Monday, July 26, 2010

More Reform Needed

The financial regulatory reform law is now in effect. It contains over 2,000 pages. As reported in the press, the big parts seem to be improvements, but I wonder what's buried in the fine print. That's where the lobbyists work their "magic" aka corruption. A lot of the responsibility for how this law will work falls to investors. Investors need to reject any taints of sleaze on Wall Street and to stop swallowing the smooth talking sugar offered by Street salesmen. Today's FT provides a good example.

FT: "Private equity groups were accused on Monday of producing disappointing returns while charging their investors fat fees amid glaring conflicts of interest in one of the most scathing critiques of the industry published to date. The attack makes the case that the industry has underperformed stock markets, taken excessive risks and overcharged investors. ... Buy-outs are “just another variation on the theme of ‘heads they win, tails you lose’, says Peter Morris, its author and a former Morgan Stanley banker."

Most "private equity" is a sham and does nothing except leverage up a company to extract tax benefits of debt, pay a fat fee to the fund managers, and then flip the company back out to the public. Nothing significant is done to improve the company's operations. If the deal is poor, the fund managers still get their 2% "management" fee while investors gets stuck with the losses.

The proper investor response is to NOT invest in private equity and don't buy IPOs from ANY buyout group. Stop playing their game and don't be a sucker for their snake oil.

Banks ?

Are the big banks really 'banks' any more, or are they just trading houses ?

FT: (re information requested by Congress from Goldman Sachs about derivatives) "Mr Angelides [the crisis investigative committee chairman] said he remained sceptical that Goldman did not have the derivatives information, given the bank’s reputation for risk management and its discipline in marking the value of every position daily. “It’s not credible that that’s a black hole,” Mr Angelides said. “It defies logic that these institutions have no clue of how much money they are making or losing from these derivatives.”

The information was vital, he said, because it would help explain how Wall Street had evolved along with the use and complexity of derivatives. “These banks have become trading operations,” he said. “This is essential information. It’s the centre of their business.”
That is the problem, said Brad Hintz, an analyst with Sanford Bernstein. The ubiquity of derivatives changed the way banks tracked trading risks and, eventually, how they structured their businesses.

“Over the years the model of a separate derivatives book became a very dated model for trading,” Mr Hintz said. “Can I really take the profitability of the corporate bond desk out of the derivatives desk?

These 'banks' suck in a huge share of deposits of the public and corporations then use the money to speculate and trade in Wall Street. Their loan departments are mostly a sham. The 'banks' core operations are now trading securities and speculating in derivatives. Public money on deposit that should be loaned to small business in communities is being sent to Wall Street to fund "trading operations". I worry that Congress missed this diversion of money and the new law will not help resuscitate lending to small and medium business that creates the jobs in America.


Doing nothing. Krypto waits to sell higher or buy lower. The S&P year to date return is 0.24% Krypto is beating that handily. Good doggie, here's your fee - a tasty dog biscuit.

Word of the Day

"Eschaton" - noun [$10]
Eschaton means the final things in the order of time. [Often used in theology regarding what is to happen at the end of time.]
Sentence: Despite both being over 2,000 pages and the subject of countless hours of Congressional bloviation, neither the financial regulatory reform law nor the health care reform law comes close to containing the eschaton of their subject matters. Congress forgot the KISS principal: Keep It Simple, Stupid.

[ Bman stumped the Google spell checker again with 'eschaton' and 'bloviation' :)) ]


Frosty said...

atta girl Krypto...prop trading doa commercial banks...GS goes private lil over book...go ahead, let's here the anti semitic rant...make mel gibson proud sir.

Bunkerman said...

lol, tomorrow I post a photo of me in action in VT ... just so you know what you'll be up against here if you dare to come across my KZ.

Frosty said...

what ya sellin Krypto...time for some milk boners?

Bunkerman said...

no selling yet ... waiting for higher prices.

this is not too far from prior sales.

Frosty said...

very unpiranha like sir...must still be basking in the glow of smokin dirty lil japs.

Frosty said...

hhmmm...must be rolled up in an afgan takin a napper.

Bunkerman said...

haha, nope ... cleaning the "equipment"