Tuesday, March 03, 2009


I didn't even bother to write about the bailout of the bailout of the bailout of AIG, because I don't know what else to say - it's an utter disaster. There is a very sweet sense of irony about their former CEO Hank Greenberg suing the company though.

Niall Ferguson wrote a piece in The Australian that touches on a theme I've hit on multiple times previously:

"There is something desperate about the way people on both sides of the Atlantic are clinging to their dog-eared copies of Keynes's General Theory. Uneasily aware that their discipline almost entirely failed to anticipate the crisis, economists seem to be regressing to macro-economic childhood, clutching the multiplier like an old teddy bear.

The harsh reality that is being repressed is this: the Western world is suffering a crisis of excessive indebtedness. Many governments are too highly leveraged, as are many corporations. More important, households are groaning under unprecedented debt burdens. Average household sector debt has reached 141per cent of disposable income in the US, 156per cent in Australia and 177 per cent in Britain. Worst of all are the banks in the US and Europe. Some of the best-known names in American and European finance have balance sheets 40, 60 or even 100 times the size of their capital. Average US investment bank leverage was above 25 to 1 at the end of 2008. Eurozone bank leverage was more than 30 to 1. British bank balance sheets are equal to a staggering 440 per cent of gross domestic product.

The delusion that a crisis of excess debt can be solved by creating more debt is at the heart of the Great Repression. Yet that is precisely what most governments propose to do."

Barry Ritholtz has a good post illustrating a key part of what's wrong with managed account compensation. In short, he tells of two brokers who managed customer money for a major firm. The brokers are compensated on a percentage of assets under management, but they get paid a different rate depending on how the assets are allocated (ie, if the assets are in cash, they get paid less than if they are in stocks.) These specific brokers did a great job getting their clients out of stocks and into cash in early 2008, resulting in only minor losses for their clients. However, they brought in less fees as a result, and were penalized by their firm - receiving a lower percentage of their profits for the next year. Completely absurd, and another reason I don't think MER will be the gem that BAC thinks it stole - that business model is somewhat dead.

Paul Kedrosky notes the irony in Cannacord Adams' decision to stop publishing its list of Best Ideas. I mean, talk about a contrarian indicator!

Finally, a long piece from Tim Duy on economists and their faith in financial engineering. He includes a money quote from Yves Smith of NakedCapitalism:

"...What is amazing is the degree to which Bernanke has been unable to process what has happened over the last year and a half. It isn't simply that he is trying to restore status quo ante; he seems to see the only possible operative paradigm as the status quo ante. Worse, he has a romanticized view of it too.

We had a massive stock market bubble, followed by an even bigger asset orgy, with housing at the epicenter, but plenty of other types got dragged along with it. Having asset appreciation fueled by debt is NOT how a healthy economy operates. It is going to take some time for the excesses to work themselves through..."
Oh - and in case you were wondering if this is the bottom....


1 comment:

Anonymous said...

Most models utterly failed, tiggering buying all the way down. Thanks quants! CAPM is dead. Private equity as a business model is, (what do you call something that is beyond dead?) For a little insight into how the vast majority of FA's perform, independent or with the big houses, go to: and read his 12/07 market letter. It's laughable.