Naked short selling

While driving around today running errands, I heard an interview with the author of an article in Rolling Stone about naked short selling and the market collapse of last year. Much of it was over my head, but the interviewer kept making the comment that descriptions of short selling, naked short selling, etc. that were very easy to follow and understand were in this article. So when I got home, I read it. For those of you who are all into the Fed and the market (i.e. Stephanie), this is a must read.

All I can say is...UNBELIEVABLE.

Iceland

Is anyone following what's going on in Iceland? Iceland, faced with the banking disaster of 2008, let its banks go belly up rather than bail them out. Who knows? Maybe they'll be in better shape for it in the end, but right now, things are grim there.

Iceland's gross domestic product (GDP) shrank 2.0 percent in the second quarter from the preceding three-month period for an annual contraction of 6.5 percent, preliminary data from the statistics office showed on Friday.

[JUMP]

'Contrary to other countries in the region, quarterly growth in Iceland is probably going to remain negative for the rest of this year,' he added.

[JUMP]

Although the central bank sees the economy of the island of only 320,000 inhabitants contracting around nine percent this year and shrinking still further next year, there is little scope for reducing interest rates, currently at 12 percent.

There are a lot of fascinating things about the Iceland situation. I'm just beginning to follow it. Maybe others here know more and could write about it. Letting the banks fail is clearly not the end of the story when vast sums of money are owed to other countries or citizens thereof, regardless of what the Icelanders may want. The Iceland situation makes one ponder the meaning of national boundaries and sovereignty.

Update: Here's a link to a Vanity Fair article from April 2009 about Iceland's banking collapse and its response to it.

Status check on bailouts

I haven't checked these numbers, but according to Tim Fernholz at Tapped today, here's the current tally on bank bailout money:

Even the limited transparency has allowed federal regulators to examine the weird compensation practices at the banks, creating a prototype for real financial regulation. And for all the talk of taxpayer money and expense, we may end up being surprised by how relatively cheap the bailouts ultimately are -- keep in mind, for all the talk of spending, the Obama administration's policies will still result in a lower deficit than if Bush administration policies had been kept in place, that banks are paying back their loans, plus interest, and that ultimately the cost of the bailouts will be much lower than its sticker price, especially if management of the program continues to improve under congressional and public pressure for higher returns. Of the $1.1 trillion in bailout money being tracked by ProPublica, only $583 billion has been committed, even less has been spent, and $77 billion has been returned.

That picture will only continue to improve as banks continue to pay the loans back. I don't know whether the bailouts were a good idea, but it's useful to keep the actual dollar amounts in mind when considering the topic.

CRA: not guilty

I'm not trolling any right wing blogs these days (now that Hot Air crashes my browser), so I don't know if they're still pushing the story that the Community Reinvestment Act is to blame for our recent economic collapse. Let's hope not, since that idea has been debunked, most recently by Ellen Seidman at The American Prospect.

Based on the Canner and Bhutta study, former Federal Reserve Governor Randall Kroszner concluded, "we believe that the available evidence runs counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis." In reaching this conclusion, Kroszner and the Federal Reserve Board joined other bank regulators in affirming that CRA did not cause the mortgage-market meltdown. Federal Deposit Insurance Corporation Chair Sheila Bair has stated, "I want to give you my verdict on CRA: Not guilty." Comptroller of the Currency John Dugan agrees: "CRA is not the culprit behind the sub-prime mortgage lending abuses, or the broader credit quality issues in the marketplace. Indeed, the lenders most prominently associated with sub-prime mortgage lending abuses and high rates of foreclosure are lenders not subject to CRA." All of these regulators were appointed by President George W. Bush.

Free market in troubled assets and banks owning troubled assets

Ezra notes this about market effects on pricing of the troubled assets and the banks holding them:

One odd argument I stumbled upon while reporting out the PPIP story yesterday that has relevance to this chart: Part of the story behind the crash in lending earlier this year was that large investors apparently sat on their money hoping that the banks would have to unload troubled assets at fire-sale prices. They didn't want to invest in normal opportunities because they sensed the possibility of extraordinary opportunities. "I know a bunch of hedge fund people who thought these things were screaming bargains," recalls Douglas Diamond, a banking expert at the Chicago School of Business, "but would become even bigger bargains soon."

Now it looks likely that the banks that own these assets are going to try -- and might even succeed -- at holding these things to maturity. Which means that it might be the banks holding the assets, rather than the assets themselves, that are the bargain.

Toxic Asset Relief Program: DOA

The administration's plan to buy bad debt from banks to help them clear their balance sheets is on indefinite hold due to lack of interest from the banks.

Ezra analyzes what this means: either a) banks would be rendered insolvent if they participated (i.e. the plan wasn't right to achieve its intended purpose of saving banks) or b) banks no longer need the help.

Fillet of Financial Crisis

This article by Matt Taibbi in Rolling Stone does a nice job explaining the current financial crisis and its origins. It should be required reading for all citizens. He touches on my favorite theme (the GAMBLING):

He [Liddy, AIG CEO] conveniently forgot to mention that AIG had spent more than a decade systematically scheming to evade U.S. and international regulators, or that one of the causes of its "pneumonia" was making colossal, world-sinking $500 billion bets with money it didn't have, in a toxic and completely unregulated derivatives market.

Nor did anyone mention that when AIG finally got up from its seat at the Wall Street casino, broke and busted in the afterdawn light, it owed money all over town — and that a huge chunk of your taxpayer dollars in this particular bailout scam will be going to pay off the other high rollers at its table. Or that this was a casino unique among all casinos, one where middle-class taxpayers cover the bets of billionaires.

He covers the legislative pieces of the puzzles and ties it together with campaign contributions:

In 1997 and 1998, the years leading up to the passage of Phil Gramm's fateful act that gutted Glass-Steagall, the banking, brokerage and insurance industries spent $350 million on political contributions and lobbying. Gramm alone — then the chairman of the Senate Banking Committee — collected $2.6 million in only five years. The law passed 90-8 in the Senate, with the support of 38 Democrats, including some names that might surprise you: Joe Biden, John Kerry, Tom Daschle, Dick Durbin, even John Edwards.

The act helped create the too-big-to-fail financial behemoths like Citigroup, AIG and Bank of America — and in turn helped those companies slowly crush their smaller competitors, leaving the major Wall Street firms with even more money and power to lobby for further deregulatory measures.

There's lots more, so please do read. (I might recommend double-dosing on any anti-depression meds first, though.)

Mark-to-market

I struggle with what all this means but here’s brief blurb by Larry Kudlow at NRO that helps a bit:

Nevertheless, behind the furor over AIG, there is some good news to report on the banking front. This week’s decision by the Federal Accounting Standards Board (FASB) to allow cash-flow accounting rather than distressed last-trade mark-to-market accounting will go a long way toward solving the banking and toxic-asset problem.

Many experts believe mortgage-backed securities and other toxic assets are being serviced in a timely cash-flow manner for at least 70 cents on the dollar. This is so important. Under mark-to-market, many of these assets were written down to 20 cents on the dollar, destroying bank profits and capital [emph. mine]. But now banks can value these assets in economic terms based on positive cash flows, rather than in distressed markets that have virtually no meaning.

Actually, when the FASB rules are adopted in the next few weeks, it will be interesting to see if a pro forma re-estimate of the last year reveals that banks have been far more profitable and have much more capital than this crazy mark-to-market accounting would have us believe.Sharp-eyed banking analyst Dick Bove has argued that most bank losses have been non-cash — i.e., mark-to-market write-downs. Take those fictitious write-downs away and you are left with a much healthier banking picture. This is huge in terms of solving the credit crisis.

"... destroying bank profits and capital." When the capital of a bank is reduced, then it’s ability to lend is correspondingly (something more than 1:1) reduced because of the (reasonable) restrictions we’ve placed on them. We don’t want to require a bank to have one dollar of gold in the bank for every dollar of loans it makes (just like we don’t require the Treasury to have a dollar of gold in Ft. Knox for every dollar it prints–though I’m starting to hear those grumblings on the really rabid fringe). OTOH, we don’t want the banks to lend everything it has without some sort of capital reserve–think bank runs in the 30s and the S&L crisis in the 80s.

I have no idea which (mark-to-market or positive cash flows) is the proper method by which to value these assets. In today’s market, however, if they really are being serviced 70 cents on the dollar, how can they be worth nothing?

Btw, if only being serviced 70 cents on the dollar, then how can they possibly be considered to be "serviced in a timely cash-flow manner"?