It really is amazing to see how very little that so-called professional money managers have learned from the financial markets meltdown and the subsequent multi-trillion bailouts. They are still investing as if nothing happened.
Prime examples of this are the managers who run public pension funds for various states, cities, etc. around the country. To see the managers responsible for the pensions of hundreds of thousands of people across the nation attempt to "secure" the future retirement income of these people by increasing their risk is mind-boggling.
One lesson that should be clear to everyone about the financial markets meltdown was that a large part of the problem was too much leverage. In other words, too much debt...borrowing money to invest.
Yet a Wall Street Journal article this week discussed how many public pension funds (they spoke about the state of Wisconsin) are, you guessed it - deciding to use to use leverage and borrow money to invest in an attempt to increase the return on their pension fund.
When I think of the people who run these public pension funds, words come to mind like stupid, incompetent, naive, gullible.....
The Wall Street "consultants" and salespeople are at the ready to offer their latest and greatest "can't miss" strategies to these fools and they seem to have bought the Wall Street sales pitch entirely.
This latest "can't miss" strategy" involves borrowing money to purchase guess what asset? The asset that I have been warning everyone is in a bubble and a bubble that will explode like a supernova, wiping out everyone unlucky enough to be in its path - long-term US Treasury bonds.
When Treasury bonds blow up in their face, the losses will be enormous because these "professional" money managers used debt (leverage) to give them even more exposure to these bonds.
And who will be left holding the bag? Why taxpayers, of course. They will have to bail out the pension plans of public employees in their local state or municipality or whatever.
What should public pension fund managers do? First, get out of these "recommended" Wall Street positions. They are a ticking time bomb.
Second, tell the people who will be receiving these pensions that whatever promises were made (10% a year or whatever), they are totally unrealistic in the current economic environment. Tell them the truth - that the returns of the 1990s and early 2000s were a once-in-a-lifetime bubble brought about by irresponsible Federal Reserve policies and that we will not see these type of returns any time soon. Tell the pension recipients to lower their expectations.
Of course, the only things that will happen are bailouts of public pensions across the country.
Saturday, January 30, 2010
Saturday, January 23, 2010
Yes We Can...Reform Wall Street
It looks like the long overdue correction in stock prices is here. The Dow Jones Industrial Average dropped about 5 per cent in the past three trading days. The stock market has been overvalued for many months, why has it begun falling now?
That can be answered by the wailing and gnashing of teeth you hear emanating from the casino owners on Wall Street. The bankers are upset that President Obama may actually do something to limit the gambling casinos run amok that are known as "banks".
Saying that "never again will the American taxpayer be held hostage by a bank that is too big to fail," President Obama has proposed for banks to be banned from trading on their own accounts and from "owning, investing in or sponsoring" hedge funds and private equity groups.
The most egregious examples of trading on their own behalf comes from Goldman Sachs, who not only routinely frontruns orders from clients, but who was heavily betting against subprime mortgage products which they aggressively sold around the world to clients as highest-quality "AAA" products.
It looks like President Obama is finally taking advice from the only 'adult' among his team of economic advisors - octogenarian former Federal Reserve chairman Paul Volcker. He has been an increasingly vocal critic of the administration's proposed banking reforms, which were no reforms at all. It looks like President Obama has finally invoked the 'Volcker rule' in dealing with Wall Street banks.
Mr. Volcker raised interest rates to unheard of levels to combat the very high inflation levels of the 1970s and early 1980s. Yes, it was painful medicine. But it was necessary. After inflation was crushed, the nation enjoyed years of solid economic growth and a strong US dollar.
I am pleased to see President Obama take advice from someone who has an intricate understanding of financial markets, but who does not kowtow to Wall Street's every wish, unlike his other economic advisors.
Look at Treasury secretary Tim Geithner, who while head of the New York Federal Reserve - which is supposed to oversee Wall Street - four times forced troubled insurer AIG to NOT disclose details of how certain parties (Goldman Sachs) received 100 cents on the dollar for derivative contracts when they should have gotten next to nothing. Why did Mr. Geithner not want those details disclosed to the public who was footing the bill?
Hopefully, Mr. Geithner is on his way out, along with Federal Reserve chairman Ben Bernanke who may not be re-confirmed as Fed chairman by the US Senate. As discussed in prior articles, Mr. Bernanke has given Wall Street untold billions of free money at zero per cent. Where is the zero per cent money for the rest of us?
Of course, the big question is whether any true reform, ala the 1930s, will actually happen. After all, reform measures must pass through Congress where both parties seem to have been bought and paid for by Wall Street.
I believe what we need to see is each of the big banks being 'separated' into two distinct entities. The first would be a 'utility' - a basic, simple bank (like in the old days) which takes deposits, make loans locally to consumers and small businesses. This 'utility' should be backed fully by the US government.
The second entity would be the 'casino' portion of these large banks. Let the traders and gamblers do what they want - if they win, they win, but if they lose, they lose. Absolutely NO government support! And limits should be placed on the leverage they use - back to the 'old' leverage ratio of 10-1, not the crazy 50 or 100 to 1 they used to get into such deep trouble in the first place.
The only hope for real reform of our financial industry may be if enough 'regular citizens' raise heck with their Congressperson. Politicians love one thing more than money and that is power, so they will do anything - even the right thing - to get re-elected.
That can be answered by the wailing and gnashing of teeth you hear emanating from the casino owners on Wall Street. The bankers are upset that President Obama may actually do something to limit the gambling casinos run amok that are known as "banks".
Saying that "never again will the American taxpayer be held hostage by a bank that is too big to fail," President Obama has proposed for banks to be banned from trading on their own accounts and from "owning, investing in or sponsoring" hedge funds and private equity groups.
The most egregious examples of trading on their own behalf comes from Goldman Sachs, who not only routinely frontruns orders from clients, but who was heavily betting against subprime mortgage products which they aggressively sold around the world to clients as highest-quality "AAA" products.
It looks like President Obama is finally taking advice from the only 'adult' among his team of economic advisors - octogenarian former Federal Reserve chairman Paul Volcker. He has been an increasingly vocal critic of the administration's proposed banking reforms, which were no reforms at all. It looks like President Obama has finally invoked the 'Volcker rule' in dealing with Wall Street banks.
Mr. Volcker raised interest rates to unheard of levels to combat the very high inflation levels of the 1970s and early 1980s. Yes, it was painful medicine. But it was necessary. After inflation was crushed, the nation enjoyed years of solid economic growth and a strong US dollar.
I am pleased to see President Obama take advice from someone who has an intricate understanding of financial markets, but who does not kowtow to Wall Street's every wish, unlike his other economic advisors.
Look at Treasury secretary Tim Geithner, who while head of the New York Federal Reserve - which is supposed to oversee Wall Street - four times forced troubled insurer AIG to NOT disclose details of how certain parties (Goldman Sachs) received 100 cents on the dollar for derivative contracts when they should have gotten next to nothing. Why did Mr. Geithner not want those details disclosed to the public who was footing the bill?
Hopefully, Mr. Geithner is on his way out, along with Federal Reserve chairman Ben Bernanke who may not be re-confirmed as Fed chairman by the US Senate. As discussed in prior articles, Mr. Bernanke has given Wall Street untold billions of free money at zero per cent. Where is the zero per cent money for the rest of us?
Of course, the big question is whether any true reform, ala the 1930s, will actually happen. After all, reform measures must pass through Congress where both parties seem to have been bought and paid for by Wall Street.
I believe what we need to see is each of the big banks being 'separated' into two distinct entities. The first would be a 'utility' - a basic, simple bank (like in the old days) which takes deposits, make loans locally to consumers and small businesses. This 'utility' should be backed fully by the US government.
The second entity would be the 'casino' portion of these large banks. Let the traders and gamblers do what they want - if they win, they win, but if they lose, they lose. Absolutely NO government support! And limits should be placed on the leverage they use - back to the 'old' leverage ratio of 10-1, not the crazy 50 or 100 to 1 they used to get into such deep trouble in the first place.
The only hope for real reform of our financial industry may be if enough 'regular citizens' raise heck with their Congressperson. Politicians love one thing more than money and that is power, so they will do anything - even the right thing - to get re-elected.
Saturday, January 16, 2010
The Federal Reserve's Failure to Learn and Its Consequences
In a speech given January 3, 2010, Ben Bernanke placed the blame for the financial crisis on everything from lax regulation to poor peasants in China.
Yet, the 2009 Time Person of the Year refused to look in the mirror and accept the fact that much of the blame for the financial crisis lies with the Federal Reserve and its low interest rate policies.
This bodes ill not only for the future course of monetary policy in the United States, but also does not bode well for the future of the US economy. It's simple - one cannot fix what is broken until there is a full understanding, by those in power, of what went wrong and how.
What Ben Bernanke seems to conviently be ignoring is the impact that ultra-low interest rates had, and continue to have, on the investment world - particularly the effect low rates has on Wall Street's bond managers, including large pension funds, retirement plans and trusts.
Interest rates of zero or one per cent produced an enormous cascading effect on the demand for high-yielding instruments. The details of the effect that low interest rates had was laid out beautifully by Barry Ritholtz, the author of Bailout Nation, at his blog.
I won't go into all of the details, but here some of the important points:
1) Ultra-low yields led to a scramble by fund managers for higher yields;
2) At the same time, there was a massive push into subprime lending by unregulated nonbanks whose sole purpose was to sell these mortgages to Wall Street firms that securitized them;
3) Since these nonbanks did not hold these mortgages for long, they lowered their lending standards to where almost everyone qualified;
4) Massive ratings FRAUD by the ratings agencies led to this junk being rated as Triple AAA;
5) That high investment grade allowed bond managers to purchase this junk which they normally would not have;
6) High leverage allowed a huge securitization process, then more leverage was piled on by the non-regulated derivatives market. This allowed firms like AIG to write $3 trillion in derivative exposure!
7) Compensation in the financial sector was asymmetrical, where employees had all of the upside and shareholders/taxpayers had all of the downside. This led to increasingly risky activity, which continues to this day.
You may say - who cares, it's water under the bridge. But the problem is that the consequences of the financial crisis continue to this day to effect the United States and its citizens in their daily lives.
In order to bail out Wall Street, the government has gone trillions of dollars deeper into debt, with that debt growing exponentially every day.
So far, the Federal Reserve has had their printing presses running full speed day and night in order to have enough money to purchase all of the government debt - Treasuries - to keep the country running.
But that game can only go on for so long before an already weak and declining US dollar goes into a steep dive into oblivion and economic chaos for the American public.
So the federal government has to come up with another solution...finding another pot of money somewhere.
Leave it to our elected officials - they have.
The Treasury Department is looking at ways to FORCE a large portion of ALL retirement plans into "fixed payment annuities"...in other words, the money would be forced into long-term Treasury bonds.
Officially this is about "retirement security", which sounds nice, but in effect it will be a seizure of private assets in order to fund government deficits at negligible interest rates.
And remember my prior warning - the value of these bonds has only one way to go - down. So the government is thinking about forcing its citizens into a guaranteed losing investment in order to fund the bailout of Wall Street and other privileged elites. Amazing!
Yet, the 2009 Time Person of the Year refused to look in the mirror and accept the fact that much of the blame for the financial crisis lies with the Federal Reserve and its low interest rate policies.
This bodes ill not only for the future course of monetary policy in the United States, but also does not bode well for the future of the US economy. It's simple - one cannot fix what is broken until there is a full understanding, by those in power, of what went wrong and how.
What Ben Bernanke seems to conviently be ignoring is the impact that ultra-low interest rates had, and continue to have, on the investment world - particularly the effect low rates has on Wall Street's bond managers, including large pension funds, retirement plans and trusts.
Interest rates of zero or one per cent produced an enormous cascading effect on the demand for high-yielding instruments. The details of the effect that low interest rates had was laid out beautifully by Barry Ritholtz, the author of Bailout Nation, at his blog.
I won't go into all of the details, but here some of the important points:
1) Ultra-low yields led to a scramble by fund managers for higher yields;
2) At the same time, there was a massive push into subprime lending by unregulated nonbanks whose sole purpose was to sell these mortgages to Wall Street firms that securitized them;
3) Since these nonbanks did not hold these mortgages for long, they lowered their lending standards to where almost everyone qualified;
4) Massive ratings FRAUD by the ratings agencies led to this junk being rated as Triple AAA;
5) That high investment grade allowed bond managers to purchase this junk which they normally would not have;
6) High leverage allowed a huge securitization process, then more leverage was piled on by the non-regulated derivatives market. This allowed firms like AIG to write $3 trillion in derivative exposure!
7) Compensation in the financial sector was asymmetrical, where employees had all of the upside and shareholders/taxpayers had all of the downside. This led to increasingly risky activity, which continues to this day.
You may say - who cares, it's water under the bridge. But the problem is that the consequences of the financial crisis continue to this day to effect the United States and its citizens in their daily lives.
In order to bail out Wall Street, the government has gone trillions of dollars deeper into debt, with that debt growing exponentially every day.
So far, the Federal Reserve has had their printing presses running full speed day and night in order to have enough money to purchase all of the government debt - Treasuries - to keep the country running.
But that game can only go on for so long before an already weak and declining US dollar goes into a steep dive into oblivion and economic chaos for the American public.
So the federal government has to come up with another solution...finding another pot of money somewhere.
Leave it to our elected officials - they have.
The Treasury Department is looking at ways to FORCE a large portion of ALL retirement plans into "fixed payment annuities"...in other words, the money would be forced into long-term Treasury bonds.
Officially this is about "retirement security", which sounds nice, but in effect it will be a seizure of private assets in order to fund government deficits at negligible interest rates.
And remember my prior warning - the value of these bonds has only one way to go - down. So the government is thinking about forcing its citizens into a guaranteed losing investment in order to fund the bailout of Wall Street and other privileged elites. Amazing!
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