Thursday, February 18, 2010

Florida Bound

I'm off on a week's holidays tomorrow - to the Sunshine State. I never thought I would say this, but I am seriously thinking of buying a place in Florida. New England winters get harder to take all the time, and the choices of destination with sunshine, warmth (after a fashion) and cheap direct flights under 3 hours are few. The Caribs is 5-6 hours and expensive. I don't fancy Arizona. California is as far from here as Paris (and frankly Paris will always win even if it is cold). So Florida it is. The real estate market there has plunged to a level where it is beginning to look attractive. A two-bed, two bath condo in the Tampa/Clearwater area can be had for less than $100,000 US. I saw a very nice one today for $65,000 - a two bedroom, 2.5 bathroom 1,100 square foot townhouse. That is only about 40,000 pounds - 48,000 Euros. Do you know what 40,000 pounds buys in England? A garage in Chiswick - maybe. In Paris? Nothing. Really - nothing. My son's rented chambre de bonne - a studio converted from a maid's room - is worth 78,000 Euros.
And since the cold winters they have been having lately in Europe might convince them to start looking for places in Florida, I want to get ahead of the game. Florida won't be the beginning of the recovery in the property market, it will probably tag along at the end of it, but cheap is cheap. See you in a week!

Tuesday, February 16, 2010

Party Political Broadcast

I rarely comment on American politics but a headline in today's Financial times prompted me to venture into this murky (and largely uninteresting) territory. I remember watching TV as a kid when suddenly a commercial would pop up and a man would say "The following is a party political broadcast." Screams of dismay would ensue and my siblings and I would run to the kitchen for a snack until it was over. It was invariably some party drone refuting what some other party drone said about him or her and went on for what seemed to be hours. That said, it was the only time I had to be exposed to politics unless I went looking.
Today's media, which treats national politicians like rock stars, shoves the stuff down our throats 24/7. Politicians have become stone figures cast in the form of their party's image (read 'spin') and their utterings and policies rarely vary from the PR dogma. One party's depictions of the other party is also mostly unchanging from year to year, century to century. But today when I saw the FT I had a sinking feeling that our politicians were really not paying the slightest bit of attention to the world outside their little bubble. And it now seems that they are once again going to bend to the special interest groups - this time to derail financial markets regulation.
The FT said: "Republicans are opposing a plan to impose tougher capital and liquidity requirements on companies that pose a risk to the financial system." My God, but their memories are short. Investment banks that were leveraged 30 to 1 debt to equity (some were thought to be as high as 60 to 1) nearly brought the country and the world to its financial knees.
Further: "Republicans say they are unconvinced that any regulator can even define systemic risk. They are happy to set up monitoring of possible bubbles but say the whole concept is too vague for an immediate introduction of sweeping powers." At the risk of sounding like John Cleese in Fawlty Towers - Too vague? Too VAGUE?! Was the demise of Lehman Brothers, Bear Stearns, and nearly AIG too vague a concept? Was the worldwide credit crunch and recession and loss of gazillions of jobs too vague to grasp? Call me gobsmacked. And it isn't just me. Former Treasury Secretary Henry Paulson sees it too. He writes in today's New York Times:
    "Congress must pass financial regulatory reform. Delays are creating uncertainty, undermining the ability of financial institutions to increase lending to the businesses of all sizes that want to invest and fuel our recovery. Our overriding goal in restructuring our financial architecture should be that taxpayers never again have to save a failing financial institution.
    This calls for two vital changes. First, we must create a systemic risk regulator to monitor the stability of the markets and to restrain or end any activity at any financial firm that threatens the broader market. Second, the government must have resolution authority to impose an orderly liquidation on any failing financial institution to minimize its impact on the rest of the system.
    Together, these two reforms will enable the regulatory system to better prevent the kinds of excesses that fueled our recent crisis, restore market discipline and keep the failure of a large institution from bringing down the rest of the system."

Thankfully there is a logical voice of reason shouting through the gloom that is our American political system. Henry Paulson was there when it happened. He saw how the system failed him and his colleagues, who had to do the best they could in a terrible situation with a total lack of tools at their disposal.
It is time to tell Congress and the Senate to butt out and listen to the experts. Politicians are not experts in anything apart from party dogma and good hair.
Senator Evan Bayh from Indiana said it best when he quit his job yesterday: "...I do not love Congress.....There is too much partisanship and... too much narrow ideology in Washington, even at a time of enormous national challenge, the people's business is not getting done."

Monday, February 15, 2010

Lessons Not Yet Learned

As it is a holiday today in the U.S., I took the latest copy of the Economist to the gym and read it on the treadmill (as you do). I was particularly interested in the special report on financial risk. The Economist is not a usual source for articles about risk and risk management, but I have a great deal of respect for the publication. But I must say this report stunned me silent (for a minute). Warning about asset class silos and the challenges of enterprise risk management has become one of my specialty subjects (where is Chris Tarrant when you need him?). If you took every article that I have written for Financial News and Traders Magazine and Securities Industry News about moral hazard and risk and financial markets over the past three years or so and threw them together into one - this would be the Economist's article.  One particular article that I wrote in Financial News in December of 2008 pointed out that financial firms had been using VaR incorrectly in the years leading up to the financial meltdown: "Failure of risk management strategies proves Murphy’s Law is alive and well". In it I said: "Valuation models such as value-at-risk were overused or not updated when market conditions changed."
According to the Economist this still holds true today. Shock, horror. Not only that, but they still have not figured out stress testing and continue to be stumped as to how to manage risk across the various asset classes. The Economist's article said: "Two-thirds of the banks surveyed said they were only partially able to aggregate their credit risks." Call me naive but they knew this ten years ago, and the whole trend toward enterprise wide risk management was in response to this issue. Technology to aggregate, analyze, display, signal and manage risk across product silos is exactly what enterprise technology is about, and it has improved by a billion gazillion percent since the first, tentative platforms.
I can only hope that in seeing an article of this granularity, dumbed-down for the masses, some simple risk manager is reading it while he is on the loo. Maybe the light bulb will be illuminated in his poor, addled head and he will say to himself, "Oy. That Economist might have something there. Maybe VaR is not enough. Maybe I should look at - uhhh - operational risk! And liquidity risk! And moral hazard risk (or not, the boss would HATE that)."
What I wrote in Financial News sums it up: "Anglo-Irish author and philosopher Edmund Burke said: “By gnawing through a dyke, even a rat may drown a nation.” By ignoring basic risk management tenets, investment banks and other financial institutions failed to manage credit risk, which turned into market risk which turned into liquidity risk and ultimately systemic risk. They took down not only themselves but global markets.

Wednesday, February 10, 2010

Greece: the Willful Teenager of Europe

I love Greece, and I love the Greek people. They are warm and friendly and proud and intelligent. And they are as crooked as the day is long. That is part of their culture. So when Greece joined the EU and somehow squirmed in to the Eurozone, Europe should probably have known that it could cause a problem one day. Greece is like a willful teenager who is making drugs out of cough syrup in his bedroom. You ignore him and one day he is under arrest for running a meth lab. You had no idea, you say. But deep down you did.
The Greeks have known forever that their civil servants and government are crooked. But they shrug their shoulders and get on with their work. They have their families and their friends and their holidays to pay for. I worked for a Greek-nationality shipowner where I learned how easy it is to cheat the system. His office was in London, his ships were registered in Liberia, his crews were Venezuelan - paid in cash (often by me) - and only the Captains were Greek. Usually a family member.
A Greek friend once told me that there are no homeless Greeks. Someone in their family will take them in. It is a matter of pride. (All of the homeless that we saw in Athens were Albanians, according to him.) So if you have to cheat the system a little or give your brother a job that he is eminently unqualified for, that's what it takes to get by.  Their motto should be 'whatever it takes'.
And now the cushiest of cushy numbers, Greek union jobs, are under threat. The government wants to - gasp! - cut wages and hours. Strikes are rampant. But inevitably some union member's brother or father or sister works for the President or the Greek Parliament or a person of power, and words will be had. And things will go back to 'normal'. Meanwhile Germany will pretend to be Ben Bernanke and bail them out. Maybe the Greeks are more like Goldman Sachs than like teenagers.........

Friday, February 5, 2010

Men Behaving Badly

Nearly one and a half years have passed since unregulated credit derivatives nearly took the world's economies down. The lessons were supposedly learned, the regulators informed and armed to respond. And what happens? Most of the largest investment banks - now commercial banks (for the moment) - pay themselves massive bonuses for a year's growth fueled by TARP money. Stock markets rally by 50% or more fueled by high frequency trading and blind optimism. Regulators hem and haw about losing business to other countries and fudge reform until it is unrecognizable as such. And everyone - mostly CNBC it has to be said - is happy. Then along comes President Obama and his henchman Paul Volcker to take away the punchbowl just as the party is starting. They advocate real reform in the guise of the old Glass-Steagall Act, and the party starts to fizzle out. Is it their fault? No. The men - and they are mostly men - behaving badly are the CEOs and MDs and traders in the very banks and firms that were behaving badly a year and a half ago. And they don't seem to have got the point that the people are fed up with them. In the past two days alone there are some egregious examples of greed and bad taste to support my argument.
First, Michael Spencer, founder and CEO of ICAP, took 45 million pounds out of the business just as he prepared a profit warning. Saying it was to support City Index - a legal (in the UK) gambling business - is no excuse. (He should have quietly taken a bet at City Index that his share prices would fall and covered the whole 45 million - then replaced it.)
Second, Bank of America's senior executives were warned to disclose Merrill Lynch's mounting losses just two days before the shareholders were due to vote on the acquisition. According to NY attorney-general Andrew Cuomo's investigation, they ignored the advice.
Third, bank lobbyists are lining up to tackle their favorite Senators and Congressmen on the Hill to get them to water down, or kill, the Volcker Rule. Even as CME Group says it won't really have a negative impact on volumes.
And fourth, although this is a smaller story, the rumored sale of CEP provider Aleri to Sybase prompted a competitor to offer a sort of 'cash for clunkers' program. StreamBase sent out a press release saying that it was unlikely Sybase would maintain Aleri's products, so it very generously offered to trade them in for StreamBase’s under the an "Amnesty Program". Can you say "opportunistic"? Someone sent me this photo to illustrate:

Tuesday, February 2, 2010

Newspapers gone mad

Much like the music industry, the newspaper industry is finding out a day late and a dollar too short that its business model sucks. But, again like the music industry, very few have a clue how to go forward. The good old days of beat reporters getting the news, setting it into type, printing and distributing it are over. The internet has destroyed its value by distributing the news online - and mostly for free. The papers are hitting back, but it may be too late. Rupert Murdoch is busting a gut to figure out how to make the Wall Street Journal purchase pay off. He is even breaking up the old Dow Jones empire, selling off golden nuggets like the Dow Jones Index service, to do it. And trying to charge for online content which - to be honest - is like trying to shoot a flying fish with a pop gun. The NY Times is also going to try. And the FT just told me I have to pay to see content online after the first 10 stories, even while I pay for my home delivery of the newspaper. I am not considered a 'subscriber' unless I pay for both. But I can find the FT articles copied onto any number of websites, so....
The papers are terrified because bloggers on Seeking Alpha and real-time websites such as Dealbreaker (which the NYT wisely bought) and Breakingviews (ditto Reuters) are the first go-to for financial markets players. Some of these can even get away with charging for content - but it can only happen when the content is not available anywhere else.