Sunday, December 21, 2008

"The Economist' Credit crunch board game

Board game available on centre page of 'The Economist' Christmas issue or just by printing pdfs (here and here) with one half of the board on each file.

Saturday, December 20, 2008

Dilbert's 'Unified Theory of Everything Financial'

'Dilbert' deserves the economics Nobel
PAUL B. FARRELL on Marketwatch

Quietly hidden in Adams' groundbreaking work is a financial formula so simple it rivals Einstein's E=mc2. In its original form Adams' formula was apparently so heretical and so explosive that no major house would touch it when he proposed publishing it as a one-page book. After initial rejections, he announced sadly that "if God materialized on earth and wrote the secret of the universe on one page, he wouldn't be able to find a publisher" either.
Fortunately for America's 95 million investors, Adams' secret nine-point formula was finally revealed in "Dilbert and the Way of the Weasels." Notice its simple brilliance in the exact reproduction of his formula:

  1. Make a will
  2. Pay off your credit cards
  3. Get term life insurance if you have a family to support
  4. Fund your 401k to the maximum
  5. Fund your IRA to the maximum
  6. Buy a house if you want to live in a house and can afford it
  7. Put six months worth of expenses in a money-market account
  8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement
  9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio

Adams boldly states that this is "everything you need to know about personal investing." In just 129 words, nine simple points, one page you have the unabridged "Unified Theory of Everything Financial." That's it. Everything!

Fed’s Rate Moves Fail to Spur Home Buying

The Federal Reserve’s efforts to make homes more affordable have yet to bolster buying and instead are fueling a surge in refinancing, according to data compiled by the Mortgage Bankers Association. Link
Source: Bloomberg

What is the US Fed doing?

Fed's damage control
Source: Washigton Post

Fed's promises explained in plain English
Source: Marketwatch

First, the Fed cut its target for short term rates to just above zero and pledged to keep its target for short-term rates low "for some time."

Secondly, the Fed promised to employ "all available tools" to help the economy and financial markets. In essence, the Fed intends to be "the invisible hand" in all financial markets, according to Joel Naroff, president of Naroff Economic Advisors. The Fed hopes that its action will reduce the spread.

Will the Fed's action work?
But by keeping credit flowing, the Fed is buying time for banks to heal. In the mortgage market, the Fed purchases have already brought down the cost of mortgages, resulting in a spurt of activity. "This latest change in monetary policy strategy by the Fed has the potential to be highly effective in our view, and will better reduce the cost of borrowing for a vast majority of consumers and businesses," said the economic team at Wells Fargo.

But how long will it take?
That nobody knows. Former Fed governor Robert Heller said the aggressive Fed easing campaign began in earnest after the collapse of Lehman Brothers in mid-September. He calculated that the lag on policy would take eight months, putting the recovery in mid-May. Naroff said that the Fed's statement reminded him of John F Kennedy's inaugural address -- that the Fed would "pay any price, bear any financial market burden, meet any economic hardship, support any frozen market, oppose any negative economic activity in order to assure the survival and the success of the economy."

Wednesday, December 17, 2008

Tuesday, December 16, 2008

The story so far - Part 2 - The first signs

Feb 2007
HSBC to Boost Loan-Loss Provisions on Bad Mortgages
This is easily the biggest signal that the makrket should have read as far as the subprime crisis is conserned.
HSBC Holdings Plc, Europe's biggest bank, said it's setting aside 20 percent more than analysts estimated for loan losses in 2006 because the company's U.S. mortgage business is deteriorating. Home loans to risky borrowers in the U.S. are going bad faster than HSBC expected just two months ago, the bank said yesterday in an e-mailed statement.

Chinese market falls 9% on Feb 27 2007
Chinese stocks got slammed with a 9% decline Tuesday, the worst single-day beating in a decade. The culprit? The Chinese government said it would begin cracking down on margin trading to cool off the country's red-hot stock market boom. This is the second major sell-off this month to come as a result of government chatter.

March 2007
Subprime Virus On Wall Street
The company said six of its 11 lenders have granted it waivers for certain terms of their loan agreements, but it's not clear whether the remaining five would provide waivers. The New Century case is of particular concern because of fears that trouble in the subprime business could spread into prime mortgages, causing pain for many more lenders.

Double Dose Of Bad News Hits Wall Street
It has been known for several weeks that defaults were rising on subprime mortgages, home loans made to people with questionable credit ratings or a lack of desire to document their earnings. But it turns out that more creditworthy borrowers are having trouble paying off their loans as well. The Mortgage Bankers Association released a report that said that 2.57% of prime borrowers, and 4.95% of all borrowers, were 30 days late or more in their payments for last year's fourth quarter -- the highest level in 3-1/2 years. The percentage of new foreclosures also spiked to 0.54%, a record level, during that period.

Meanwhile, U.S. retail sales posted a minor increase in February, falling below Wall Street’s expectations and raising concerns that American consumers, whose cheerful propensity for spending in the face of adversity has kept the world economy humming in recent years, are finally beginning to tighten their belts.

Blackstone Rocks Wall Street
This was another ominous sign - a private equity firm going public.

Private equity is going public -- and with a vengeance.
"It's not really an IPO as much as it's an exit strategy," says David Menlow, founder and CEO of Millburn N.J.-based IPO Financial Network, which tracks IPOs. "This is a way to say we'll get a higher valuation than if we were private."

Monday, December 15, 2008

The story so far - Part 1 - All is well in paradise

It feels like the intermission during a movie whose ending would most probably affect your life and everyone you know. It is not very easy at this point to identify the real villains (many have gotten away with murder) and heroes (too few left in the game who could potentially become one by the end of the movie). Most are just like the extras in a Godzilla movie who get killed in collateral damage.

For many of my friends, especially those who are not working in capital markets , what is happening now might just look like a case of stock markets going down - something that happens every few years. One could just hope that is the case.

When (not if) the movie ends, it would be great if one could come out of the hall and say, "There were too many unwarranted twists, only leading to a familiar climax".

But lets do a quick recap of the story so far. The movie begins in late 2006.

Dec 2006

Goldman has just reported a fantastic year

The environment for investment banking and trading has been excellent across the board, and 2006 will be remembered in financial circles as an historic year. The year isn't even over, and it has already set records for mergers-and-acquisitions volume and for biggest leveraged buyouts.

The results reflect a strong environment. Stocks have moved higher since the summer, and the global economy remains solid, despite slowing growth, Viniar said. He said the combination of a decent economy and strong CEO confidence boosted investment banking and created a good environment for trading. Revenue from equity trading soared 105% to $1.23 billion.

Goldman's culture also contributes to its success. The company uses its profits to hire and retain what it believes to be the best minds in finance. It has spent $16.5 billion, or about 42% of its revenue for 2006, on salaries, benefits, and bonuses, which run into the tens of millions of dollars for top bankers and traders.

Jan 2007

Merrill CEO O'Neal gets $46 million

Please remember the name Stan O'Neal. This guy is sure to make another spectacular entry later in the movie)

Merrill Lynch & Co.'s chief executive officer, Stanley O'Neal, received $46 million (€35.4 million) in salary and bonuses in 2006, ranking him the second-highest paid CEO on Wall Street.

The largest U.S. brokerage said O'Neal received $18.5 million (€14.2 million) in cash as a performance bonus on top of his $700,000 (€538,255) salary, according to a filing with the Securities and Exchange Commission. He also was awarded $26.8 million (€20.6 million), the filing revealed. This puts him among the highest paid CEOs at the big five U.S. Wall Street investment banks, which include Merrill Lynch along with Morgan Stanley Inc., Lehman Brothers Holdings Inc., Bear Stearns Cos. and Goldman Sachs Group Inc.

Feb 2007

All is well in paradise, really

Speaking to the House of Representatives' Budget Committee, Bernanke buoyed investors, saying that markets "seem to be working well" and that there had been "no material change in our expectations for the U.S. economy since I last reported to Congress" two weeks prior.

He added that if housing and business inventories can stabilize over the next few months, the economy should come out of its slump by the year's end.Whether that will happen remains to be seen. For the time being, however, the U.S. Commerce Department offered new evidence that U.S. economy is weaker than previously thought. Nonetheless, the news was mainly greeted as a sign that inflation would not be a problem in the months ahead.

March 2007

People actually needed some guidance on how to splurge their money.

Expecting a $200,000 bonus? We suggest spending $70,000 of it on a 23-day world tour via private jet. If something closer to home is more your style, check out BMW’s 500 horsepower M6 convertible. It will set you back $104,000. But you’d better act fast. If the kind of money being doled out this month and next is any indication, these and other big-ticket items won’t be around for long.

Blogging again

It has been 35 months since my last blog post. My life has changed a lot and the world more so.

The last few months have been the busiest of my life and I have absolutely enjoyed every minute of it. It has been very personal as well. Reading flash news about job losses on CNBC is one thing, actually seeing that happening to your close colleagues and classmates is something you have to live through to understand.

We are living in special times indeed. I decided to blog again just out of pure curiosity about how things will turn out in the end. Even if it does not add much value to me right now, Im pretty sure it would be fun to read this blog a few years down the line. If it helps my friends understand better whats happening in these special times, it would be an added bonus. Lets see how it goes.

It would be great if you could send in your comments and suggestions.