naked capitalism

doc holiday says:

Yves,

Sorry to be OT, but have you heard about this stuff, e.g, Capital Magnet Fund and how it fits with The Plan?

Re: The Housing and Economic Recovery Act of 2008 establishes a permanent trust fund called the Capital Magnet Fund within the Treasury’s Community Development Financial Institutions (CDFI) Fund. It will be financed by contributions based on Fannie Mae and Freddie Mac’s annual new business purchases from the previous year. The CDFI Fund will use these resources to provide competitively
awarded grants to CDFIs and qualified nonprofit housing organizations to finance affordable housing
and community development projects.

From The Plan: DEPOSITS.—Not less than 20 percent of any profit realized on the sale of each troubled asset purchased under this Act shall be deposited as provided in paragraph (2).
(2) USE OF DEPOSITS.—Of the amount referred
to in paragraph (1)—(A) 65 percent shall be deposited into the Housing Trust Fund established under section 1338 of the Federal Housing Enterprises Regulatory Reform Act of 1992 (12 U.S.C. 4568); and (B) 35 percent shall be deposited into the Capital Magnet Fund established under section 24 1339 of that Act (12 U.S.C. 4569)."

>> I'm watching this game, and have never heard of Capital Magnet Fund, so which pea is this shell covered by??

doc burned out holiday says:

Sorry, but..

ACORN Issue Fueling Bailout Opposition

http://www.cbsnews.com/stories/2008/09/27/politics/politico/thecrypt/main4483168.shtml

Earlier today, when House Republican leadership framed its opposition to the bailout bill as it currently stands, a principal objection focused on the group ACORN, which the e-mail alert called “the scandal-tarnished ‘community organizing group’” — with scare quotes in the original.

They’re referring to the Association of Community Organizations for Reform Now, a group generally allied with Democrats and derided by the GOP as corrupt, inefficient and a front-group for Democratic efforts on the ground.

???

Liberals Try to Bail Out ACORN and Other Radical Community Organizer Groups
http://canadafreepress.com/index.php/article/5223

As first reported by Warner Todd Huston of NewsBusters, Democratic lawmakers have been attempting to insert language into the bailout package to siphon off 13%* of profits (if there are any) from the sale of troubled assets and put it into a slush fund called the Housing Trust Fund. Here is the wording, apparently from Senate Banking Committee chairman Chris Dodd (D-Connecticut):

Jojo says:

Clearly, these hedge funds are too integral to the functioning of our economy and therefore, MUST be bailed out.

Let me go out back and pluck a few more bills and coin off of my money tree. I think I best add a bit more fertilizer while I am out there also.

Richard Kline says:

I’m not convinced that a default by the US on its sovereign debt is ‘unavoidable,’ and I say that as someone who has openly discussed such a possibility from my own longstanding concern. It is a non-trivial possibility, however. If we pass this bailout, I would submit that an eventual default becomes a signficant probability which will only be avoided by deliberate positive action, not only in the US but by all major central banks and sovereign financial actors working in concert.

I oppose the Bullrush Bailout on many grounds, but the first and worst is that it puts us on a slippery slope toward default which we will only get off of through much greater pain subsequently. It’s and Act of Madness by Congressdweebs who are used to waving their pens and having the world sway in time. —Not this time.

Anonymous says:

“Hedge fund of funds are expected to be hardest hit. One investor said: “You take a risk with individual managers but fund of funds are paid to make sure you’re diversified. Many have failed.”…

This is nicely anonymized. But they’re talkin’ about YOU, John Mauldin — Mr. Pied Piper ‘Fund of Funds’. How are those redemption requests going? Have you thought about reinvesting some of your fat fees in a ranch in Paraguay, which has no extradition treaty with the United Snakes?

But looking beyond individual Ponzi operators, the hedge fund rumbles suggest that no sooner than the ‘president’ signs the bailout bill with a shaky purple-Crayola ‘X’ and cartoon happy face, ‘LTCM II’ will explode in our faces, along with a fresh howl for a wider scope of relief. We saved the hedge funds in 1998, so we’ve got to do it again — or face Greenwich turning into a ghost town!

Commenter ‘jojo’ above is on the right track. At its deepest roots, the current crisis is being caused by failure of the debt-based Bretton Woods II global exchange regime. This fatally flawed system rewards the boldest debtors — particularly the reserve currency countries — with intoxicating Bubbles, which mysteriously mutate into life-threatening black holes. The incandescent Tech Bubble of 1999 mutated into a near-80% smash in the Nasdaq, rivaling the Dow’s drop in Depression I. And the spectacular Housing Bubble demise single-handedly took out the GSEs, the entire investment banking sector, and (as you’ll soon see) the Federal Reserve. Failing to spot the linkage between these and other, earlier clues (the crash of 1987, for instance) ensures a misdiagnosis and more trouble ahead.

Fiat currency is a doomsday mechanism. Creating currency from debt GUARANTEES nothing but a succession of Bubbles. Paradoxically, any country which moves to restore sound currency will suffer the deepest economic recession. Meanwhile, the best competitive devaluators may manage to keep a false inflationary blush of health on their cheeks.

In a dismal abortion of democracy, it appears that the US is instinctively headed for the latter camp with its $700 bailout bill. A near-immediate consequence will be further drops in both stock indexes and the dollar, and probably a worrisome pop in long bond yields as well. But even the term “dollar crisis” will not capture the full scope of the problem.

Bretton Woods II is broken. The glib, louche ghost of Maynard Keynes must be exorcised. I can write the founding principle of Bretton Woods III in one sentence:

“No non-redeemable currency is acceptable in international exchange.”

Read it and weep.

– Juan Falcone

Will Divide says:

Look it up. “Decimation” is a ten percent loss.

I think we need another word,

Anonymous says:

In an attempt to spend a few more days in the sun it appears that our government has reached an agreement on how to loot another $700 + Billion from the taxpayers.

Next stop: The hollowed out state…

‘ONWARD TO A HOLLOW STATE
The modern nation-state is in a secular decline, made inevitable by the rise of a global market system. Even developed nations, like the US, are not immune to this process. The decline is at first gradual and then accelerates until it reaches a final end-point: a hollow state. The hollow state has the trappings of a modern nation-state (”leaders”, membership in international organizations, regulations, laws, and a bureaucracy) but it lacks any of the legitimacy, services, and control of its historical counter-part. It is merely a shell that has some influence over the spoils of the economy. The real power rests in the hands of corporations and criminal/guerrilla groups that vie with each other for control of sectors of wealth production. For the individual living within this state, life goes on, but it is debased in a myriad of ways.

The shift from a marginally functional nation-state in manageable decline to a hollow state often comes suddenly, through a financial crisis. This crisis typically has the following features:

Corporations and connected individuals systematically loot the nation-state of financial assets and natural resources through a series of insider/no cost deals. These deals are made to “save” the nation’s economy or financial system from collapse.

Once the full measure of the crisis is known, the nation-state’s currency falls precipitously, it’s debt becomes expensive, and it is forced to submit to international oversight/rules.

The services the state provides rapidly evaporate as its bureaucracy is starved for cash/financing. This opens up a window for the corruption of government employees unused to deprivation.’…snip…

To view entire article:

http://globalguerrillas.typepad.com/globalguerrillas/

River

Anonymous says:

“The financial statements posted on Goldman Sachs website say that Henry Paulson received restricted stock and was a beneficiary of several Goldman Sachs benefits plans.”

They should also investigate whether Goldman and any other banks had fraudulent marks for their securities from 2003-2006. Prosecute management for securities fraud.

Anonymous says:

“What we have here with these hedge funds is a failure of mathematical models.”

Management at the banks promoted securities using models they knew were wrong, just like Michael Milken promoted securities using analysis he knew was wrong.

The worst thing about the bailout is that it will limit the damages that the banks customers and other stakeholders can sue bank management for — if management engaged in securities fraud. Buying dodgy debt from banks pumps up bank stock prices so that — if there was securities fraud — so shareholders are hurt less, and in turn, can sue management for less money.

Anonymous says:

You are right, and it was obvious from the beginning to the mathematically well-informed. It’s been well known in physics since the 1970s (and in electrical engineering much longer than that) that complex systems usually do not have Gaussian fluctuations.

****

That is wonderful. It is great news that it was common knowledge among quantitative securities professionals that management was using wrong models to promote its own stock and securities sold to customers. This may help prosecute them, like Milken who knew it was not appropriate to rely on prior academic research regarding bonds of “fallen angel” companies to promote Milken’s junk bonds.

kwik-e-trading says:

Why do you think 2 and 20 is so high? Is it really higher than comp levels at i-banks or prop trading depts of commercial banks?

It is hard to start a hedge fund on less than 2/20, and when investor demand makes the fund grow it certainly doesn’t need to cut fees. It seems to me that hedge fund fees may fall as a part of financial sector-wide contraction, but it doesn’t look to me like they are are currently out of line with the sector.

Anonymous says:

Follow the Leader Models: or, Collapse of Information Cascades…

‘Information cascades are important. They explain many of the big problems we currently face. Here’s how an information cascade works:

1) An event occurs or a problem surfaces.

2) A person who is perceived to have good data/insight into the event or problem makes a decision.

3) Other people, observing the first person’s decision, opt to avoid original analysis/discovery and copy the earlier decision.

4) The more people that copy the earlier decisions, the less likely any new discovery or analysis is done.

If the earliest decision was correct, then everything works out. If it isn’t, the error is compounded until it becomes a major problem when it collapses. In today’s world, with its copious communications systems, information cascades occur with increasing rapidity. They can spiral out of control in hours/days. This also means that on the flip side, an information cascade can collapse suddenly, when the original decision(s) is(are) proven wrong.

An information cascade is a good explanation for why the financial industry became so hopelessly lost. They based their decisions on economic and financial theories that claimed to have predictive power in EXTREMELY complex domains (since this methodology came from careful study in academia, it was assumed to be correct). The information cascade was the rampant application of these theoretical models throughout the financial industry over decades. However, as Nassim Taleb (although the writing is often tough to decipher) points out in this brief, the true predictive capacity of these models was nil/nul/void, since they are extremely vulnerable to black swans — the collapse of the massive hedge fund, Long Term Capital Management proved this point nearly a decade ago. So, what happened when the black swan arrived that demonstrated that these models were wrong? The system imploded as confidence in all of the previous decisions made with those models are called into question (the information cascade collapsed).’…snip…

http://globalguerrillas.typepad.com/globalguerrillas/

Nasim Taleb’s ‘Black Swan’ is an excellent read, imo.

I think the jury should remain in deliberation on the cause of the current economic train wreck. More evidence might surface. There are those that contend this entire debacle was hatched by a few Wall St Bankers who were well aware of the consequences of their actions.

River

Anonymous says:

Why not take it all the way to the bottom of the pile and include all the real estate sales people. They shoved hugh homes on people who would never be able to afford them and now, forclosures!!!!! They still got their commissions while their clients not are losing their homes and having to live on credit cards that will never be paid off either.
Is this pure greed or what??? Also,
Lets face it people—–we put these jerks in Washington—maybe now its time to get them out!!!!!

dearieme says:

“m said…
Who was it coined the “Politician’s Syllogism” ?”

The first time I heard it was on the 1980s BBC comedy “Yes, Minister”. The scriptwriters were Jonatahan Lynn and Antony Jay.

dearieme says:

Oops, “Jonathan”. And I’m uncertain about the comma after the “Yes” but youtube would resolve that.

Anonymous says:

Anonymous @ 11:07 – Perhaps, but I suspect that there has been criminal behavior that would be much easier to explain to a jury than misuse of Gaussian fluctuation models.

All models are approximate. A model that’s a better approximation can make you money trading in a market. The problem here isn’t the use of approximate models so much as (1) the herd behavior and (2) the leverage. Both amplify the small errors, which would have no effect if you were trading for your own account with a unique model.

Anonymous @ 10:56

Anonymous says:

“Yes, yes, Mr. Falcone, we know that gold has magical economic properties …” — moopheus

Who said anything about gold? Not me. I said “redeemable.” But not into WHAT.

Could be gold. Could be silver. Could be a commodity basket. Even redeemability into the securities which allegedly back Federal Reserve Notes would impose some accountability upon the current empty circularity. That’s how ETFs are held in line with their intrinsic asset values; why not currencies?

Well, we know why, don’t we? Central banks are one-way check-kiting schemes. They can’t be arsed to offer two-way bid/ask quotes on their liabilities, as an honest broker would do.

Gold is a suboptimal reserve asset which happens to be better than many other suboptimal choices, in that its supply can’t be multiplied without limit. Other than that, I have no particular brief for gold.

The ultimate quantum of value, I would submit to you, is energy. Let a dollar equal a thousand ergs or a thousand BTUs, deliverable in a choice of formats (electrical, fuel, nuclear, electromagnetic, etc.) compatible with current technology. Energy, thermodynamics tells us, is fundamentally scarce. At least, our ability to obtain and exploit it is. Energy, therefore, is money in its purest, most abstract form.

– Juan Falcone

SheldenfromBellevue says:

I am confused on how exactly the US could “default” on dollar denominated debt?

Since they have the printing press to create as many dollars as they want, there would not be a default. There would be dollar devaluation, high inflation and high interest rates for sure – but they could repay this debt (at the huge expense of the holders of this paper for sure). Is that what you mean by a “default”?

Anonymous says:

Yves, you are right: the chest pounding is unattractive.

Matt Dubuque says:

Matt Dubuque

River-

Taleb is a good read, as is Mandelbrot.

Matt Dubuque
mdubuque@yahoo.com

PS: As for the faceless and personal attack of anonymous at 209pm, you are not the moderator.

Yves is free to speak up on this issue in her usual measured way. She established quotas for the numbers of posts allowed for participants here (1 in 10, 2 in 10 if a response is received) and I have followed them.

And others have commented that my comments are useful. I’ll leave it at that.

Anonymous says:

Defaulting is more or less a liquidation.

Warehousing gold established the basis for factional reserve banking better known as legal tender.

It is more a matter of trust when it comes to monetary systems, you are believed to perform on obligations until you can’t or won’t.

Apparently, capitalists can’t be happy with a…… say 5% growth rate a year. Going home to a front yard bordered by a white picket fence to enjoy the wife and kids immediately after work is just to mundane. Greed kicks in as a goal.

Anonymous says:

Matt…

I did not respond to any anon comments.

For the average person I believe Taleb is more readable than Mandelbrot…Unless one is fond of complex math.

This is a great site and Yves seems to keep things in order without being overbearing.

I enjoy your comments and I always add ‘River’ at the bottom of my comments.

Good luck

River

Anonymous says:

Yves pointedly refrains from chest-pounding, while Roubini and Mish do it all the time. And did you say she was wrong here? I note utter silence on the substance.

The point, if I read it correctly, is that cartel pricing is destined to fail in the long term. That is hardly a controversial view, but it apparently gets denied in specific contexts.

a says:

“Not a single hedge fund strategy has produced positive returns so far this month, with convertible arbitrage and distressed securities down an estimated 7.96 per cent and 7.34 per cent, respectively, according to Dow Jones Hedge Fund Indexes. Equity market-neutral funds, which often short a stock in one sector and go long on another in the same sector, are down 1.85 per cent.”

Two of three of the strategies mentioned – convertible arbitrage and market-neutral funds – depend on short selling of securities. The attack by governments on short selling, has at worst forced the hedge funds to liquidate their shorts or at best pushed the market against their positions (e.g. being short financials).

I could be wrong, but I don’t think Gaussian assumptions had much to do with the hedgies’ loss this month.

russell1200 says:

Matt’s comments certainly don’t bother me – and thank you for the link.

The general goldbug theme that I have heard since the 1970s I have found annoying. The fact that I often found their arguments to be plausible being somewhat beside the point.

I was able to fairly easily explain the current situation to my (non-finance) wife by explaining what happens when you have 3.33% losses at 30-1 leverage. But the default swap market (leverage through lack of reserves) has to be reeling.

And the much larger interest rate swap market has to be getting scary when jumbo loans go to 9%. If you bought the fixed rate in return for the floating rate portion of the swap you have to be getting hammered. Particularly as the spread between t-bills and jumbos widened.

Both of these are areas where lack of over site allowed (hedge funds) huge amounts of leverage.

Independent Accountant says:

Hedge fund talent? Surely you jest. The average hedge fund does not beat Vanguard's S&P 500 fund. These clowns are overpaid!
Chest pound all you want.

Anonymous says:

I love watching these hedge funds idiots lose their jobs. They thought they were Masters of Universes. In actuality, they are as dispendible as mortgage brokers.