reuters reports, including the sums borrowed by concerned parties and collateral offered. The move could spark a fresh debate about the suitability of some bailouts, the news agency notes. Reuters adds that Ben Bernanke, Federal Reserve chairman, yesterday warned that a long period of high unemployment would carry “very severe economic and social consequences.” It also reports that Jeffrey Lacker, Richmond Federal Reserve Bank president, said yesterday that the Fed will eventually have to time the withdrawal of monetary stimulus delicately to avoid rising inflation.
The Financial Crisis Inquiry Commission has delayed its report into the causes of the crisis amid rancour between members of the panel, reports the FT. Set up by Congress as a version of the widely praised Pecora commission, which in the 1930s studied the causes of the Great Depression, the FCIC has told the White House it wants to delay publication of the report from December. The FCIC has hauled before it financial figures ranging from Lloyd Blankfein, chief executive of Goldman Sachs, to Ben Bernanke, Federal Reserve chairman, producing some memorable moments and unearthing millions of pages of documents.
Banks which are expanding into new businesses and markets as they diversify following the financial crisis, may end up facing higher expenses that could eat significantly into profit margins in the interim, Bloomberg reports. Citigroup is among banks moving decisively into new asset classes and geographies, like commodities and China. According to the news agency, chief executive Vikram Pandit hopes to add some 7,500 staff in China, 100 commodity traders worldwide, and to double its North American private banking business to 260 employees. Bloomberg adds the bank promised $9m to a Houston-based investment banker to lure him from UBS last month. A Wall Street Journal survey, meanwhile, finds that pay in the banking industry is on pace to break a record high for a second consecutive year. About three dozen of the top publicly held investment firms are set to pay $144bn in compensation and benefits this year, a 4 per cent increase.