Asness: Keep the Casinos Open

Cliff Asness has a great piece on why the current state of financial reform is more about grabbing power than actually fixing any of the problems.

Instead of fixing Too Big Too Fail this reform package institutionalizes it. The government is taking no responsibility for their role in this crisis - letting Wall Street be the scapegoat. Don't get me wrong, I'm sickened by wall street and the anti-capitalistic vampire it has become - but the financial reform bill simply seeks to punish wall street short term, while not really changing much.

We need real reform, we are getting a power grab. The funny thing is that most Democrats who are for it don't know why they are for it and most Republicans who are against it don't why they are against it - none of them have a clue.

There are simple things that need to be done, but the simpler the task the more difficult the political reality.

Don't expect our financial structure problems to be solved anytime soon.

Scott Dauenhauer CFP, MSFP, AIF

WSJ: 103 Months to Clear Housing Inventory

The number of months it would take to sell off all the foreclosed homes in banks’ possession, plus all the homes likely to end up there over the next couple years, at the current rate of sales.

Hmmm, this is not a good number.

Scott Dauenhauer CFP, MSFP, AIF

Goldman's Dirty Customers

While Goldman and hedge-fund king John Paulson garner all the scrutiny, John Carney reveals how the shadiest player in the saga might be the alleged victim.

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Foolish GM Commercials Mislead American People

I'm sure by now you've seen the commercials the CEO of GM is featured in stating how they've paid back the American people and done it ahead of schedule - don't believe the hype. GM has not paid you back, in fact the money they used to pay back the loan was the money we lent them. We bailed out GM to the tune of $50 billion and another $10 billion from Canada. Much of this was in the form of stock so that they didn't have to pay interest. Read the whole article about the structure at Forbes by clicking the link above.

This is the most misleading commercial I've seen in a long time as it tries to get you to believe that everything is well again and that GM has repaid their debt to society when nothing could be further from the truth.

This is the stuff that really annoys me - don't be fooled, you have not be made whole on GM and its doubtful you ever will.

Scott Dauenhauer CFP, MSFP, AIF

Threat of deflation stalks recovery

David Rosenberg points to this article as he muses about deflation being the primary concern going forward, not inflation. He says that economists are split 50-50, yet the evidence has been in favor of deflation. A few tidbits from this article:

"Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said: “As long as inflation expectations, broadly understood, remain within already established ranges, and actual measured inflation and core inflation remains low, there is no urgency on the part of the Federal Reserve to hike interest rates.”

But while a sustained period of low inflation might be a welcome development, a spell of sharp deflation would be more worrying because it could derail economic growth."

Mr Resler, who says his monetarist roots would have led him to believe inflation would increase, has been particularly focused on wages in US employment reports. In March, wages fell, by the most in 20 years.

“Worries about inflation continue to be very misplaced,” he said. “If the money that has been pumped into the system by the Fed does not flow into transactions, and banks are not lending, it cannot be inflationary.”

“Deflation remains the primary trend, notwithstanding the bounce in commodity prices that surely are going to act as a significant margin squeeze for retailers,” said David Rosenberg, chief economist at Gluskin Sheff.

Nick Beecroft at Saxo Bank think it will emerge as a factor by year-end. “By the fourth quarter of this year, the markets will be gripped by a deflation scare, similar to the one which so pre-occupied us all in 2002/2004,” he said.

Scott Dauenhauer CFP, MSFP, AIF

My Thoughts On Goldman

There seems to be a collective cheer as Goldman gets sued by the SEC. My initial reaction was that it was about time, however when I read what they were being sued for I was a bit uncomfortable with it. Don't get me wrong, I'm no Goldman fan or apologist (though you have to admire how they have their tentacles into seemingly everything...but you also must fear it). The issue at hand is that Goldman allowed a Hedge Fund manager (John Paulson) to essentially help design a security that the manager could then bet against. Goldman would then find buyers for these security, essentially another party to take the other side of the trade. Goldman would create the security, Paulson would bet against it - someone else would bet that it would work out (its actually a bit more complicated as Paulson did not short the security, he bought CDS protection on it...but don't worry about that now). Goldman is basically in trouble for NOT telling the people they sold the security to that others thought it would fail, but also because they appeared to have built into this security the most toxic of assets (again, technically this is a synthetic security meaning it was actually a derivative of another set of securities - essentially CDS contracts on other CDO's - again, ignore this).

Keep in mind that Goldman "sold" this security to willing buyers who were not amateurs and to my knowledge did not owe them a fiduciary duty (which in itself is a problem, but I could also be wrong, if they did owe a Fiduciary duty then they should be sued). These professional investors either bought these securities on Goldman's demand (which is just stupid) or they actually did research and determined that these securities where a good deal. Regardless, it is incumbent upon a professional investor to do their OWN homework before buying something. If Goldman puts together a Toxic, piece of junk security and professional investors look at it and think it is garbage, they are not forced to buy it.

Goldman didn't force anyone to buy their junk, they certainly where pushing for it to be purchased as they reaped huge fees, commissions and prestige - but they are salesman. As consumers, these professional investors KNEW that Goldman was acting as a salesperson and they should have done there research.

If Goldman knew the securities where going to blow up, they certainly weren't that smart in selling them to a bunch of their clients just to benefit one hedge fund. In fact, that would be a really stupid business move.

I think Wall Street is complicit in the meltdown and made it worse - the specific deal described in the lawsuit was one of the accelerants for the collapse. These firms couldn't get enough real product so they manufactured "synthetic" CDO's - which essentially are packaged Credit Default Swaps. These levered bets combined with CDS bets for and against these securities created derivatives that were four and sometimes five times removed from the actual underlying asset (essentially a home loan).

Without any of us knowing, our home loans became pawns in a massive game of chess, only we didn't know who had what interest in seeing them fail. To this day the real estate market is affected negatively because of the derivatives that have been created that create so many interests in one underlying property as to make it impossible to work that property out in a real modification.

I understand most of this post is over most people's heads (not a knock, its just complicated), it would have been foreign to me just three years ago. My basic point is that this particular transaction, though it represents the complete breakdown of our financial system was likely not something Goldman should be sued for. Of course, I'm sure they should be sued for all sorts of other things.

Goldman should lose its bank-holding company status and be required to pay back its FDIC insured debt. Wall Street needs reform, that is what this transaction really shows.

Scott Dauenhauer CFP, MSFP, AIF

Cramer Slammed on CNBC

Its no secret that I can't stand Jim Cramer, so it is with great pleasure I present the following CNBC clip!

Understanding the Governments Takeover of AIG

Understanding the Defendants’ Takeover of AIG

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Shiller's History of Home Values

This was published in 2006....sure Greenspan, there was no evidence of a housing bubble.

Deflation: The Wal-Mart Signal? Rosenburg

I've posted many times on the deflation vs inflation debate. Evidence is growing that we are in a deflationary environment, at least temporarily (though long term I believe the issue will be inflation).

For many this will be hard to believe given that they don't see many prices falling (which by the way isn't actually deflation - but the effects), but the evidence is trending toward deflation. Incomes are not growing, they are shrinking, home prices are only up because they have been subsidized heavily. Energy has been the one area that has risen and this will no doubt cause pressure.

David Rosenburg in his Breakfast with Dave commentary has the following to say:

"With credit contracting, rents deflating, the broad money supply measures now declining and unit labour costs dropping at a record rate, it hardly seems plausible that inflation is a risk at any time on the near- or intermediate-term forecasting horizon.

Plus, keep in mind that the price-setter for the entire retail sector, Wal-Mart, just announced price cuts on 10,000 items -- you heard that right. That is deflation, not disinflation or inflation or any other 'flation. And just to show you the enormity of this announcement, the CPI contains 8,018 items!

M2 declined by 11.7 billion dollars in the March 29th week and MZM fell by $5.2 billion. Both are down 4 weeks in a row. On a 13-week rate of change basis, M2 has contracted at a 2% annual rate. MZM is down 7.2% over this time frame.

In other words, liquidity conditions are no longer sources of support for the overall investment landscape. The Fed has also allowed the monetary base to shrink over the course of the past month. So while policy rates are still low, the abundance of money supply evident in the broad monetary aggregates is beginning to recede.

Bank credit is still shrinking with total loans and leases being run down by 13.2 billion dollars in the latest week. Over the past 13 weeks, bank lending to households and businesses has declined at an 8% annual rate.

The banks have been buyers of late of government securities -- adding $185 billion to their cache in the past year. This has helped finance around 15% of the fiscal deficit and the commercial banks still have 1.3 trillion in cash assets to put to work in the bond market since there is little chance these reserves will ever be deployed into nonliquid assets such as consumer or real estate loans."

The point he is making is that interest rates may NOT be heading up anytime soon.

Scott Dauenhauer CFP, MSFP, AIF

FDIC sells $491 million in home loans - True Value of Loans?

The Associated Press

The Federal Deposit Insurance Corp. has sold $490.7 million in troubled mortgage loans from 19 banks that failed between August 2008 and March 2009 as it works through an inventory of assets from the institutions it has taken over.

The FDIC said Thursday that the winning bidder in its auction, Charlotte, N.C.-based Roundpoint Mortgage Servicing Corp., paid $34.4 million for a 50 percent stake in a new company set up to hold the home mortgage loans. The FDIC has the other 50 percent.

About half the loans are 30 or more days delinquent, the FDIC said. The agency said about 80 percent of the homes involved are located in Arizona, Florida and Georgia, which are among the states with the highest numbers of failed banks.

Last year, 140 U.S. banks succumbed to the soured economy and a cascade of loan defaults — the most in a year since 1992 at the height of the savings-and-loan crisis. The failures compare with 25 in 2008 and three in 2007. They cost the federal deposit insurance fund, which fell into the red, more than $30 billion last year.

FDIC Chairman Sheila Bair has said bank failures are expected to be higher this year than in 2009, mainly driven by losses in commercial real estate loans.

If this press release doesn't prove that most banks are actually insolvent and hiding behind fake bookkeeping, I don't know what does.

If you do the math - I'll do it for you - you find that these loans fetched .14 cents on the dollar - as follows:

Roundpoint pays $34.4 million and receives 50% stake
FDIC retains the rest of the stake which is the other 50% which is presumably worth $34.4 million.

$34.4 million plus $34.4 million equals $68.8 million or the implied value of the loans on assets originally valued at $491 million, that means these loans sold for 14% of the original value ($68.8/$491 million).

If banks today marked their loans to the FDIC values I'm positive they would be insolvent.

A client of mine just short-saled his house and settled the second for just .09 cents on the dollar (for a worthless loan - client figured why go bankrupt over a few thousand bucks). The very same second is being carried on most bank books for around 85 - 100% of the value - this is Enron type accounting and fraudulent.

Scott Dauenhauer CFP, MSFP, AIF