Wednesday, May 11, 2011

The Bald, The Beard & The Ugly (Inside Job, The Movie)



This was posted back in November 2008, and published in StarBiz as well. Well, they finally made a movie of the subprime mess. It was superbly done, I must say. Matt Damon was the narrator. I loved the many interviews, especially the ones fronting for the bad guys twitching and lying through their teeth ... Funny thing was, the bad guys are not just your usual suspects, they included many economist professors of high regard.

To watch the movie and to read my dated posting, I think I should have made the movie myself... lol.



I was watching the uncomfortable grilling by the US lawmakers on Ben Bernanke and Henry Paulson on the US rescue plan. Pity those two guys. They are trying to fix a problem which was inherited and they have to suffer the embarrassment of trying to persuade the lawmakers to approve the funds.

But who really are the culprits that brought about such a calamity? I shall try to ascribe blame to the relevant parties. But please note, it’s a highly subjective issue and everyone has a different opinion. Here’s my two cents worth (and rapidly diminishing two cents in value):

The blame game:

30% - Management of Investment Banks & Mortgage Lenders

They were greedy and overpaid. They had thrown risk management out the window. When the going is good, they pocket more than their fair share.

Paulson (left) and Bernanke could have tried to reverse the damage in their early days as they basically inherited a huge problem.– AP

The worst punishment they got was to walk out the door with nary an apology. The vast amount of liquidity in the system and the thirst for mortgages prompted them to “invent” new fangled instruments to package these loans and resell them, with little regard to the leverage effect.

Lenders kept pushing adjustable-rate and subprime mortgages, while investment banks bundled millions of risky loans and resold them to investors.

It was when these investment banks started to buy these same instruments that they really decimated their capital.

15% - Alan Greenspan

He will continue to deny it was his doing, but since 2001, he advocated lowering interest rates and continued a strong money supply growth policy.

That prompted the public to buy properties and even speculate in them. Greenspan was well known for lowering rates aggressively to counter any crisis €“ the query was that by doing that markets were never allowed to adequately correct the imbalances.

This led to the credit explosion.

He must have noticed the deterioration in the credit market back in 2003 and 2004 or was just plain blind. But he hadn’t warned lenders of using the “non traditional mortgages” now seen as a precursor to the credit crisis which unravelled as early as December of 2005, shortly before Greenspan resigned.

The excessive liquidity in the system was not just owing to the Fed’s measures. Major central banks were guilty of pumping vast amount of money supply into the system. Back in 2004, Greenspan opposed tougher regulation of financial derivatives, and actually praised adjustable-rate mortgages and refinancing for homeowners.

35% - Ratings Agencies

They are the unwitting culprits. (I am being nice here). They rated loans and bonds based on these mortgages AAA status, which caused many buyers to believe in their assurance that they were buying solid AAA papers.

The ratings agencies again acted too late to downgrade these papers €“ long after the damage is done.

They had earlier accorded high ratings and analysis which fuelled interest in these instruments to be hawked to unsuspecting investors. It is also this that led the investment banks to boldly pile up these instruments.

What kind of value-added analysis are the issuers paying these rating agencies for? It’s obvious that the analysts knew that a bulk of the packaged loans consisted of subprime.

Were the fees too enticing? Were the ratings agencies trying to curry favour with the banks? If these agencies cannot do their jobs without fear or favour, then how can investors rely on these ratings?

Maybe the US should empower the government to rate bonds, especially if the government requires certain kinds of fund managers to own only officially-rated bonds.

15% - The Regulators

The financial markets and the various instruments have their respective regulatory units.

You may include the Fed, the CFTC (Commodity Futures Trading Commission), the SEC (Securities and Exchange Commission), FDIC (Federal Deposit Insurance Corp), even the FASB (Financial Accounting Standards Board) into the fold.

They are supposed to regulate and oversee the markets and the financial instruments.

But where was the voice of reason? The last six years’ housing and subprime mortgage bubble and bust had little to do with excessive government intervention.

Instead, they had all to do with the lack of any basic sensible government regulation of the mortgage market.

They should have instituted new guidelines and rules to govern these CDOs (collateralised debt obligation), credit default swaps, and the leverage aspect of financial firms and their capital at risk.

Even now, they are mainly silent.

5% - US Treasury chief Henry Paulson & Federal Reserve chief Ben Bernanke

They could have tried to reverse the damage in their early days as they basically inherited a huge problem.

But only now, they are talking about having proper mechanisms to regulate derivatives and new instruments. Sigh.

There were institutions and people appointed to do these jobs; it’s just that they did not do their jobs properly. I am still waiting for some of the culprits to be prosecuted for what they did or didn’t do.

At the end of the day, it appears that what some of them didn’t do would be more punishable.

“But what about the American borrowers/homeowners,” you ask? Shouldn’t they too shoulder some of the blame? I left them out of the above equation for various reasons listed below:

a) I do think there should be an element of “personal responsibility” but it seems to me that they are already paying the cost of their foibles. Many have had their homes foreclosed, they have lost their deposits and payments made on these loans.

It seems to me, they are THE ONLY group that has actually “really lost” materially and has been punished.

b) The bailouts do not really bailout the end borrowers. They simply extend the life of the companies.

Maybe the bailouts will allow the companies more time to foreclose these properties in an orderly manner. Very few of those will be able to renegotiate their existing loans on decent terms to allow them to continue to fund their mortgages.

Most of the loans were priced at a time when property values were at least 30%-40% higher than now. Perhaps, it’d be better to declare bankruptcy than to continue to reconfigure the loan?

c) The public are not equipped to regulate themselves. That is why there are agencies created with “capable people” to regulate and monitor the markets.

You cannot expect the majority of borrowers to understand in detail CDOs, credit default swaps, or whether the brokers are leveraging themselves to the hilt.

You instead get assurance from top ratings agencies that brand certain papers as top notch grade. Who will really pore over hundreds of pages in a report, examine if these debt papers/bonds consist of thousands of small mortgages spread out over the country or how to value the price trends and affordability ratios of borrowers?

d) The public often acts in herd-like mentality and like most people, they are driven by the pursuit of wealth.

They see people making 50% in two years from speculating in properties and they, too, want to be part of it. Then they apply for loans, and were probably even more shocked that mortgage lenders were more than willing to lend to them.

The markets are often characterised by bouts of insanity; if you stir them up with enough incentives and carrots, people will act irresponsibly.

The regulating agencies are there to ensure an orderly market and to quell excesses. The people cannot do it themselves.

The ones who got out early will think they are very smart. The ones who got hit will think they were unfortunate victims. Both are wrong in their perception of their actions, financial decision making and brain power.

Both groups are closer to each other in every aspect than they would care to admit. It’s like a game of financial musical chairs “ the winners and losers are those who act the fastest/slowest when the music stops“ not how smart you are.

PS: In case you haven’t figured the headline out: The bald, the beard & the ugly are Paulson, Bernanke & Greenspan.

p/s photos: Ema Fujisawa (my date in Tokyo)


21 comments:

Dennis said...

Hi Sal, a friend introduce your blog to me and have been following it everyday ever since. Great Blog.

Would like to see your take on why such a drastic movement in prices of essential commodity such as oil and especially food stuff. Seems to be in tandem with the US financial crises. Too much of a coincidence, I think. If US (& EU) is the culprit, why no oversight committee on this? very hard to explain a 100% increase/decrease in commodity prices simply from demand alone.. since these are essential commodities and not luxury items. I remembered that the so called "food crises" was just months ago.

dk

Ivan said...

Hi Dali,

So far so good, market already go very fast in the pass 2 weeks. And it bring to DJIA to breakdown 8000 level as well.

Anyhow, a lot of people is try say quick tech rebound is near in the corner. I do agree with your idea as well .

Anyhow, over long run, do you think the market still will fall ?

What is DJIA bottom level?
7000? 5000?

What do you expect after the US700b inject money, guarantee deposit, cut interest rate?

By the way, in your personal view, what do you think the Gov shall implement to rescue the market ? So far, we have seem many technique coming, but investors still fear to invest. .and hence bring market down for the pass X days.

happy sharing. 10s for your sharing.

Isaac said...

Hi there. I think you are missing a key group to blame: the U.S. mutual fund industry.

It is Fidelity and Putnam that owns most of the stock of the public companies in the U.S. It is the dangerous split between board oversight, shareholder accountability, and management control that has allowed these institutions to mushroom in complexity while paying themselves big bonuses for things going well and not sharing in the downside otherwise. (Hey, reminds me of a hedge fund! Only, investors in Morgan Stanley and Lehman didn't look on it as investing in a hedge fund; it's fair to say they partly, but not totally, should have.)

Anyway, if Fidelity wasn't so pandering to the board of AIG, for instance, maybe they would have challenged why people like Ellen Futter, the chairmwoman of the Museum of Natural History, had business overseeing accounting for the AIG board. What a joke!! But Fidelity wanted AIG to move its retirement accounts there, so they wouldn't dare say a thing.

The big mutual funds are more than just complicit.

When I assign blame:

Big mutual fund houses -- 50%.

Ok, enough of a rant, but I usually agree with you and don't here so I felt the need. BTW- I always love your blog, and would continue to if you either dropped the commentary OR dropped the photos! :)

santini said...

This website is getting lame simply because:
1. you keep 'frying' the same things which publicly known again and again.

2. unlike other blogs, you never have guts to show your positions. And you admit youself that you are chikenshit to do so. (not that it will be useful, just that people would like to see what judgement you make base on the information)

3. Hence this blog is only meant to reveal the macroscopic state of industry from your prespectives, which in most cases, YOU JUST FOLLOW THE WIND. No surprise.

4. The only thing you did well is keep posting 3rd page cover girls. (perhaps that's the only way for you to keep the readers, but even so the quality is fading)

5. Jim cramer might be idiot, but he obviously has more fun and guts than you.

Andrew Chua said...

what about the defaulters? the housing loan borrowers who didn't pay what they owed? ultimately, the problem is traced to their acts of non-payment that led to the whole mess... should they be allocated some blame too?

and is Paulson really deserving of pity? being the former head of Goldman Sachs, did he truly inherit this problem, or did he help create this monster?

anyway... Ema is really quite beautiful :)

Andrew Chua said...

here's my view of why the American borrowers/defaulters shouldn't be excused:-

"a) I do think there should be an element of “personal responsibility” but it seems to me that they are already paying the cost of their foibles. Many have had their homes foreclosed, they have lost their deposits and payments made on these loans. It seems to me, they are THE ONLY group that has actually “really lost” materially and has been punished."

being punished does not excuse us from wrong doing. even if a serial rapist is finally sentenced to life imprisonment, the blame still lies squarely with him. you can't shift the blame to someone else after he has been punished.

"b) The bailouts do not really bailout the end borrowers. "

not being saved also does not excuse them from anything.

"c) The public are not equipped to regulate themselves.

and

d) The public often acts in herd-like mentality and like most people, they are driven by the pursuit of wealth."

these are the reasons why they were lulled into wrong-doing, but it does not mean they are free of wrong-doing.
when we borrow, we must repay. if we don't repay, we are wrong. we can't say 'everybody borrow from ah long, so how i know it's wrong...?'


just my two cents worth :)

gomensux said...

you should also blame The US and EU's for the uncontrolled expansionary policy.

this is their only way to please the voters.

Gamelion said...

The world has been enjoying an illusion of everlasting prosperity with the money created out from thin air by the biggest cover up of deceptive lie propagated by the government. In order for this lie to be effective is to tell another bigger lie and keep repeating it until most people believe it. This crisis has nothing to do with liquidity (in fact there is an unlimited of amount and tools the government can use) but is the "CONFIDENCE CRISIS". The only solution is the most hardest the present government might take ;that is to revert to the difficult to manipulate the creation of money backed by solid physical gold . THE EMPEROR HAS NO CLOTH ANYMORE !!!!!!!!!!!!!!!!!!!!

FA investor said...

really ? if u knew it , u will never called people to level buy at KLCI 1,100 2 motnhs ago, backhand again ? what went wrong with your evergreen at 1.30? insas ?iris ?masteel?mahsing ?

know the word shame ?

need me to bring up your posting here ? hurry ,go delete yr posting now , ha ha..I have a copy in hand already

Salvatore_Dali said...

dennis,

leveraging and deleveraging... real demand still there, food crisis still there

ivan,

how to call bottom...


fa invetsor & santini,

whats yr problem... i do not seek praises, i dont need to hear why u r unsatisfied... just dont visit the blog la... who charge u to read... go someplace where u can be happy... a blog is just a place for my views, its not the best views, its mostly wrong, and my picks r really bad... so dont fkin come la... i dont like to post stock picks... yes i have a few picvks way under water, so sue me, dont read la. wtf is wrong with u people... when ppl write so bad u still want to read... go jerkoff somewhere else

FA investor said...

cool it dali, why get so fras ? badly hurt by the bear ka ?

sorry loh if I have offended you , maaf yah ?

Salvatore_Dali said...

fa inv,

no problem at all... just pointing out why u need to visit a blog that pissed u off? go write yr own blog la... i welcome constructive comments, not stupid comments ... no one is hiding from our previous recommendations... u can still find all those postings on Iris, Evergreen, Perwaja... so whats the point? You all dont read, then the blog will die la... simple...

CSK said...

Finance news , pretty woman's picture , fancy paintings and a mp3 playlists of good songs...

makes me very interested to read this blog,..

Ivan said...

Hi FA Invesor,

I had read the IRIS posting before.It is super good analysis.

I am comment about the analysis. What Dali show is about the Fundamental regarding the IRIS.

IRIS is a tech stock, listed at mesdaq. This share has been speculate before but now, the price is moving around 10sen to 12sen.

Anyhow, if look on Dali analysis; and study more careful, you shall know the NTA of IRIS is around 22sen something + the technology is good in hand.

IRIS- also have some good project in hand whereby link to XXX contry. And initally, Dali also comment the IRIS maybe can get the XXX country project. After few weeks, it really come out to declare they get the project.

I do agree with dali has call to invest in this share. I believe his call is base on the fundamental and the trading price is below the NTA, (mean we are buy something cheper) .. that is for long term investment.

Anyhow, market sometime also have some oversold, sentimen problem . market is market. we are hard to control it unless we have RM m m .

If you are in the market for maybe 3 years, I am sure you know . . a lot of share are also trade below the NTA too.

Happy sharing & no ofense.
I am newbie. Come here to 3 8 and try get some info put it in my pocket.

Ivan said...

Dali,

My bottom mean the lowest price / point that DJIA might hit before it make a u-turn (perhaps this u-turn need to take a long period).

wc said...

For those self-proclaimed FA investors from another blog of a much less superior quality, thanks for showing your interest in this blog. I have been a follower of both blogs but I have to say that in the end of the day, no one owes you a thing. I find Dali's postings to be more than good and who cares for revealing portfolios to claim credits.

说话要有分寸,别人也有底线。
Don't cross the line.

And for the guy with an id resembling sanbumi, the envious claims you made are completely understandable. Can't reach the stars(dom)? Nevermind, shoot them. LOL.

bleeding gums said...

i think you critical folks should give dali a break.

he is no god. no one could have foreseen the situation becoming so bad. sure, his stock picks aren't performing well now, but show me someone who's stock pick is still doing well now.

lame? i think santini is envious of the popularity of dali's blog!

starting a blog in blogspot is free, so why not start your own? and let us judge how good are you?

it's so much easier to criticize than build something up...

bg

Pulau Tikus M-Club said...

Hi Santini,

1. Most governments, if not all, are acknowledging the risk of their countries falling into recession. However, the Malaysian government is 'frying' different story by telling us that Malaysia remains resilient :)

For me, frying the same thing is not as bad as frying nonsense!

2. Judging from Dali's write-up on a few stocks and his long/short positions on oil prices, I am sure Dali DID have his guts to show his positions on certain issues.

It is important that YOU decide on your positions by reading/browsing news, internet, blogs, reports, books, gossips etc.....In case Dali has made a position, are you going to follow him blindly or simply going against him?

3. If you are adopting top-down approach, you should start with macroscopic view. The world is facing sub-prime problems, collapses of big corporations, wild fluctuation of oil price and lost of confidence. So, you want Dali to write about 'Japan's lost decade' in order to be different??

4. Everyone has different taste and preference! If someone visits Dali's blog just for the photos, I would suggest to him/her to visit other websites, which boast better collection of photos.

5. Please follow Jim Cramer's website.


utopiainjapan

Butt said...

I read both blogs and other blogs too. When you decide to make an investment based on information in any blogs, you do it at your own risk. Bloggers are human and not god. If u think the blogger is lousy then don't follow or don't read and if you think the blogger is great then so be it. This blogs shld be used for healthy discussion and sharing of information and opinions. No blogger will guarantee that you'll make money from their calls. If you lose money.....then too bad maybe the call was lousy, maybe you didn't do enough homework and check whether the blogger's opinion os good. If you make money, will you be sharing with the blogger? Please be responsible for your own actions.

Buyer said...

Hey Dali.....
Ema Fujisawa (my date in Tokyo)
sure bor?!!!!!!! :-)

Is she an artist??

hkloon said...

Dali, I tot you were already married with kids...