Capital Markets - News and analysis

Alan Greenspan recently published a paper, The Crisis, by Alan Greenspan, President Greenspan Associates LLC, March 9, 2010, dealing in a very informative way with the financial crisis and potential measures to avoid future crises.

Harvard's G. Mankiw has written a very respectful commentary on the paper. Both Greenspan's paper and Mankiw' commentary are a must read!

We have had a post about the relationship between economic freedom and economic growth. The post had a quote from Bergh and Karlsson:

"Finally, we find that the negative effect of government size decreases substantially in size but remains significant when we add the period 1996-2005 to the sample. Our results support the idea that countries with big government can use institutional quality such as economic freedom and globalization to mitigate negative growth effects of taxes and public expenditure."

If there is an area where institutional quality heavily contributes to well functioning markets it definitely is capital market oversight as (should) be done by the SEC. Too many fraud cases contribute to the growth of leftist ideas.

There is a series on BigThink called "Is Wall Street overstepping?" Here is Nestlé's president Peter Brabeck's contribution:

FT: Hedge fund reform talks collapse, March 16, 2010

European Union finance ministers on Tuesday abandoned efforts to get a compromise deal over the EU’s controversial proposals to reform hedge funds and private equity.

Spain, which holds the rotating EU presidency, withdrew the issue from the agenda of Tuesday morning’s meeting after 11th-hour negotiations failed to overcome hurdles, including strong British opposition to aspects of the proposed regulation.

Spanish diplomats said they hoped to agree a proposed compromise deal before the end of the presidency in June. read more

The Making of an Investment Banker: Stock Market Shocks, Career Choice, and Lifetime Income, by Paul Oyer, Stanford, 2008

Michael Lewis, ex invesment banker and bestselling author, says in a CBS interview that the people at Wall Street are not all criminals but that there has been a tremdendous mass delusion. Here are Lewis' original words:

"I think the story is much more interesting than that," he said during an interview on CBS's 60 Minutes. "I think it's a story of mass delusion. The incentives for people on Wall Street got so screwed up, that the people who worked there became blinded to their own long term interests. And because the short term interests were so overpowering. And so they behaved in ways that were antithetical to their own long term interests."

Lewis is most probably getting to the center of the problem. Here you can watch part 1 and part 2 of the Lewis interview:

Find here a collection of ascorted links to the Lehman, potential fraud problem:

Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner¡¯s Report; Jenner & Block is providing links to the Report of the Examiner in the Chapter 11 proceedings of Lehman Brothers Holdings Inc.

Here is an excerpt from the summary of the report:

"Contemporaneous Lehman e-mails describe the function called repo 105 whereby you can repo a position for a week and it is regarded as a true sale to get rid of net balance sheet. Lehman used Repo 105 for no articulated business purpose except to reduce balance sheet at the quarter end. Rather than sell assets at a loss, Repo 105 increase would help avoid this without negatively impacting our leverage ratios.Lehman's Global Financial Controller confirmed that the only purpose or motive for [Repo 105] transactions was reduction in the balance sheet and that there was no substance to the transactions. Lehman did not disclose its use - or the significant magnitude of its use -of Repo 105 to the Government, to the rating agencies, to its investors, or to its own Board of Directors. Lehman's auditors, Ernst&Young, were aware of but did not question Lehman's use and nondisclosure of the Repo 105 accounting transactions."

Wall Street Journal: Repos Played a Key Role in Lehman's Demise; Report Exposes Lack of Information and Confusing Pacts With Lenders, March 13, 2010

Wall Street Journal: Financial Crisis May Reach Auditors, March 14, 2010

Guardian: Auditors face inquiry call after Lehman revelations; MPs and financial experts demand regulators reform industry in effort to eliminate risky practices, March 14, 2010

NYT: Auditor Could Face Liability in Lehman Case, March 14, 2010

Economist: A postmortem on Lehman Brothers, Oh, brother, Shining a harsh light on Lehman¡¯s bankruptcy, March 12, 2010

paper

FT: EU seeks compromise on hedge fund rules, March 14, 2010

European Union finance ministers will attempt on Tuesday to strike a compromise on regulating the hedge fund and private equity industries, widely blamed in Europe for contributing to the worst financial crisis since the 1930s.

Spain, the holder of the EU’s rotating presidency, is pressing for a definitive agreement at the ministers’ meeting in Brussels, so that the European parliament can convert the proposals into law before the end of this year.

The French and German governments are strong supporters of the draft legislation, known as the Alternative Investment Fund Managers Directive, but the UK fears that the proposals may disrupt the operations of London-based hedge funds. read more read more

Here is a story about a firm which had systemic relevance...

It seems to be a quite obvious finding that marriage, which is a quite safe asset for women, does make them less risk-averse:

VOX: Are married women less risk averse? If so, why? by Graziella Bertocchi, Marianna Brunetti, Costanza Torricelli, March 13, 2010

Does marriage make people less risk averse? This column argues that this is the case for women, but not for men. But the different attitudes to risk for married women have reduced over time as the prevalence of marriage in society has faded. For women who work, marriage makes no difference. read more

Guardian: Lehman Brothers bosses could face court over accounting 'gimmicks'; Former chief Dick Fuld and accountants Ernst & Young criticised in 2,200-page report; Claims that buyer Barclays received assets it was not entitled to; Fuld tried to involve Gordon Brown to fast-track Barclays rescue, March 12, 2010

A court-appointed US bankruptcy examiner has concluded that there are grounds for legal claims against top Lehman Brothers bosses and auditor Ernst & Young for signing off misleading accounting statements in the run-up to the collapse of the Wall Street bank in 2008 which sparked the worst financial crisis since the Great Depression. read more

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

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

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

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...

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.