From Banks, Brokers, & Bullsh1+ part 1:

A thorough forensic analysis of Goldman Sachs, Bear Stearns, Citigroup, Morgan Stanley, and Lehman Brothers has uncovered...

More on Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture:

From Banks, Brokers, & Bullsh1+ part 1:

A thorough forensic analysis of Goldman Sachs, Bear Stearns, Citigroup, Morgan Stanley, and Lehman Brothers has uncovered...

More on Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture:

Implied volatility for the big banks is down across the board, just about where it was before the system went into convulsions. This implies the coast is clear, as do the share prices of many banks.

Hard core forensic and fundamental analysis implies otherwise. So does the Fed's actions, which still incorporates ZIRP policy, as well as the waffling at FASB. We will either have smooth sailing from this point on out or there is a nasty surprise waiting (on and off balance sheet) for bank investors in the near future. I invite readers to weigh in with their opinions.

image001.png

As you can see, we are just about where we were in 2007 in terms of average volatility. 

Implied volatility for the big banks is down across the board, just about where it was before the system went into convulsions. This implies the coast is clear, as do the share prices of many banks.

Hard core forensic and fundamental analysis implies otherwise. So does the Fed's actions, which still incorporates ZIRP policy, as well as the waffling at FASB. We will either have smooth sailing from this point on out or there is a nasty surprise waiting (on and off balance sheet) for bank investors in the near future. I invite readers to weigh in with their opinions.

image001.png

As you can see, we are just about where we were in 2007 in terms of average volatility. 

I will start posting more news topics of interest and welcome readers to forward research and investment ideas at will. Here is the crop from last week. I will post topics from the weekend later on today, and as usual will randomly comment on daily news events.

From Alliance Bernstein:

  • Core Intermediate Producer Prices have taken 6 months to rise 5.2% annualized, recession of 2002 took 2 years to reach same level
  • Operating Rate hit low of 65.4% last year and has only risen to 69.4%, still short of historical threshold causing rise in raw material prices (74%)
  • Increases in foreign operating rates have started to indicate US may now be a price follower instead of price leader
  • The Fed cited lack of resource utilization as reasoning for maintaining record low rates, as these concerns begin to wane Alliance Bernstein sees easing of emergency Fed policy

Bloomberg.com:

  • Christina Romer, Peter Orszag, and Tim Geithner have predicted unemployment will settle in 2010 at around 9.7%, citing poor job conditions
  • Federal deficit projections for 2011 & 2015 are $1.5 trillion & $751 billion respectively, White House officials cite Bush's medicare and income tax cuts for allowing deficit insanity

I will start posting more news topics of interest and welcome readers to forward research and investment ideas at will. Here is the crop from last week. I will post topics from the weekend later on today, and as usual will randomly comment on daily news events.

From Alliance Bernstein:

  • Core Intermediate Producer Prices have taken 6 months to rise 5.2% annualized, recession of 2002 took 2 years to reach same level
  • Operating Rate hit low of 65.4% last year and has only risen to 69.4%, still short of historical threshold causing rise in raw material prices (74%)
  • Increases in foreign operating rates have started to indicate US may now be a price follower instead of price leader
  • The Fed cited lack of resource utilization as reasoning for maintaining record low rates, as these concerns begin to wane Alliance Bernstein sees easing of emergency Fed policy

Bloomberg.com:

  • Christina Romer, Peter Orszag, and Tim Geithner have predicted unemployment will settle in 2010 at around 9.7%, citing poor job conditions
  • Federal deficit projections for 2011 & 2015 are $1.5 trillion & $751 billion respectively, White House officials cite Bush's medicare and income tax cuts for allowing deficit insanity

The Greek Tragedy is unfolding pretty much as I expected. Readers, at least (if not Greek citizens) should be comforted to hear that things are going as anticipated. From CNBC: Greek Bank Shares Fall on EU Support Worries

Greek bank shares fell more than 4.0 percent on Thursday, underperforming the broader Greek market, on worries Greece may be forced to turn to the IMF to deal with its debt crisis for want of EU aid.

"There are concerns over the lack of concrete EU support and because Greece seems to be dragged towards the last resort, which is the International Monetary Fund," Cyclos Securities analyst Constantinos Vergos said.

Shares in National Bank, which reports full-year results after the market's close, were down 3.8 percent to 15.03 euros, withAlpha Bank shedding 4.1 percent. 

"The IMF scenario was off the table but now seems to be coming back, raising question marks as to what this would entail," said analyst Nikos Koskoletos at EFG Eurobank Securiries.

For those subscribers who didn't get to act on my Greek bank warning a while back (see  Banks exposed to Central and Eastern Europe and  Greek Banking Fundamental Tear Sheet), don't fret. If I continue to be correct, this is but the tip of the iceberg, subscribers see Greece Public Finances Projections). The Greek PM is implicitly backing my analysis: Papandreou Urges EU Emergency Plan After German Officials Suggest IMF Aid

The Greek Tragedy is unfolding pretty much as I expected. Readers, at least (if not Greek citizens) should be comforted to hear that things are going as anticipated. From CNBC: Greek Bank Shares Fall on EU Support Worries

Greek bank shares fell more than 4.0 percent on Thursday, underperforming the broader Greek market, on worries Greece may be forced to turn to the IMF to deal with its debt crisis for want of EU aid.

"There are concerns over the lack of concrete EU support and because Greece seems to be dragged towards the last resort, which is the International Monetary Fund," Cyclos Securities analyst Constantinos Vergos said.

Shares in National Bank, which reports full-year results after the market's close, were down 3.8 percent to 15.03 euros, withAlpha Bank shedding 4.1 percent. 

"The IMF scenario was off the table but now seems to be coming back, raising question marks as to what this would entail," said analyst Nikos Koskoletos at EFG Eurobank Securiries.

For those subscribers who didn't get to act on my Greek bank warning a while back (see  Banks exposed to Central and Eastern Europe and  Greek Banking Fundamental Tear Sheet), don't fret. If I continue to be correct, this is but the tip of the iceberg, subscribers see Greece Public Finances Projections). The Greek PM is implicitly backing my analysis: Papandreou Urges EU Emergency Plan After German Officials Suggest IMF Aid

Monday, 08 March 2010 18:00

The Financial Times' Banker on Bonuses

The Financial Times has published an Op-Ed piece I penned on bonuses in the banking industry. Enjoy!

A bank employee recently asked me: "As a trader, my bonus is derived directly from my profit and loss, which is accrued over the quarter and kept in a separate account. It does not go into the firm's bottom line and then back out to me. Also, like most traders, I accrue 2% of my gains in a loss provision account in case I have a major write-down in the year. My bonus is 10% of my profit for the year. If I make $50m for the year my bonus is $5m. What does my bonus have to do with the mortgage-backed securities [MBS] trader who is sitting on losses? Did I or did I not show a profit of $40m to the firm's bottom line?"

 Main Street is absolutely flabbergasted that bankers do not understand the core issues of this bonus question. Allow me to clearly outline the problem and propose a solution. Assuming this trader works for a prominent US bank that received a bailout, he is not entitled to a $5m bonus if he made $50m for the year. Why not? Because he generated that 10% return from taxpayer capital, not firm capital. For example, Goldman Sachs would have had the drawdown from purgatory had it not been rescued from a $30bn credit default swap deal with AIG.

Let's assume AIG would have negotiated a 40% payout to Goldman Sachs, which is realistic given that litigation with an insolvent company that had many more contingent and direct claims would probably have resulted in a lower net receipt to Goldman. This alone would have resulted in a hole of about $7.8bn for the bank.

Monday, 08 March 2010 18:00

The Financial Times' Banker on Bonuses

The Financial Times has published an Op-Ed piece I penned on bonuses in the banking industry. Enjoy!

A bank employee recently asked me: "As a trader, my bonus is derived directly from my profit and loss, which is accrued over the quarter and kept in a separate account. It does not go into the firm's bottom line and then back out to me. Also, like most traders, I accrue 2% of my gains in a loss provision account in case I have a major write-down in the year. My bonus is 10% of my profit for the year. If I make $50m for the year my bonus is $5m. What does my bonus have to do with the mortgage-backed securities [MBS] trader who is sitting on losses? Did I or did I not show a profit of $40m to the firm's bottom line?"

 Main Street is absolutely flabbergasted that bankers do not understand the core issues of this bonus question. Allow me to clearly outline the problem and propose a solution. Assuming this trader works for a prominent US bank that received a bailout, he is not entitled to a $5m bonus if he made $50m for the year. Why not? Because he generated that 10% return from taxpayer capital, not firm capital. For example, Goldman Sachs would have had the drawdown from purgatory had it not been rescued from a $30bn credit default swap deal with AIG.

Let's assume AIG would have negotiated a 40% payout to Goldman Sachs, which is realistic given that litigation with an insolvent company that had many more contingent and direct claims would probably have resulted in a lower net receipt to Goldman. This alone would have resulted in a hole of about $7.8bn for the bank.