Saturday, June 27, 2009
I see that the administration has come to some roughly similar conclusions as me, in regards to reducing incentives to willy-nilly securitize crappy loans. Have they achieved the appropriate balance between efficiency of capital, and systemic risk reduction and system redundancy?
According to reports, the administration intends to reduce the vile habit of bankers throwing crappy loans through to unsuspecting investors (imagine, investors EXPECTING banks to have performed some sort of reasonable underwriting in the first place).
It appears that the administration intends to force the underwriting firm to hold at least 5% of the securitized loans through to completion, and further disallow firms to immediately book securitization profits. Instead, they would book the profits as the loans matured and would have that securitization income reduced if the loans performed badly due to weak underwriting standards.
While this is not quite as good as the 15-25% loan book hold-back I felt would be prudent, this is certainly a large step forward.
The 5% hold-back still amounts to 20 to 1 leverage in effect, atop the normal leverage that banks enjoy. Given banks particularly important place in our economy, I am not sure that is prudent enough.
While this is not quite as good as the minimum 15-25% hold-back, it is a large step forward from existing standards - yet I am still left wondering whether this is not a half measure.
I'm therefore hopeful that FASB rules will further help to dampen the capital leveraging effect through some proposed rules, yet to be issued.
Now, of course, reforming executive pay remains a important topic which needs serious attention in order to also reduce further systemic risk.
This is something I have written about previously, and that my internet "colleague", Rick Konrad, at Value Discipline, is writing about in greater detail.
I encourage you to visit his blog, read some of his posts (1, 2, 3) on the matter, and to add your voice by sending your elected official a quick email (find your congressperson here, find your senator here) encouraging such reform.
Monday, June 22, 2009
The last time I wrote, it seemed like the global economy generally, and the American economy in particular, was in for a serious bout of greacession.
However, the coordinated global attack on the economic slowdown and banking sector crisis appears to have had some effect with, most importantly of all, confidence being restored. That's not to say there won't be some washouts in the road ahead, but most commentators seem to agree that "The Great Depression, Redux" just won't happen at this time. Opinions on the severity and remaining length of the recession in front of us, and the inflation to follow (or not!) now seems to be the subject of debate, rather than the collapse of the economic system itself.
With all that in mind (or not) and remembering that the most important aspect of investment is the right temperament, here is an investment clock that can suggest various investment timing to be had in the cycle in front of us. Whereas it can often be quite difficult to tell exactly where in the cycle we are, at this time it is unusually clear, at least to the extent of knowing that we aren't in the boom phase, nor have we really reached recovery yet. We appear to be, undeniably, in the recession phase at this time.
Therefore, if you like sector rotation and feel you can use it to your advantage, then this Merrill Lynch clock should be very handy at this time.