Michael Lewis chronicles the Irish debt crisis

Long-ish read, but riveting, as usual.

When Irish Eyes Are Crying

First Iceland. Then Greece. Now Ireland, which headed for bankruptcy with its own mysterious logic. In 2000, suddenly among the richest people in Europe, the Irish decided to buy their country—from one another. After which their banks and government really screwed them. So where’s the rage?

BY MICHAEL LEWIS•PHOTOGRAPH BY JONAS FREDWALL KARLSSONMARCH 2011

CRASH COURSE
University College Dublin professor Morgan Kelly, in Hogans pub, in Dublin. He predicted the Irish Crash in 2006.

Are you detecting a theme over the last few years?

Here’s a hint: privative the gains, socialize the losses.

#theyarewhowethoughttheywere #greatmomentsinbankinghistory

Bill Gross' February Investment Outlook- "This Isn't God's Work"

This is troubling.

As regular readers know, Bill Gross runs PIMCO, and manages the Total Return Fund (the largest bond vehicle in the world). When he talks, people listen. So imagine our surprise here at The Scrambler when in this month’s investment outlook, Billy Bob starts spouting nonsense about finance NOT being God’s work. 

Why does he hate America? 

Even if it’s a joke, it’s not funny. He needs to knock it off.

#unforgivable. Excerpt below.

Money would also become the economic and political wedge for profound changes in American society. Fifty years ago, the highest paid and most prestigious professions were that of a doctor or a 707 airline pilot who flew the “golden” route from Los Angeles to Honolulu. Today the yellow brick road begins on Wall Street or the City. Aside from supernova innovators such as Steve Jobs or Mark Zuckerberg, the money is made from securitizing things instead of booting and rebuilding America. The tallest buildings in almost every major city are banks, with tens of thousands of people shuffling and trading paper for a living. One of this country’s premier investment banks paid each of its 26,000 employees an average of $370,000 in 2010, nearly ten times the take-home pay of other American workers. Almost a quarter of the 400 wealthiest people on Forbes annual richest list make their money from money, whereas only 8% could make that claim in its first issue in 1982, and probably close to 0% when I first read my economic primer in 1966.

Having been part of this process and even a member of the rogue’s gallery itself, I know one thing for sure: This is not God’s work – it has the unmistakable odor of Mammon. PIMCO, while Mammonesque, is a company to be proud of. I can say with confidence that there are very few clients who have not benefited from our investment management over the years. Some of the rest of this industry, however, I’m not so sure of: rating agencies that perpetually fail at commonsensical quality judgments, bankers that make loans to subterranean credits and then extend the beggar’s bowl for themselves, and 80% of active money managers that underperform the market. As a profession we have failed miserably at our primary function – the efficient and productive allocation of capital:The S&L debacle of the early 1980s, the Asian crisis, LTCM, dotcoms, subprimes, Lehman and the resurrection, instead of the reformation, of Wall Street, are major sins of the modern era of money. Hang your heads, moneychangers. And no, it is not yet time to move on, as many banking CEOs suggest. How can bond traders make ten, one hundred, one thousand times more money than an engineer or social worker given their dismal historical performance? Why is it that some of today’s doctors are using food stamps while investment banking executives complain about millions of dollars in compensation that might be deferred in case of a future bailout?

Financiers have lost their high ground and, if truth be told, we began to lose it a long time ago when we figured out that money was more than a medium of exchange or a poor substitute for a store of value. We figured out a turbocharged way to make money with money and proclaimed ourselves geniuses in the process. Well, we’re not. We may be categorized as “opportunists,” to be generous, but society’s “paragons” and a legitimate destination for a significant percentage of college graduates? Hardly. To paraphrase Paul Volcker, the only productive invention to come out of the banking industry over the past generation was the ATM.

This country desperately requires a rebalancing of priorities. After readjusting the compensation scales via regulation and/or free market common sense, America needs to anoint a new set of Mensans who can create something more than a cash machine and make this country competitive again in the global marketplace. We need to find a new economic Keynes or at least elect a chastened Congress that can take our structurally unemployed and give them a chance to be productive workers again. We must have a President whose idea of “centrist” policy is not to hand out presents to the right and the left and then altruistically proclaim the benefits of bipartisanship. We need a President who does more than propose “Win The Future” at annual State of the Union addresses without policy follow-up. America requires more than a makeover or a facelift. It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system. It needs a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola. Are record corporate profits a fair price for America’s soul? A devil’s bargain more than likely.

#greatmomentsinbankinghistory, #sadmomentsinbankinghistory, #worldviewshattered, #whydoeshehatefreedom?

The CDO Daisy Chain

ProPublica bringing the heat today. A long piece on some GREAT MOMENTS IN BANKING HISTORY….

FTA Redux:

Having told the tale of hedge fund Magnetar in April, Propublica and Planet Money have gone after even bigger game in their latest investigative piece.

The new article by Jake Bernstein and Jesse Eisinger describes, in salacious detail, how the composition of CDO buyers shifted from “real” investors like pension schemes to other CDOs — prolonging the boom in these securities and exacerbating the eventual fallout for the banks.

And the banks have themselves to blame. From the article, emphasis ours in all excerpts:

As the housing boom began to slow in mid-2006, investors became skittish about the riskier parts of those investments. So the banks created — and ultimately provided most of the money for — new CDOs. Those new CDOs bought the hard-to-sell pieces of the original CDOs. The result was a daisy chain that solved one problem but created another: Each new CDO had its own risky pieces. Banks created yet other CDOs to buy those. …

And how bad did it get?

An analysis by research firm Thetica Systems, commissioned by ProPublica, shows that in the last years of the boom, CDOs had become the dominant purchaser of key, risky parts of other CDOs, largely replacing real investors like pension funds. By 2007, 67 percent of those slices were bought by other CDOs, up from 36 percent just three years earlier. The banks often orchestrated these purchases. In the last two years of the boom, nearly half of all CDOs sponsored by market leader Merrill Lynch bought significant portions of other Merrill CDOs.

And in a particularly impressive display of the lunacy that was Wall Street in the mid-2000s, CDOs started buying each others’ pieces:

The portion of CDOs owned by other CDOs grew right alongside the market. What had been 5 percent of CDOs (remember the “bucket”) now came to constitute as much as 30 or 40 percent of new CDOs. (Wall Street also rolled out CDOs that were almost entirely made up of CDOs, called CDO squareds.)

The ever-expanding bucket provided new opportunities for incestuous trades.

It worked like this: A CDO would buy a piece of another CDO, which then returned the favor. The transactions moved both CDOs closer to completion, when bankers and managers would receive their fees.

ProPublica’s analysis shows that in the final two years of the business, CDOs with cross-ownership amounted to about one-fifth of the market, about $107 billion.

Nor was there any shortage of bully tactics used by the banks to convince CDO managers to buy their crap bonds rather than another bank’s:

“I would go to Merrill and tell them that I wanted to buy, say, a Citi bond,” recalls a CDO manager. “They would say ‘no.’ I would suggest a UBS bond, they would say ‘no.’ Eventually, you got the joke.” Managers could choose assets to put into their CDOs but they had to come from Merrill CDOs. One rival investment banker says Merrill treated CDO managers the way Henry Ford treated his Model T customers: You can have any color you want, as long as it’s black.

The article goes on to names names, explains why the ratings agencies blew it, and gets into the wider fallout for the rest of the financial sector.

Worthwhile reading on a Friday afternoon.

DID YOU RAISE THE RATES? Or, How low can they go?

Via FTA:

Another day, another set of lows in 10-year Treasury and bund yields:

In bund yields specifically, we might add that these are record lows for both the 10-year and 30-year yields — which on Friday struck 2.273 per cent and 2.957 per cent respectively.

As to what’s driving the lows, one explantion that has been put forth is that the Fed’s own move to reinvest proceeds generated by its asset purchases has magnified the forces of mortgage convexity hedging.

As FT Alphaville has explained previously, when interest rates are very low homeowners often take advantage of the rates by refinancing and paying down their old mortgages. When that happens, MBS owners find their bonds are repaid faster than expected. To offset that, the MBS investors usually buy longer-dated assets such as Treasuries. When interest rates start to rise, the reverse occurs and MBS investors start selling longer-dated stuff.

Indeed as Sean Corrigan of Diapason Commodities wrote in his latest material evidence note on Thursday:

…[The Fed’s] own actions would magnify the very mortgage convexity-hedging feedback which has already driven a massive short-covering rally, a curve flattening, a bullet-barbell collaspe, a volatility spike, and a swap spread narrowing/invertion.

But we’re not sure that would have to do with bund yields, eh?

Of course, the Bundesbank raising its growth forecast to 3 per cent from 1.9 per cent on Thursday will no doubt have made bunds look attractive.