From here: After all, Madoff’s scheme -- at least in spirit, if not in its nefarious intent -- wasn’t much different than the business models at some of the nation’s largest failed financial institutions. Back in May, four months before it collapsed, American International Group Inc. increased its dividend at the same time it unveiled plans to raise $12.5 billion in capital. Later, when its cash ran out, AIG got a government bailout, the size of which has expanded to about $150 billion.
Whether you call that a Ponzi scheme or something less sinister, AIG was paying old investors with money raised from new investors. The same could be said of many banks that blew through billions of dollars in freshly raised capital the past couple of years, continuing to pay large dividends even as their balance sheets quietly imploded.
Showing posts with label wall street shenanigans. Show all posts
Showing posts with label wall street shenanigans. Show all posts
Thursday, December 18, 2008
Pervasive Ponzi(ness)
The more I start to understand the methods employed by Wall Street firms to achieve profits, the more I am convinced that grandfather Madoff might not be the only one running a Ponzi scheme…
Wednesday, December 17, 2008
Wall Street Ponzi
Tom Friedman sees no difference between the Ponzi scheme run by Mr. Madoff and the Ponzi scheme run by Wall Street. I could not agree more.
I have no sympathy for Madoff. But the fact is, his alleged Ponzi scheme was only slightly more outrageous than the “legal” scheme that Wall Street was running, fueled by cheap credit, low standards and high greed. What do you call giving a worker who takes only $14,000 a year a nothing-down and nothing-to-pay-for-two-years mortgage to buy a $750,000 home, and then bundling that mortgage with 100 others into bonds — which Moody’s or Standard & Poors rate AAA — and then selling them to banks and pension funds the world over? That is what our financial industry was doing. If that isn’t a pyramid scheme, what is?
Thursday, December 11, 2008
'Tis the season
As the annual bonus tree blooms again on Wall Street, firms that were used to making multimillion dollar payouts to incompetant bankers are finally making some practical changes to their compensation structures.
But it was Morgan Stanley’s claw-back announcement, which will affect some 7,000 workers, that captured the attention of employment lawyers and recruiters. It is similar to a rule introduced by UBS, the big Swiss bank, in late November, but Morgan’s is far broader in its language. Pay can be retracted from workers who engage in “conduct detrimental to the firm,” according to an internal memorandum announcing the move, or who cause “a restatement of results, a significant financial loss or other reputational harm.”
Morgan Stanley already holds on to 35 to 60 percent of high earners’ bonuses, but in the past it has held that money entirely in stock and stock options. Now a large portion will be cash, the bank said. “So if you’re a trader and you’ve had a huge year and you get paid a lot of money and then the following year it turns out you were taking outsize risk, we can go back and ding your pay from the year before,” said
Jeanmarie McFadden, a spokeswoman for Morgan Stanley.
Thursday, November 06, 2008
Bonus reductions
Projected bonus cuts on Wall Street here. About time those millions were cut (in my view) and redistributed. Of course, some of this might be companies posturing to the market in the hope of driving up stock prices. The same strategy employed when companies announce layoffs... Has anyone gone back a year later to some of these companies that garner headlines when they project layoffs and asked them exactly how much they laid off or exactly how much they cut bonuses? No. I am sure not. Yes, posturing for the markets is an important aspect of this exercise...
Monday, September 15, 2008
Using more of our money… Bail Baby, Bail!
On April Fools day of this year, I wrote about a money spigot opened up by the Fed that allowed investment banks on Wall Street to drive by and borrow any amount that they wished from the Feds sans rigorous oversight or regulation. The rate of drawing from the spigot was about $33 billion a day then – I do not have the numbers for now. The ostensible reason for this largesse was to preserve 'financial liquidity' and make sure that the major players on the Street have enough money to perform their complex dalliances and ensuring year end bonuses.
This weekend, we witnessed multiple events that almost looks like an automatic structural re-adjustment of the financial industry. The spectacularly predictable failure of Lehman. Merrill rushing into the waiting hands of its suitor, Bank of America and AIG (the biggest insurance company in the world) gasping for air as it asks the Fed for $40 billion in restructuring costs.
Well, the common sense would dictate the following: Hey, these companies played poker with the money entrusted to them and during the process of carving up mortgages into complex financial instruments that no-one understood, they were setting themselves for failure. Let the structural adjustment happen, let the financially unsound institutions fail, as soon as the bad apples amongst the lot is weeded out and we should see the bottom of this thing - Or so, one might think.
Well, the Fed thinks otherwise. In a sign of continuing largesse and misfired blanks from Paulson’s bazooka, the Fed has opened up newer spigots of money to Wall Street banks.
From here:
In an obscure but highly important announcement late Sunday evening, the Fed said it would let Wall Street firms post as collateral much riskier assets — including equities, junk bonds, subprime mortgage-backed securities and even whole mortgages — in exchange for emergency loans through the Primary Dealer Credit Facility.
But with the new announcement, the Fed will accept stocks and some debt that has junk-bond status and some securities that may have few real buyers.
Well, now they are ready to accept junk bonds from distressed companies on Wall Street. Wonder what is next.
What amazes me is that we have just peeled some preliminary skin off the mortgage mess. We are only witnessing the fallout from a type of mortgage called 'sub-prime'. Mortgages of lesser toxicity sit waiting for their turn to wreck havoc – an example of such a mortgage is called 'Alt-A'.
From here:
Homeowners lured by low introductory rates to Alt-A mortgages, which typically require little or no proof of a borrower's income, may fuel the next wave of foreclosures and further delay a recovery from the worst housing decline since the 1930s. Almost 16 percent of securitized Alt-A loans issued since January 2006 are at least 60 days late, data compiled by Bloomberg show. Defaults will accelerate next year and continue through 2011 as these loans hit their three- and five-year reset periods
About 3 million U.S. borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding, according to Inside Mortgage Finance, a trade publication in Bethesda, Maryland. Of the Alt-A borrowers, 70 percent may have exaggerated their income, said David Olson, president of mortgage research firm Wholesale Access in Columbia, Maryland.
Wonder what the Fed will do when the bottom on the Alt-A mortgage market fall out. I guess we all have a simple enough answer: Use more of our money… Bail Baby, Bail! 
This weekend, we witnessed multiple events that almost looks like an automatic structural re-adjustment of the financial industry. The spectacularly predictable failure of Lehman. Merrill rushing into the waiting hands of its suitor, Bank of America and AIG (the biggest insurance company in the world) gasping for air as it asks the Fed for $40 billion in restructuring costs.
Well, the common sense would dictate the following: Hey, these companies played poker with the money entrusted to them and during the process of carving up mortgages into complex financial instruments that no-one understood, they were setting themselves for failure. Let the structural adjustment happen, let the financially unsound institutions fail, as soon as the bad apples amongst the lot is weeded out and we should see the bottom of this thing - Or so, one might think.
Well, the Fed thinks otherwise. In a sign of continuing largesse and misfired blanks from Paulson’s bazooka, the Fed has opened up newer spigots of money to Wall Street banks.
From here:
In an obscure but highly important announcement late Sunday evening, the Fed said it would let Wall Street firms post as collateral much riskier assets — including equities, junk bonds, subprime mortgage-backed securities and even whole mortgages — in exchange for emergency loans through the Primary Dealer Credit Facility.
But with the new announcement, the Fed will accept stocks and some debt that has junk-bond status and some securities that may have few real buyers.
Well, now they are ready to accept junk bonds from distressed companies on Wall Street. Wonder what is next.
What amazes me is that we have just peeled some preliminary skin off the mortgage mess. We are only witnessing the fallout from a type of mortgage called 'sub-prime'. Mortgages of lesser toxicity sit waiting for their turn to wreck havoc – an example of such a mortgage is called 'Alt-A'.
From here:
Homeowners lured by low introductory rates to Alt-A mortgages, which typically require little or no proof of a borrower's income, may fuel the next wave of foreclosures and further delay a recovery from the worst housing decline since the 1930s. Almost 16 percent of securitized Alt-A loans issued since January 2006 are at least 60 days late, data compiled by Bloomberg show. Defaults will accelerate next year and continue through 2011 as these loans hit their three- and five-year reset periods
About 3 million U.S. borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding, according to Inside Mortgage Finance, a trade publication in Bethesda, Maryland. Of the Alt-A borrowers, 70 percent may have exaggerated their income, said David Olson, president of mortgage research firm Wholesale Access in Columbia, Maryland.
Wonder what the Fed will do when the bottom on the Alt-A mortgage market fall out. I guess we all have a simple enough answer: Use more of our money… Bail Baby, Bail!
Tuesday, April 01, 2008
Insult to injury
I had lamented here earlier that we were not doing enough to regulate investment banks while opening up the 33 billion dollar a day money spigot for them with easy lending terms and little or no regulatory framework. Well, the Treasury Secretary Henry M. Paulson Jr. yesterday laid out a plan to overhaul the regulatory apparatus that oversees our nation’s financial system.
New York Times calls it 'dead on arrival'. I humbly agree.
Instead of greater regulation, the plan seems to buttress deregulation: One of the changes that Wall Street wants had wanted for years was for regulators to shift from being the rules police to looser “principles” based interpretations people - always a recipe for disaster - and it seems that this latest move by the Secretary seems to do just that. More details here.
The best reaction that I had read to the plan came from a statement issued by the Consumer Federation of America. The last sentence is telling and damning.
“Rolling out this plan in the middle of the current crisis is like telling Hurricane Katrina victims stranded on their rooftops in New Orleans, ‘Don’t worry, if you can hold for a few years, we’ve got a really great plan to restructure the federal emergency response system’"
“This plan had its genesis in Secretary Paulson’s conviction that overregulation and inefficient regulation were hurting the global competitiveness of U.S. markets. In fact, experience has repeatedly shown that regulatory failure, not overregulation, is the greatest threat to the health of our markets."
Placido Costanzi (1702 - 1759), ‘Justice and Temperance triumphant over Vice’, oil on canvas, 24” X 29” (Photo from a Christie’s auction book)
New York Times calls it 'dead on arrival'. I humbly agree.
Instead of greater regulation, the plan seems to buttress deregulation: One of the changes that Wall Street wants had wanted for years was for regulators to shift from being the rules police to looser “principles” based interpretations people - always a recipe for disaster - and it seems that this latest move by the Secretary seems to do just that. More details here.
The best reaction that I had read to the plan came from a statement issued by the Consumer Federation of America. The last sentence is telling and damning.
“Rolling out this plan in the middle of the current crisis is like telling Hurricane Katrina victims stranded on their rooftops in New Orleans, ‘Don’t worry, if you can hold for a few years, we’ve got a really great plan to restructure the federal emergency response system’"
“This plan had its genesis in Secretary Paulson’s conviction that overregulation and inefficient regulation were hurting the global competitiveness of U.S. markets. In fact, experience has repeatedly shown that regulatory failure, not overregulation, is the greatest threat to the health of our markets."
Placido Costanzi (1702 - 1759), ‘Justice and Temperance triumphant over Vice’, oil on canvas, 24” X 29” (Photo from a Christie’s auction book)Monday, March 17, 2008
On why Bear Stearns should have failed this time
For all the talk about 'government is the problem' and 'too much regulation stifles the free market', the events that unfolded over the weekend saw the government actually financing the purchase of a troubled investment bank (Bear Sterns) through a conduit (JP Morgan Chase) leaving one to believe ardently in the fact that, more, if not an excessive oversight of the financial markets would be the medicine for the boom-bust cycle that we seem to be living through (with a cyclic frequency approaching the 10 year mark - the last one I remember was the dot com bust).
The government yesterday evening, decided to underwrite the take-over of a troubled investment bank on Wall Street in the hopes that rescuing this one might stave off further collapse of the financial system. While, it is well intentioned, this has left me pondering on these open unanswered questions:
- In bailing out some of the key stakeholders of the financial system, isn’t the government also bailing out some of the same people who led us into this mess (people who lived and got their bonuses through promising people easy homes with no money down, interest only payments and adjustable rate mortgages)?
- By bailing out banks and institutional players in the industry, is the government also helping to prop up what might be a house of cards built upon the mortgage bubble? Shouldn’t the government just sit and wait this one out and let the structural readjustment process bring the hype to what the markets can nominally sustain? Isn’t the government just putting off for another day what might have happened today (a normal structural adjustment to prevailing levels)?
- Aren’t we, in effect, playing dice with 'free-market / market-knows-best’ principles that was embraced in better times but thrown to the winds at the first sign of trouble?
As this and other questions swirl in my mind, it is worth reading excerpts from the op-ed column by Paul Krugman in today’s Times
Between 2002 and 2007, false beliefs in the private sector — the belief that home prices only go up, that financial innovation had made risk go away, that a triple-A rating really meant that an investment was safe — led to an epidemic of bad lending. Meanwhile, false beliefs in the political arena — the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing — led Washington to ignore the warning signs.
The result of all that bad lending was an unholy financial mess that will cause trillions of dollars in losses. A large chunk of these losses will fall on financial institutions: commercial banks, investment banks, hedge funds and so on.
Nobody expects an investment bank to be a charitable institution, but Bear has a particularly nasty reputation. As Gretchen Morgenson of The New York Times reminds us, Bear “has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach.”
Bear was a major promoter of the most questionable subprime lenders. It lured customers into two of its own hedge funds that were among the first to go bust in the current crisis. And it’s a bad financial citizen: the last time the Fed tried to contain a financial crisis, after the collapse of Long-Term Capital Management in 1998, Bear refused to participate in the rescue operation.
Bear, in other words, deserved to be allowed to fail — both on the merits and to teach Wall Street not to expect someone else to clean up its messes.
At the time of writing this, the markets and futures are still falling globally, the Federal Reserve further cut the overnight lending rate and the New York Stock Exchange just opened with a 150 point drop in the DOW.
The government yesterday evening, decided to underwrite the take-over of a troubled investment bank on Wall Street in the hopes that rescuing this one might stave off further collapse of the financial system. While, it is well intentioned, this has left me pondering on these open unanswered questions:
- In bailing out some of the key stakeholders of the financial system, isn’t the government also bailing out some of the same people who led us into this mess (people who lived and got their bonuses through promising people easy homes with no money down, interest only payments and adjustable rate mortgages)?
- By bailing out banks and institutional players in the industry, is the government also helping to prop up what might be a house of cards built upon the mortgage bubble? Shouldn’t the government just sit and wait this one out and let the structural readjustment process bring the hype to what the markets can nominally sustain? Isn’t the government just putting off for another day what might have happened today (a normal structural adjustment to prevailing levels)?
- Aren’t we, in effect, playing dice with 'free-market / market-knows-best’ principles that was embraced in better times but thrown to the winds at the first sign of trouble?
As this and other questions swirl in my mind, it is worth reading excerpts from the op-ed column by Paul Krugman in today’s Times
Between 2002 and 2007, false beliefs in the private sector — the belief that home prices only go up, that financial innovation had made risk go away, that a triple-A rating really meant that an investment was safe — led to an epidemic of bad lending. Meanwhile, false beliefs in the political arena — the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing — led Washington to ignore the warning signs.
The result of all that bad lending was an unholy financial mess that will cause trillions of dollars in losses. A large chunk of these losses will fall on financial institutions: commercial banks, investment banks, hedge funds and so on.
Nobody expects an investment bank to be a charitable institution, but Bear has a particularly nasty reputation. As Gretchen Morgenson of The New York Times reminds us, Bear “has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach.”
Bear was a major promoter of the most questionable subprime lenders. It lured customers into two of its own hedge funds that were among the first to go bust in the current crisis. And it’s a bad financial citizen: the last time the Fed tried to contain a financial crisis, after the collapse of Long-Term Capital Management in 1998, Bear refused to participate in the rescue operation.
Bear, in other words, deserved to be allowed to fail — both on the merits and to teach Wall Street not to expect someone else to clean up its messes.
At the time of writing this, the markets and futures are still falling globally, the Federal Reserve further cut the overnight lending rate and the New York Stock Exchange just opened with a 150 point drop in the DOW.
Tuesday, February 12, 2008
What afflicts us...
Normally, I do not pay too much attention to those annoying forwarded emails one gets in their inboxes. Most times, I delete them without much thought. This one I decided to read on... (especially in light of news like this).
------------------------------------------------------------------------------------
A Japanese company and an American company decided to have a canoe race on the Missouri River. Both teams practiced long and hard to reach their peak performance before the race.
On the big day, the Japanese won by a mile.
The Americans, very discouraged and depressed, decided to investigate the reason for the crushing defeat. A management team made up of senior management was formed to investigate and recommend appropriate action. Their conclusion was the Japanese had 8 people rowing and 1 person steering, whi le the American team had 8 people steering and 1 person rowing.
Feeling a deeper study was in order, American management hired a consulting company and paid them a large amount of money for a second opinion. They advised, of course, that too many people were steering the boat, while not enough people were rowing.
Not sure of how to utilize that information, but wanting to prevent another loss to the Japanese, the rowing team's management structure was totally reorganized to 4 steering supervisors, 3 area steering superintendents and 1 assistant superintendent steering manager. They also implemented a new performance system that would give the one person rowing the boat greater incentive to work harder. It was called the 'Rowing Team Quality First Program,' with meetings, dinners and free pens for the rower. There was discussion of getting new paddles, canoes and o ther equipment, extra vacation days for practices and bonuses.
The next year the Japanese won by two miles.
Humiliated, the American management laid off the rower for poor performance, halted development of a new canoe, sold the paddles, and canceled all capital investments for new equipment. The money saved was distributed to the senior executives as bonuses and the next year's racing team was out-sourced to India.
Note: Ford has spent the last thirty years moving all its factories out of the US , claiming they can't make money paying American wages. Toyota has spent the last thirty years building more than a dozen plants inside the US. The last quarter's results: Toyota makes 4 billion in profits while Ford racked up 9 billion in losses.
------------------------------------------------------------------------------------
A Japanese company and an American company decided to have a canoe race on the Missouri River. Both teams practiced long and hard to reach their peak performance before the race.
On the big day, the Japanese won by a mile.
The Americans, very discouraged and depressed, decided to investigate the reason for the crushing defeat. A management team made up of senior management was formed to investigate and recommend appropriate action. Their conclusion was the Japanese had 8 people rowing and 1 person steering, whi le the American team had 8 people steering and 1 person rowing.
Feeling a deeper study was in order, American management hired a consulting company and paid them a large amount of money for a second opinion. They advised, of course, that too many people were steering the boat, while not enough people were rowing.
Not sure of how to utilize that information, but wanting to prevent another loss to the Japanese, the rowing team's management structure was totally reorganized to 4 steering supervisors, 3 area steering superintendents and 1 assistant superintendent steering manager. They also implemented a new performance system that would give the one person rowing the boat greater incentive to work harder. It was called the 'Rowing Team Quality First Program,' with meetings, dinners and free pens for the rower. There was discussion of getting new paddles, canoes and o ther equipment, extra vacation days for practices and bonuses.
The next year the Japanese won by two miles.
Humiliated, the American management laid off the rower for poor performance, halted development of a new canoe, sold the paddles, and canceled all capital investments for new equipment. The money saved was distributed to the senior executives as bonuses and the next year's racing team was out-sourced to India.
Note: Ford has spent the last thirty years moving all its factories out of the US , claiming they can't make money paying American wages. Toyota has spent the last thirty years building more than a dozen plants inside the US. The last quarter's results: Toyota makes 4 billion in profits while Ford racked up 9 billion in losses.
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