"Fat Fingers", HFT, & Yesterday's Stock Market

"Lurching From Port to Starboard"

My favorite quotes assessing yesterday's market action follow.

(Note: 'HFT' stands for "High Frequency Trading"; "fat finger" refers to the rumor circulating that someone at Citigroup mistakenly entered a trade with "billion" instead of "million" entered.)

Personally, I find it hard to believe that a clerical error could be the culprit.

If this wild ride continues, it will provide further evidence that markets need adult supervision.

--Floyd Norris, The New York Times

What happened today was no fat finger, it was no panic selling by one major account: it was simply the impact of everyone in the HFT community going from port to starboard on the boat, at precisely the same time.

--Tyler Durden, Zero Hedge Blog

Good thing we never let the adolescents and greedheads on Wall Street get their hands on the housing market . . .

P.S.: Continuing with the theme of "taking responsibility" . . . . how about if, a trading glitch was at the heart of yesterday's melt-down, the head of the NYSE (or whoever else is in charge) gives a press conference explaining exactly what happened?

Financial "Miranda Warning" for Goldman Sachs Clients?

Oops, They Did it Again!

If we're not going to shut down rogue investment banks like Goldman Sachs, or break them up into smaller, less economy-threatening pieces, how about at least requiring that they give their clients (hard to believe they still have any) the equivalent of a financial "Miranda warning."

Something like this perhaps:

You have the right not to borrow or otherwise do business with us. However, if you do, everything we learn about your financial condition can and will be used against you, by us or our affiliates, to maximize our profit. Oh . . . and the financial products we sell you . . . may be dangerous to your financial health (and everyone else's!)

In the unfolding saga of Greece's sovereign debt mess, consider -- once again -- who seems to be at the dirty little epicenter (and apparently, cashing in again):

Goldman Sachs and J.P. Morgan, and perhaps others, sold financial instruments to Greece that were designed to artificially depress its borrowing and budget deficits.
Goldman and Morgan declined to comment. Greece says what it did was legal at the time.

Now Greece is under attack in the markets, and the major countries in the euro zone are trying to force it to clean up its act and to keep it from defaulting. There is little agreement on how to do that. Traders who bet against Greece — by shorting Greek bonds while buying German ones, for example — have made a lot of money as the market realized just how much trouble Greece was in.

The European Union is now asking Greece for details of what it did. But it should go further. It should seek to find out if the banks that helped Greece lie — and thus knew its numbers were false — made money betting against it. If so, do those banks deserve to keep those profits?

--Floyd Norris, "Helping Governments Deceive"; The New York Times (2/16/2010)

One more time, louder and all together:

A-r-r-g-h-h!

The Scourge of Cash-Out Refinancings

Thirty Years in a Home -- And No Equity

It used to be that people who had owned homes for a longer time were less leveraged than recent purchasers, but the refinancing boom changed that. “A coordinated increase in leverage among homeowners during good times will lead to sharply higher correlations in defaults among those same homeowners in bad times,” two authors of a new academic paper wrote.

--Floyd Norris, "Confronting High Risk & Banks"; The New York Times (12/10/2009)

I first noticed it about two years ago selling condo's perfect for downsizers.

The 50 and 60-somethings coming through my open houses would "ooh and ah" -- but that was usually it. Or, they would say how much they loved the condo, and would then ask if the owner was open to a contingent offer (older and struggling with health issues, fixed timetables, etc. they usually weren't).

It turns out many of these would-be Buyers, despite owning their current home for decades, had little or no equity.

I suppose these people could all have borrowed against their homes to buy toys and go on vacations.

But this is Minnesota, after all.

Wall Street's "Unretirement Plan"

My vibe was that the proceeds of all those cash-out refinancings (basically, pulling the equity out of your home) went for things like medical, helping out kids, paying down other debt, and the like.

It sure didn't go for fancy new cars or clothes -- I saw very little evidence of that.

Guess who takes care of retirees who've exhausted all their savings? (It's not Wall Street).

P.S.: In the same vein, I've lost count of how many foreclosures I've now seen where, when you look up the tax assessed value and what the foreclosed owner paid, you can't find anything for the latter value. That usually means the owner who lost the home owned it at least since 1991, which is when MLS generally started tracking that.

Imagine: 20 years-plus in a home, and no equity!

Goldilocks Approach to Mortgage Modification

Stopping the Runaway Foreclosure Train

The [mortgage modification] rules now being applied . . . have a Goldilocks quality. To get a modification a borrower has to need it a lot, but not too much. If the home is “underwater” — worth less than the balance of the loan securing it — but the borrower can still afford the payments, there is to be no modification. If the borrower is in such bad straits that default is likely even with a modification, again that borrower is supposed to be turned down.

Modifications [go] to those who come up with the right income number, neither too high to qualify nor too low to be likely to meet the modified payments.

--Floyd Norris, "Why Many Home Loan Modifications Fail"; The New York Times (12/3/09)

The low percentage of successful mortgage modifications says volumes about (non-existent) underwriting standards in many parts of the country a few years ago.

In the language of another children's story, the "Three Little Pigs," mortgages are like homes made of straw, wood, and brick in their ability to withstand adverse financial conditions (the proverbial "wolf at the door").

Even straw is too generous in the case of millions of subprime and Option-ARM loans made to already marginal borrowers.

The material that comes to mind is paper -- as in all the Triple A, mortgage-backed "paper" sold by the trillions to investors world-wide.

How ironic.

Floyd Norris: 'Save This Store'

Trickle-Down Economics, Wall Street-Style

Floyd Norris, one of my favorite financial writers, ran a post earlier this week noting a recent London jewelry store burglary where the average bauble cost $1.5 million.

That prompted this observation, "It will be hard for stores like this to stay in business if governments refuse to support bankers in the style to which they have become accustomed."

In response, I posted this comment:

I used to think that obscene Wall Street pay would finally be stopped when shareholders stood up and said “no more.”

Then I thought it would be stopped once Wall Street had effectively emptied the government’s coffers.

Now I think it will stop only when the government’s coffers have been emptied, its debt is maxed out, and no creditor countries will lend it any more.

How far away is that point?

Do we really want to find out?

--Ross Kaplan, Comment on "Save This Store"; Floyd Norris, The NY Times (8/12/09)

The beauty of the Internet is that there's always a "last, last word," after the previous "last word."

Here's mine:

I'm starting to think that Wall Street VIP's will be obscenely paid until the last sun in the last solar system flames out.

"The Joy of Sachs"*

And Then There Were Two

Goldman and Morgan were assisted in a rather violent industry consolidation. They remain, more than ever, officially “too big to fail” (TBTF), so they know they can always request tax funds directly from the Treasury Department and elevate risks above competitors. With their enormous profits they can buy out any remaining politicians and expand their direct appropriation of taxes, pensions, and anything else they might want. They really should be congratulated. It isn’t easy toppling a large nation with barely a shot fired.

--post, Floyd Norris blog , "A Great Time to be a Banker"; (NY Times; 7/16/09)

No, the author of this post isn't Matt Taibbi (the "poster" is someone named Nelson Alexander).

And, yes, his analysis of what has transpired the last 18 months or so seems startlingly accurate (and depressing, and enraging).

Or, maybe it's just that I agree with it.

Here's my post on Mr. Norris' blog in response (yes, I occasionally contribute to other blogs):

Once upon a time, corporate charters were granted stingily, directly by the sovereign, on the condition that the recipient serve the interests of the commonweal. Can anyone argue that that’s what Goldman Sachs and JP Morgan Chase are doing today? Or have done the last 2 years — or twenty?

Forget the inevitable class actions suits to come, kicked off by CALPERS’ against the credit rating agencies. The judgments will be years in the coming, then appealed even longer (think, Exxon Vadez). Maybe it’s time to go for their jugular; they sure know how to go after ours!

--"A Great Time to Be a Banker", Floyd Norris blog (see, comment #28)

Want a more succinct take on all this? Try *Paul Krugman:

Goldman is very good at what it does. Unfortunately, what it does is bad for America.

--Paul Krugman, "The Joy of Sachs"; The NY Times (7/17/09)

"Does This Impress . . Floyd Norris?"

The Quick Way to Bank Profitability

If the roots of today's financial crisis were economic in nature, the vital signs to monitor would be such financial measures as the stock market, unemployment levels, and interest rates.

However, a growing chorus of commentators believe that today's dysfunctional financial system is ultimately a symptom of a political problem. As in, who makes the rules?

So, before investment banks could leverage their bets 35:1, the SEC had to give its ok; before AIG could write billions (trillions?) in exotic credit insurance, regulators had to look the other way; before Citigroup, Bank of America and others could bury hundreds of billions in liabilities in off-balance sheet entities, the Financial Accounting Standards Board ("FASB") had to allow it.

As President Obama has said, the dirty little secret of today's financial crisis isn't how many laws were broken . . but how few.

"Does This Impress . . . Floyd Norris?"

So, have trillions in Wall Street losses and bad bets (so far) weakened bankers' control over regulators? Hardly.

Here's the latest from Floyd Norris, the chief financial correspondent of The New York Times -- not just the unofficial dean of financial journalists, but as impeccable and unimpeachable a commentator as you'll find anywhere:

The world of accounting rulemaking is normally a staid and slow-moving one, with the board offering detailed rationales for changes and giving interested parties months to comment on them. Most comment letters come from people well versed in the accounting literature, arguing points that can seem arcane even if they could have a major impact on financial reports.

The process this time has been different in almost every respect. The board allowed only 15 days for comments, and said it would act after taking just a day to review the comments. Those comments arrived by the hundreds, including bitter reactions from investors. “Market value is market value. Stop letting the financial industry call a duck a whale,” stated an e-mail message signed by Diane Walser. “Who will benefit?” asked Roy Bell. “Only the very ones who already broke all the rules and have brought destruction to the world as we know it.”

--Floyd Norris, "Banks Are Set to Receive More Leeway on Asset Values"; The New York Times (3/31/09)

Leaving all the arcane accounting aside, the basic issue is whether the banks must write down their assets to market value, or use more subjective criteria (their own). The latter approach has been called, deservedly, "mark to management."

Suffice to say, the banks are prevailing.

The Tonight Show has a running bit, called "Does This Impress Ed Asner?," in which amateurs perform kitschy routines to try to win Mr. Asner's approval.

I propose my own version for the financial markets: "Does This Impress . . Floyd Norris?"

The banking industry's latest trick -- anything but the work of amateurs -- decidedly does not (disgust is more like it).

'09 Stock Market Rally

Out of Treasuries, Into Stocks?

"Obama Warns Trillion-Dollar Deficit Potential"
--The New York Times (Jan. 7, 2009)

"Suddenly, a Markets Turnaround"
--The Wall Street Journal (Jan. 7, 2009)

The stock market is famously forward-looking, so it's certainly possible that the rally the last month or so -- up 10% to 20% from its lows, depending on the index -- reflects investors' optimism that the economy is due to start improving (or, as NYT columnist Floyd Norris puts it, that "things are getting worse at a slightly slower rate").

It's also true that tax-loss selling peaks near the end of the year, and that once it subsides stocks frequently rise (called the "January effect," which often as not now occurs in December).

However, it's at least a fair guess that some of the market's rise is due to investors taking President-elect Obama at his word, and exiting suddenly not-so-safe Treasuries. Where does that money go? Stocks, bonds, gold, commodities -- you name it, all these asset categories have rallied recently.

High Risk, No Reward?

For the uninitiated, literally trillions of dollars have flooded into U.S. government debt (T-bill's and bonds) seeking refuge from the stock and credit market crack-up's the last 18 months ago. The stampede has been so great that the yield on short-term debt has effectively been driven to zero -- less when you take account of fees.

Now, with the prospect of trillion dollar U.S. deficits as far as the eye can see, would-be Treasury buyers are faced with the double whammy of minuscule yield and debased currency (in truth, the latter has been a concern for some time, but the magnitude of the risk is clearly rising along with the deficit projections).

Such a combo recalls the Cal Tech football team's slogan: 'we may be small, but we're slow.' Not surprisingly, investors are taking the hint and deploying their money elsewhere.

Floyd Norris Column

"Voting" your Home, or Your 401(k)?

New York Times business columnist Floyd Norris has a provocative piece today titled "Housing Prices and McCain":

http://norris.blogs.nytimes.com/

Norris' premise is that Obama defections are likeliest in "red" states where home prices have dropped the most. Could be, although you'd be hard-pressed to isolate just one factor in causing a former Bush supporter to switch.

When people are feeling this much economic pain, I doubt they make careful distinctions about the precise source(s) any more. However, as I posted on Mr. Norris' blog, you don’t get a monthly statement telling you how much your home price just dropped. It's also the case that, at any given time, only a small fraction of homeowners are actively in the market -- less as we head into the holidays.

Personally, my guess is that people are “voting” their 401(k)’s more than their home prices this election cycle . .