Author Archives: Yves Smith

Deep T: Australian Banking System on Unstoppable Path to Collapse or Government Bailout

Yves here. This long and informative post on the pending train wreck in the Australian financial system might seem to be too narrow a topic for most Naked Capitalism readers, but it makes for an important object lesson. Australia managed to come out of the global financial crisis largely unscathed because its banks did not swill down toxic assets from the US (chump quasi retail investors were another matter) and it benefitted from the commodities boom.

Nevertheless, one might think its bank regulators might see what happened abroad as a cautionary tale. Mortgage debt took center stage in the crisis, and Australia is in the throes of a serious housing bubble. Yet as this post describes, the regulators seem asleep at the switch as to one of its major drivers.

By Deep T., a senior banking insider who is fed up with his colleague’s reliance on public support. Cross posted from MacroBusiness.

Previously I have posted on how the major banks recycle capital in The Capital Rort. I want to extend that subject by showing how mortgage ‘rehypothecation’ in Australia has led to the massive expansion in liquidity available to Australian banks which is at the root of the mortgage affordability issues in Australia and has put Australia’s banking system on the unstoppable path to collapse or government bailout.

Is the Proposed NYSE-Deutsche Börse Merger All It’s Cracked Up to Be?

The financial media is duly falling in line and giving a thumbs up to the proposed merger between the New York Stock Exchange and Deutsche Börse. Mayor Bloomberg contends it is both good for New York City and provides customers better service in an era of increasingly global equity trading. Industry analysts approved. Not surprisingly, stocks of other exchanges are up based on takeover speculation.

Your truly is wary about concentrations of power in the financial arena, and consolidation of stock exchanges has the potential to go in that direction. One critic of the deal was former Goldman Sachs co-chairman John Whitehead. Admittedly, some of his objections sound quaint, echoing the hand wringing of the 1980s when the Japanese acquired trophy assets such as the Rockefeller Center. From Bloomberg:

“I speak out rarely, and this is one time when I can’t hold myself back,”

Links 2/10/11

Looking at body can reduce pain BBC

Huffington is right to take the cash John Gapper, Financial Times. Gapper begs to differ with Felix Salmon.

Security Firms Pitching Bank of America on WikiLeaks Response Proposed Targeting Glenn Greenwald Marcy Wheeler. You MUST read this.

Live from Cairo (18) Lambert Strether. Amazing how US coverage has fallen off, or maybe not.

GSE Headfake: Yet More Looting Branded as “Reform”

As time goes on, the various Ministries of Truth just get better and better at their stock in trade. We’ve gone from artful obfuscation like “extraordinary rendition”, and “Public Private Investment Partnerships” to stress free “stress tests” (particularly the Eurozone version) designed to get bank stocks up and credit default swap spreads down, to even grosser debasement of language. What passes for the left has for the most part been dragged so far to the right that the use of once well understood terms like “liberal” and “progressive” virtually call for definition. And the word “reform” has virtually been turned on its head. Financial services reform was so weak as to be the equivalent of a jaywalking ticket; health care reform was a Trojan horse for even large subsidies to Big Pharma and the health care insurers. But GSE reform takes NewSpeak one step further by turning the “reform” concept on its head and using the label to describe an effort to institutionalize even bigger subsidies to the mortgage industrial complex.

While Team Obama appears to have backed down from the trial balloon floated by the Center for American Progress (note that press reports give another rationale) and is expected to offer a menu of choices for “reform” in its overdue white paper on Friday, don’t be fooled. The proposals coming from the lobbyists expected to have real influence on which ideas get the green light are virtually without exception serving up such a narrow menu of choices as to constitute unanimity. We offered our take as of the release of the CAP report; a subsequent proposal by Moody’s Mark Zandi (see details here) is more of the same.

It’s as if a population suffering from a toxic reaction to mustard was now offered options ranging from Dijon to pommery to spicy brown as meaningful improvements.

Why the Krugman “I See No Commodities Speculation” Analysis is Flawed

Paul Krugman correctly anticipated that I would be unable to resist taking issue with him again regarding his view that the recent increase in commodities prices are warranted by the fundamentals.

Note that I am not saying in this post that “commodities prices have increased as a result of speculation.” That takes more granular analysis of conditions in various markets; we’ll be looking at some that look suspect in the coming days and weeks.

I intend to accomplish something much simpler in this post: to dispute the logic of Krugman’s overarching argument. He professes to be empirical, but as we will show, he is looking at dangerously incomplete data, so his conclusions rest on what comes close to a garbage in, garbage out analysis. And that’s been a source of frustration given his considerable reputation and reach.

Exclusive: Harvard Economists Prove that Bankruptcy is Mythical

This document was leaked to Naked Capitalism by a university economics student who has asked to remain anonymous

Background

Mixed reactions have followed the recent brilliant demonstration by a pair of young Harvard economists that bankruptcy cannot occur. While the community of economists has generally affirmed the correctness of the reasoning at issue, various individuals already distinguished for their carping attitudes have willfully misunderstood the theorem; for example, the controversial blogger Yves Smith has publicly labeled the proof ‘yet another demonstration that economics is the ugly stepsister of astrology.’

This sort of obscurantism is hardly surprising – as Ludwig von Mises pointed out in 1956 in The Anti-Capitalistic Mentality, ‘economics is so different from the natural sciences and technology on the one hand, and history and jurisprudence on the other hand, that it seems strange and repulsive to the beginner.’ Ms. Smith is evidently one of the people who experienced as a student this natural but irrational feeling of aversion, and has since refused to make the effort to think with true economic rigor.

The insight incorporated in the recent theorem is not difficult to explain, although for a full understanding, knowledge of the relevant mathematical techniques is, of course, essential.

Questioning Goldman’s “Market Making” Defense

The notion underlying the Volcker rule is that too big to fail institutions have a government backstop and therefore their activities should be restricted to the types of intermediation that support the real economy. The taxpayer has no reason to fund “heads I win, tails you lose” wagers. Various firms, most notably “doing God’s work” Goldman, has tried to play up the social value of its role, whenever possible wrapping its conflict-of-interest ridden trading activities in the mantle of “market making”.

A big problem in taking about market making versus position trading is that, Goldman piety to the contrary, the two are closely linked. Even though all the major dealer banks created proprietary trading operations to allow top traders to speculate with the house’s capital, plenty of positioning also takes place on dealing desks. While dealers are obligated to make a price to customer (well, in theory, it’s amazing how many quit taking calls in turbulent markets), they are shading their prices in light of how they feel about holding more or less exposure at that time. And the dealing desks, just like the prop traders, are seeking to maximize the value of their inventories over time.

A Goldman discussion of risk management presented yesterday (hat tip reader Michael T) gives reason to question that much has changed on Wall Street regarding the role of position taking, now taxpayer supported, in firm profits.

Is AIG Getting Yet More Presents from the Treasury, Meaning the Chump Taxpayer?

On the one hand, as we pointed out, the Treasury has from the get go of its ongoing rescue of AIG engaged in continued subsidization of the giant insurer, starting with the all too frequent restructurings of its financings. The net effect was not simply to provide more dough to the AIG, but to put the taxpayer in a worse and worse position. The taxpayer effectively owned AIG, with the first financing secured by all the assets of the company and further holding 79.9% of the equity. The first rule of being a creditor in a troubled company is that you want the most senior position in the capital structure, always. That rule was repeatedly violated with AIG.

The latest until now took place in the pre-IPO restructuring, which looks to have provided a further $6 billion to AIG.

Links 2/9/11

Ravens stressed by ‘gang life’ BBC

Bird kills man at cockfight Guardian (hat tip reader Buzz Potamkin)

Dapper Blue Penguin: Tux Is a Feathery First LiveScience (hat tip reader John M)

Hudson Bay Still Not Frozen Solid… Brad DeLong

Lymph Node Study Shakes Pillar of Breast Cancer Care New York Times. I guarantee practice will be slow to change.

Amended Complaint in LPS/Prommis Solutions Litigation Provides More Details of Alleged Kickbacks, Impermissible Fee Sharing

e’ve been following litigation against Lender Processing Services, which among other things is the leading provider of default management services to mortgage services in the US, handling over 50% of foreclosures. The complaint that is moving forward the fastest (and fast in litigation land is not all that fast) is the Mississippi Northern District Bankruptcy court and alleges that Lender Processing Services along with another service provider in the default services space, Prommis Solutions both engaged in impermissible sharing of legal fees (only law firms are permitted to do legal work; even referral fees are consider not-kosher fee splitting). This case is seeking class action certification, and the Chapter 13 Trustee for the Northern District has joined the plaintiffs on her own behalf and for all Chapter 13 Trustees as a class.

Lender Processing Services continues to give investors the impression that there is nothing to see here. In a conference call last week, its only mention of this case was that its motion for summary judgment was “outstanding” which is technically accurate but more than a bit misleading. Consider: while LPS has tried to depict this case as a mere “fishing expedition”, its general counsel attended a procedural hearing in late January. How often do general counsels of public companies sit in on unimportant litigation in geographically disadvantaged location?

And the hearing did not go well for the defendants.

Links 2/8/11

Climate readiness ‘to boost economy’ BBC

Flu breakthrough promises a vaccine to kill all strains Guardian

Why lunch with the girls beats a night with a man Daily Mail (hat tip reader May S). I hate to get empirical, but the evidence is than men have to “invest” less than ever before to get laid….

N.Y.U. Report Casts Doubt on Taliban’s Ties With Al Qaeda New York Times (hat tip reader furzy mouse). So are any of the official rationales for why we have boots on the ground in the Middle East even remotely accurate? Not that anyone will take notice at this late date….

Mirabile Dictu! SEC is Taking a Hard Look At Bad Mortgage Practices

While it is far too early to break out any champagne, the Powers That Be seem to be taking notice of the continuing train wreck in courtrooms all over the US as far as banks’ ability to foreclose is concerned. Apparently, the American Securitization Forum’s “Drive on by, nothing to see here” mantra is becoming less and less convincing with every passing day.

It’s worth nothing that only the Financial Times seems to be carrying this story (yours truly did check on key word variants in Google News and came up empty-handed). They also deem it to be worthy of front page placement. This is only an isolated sighting, but one of the features of the runup to the financial crisis was an ongoing news disparity between the Financial Times and US business press, particularly the Wall Street Journal. The FT would pick up on stories that seemed important and were too often either completely ignored or reported by the American financial outlets only in in a selective manner. So if we see more bypassing of inconvenient news by the usual suspects in the US, take heed.

What is particularly interesting is that the SEC seems to be targeting specifically the sort of abuses that we have chronicled at length on this blog…