MarketObservation.com

This could be a good complementary service to the conventional rating agencies.

Guardian: Brussels targets derivatives to help euro; José Manuel Barroso says European commission considering ban on credit default swaps to ease market pressure on Greece, March 9, 2010

The European commission announced moves today to shore up the euro and ward off market pressure on Greece by considering a ban on complex derivatives allegedly being used to undermine the single currency.

The draconian move suggested by José Manuel Barroso, commission president, follows a joint campaign by the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, for a prompt clampdown on credit default swaps (CDS). read more

Spiegel Online International: The Fundamental Flaw of Europe's Common Currency, March 9, 2010

The euro is under attack like never before, as the promises on which it was based turn out to be lies. Hedge funds are speculating against Greek debt, while euro-zone politicians work behind the scenes to cobble together rescue packages. But fundamental flaws in the monetary union need to be fixed if Europe's common currency is to survive. read more

WSJ: Worries Rebound on Bull's Birthday, March 9, 2010

"Investors celebrating the new bull market's first birthday on Tuesday may remember a less happy milestone on Wednesday: the 10-year anniversary of the peak of the technology-stock bubble.

The great debate among stock-market analysts these days is whether the market has finally worked off years of excessive prices and can return to steady growth."...


Even heavy weights such as J. Siegel and R.J. Shiller see the state of the market differently:

"Mr. Shiller worries that the housing market could be turning down after a brief recovery, which could contribute to a decline in U.S. stocks, which already look expensive to him. "I wonder about a return to another break in the market," he says, though he notes the market is far less expensive today than when he wrote his book."...

"Mr. Siegel scoffs at his friend's concerns—and at his numbers. "This is an extremely cheap market," he says, and its future is bright."...

It is worth to read the whole article in the Wall Street Journal

Who ever tells that Fannie and Freddie were not an enhancing element of the US financial crisis..

Bloomberg: Fannie, Freddie Ask Banks to Eat Soured Mortgages, March 5, 2010

Fannie Mae and Freddie Mac may force lenders including Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages.

That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says U.S. banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.

Sooner or later retaliating European countries might need parties who make markets liquid...Where does speculation begin and long-term investing end?

Guardian: Europe bars Wall Street banks from government bond sales; Leading US banks blamed for triggering financial crisis; Policymakers propose a rival European monetary fund, March 8, 2010

European countries are blocking Wall Street banks from lucrative deals to sell government debt worth hundreds of billions of euros in retaliation for their role in the credit crunch.

For the first time in five years, no big US investment bank appears among the top nine sovereign bond bookrunners in Europe, according to Dealogic data compiled for the Guardian. Only Morgan Stanley ranks at number 10.

Goldman Sachs doesn't make the table. Goldman made it to number five last year and in 2006, and number eight in 2007, the data shows. JP Morgan was in the top ten last year and in 2007 and 2006 but doesn't appear this year.

"Governments do not have the confidence that the excessive risk-taking culture of the big Wall Street banks has changed and they still cannot be trusted to put the stability of the financial system before profit," said Arlene McCarthy, vice chair of the European parliament's economic and monetary affairs committee. "It is no surprise therefore that governments are reluctant to do business with banks that have failed to learn the lesson of the crisis. The banks need to acknowledge the mistakes that were made and behave in an ethical way to regain the trust and confidence of governments." read more

In his latest New York Times article Paul Krugman argues with the question of what we really know about the financial crisis:

NYT: An Irish Mirror, by Paul Krugman, March 7, 2010

Everyone has a theory about the financial crisis. These theories range from the absurd to the plausible — from claims that liberal Democrats somehow forced banks to lend to the undeserving poor (even though Republicans controlled Congress) to the belief that exotic financial instruments fostered confusion and fraud. But what do we really know?

Refering to a new irish research paper by Connor and Flavin Krugman points to the deep causal factors that financial crises in the US and Ireland had in common:

"As a new research paper by the Irish economists Gregory Connor, Thomas Flavin and Brian O’Kelly points out, “Almost all the apparent causal factors of the U.S. crisis are missing in the Irish case,” and vice versa. Yet the shape of Ireland’s crisis was very similar: a huge real estate bubble — prices rose more in Dublin than in Los Angeles or Miami — followed by a severe banking bust that was contained only via an expensive bailout.

Ireland had none of the American right’s favorite villains: there was no Community Reinvestment Act, no Fannie Mae or Freddie Mac. More surprising, perhaps, was the unimportance of exotic finance: Ireland’s bust wasn’t a tale of collateralized debt obligations and credit default swaps; it was an old-fashioned, plain-vanilla case of excess, in which banks made big loans to questionable borrowers, and taxpayers ended up holding the bag.

So what did we have in common? The authors of the new study suggest four “ ‘deep’ causal factors.”"

First, there was irrational exuberance: in both countries buyers and lenders convinced themselves that real estate prices, although sky-high by historical standards, would continue to rise.

Second, there was a huge inflow of cheap money. In America’s case, much of the cheap money came from China; in Ireland’s case, it came mainly from the rest of the euro zone, where Germany became a gigantic capital exporter.

Third, key players had an incentive to take big risks, because it was heads they win, tails someone else loses. In Ireland this moral hazard was largely personal: “Rogue-bank heads retired with their large fortunes intact.” There was a lot of this in the United States, too: as Harvard’s Lucian Bebchuk and others have pointed out, top executives at failed U.S. financial companies received billions in “performance related” pay before their firms went belly-up.

Krugman's conclusion on the causes of the US crisis:

"What really mattered was free-market fundamentalism. This is what led Ronald Reagan to declare that deregulation would solve the problems of thrift institutions — the actual result was huge losses, followed by a gigantic taxpayer bailout — and Alan Greenspan to insist that the proliferation of derivatives had actually strengthened the financial system. It was largely thanks to this ideology that regulators ignored the mounting risks."

All cursive text passage are excerpts from Krugman's article above

I do not see big differences between the causes of the Iris and the US financial crises. Both countries had some specific causing factors. I still believe that Fannie and Freddie were one in the US.

Following study for the international book markets implies that a realignment of cross-country consumption levels may require large and persistent exchange rate changes.

VOX: Consumer reactions to exchange rate and trade price shifts: New evidence from online book retailing, by Jean Boivin, Robert Clark, Nicolas Vincent, March 6, 2010

How much of a change in exchange rates is required to redress global imbalances? This column presents new evidence from online bookstores suggesting that neither shoppers nor retailers react to price differences across borders. This implies that realignment of cross-country consumption levels may require large and persistent exchange rate changes.

Over the last few years, the potential consequences of “global imbalances” and their role in the build-up to the current crisis has been the topic of fervent discussion (see for example Obstfeld and Rogoff, 2009).

Eliminating such imbalances could be done through exchange rate movements and indeed, in the case of the US-China imbalance, a revaluation of the renembi has come to be the dominant policy recommendation in the US (see for example Reisen 2009). A weaker dollar, the theory goes, would make US exports cheaper and Chinese exports more expensive and these relative price changes would help balance trade. Yet, for this to happen, markets need to be integrated in the sense that price changes lead to expenditure shifting. If markets are strongly segmented – in the sense that firms and consumers treat the markets as quite distinct with little cross-market interaction – then movements in relative prices will only cause a limited shift in expenditures. read more

We have the impression that it could still be a long way to convince China's senior leaders of a flexible exchange rate to the dollar...or even an appreciation of the renminbi. We will see..

FT: Beijing studies severing dollar peg, March 6, 2010

China’s central bank chief laid the groundwork for an appreciation of the renminbi at the weekend when he described the current dollar peg as temporary, striking a more emollient tone after months of tough opposition in Beijing to a shift in exchange rate policy.

Zhou Xiaochuan, governor of the People’s Bank of China, gave the strongest hint yet from a senior official that China would abandon the unofficial dollar peg, in place since mid-2008. He said it was a “special” policy to weather the financial crisis.

“This is a part of our package of policies for dealing with the global financial crisis. Sooner or later, we will exit the policies.”

Mr Zhou’s comments contrasted with recent Chinese comments on its currency policy in the face of international criticism that the renminbi was undervalued. In December, premier Wen Jiabao said: “We will not yield to any pressure of any form forcing us to appreciate.” Chinese officials have repeatedly emphasised the need for a stable exchange rate.

However, while the recent increase in consumer prices in China has strengthened the hand of those officials who think the currency should now rise, it is not clear that this argument has yet won over the country’s senior leaders. read more

Eugene Fama writes a retrospective on his life in finance. It is also a journey along the theory of finance. His milestones are:

Efficient Markets
Event Studies
Forecasting Regressions
Agency Problems and the Theory of Organizations
Macroeconomics
Corporate Finance
The CAPM
The Three-Factor Model

For finance professionals it is worth to read Fama's contribution. We are looking forward to read his work in the future. The theoretical foundations will continue to play an important role. Even the Efficient Markets Theory...

NYT: China’s Bank Chief Says Currency Is Unlikely to Rise, March 6, 2010

China’s central bank governor indicated Saturday that the government was unlikely to detach the value of China’s currency from that of the dollar anytime soon, echoing Prime Minister Wen Jiabao’s statement on Friday that exchange rates would remain “basically stable” for now.

Many Western economists and leaders, including President Obama, have called for China to let its currency, the renminbi, appreciate against the dollar, arguing that an artificially cheap renminbi increases Chinese exports at the expense of the rest of the world’s economies. read more

NYT: China’s Bank Chief Says Currency Is Unlikely to Rise, March 6, 2010

China’s central bank governor indicated Saturday that the government was unlikely to detach the value of China’s currency from that of the dollar anytime soon, echoing Prime Minister Wen Jiabao’s statement on Friday that exchange rates would remain “basically stable” for now.

Many Western economists and leaders, including President Obama, have called for China to let its currency, the renminbi, appreciate against the dollar, arguing that an artificially cheap renminbi increases Chinese exports at the expense of the rest of the world’s economies. read more

Here is a new Swiss weblog by authors Urs Birchler, Marius Brülhart and Monika Bütler, Professors at the Universities of Zurich, Lausanne and St. Gall

www.batz.ch

Excerpt from Youtube:

Here is the whole interview:

Joseph Stiglitz interviewed by Charlie Rose on March 2, 2010

Related:

This is a Bloomberg background story on one of the alleged players in the Euro attack:

Bloomberg: Cohen Trades Secrecy for Golf With Investors Lured by 30% Gains, Feb. 26, 2010

Here is a summary of the article by Barry Ritholtz:

• Its Stamford, Connecticut trading floor houses 180-people;
• The firm has 800 employees, including 100 portfolio managers;
• The trading floor is kept at precisely 69 degrees year round;
• SAC Capital buys and sells 100 million shares a day — 1% of total US market volume;
• Typical holding periods: 2-30 days;
• SAC’s fees are unusually high: 3/50, versus the industry standard 2/20;
• Cohen dislikes noise, so the phones on the floor don’t ring; they light up;
• SAC has averaged 30% annual returns for 18 years;
• The fund’s leverage is (rumored to be) about 4 to 1;
• 2008 was his lone negative year at -19%;
• SAC manages $12 billion, down from $18 billion at its peak;
• Numerous small teams manage $300-500 million each
• Cohen accounts for 10% of the firm’s profits — years ago, he did all the heavy lifting, accounting for 50% of SAC’s gains.

Related:

EuroIntelligence: “Greek crisis over” – Our ability to delude ourselves has reached the next level, 5.3.2010