wall street

Kuttner's prediction from March

Robert Kuttner made the following prediction in an article in the Huffington Post on March 30, 2009:

It's possible that the Geithner plan will "work" in the sense of re-starting the Wall Street bubble machine, this time with a limitless line of direct credit from the Federal Reserve. If that happens, it will defer an even more serious day of reckoning, as the cost of the Fed's immense credit creation comes due. But the greater likelihood is that the plan will merely enrich some speculators, but neither bring zombie banks back to life, nor get a normal banking and credit system operating again. And then the administration will need to come back to Congress, this time with less credibility, with the economy in even worse shape, having burned through more than a trillion dollars.

Moody's Tries to Make Up for Past Mistakes?

Wow, where was this analysis several years ago.

Banks have failed to make adequate provision for the losses on loans and securities they face before the end of next year, Moody’s Investors Service said.

U.S. banks may incur about $470 billion of losses and writedowns by the end of 2010, which may cause the banks to be unprofitable in the period, the ratings company said in a report published today.

“Large loan losses have yet to be recognized in the banking system,” Moody’s said. “We expect to see rising provisioning needs well into 2010.”

So, if true, who is the zombie bank? Check this amazing quote from the Bloomberg Article:

Vice Chairman of Goldman Sachs International Appointed to Key State Dept. Position

That is right. Robert Hormats, Vice Chairman of Goldman Sachs, has be appointed to a very important position in the State Department.

Hormats was named by the Obama administration Friday to be the department's undersecretary for economic, energy and agricultural affairs, an official announcement indicated.

How About Some Perspective on these "Earnings" Reports?

Some Wall Street talking head said today that the worst is over. Oh really. These "earnings" announcements don't really reflect that. This past week we have heard the Goldman Sachs, JP Morgan Chase, Bank of America and Citigroup all reporting a "profitable" second quarter. But don't be fooled by the hype. These reports of "profits" are certainly not an indication that the economy is improving or that these beneficiaries of tens of trillions of dollars of taxpayer money have survived the financial crisis.

These financial conglomerates have one big thing in common: the benefit of borrowing money from taxpayers at very low rates. They used this cheap money and made profitable trades in the market. In some cases they sold off parts of their business. That is it. They certainly didn't do anything to help the economy.

Let's take a closer look at these "profit" announcements:

Goldman Sachs

LOL. Citigroup Says AIG has Zero Value.

Citigroup said today that AIG may have zero value after government rescue.

But the funny part about this is who is Citigroup. Citigroup is the biggest zombie bank. At the same time they are telling us that AIG is worthless they are giving us 34% stake in their weak-ass bank and they are "shaking up top management".

Citigroup Inc announced its biggest management shake-up since the financial crisis began, replacing its chief financial officer and installing a new banking chief as it prepares to give the government a 34 percent equity stake.

What about the CEO? Vikram Pandit is still there and calling the shots. Citigroup owes its existence to taxpayers.

Turning Junk Into Treasure

Another man's junk is another man's treasure. Morgan Stanley is taking this saying and trying to profit from it: Morgan Stanley Plans to Turn Downgraded Loan CDO into AAA Bonds. Morgan Stanley is trying to turn junk into gold.

Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

More Off-Balance Sheet Troubles

The size of the "Shadow Banking" system must be huge. More off-balance sheet problems for financial conglomerates.

In an unusual move, banks such as Citigroup, JPMorgan Chase and Bank of America have come to the rescue of the off-balance-sheet vehicles that help them to fund credit card loans.

Issuers typically sell their credit card loans to trusts which in turn sell bonds to investors. The banks retain a small interest and manage the trust.

There limits to the amount of liquidity and leverage an economy can absorb but "Too Big" conglomerates don't care because the need the fees and returns to survive. I digress.

The problem for the financial conglomerates is that these off-balance sheet trusts are starting to lose money fast. Any cushion or reserves are being eaten up by mounting credit card defaults.

Thomas Frank's Lament

It was surely a surprise when the WSJ hired Thomas Frank to write an opinion column. Anyone who has read either of his bestsellers, What's The Matter With Kansas? or The Wrecking Crew understands that his view of American politics just doesn't fit in with the other editorial page writers there. I, for one, am very happy he is writing there and his column today should be required reading for every citizen who cares about the future of this country.

Why Congress Won't Investigate Wall Street
Republicans and Democrats would find themselves in the hot seat.

From couples to copulas, David Li was an actuary!

You will recall David Li, the quant who devised the formula that "revolutionized" derivatives. I believe this post from Robert Oak was the last time he was discussed at EP.

Now, along comes this article recently published in FT. While it doesn't shed any new light on the formula, per se, it is a very interesting biographical piece about young Mr. Li. It also retraces key developments in the creation and the ascendancy of quantitative analysis on Wall Street.