The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism (Part 3)Submitted by Econophile on 08/14/2010 14:02 -0500
Until I began to examine the Dodd-Frank financial overhaul bill I had no idea that it would so significantly change the direction of the United States. It's scope is so vast and pervasive that it is difficult to grasp its totality. I wrote this article to try to explain this and why I believe it is so important for us to understand it. Because of its complexity it was not possible to do this briefly, so I wrote this major "white paper" and divided it into four parts to make it easier to digest. Please stick with me for the next few days; your eyes will be opened. This is Part 3 of 4.
John Carney's New York Times op-ed piece is a tour de force, a paean to nonsensical thinking. In, "Fannie Mae and Freddie Mac: Too Big Not to Fail," Carney ignores the Fannie and Freddie of the real world. Instead, he goes after the Fannie and Freddie that exist only in his imagination.
Pure cannibalization of a dead business model in action. Now all we can do is lean back, grab the popcorn, and wait for the Moody's response, as both companies junk each other (literally) into oblivion. Importanly, we learn that the passed Donk provision on rating agencies is pretty much a dealbreaker for the rating agency model. Once the SEC exemption is over, Mark Zandi better have that government job in hand: "In our opinion, the legislation will likely result in more instances of defending against litigation and other changes in operating practices that will likely increase operating costs and thereby reduce profitability and margins. The legislation, among other things, addresses the applicable pleading standards for certain litigation brought against rating agencies. This is contained in a provision whereby investors may be able to sue a rating agency if they can show that the agency knowingly or recklessly failed to (1) conduct a reasonable investigation of the factual elements relied upon by a credit rating agency's rating methodology, or (2) obtain a reasonable verification of those factual elements from independent third-party sources. While we believe it is likely that the new pleading standard will lead to an increase in litigation-related costs at Moody's and therefore poses an element of risk, whether the new pleading standard may increase the likelihood of successful litigation against Moody's will be determined in the future by the courts."
These are the Top 10 most read posts of the prior week:
- Marc Faber: Relax, This Will Hurt A Lot
- Ever Wondered How You Know You Are In A Depression? David Rosenberg Explains
- Guest Post: Gold Swap Signals the Roadmap Ahead
- "It's Not A Market, It's An HFT 'Crop Circle' Crime Scene" - Further Evidence Of Quote Stuffing Manipulation By HFT
- Jim Rickards Compares The Collapse Of The Roman Empire To The US, Concludes That We Are Far Worse Off
- LBMA Closes Off Public Access To Key Bullion Bank Trading Data
- S&P Priced In Gold: Comparison Between The Great Depression And Now
- Warren Pollock Warns Of Emergency Drug Shortage As EMTs Told To Go To "Alternate Protocols"
- China Calls Our Bluff: "The US is Insolvent and Faces Bankruptcy as a Pure Debtor Nation but [U.S.] Rating Agencies Still Give it High Rankings"
- Already Bought A 3D LCD In Anticipation Of QE "Instarefi" 1.999? You May Want To Consider A Refund
China Calls Our Bluff: "The US is Insolvent and Faces Bankruptcy as a Pure Debtor Nation but [U.S.] Rating Agencies Still Give it High Rankings"Submitted by George Washington on 07/23/2010 19:13 -0500
Here's the scary part ...
A New Normal world is likely to
be one with frequent flips between “risk on” and “risk off” days. With
so much profit and loss riding on tail events and so little profit and
loss tied to the cluster of outcomes near ex ante means,
repositioning will likely be more frequent. This is because many
investors lack conviction in their understanding of the true
distribution, so that each passing day provides an opportunity to learn
or unlearn how likely the relevant tail events are. Positioning
for mean reversion will be a less compelling investment theme in a world
where realized returns cluster nearer the tails and away from the
mean. James Carville said twenty years ago that he
wanted to be reincarnated as the bond market because the vigilantes had
so much clout over policymakers. But in the New Normal world, he might
wish to be reincarnated as the Asian equity markets because they are
where traders in Europe and the U.S. look to see if it is a “risk on” or
“risk off” day. With so much money chasing fewer assets with known
return distributions, and with reliable investment rules of thumb
scarce, frequent flips between “risk on” and “risk off” days will likely
be a continuing symptom of the Knightian uncertainty that still, to
some extent, hangs over global financial markets.
- Richard Clarida, Pimco
Last night we referenced an article by the WSJ which essentially confirmed that the death knell for the rating agencies is being rung. Today, China proves that the best time to kick a body (or a rating agency) is just after it has been shot in the back of the head and before it is begins stinking up the place. And in doing so, it has officially put a stake in for the role of primary global credit rater, citing China's unique role as the world's primary creditor. Of course, if that were to occur, the US rating may promptly be impacted just a tad more than the record 2 Years and just below record 10 Years would suggest is agreeable. As was posted previously, Dagong already issued a rating grid in which China, not at all surprisingly, came on top of both the US and UK, neither of which has any possibility of paying back the trillions and trillions of debt accumulated over the years. Now whether China would be willing to suicide itself and junk the US, is a different question.
The recently passed Donk (Dodd-Frank) Finreg abomination, which nobody has yet read is finally starting to disclose some of the interesting side effects of its harried passage. Such as that the rating agencies may have suddenly become extinct. As the WSJ's Anusha Shrivastava discloses: "The nation's three dominant credit-ratings providers have made an urgent new request of their clients: Please don't use our credit ratings." The Moodies of the world suddenly have good reason to not want their name appearing next to those three A letters (at least in Goldman CDO and bankrupt sovereign cases) out there: "The new law will make ratings firms liable for the quality of their
ratings decisions, effective immediately." In other words, "advice by the services will be considered "expert" if used in formal documents filed with the Securities and Exchange Commission. That definition would make them legally liable for their work, meaning that it will be easier to sue an firm if a bond doesn't perform up to the stated rating." And since ratings are officially a part of a vast majority of Reg-S filed documentation, the response by issuers has been a complete standstill in new issuance, especially asset-backed underwriting and non-144A high yield issues, as the raters evaluate how to proceed. Alas, as there is no easy fix, underwriters' counsel and issuers will promptly uncover new loopholes and ways to issue bonds without the rating agencies' participation. Did Moody's and S&P just become extinct?
The story of a 15% price swing in ATP Oil and Gas's (ATPG) stocks due to a $450-million math error by a JP Morgan (JPM) analyst probably has prompted some to question the value and validity of analysts' forecasts. A study by McKinsey Quarterly published in April should provide some insight.
Death by a Thousand Irish Cuts: The Poster Child of Austerity Measure Success Gets Downgraded After Several Devastating Expenditure Reductions That Really, Really Hurt the Irish People!Submitted by Reggie Middleton on 07/19/2010 05:27 -0500
For the first two quarters of this year, we’ve been pounding the
pavement on the risks inherent throughout Europe. The 50+ article (and
counting) series known as the Pan-European Sovereign Debt Crisis is
rife with opinion, analysis, commentary (albeit rather smart ass
commentary), and data that is hard to come across from objective
The weaknesses in the S.E.C.’s case against Goldman were always obvious. At the end of the day, an investor who bought Abacus 2007 AC-1 was buying a static portfolio of risks. It didn’t matter who chose the underlying investments in the CDO, or whether John Paulson was destined to receive a windfall. If you were a sophisticated investor who had done his due diligence, you didn’t need to be told that the deal was designed to fail. You would have figured it out for yourself. If you actually reviewed the performance of mortgage backed securities held by the CDO, and understood how cash flow waterfalls and delinquency triggers worked, then you could see that subordinate tranches being insured for the benefit of Goldman were already worthless when the CDO closed. You could also figure out that the rating agencies had deliberately delayed announcing downgrades of the RMBS within the CDO, in order to keep the markets and the deal flow moving. But the dirty little secret on Wall Street was that all too often, due diligence was a sham.
It was only yesterday that Britain's societies of accountants and economists disturbed 5 o'clock tea, saying that - according to their calculations - the Empire's public net debts of £2 Trillion were more than double the official figure. This was a bad guess. It is £4 Trillion or again double that overnight. It appears Dagong's "AA-" rating is closer to the reality than the "AAA" given by Western rating agencies, who have so far only cautioned a downgrade in the distant future for the UK. But it still escapes my understanding how 3 major bodies can differ so widely on the key figure of these times: total government debt.
I have often said we can never eliminate risk, only manage it based on what the market is telling us. Our tactical asset allocation is directed towards the active management of risk versus reward in defining how we approach the financial markets. Our focus is to preserve wealth by controlling our exposure to risk assets, based on a number of quantitative and qualitative data points. In my opinion, a buy and hold allocation is a dead decision during markets such as we have now. Asset allocation, in my opinion, is an art involving quantitative analysis of financial markets combined with common sense. One critical factor in our process is finding the “sleeping point,” which I define as that level of risk exposure that allows you to sleep at night. Or, as one of my clients stated recently, “Cliff, I do not want to go back to eating spam.” We are here to make sure your investment process protects against the spam effect. We have had the worst May in stocks since 1940. No credit still equals no jobs. China is destined for turmoil as its real estate market unwinds. The Consumer Confidence Index is down to 52.9 in June from 62.7 in May. Fair value on the S&P for me is 950, which would indicate another 7% decline in stock prices from here. - Cliff Draughn, Excelsia Investment Advisors
The Efficacy of the EU/IMF Bailout is Waning Significantly, As Greek Yields Rise and Portuguese Ratings are DroppedSubmitted by Reggie Middleton on 07/13/2010 06:36 -0500
Why isn't the popular financial media reporting the fact that Greece's funding costs increased after the $1 trillion dollar bailout? Why isn't it pointed out the Portugal's credit rating has been dropped - post bailout? Exactly what is $1 trillion US dollars good for these days - trick question, but I dare 'ya to answer :-)